Closing Recap

Wednesday, March 29, 2023

Index	Up/Down	%	Last
DJ Industrials	323.71	1.00%	32,717
S&P 500	56.61	1.43%	4,027
Nasdaq	210.16	1.79%	11,926
Russell 2000	18.97	1.08%	1,771

 

Equity Market Recap

·     It’s a no-fear day as no bad news is good news. Investors have once again taken to ignoring Fed speakers’ commentary about peak rate ranges and duration in favor of expectations for a pause and lower rates by year-end. Current implied rates look peak-ish in May at just over 4.9%, while December’s implied has declined to just over 4.3%.  Clearly, we’ve seen a huge swing since investors had embraced Fed guidance just a few weeks back. Both the S&P 500 and NASDAQ worked higher through the morning with all major industry groups in the green, though Healthcare was flattish, and we’re near highs heading into the final hour. Separately, and in contrast to today’s market activity, Street commentary was a bit less bullish. Fairlead was out this morning calling for an April pullback in equities and advising clients to wait for more evidence of a bottom before adding exposure. Similarly, Barclays commented they see fair value in US equites 10-15% below current levels.

·     Data-wise, you can take your pick. On the bullish side, @LizAnnSonders noted lower global shipping rates indicate the worst of the supply chain crisis is behind us, while @RyanDetrick highlights a failure of the S&P to close below the December low during 1Q generally is a bullish signal for the year. Lastly, @charliebilello points out, “The Fed seems to finally have room to pause, with the Fed Funds Rate above Core PCE (the Fed’s preferred measure of inflation), suggesting that monetary policy is entering a contractionary phase.” On the bearish side, @DataTrekMB notes the Cass Freight Indices are rolling over, which typically happens just ahead of a recession, and the 2/10 Treasure spread is shrinking quickly, also a recession indicator.

·     Sector-wise, heading into the final hour of trading, it was all green. Technology (XLK, +1.85%) enjoyed a bounce-back day and led gainers, while Real Estate (XLRE, +1.76%) and Consumer Discretionary (XLY, +1.57%) nearly kept pace. Financial (XLF, +1.15%) continued to recover from recent turmoil, while Healthcare (XLV, +0.07%) and Consumer Staples (XLP, +0.37%) were laggards on the day. Growth and Value both enjoyed nice gains, with Growth leading on the backs of the tech strength (Russell 1000 Growth +1.25% vs Russell 1000 Value +1.06%). Unsurprisingly, given the sector balance to the upside, breadth was similarly strong with gainers outpacing decliners by about 2.8:1.

 

Economic Data:

·     Pending home sales for Feb rose 0.8%, above views for a (-2.3%) decline and after jumping 8.1% to 82.5 in January (the highest level since August). The data shows a third straight monthly gain following 13 consecutive months of declines. (Pending Home sales -21.1% y/y).

 

Commodities, Currencies & Treasuries

·     April gold settled -$6.60/oz, or -0.33%, to $1,966.90 and marked the third loss in the last four sessions as investors continued to secure profits. Improving investor confidence in the banking sector and a higher US Dollar have combined to create pressure on gold as a safe-haven asset.  Looking ahead, the $2,000 level continues to be the focus and has yet to be a sustainable price point as banking, Fed and Dollar volatility have created inconsistency.

·     Following early strength and weekly crude stocks draw of 7.5Mm bbls vs an expected 0.1Mm bbl build, WTI May crude slipped into midday and settled -$0.23/bbl, or -0.31%, at $72.97. Brent similarly, dipped on the day, settling -$0.37, or -0.47%, at $78.28/bbl. Traders attributed the fade to apprehension around the recent banking crisis and sketchy liquidity. Also mentioned was a big jump in refinery runs posted in the EIA data causing traders to adjust the crack spread. U.S. natural gas futures extend losses, prices fall to lowest since september 2020.

 

 

Macro	Up/Down	Last
WTI Crude	-0.23	72.97
Brent	-0.37	78.28
Gold	-6.60	1,966.90
EUR/USD	-0.0003	1.0840
JPY/USD	1.92	132.78
10-Year Note	0.003	3.572%

 

 

Sector News Breakdown

Consumer Staples & Restaurants:

·     In food: HSY upgraded to Equal Weight at Wells Fargo saying new pricing action changes things, protecting EPS well into ’24, a unique tail of EPS visibility and on macro side, defensives now back in play and there are few like HSY. CALM Q3 EPS $6.62 above Consensus $5.47, with revenue above and said dozen Eggs Sold 291,416 vs year-ago 287,651.

·     In Restaurants: Citigroup said for the week ending 3/25, Citi Credit Card data showed a second consecutive step down in y/y spending, with total category growth slowing to a new low for 2023 and LSRs turning negative for the first time in 2023. PLAY Q4 comps of +19% beat by +180bps and were up +14.1% vs 2019, while cost of sales were 20bps lower than expected.

Retailers:

·     LULU shares jump after reported 4Q adj. EPS of $4.40 (vs. Street $4.26) with upside driven across every line item: +30% revenue y/y (vs. est. +27%) representing +26% on a 3-yr CAGR, -70bps GPM contraction Y/Y (above Street -97bps & mgmt’s down 90-110bps guidance), and ~120bps of SG&A leverage (= Street). Digging deeper, 4Q markdowns came in 40bps above 2019.

·     Macy’s (M) said that Jeff Gennette, chairman and CEO, will retire next February after a 40-year run at the retailer. Tony Spring, Macy’s executive vice president and Bloomingdale’s chairman and CEO, has been appointed to the role as president and CEO-elect.

·     CONN tumbles early after Q4 adjusted EPS loss (-$1.53) vs. est. loss (-$0.87); Q4 revs $334.9M vs. est. $331.22M; Q4 same store sales decreased (-21.8%); shares rebound.

·     In research: UBS downgraded ROST, BURL, URBN, FL to Sell; and BBWI to Neutral in Softline retail, saying they have become increasingly bearish on the sector; cuts targets on 17 names in space and reduce CY23 EPS estimates across our coverage by 10%, on average. The call weighed on various other retailers on day.

 

Autos, Leisure, Gaming & Lodging:

·     In cruise lines, CCL receives its second analyst upgrade in as many days as Susquehanna raised its rating to positive from Neutral after Wells upgraded shares yesterday.

·     In casinos: DKNG announced today that DK Horse, the digital gaming operator’s first-ever horse racing product, has launched in twelve (12) states and expects to launch in additional states by the Kentucky Derby on Saturday, May 6, 2023.

·     In autos: Electric-vehicle sales in China are likely to show further sequential improvement when startups NIO, XPEV, LI report China EV sales for the month of March and the first quarter, likely on Saturday. EV and battery giant BYD also plan to report March and Q1 sales.

 

Homebuilders, Building Products, Home Furnishing:

·     Weekly mortgage data from Mortgage Bankers Assoc (MBA) showed mortgage index rises 2.9% in latest week, purchase index rises 2.0%, refinancing index rises 4.8% as the average 30-year mortgage rate falls 3 bps to 6.45 pct in March 24 week.

·     Home improvement retail: Cowen noted prefer HD, but LOW’s P/E has compressed. Said mid-quarter review shows 1) LOW improving Building Materials trends but remain below HD on Y/3Y; 2) LOW gained meaningful Decor share; 3) HD has more attractive store employee stats; 4) Est. HD’s sales/sq. ft +39% above LOW.

 

Energy, Industrials and Materials

·     Emergency releases from the U.S. Strategic Petroleum Reserve are slated to end this month, concluding an unusual attempt to lower gas prices after Russia’s invasion of Ukraine sent oil prices soaring. Over the release period, Washington sold 180 million barrels of crude at an average of $96.25 apiece, well above the recent market price of $74.29—meaning the U.S., for now, is almost $4 billion ahead – WSJ https://on.wsj.com/40LtwMW

·     Weekly inventory data showed: American Petroleum Institute inventory data showed crude stockpiles fell -6.076M barrels, Cushing -2.388M barrels, Gasoline fell -5.891M barrels and Distillates +0.548M

·     In aerospace & defense: Airbus (EADSY) has decided not to make an offer for a minority stake in Atos’ soon-to-be spun-off division Evidian, sending shares in the French IT firm down more than 15%. RYAAY CEO says expects BA 737 max 7 to be certified in first half, expects 737 max 10 to be certified towards end of this year. RYAAY says back in talks with BA for 100 new airplanes.

 

Financials

Banks, Brokers, Asset Managers:

·     UBS rehired Sergio Ermotti as CEO to steer its massive takeover of neighbor Credit Suisse (CS) in a surprise move to take advantage of the Swiss banker’s experience rebuilding the bank after the global financial crisis.

·     Senate probe alleges Credit Suisse (CS) helped Americans commit tax fraud – CNBC reported. Wyden investigation finds Credit Suisse complicit in ongoing tax evasion by ultra-wealthy Americans -united states Senate committee on finance. https://cnb.cx/40mQt9a

·     Billions in Signature Bank (SBNY) debt to be sold by Newmark Group (NMRK) – FDIC to tap real-estate firm to market about $60 billion in failed lender’s loans – WSJ https://on.wsj.com/3nlCgL0

·     Day two of FDIC Chairman Martin Gruenberg and Fed’s Vice Chairman for Supervision Michael Barr speaking on Capitol Hill on the recent bank failures. Yesterday it was revealed that regulators said $100B in withdrawals were scheduled on the same day that SVB was seized. The day before, over $40B was withdrawn. That’s a total of $140B, 80% of SVB’s deposits, in 2 days!

 

Healthcare

Biotech, Pharma, Healthcare Services:

·     ARCT Q4 EPS $4.33 vs. est. $0.98; Q4 revs $160.3M vs. est. $72.68M; increase in fourth quarter and year-over-year revenues primarily relates to the $200 million upfront payment we received from the CSL transaction.

·     BLUE said it expects delay on FDA Sickle Cell Drug Application after reports Q4 results.

·     ILMN activist investor Carl Icahn wants change at the management level, and he has a candidate in mind for the top spot: former CEO Jay Flatley – WSJ https://on.wsj.com/40HwzFN

·     MDT assumed at UBS with a double downgrade, cuts PT to $79 from $127 saying lacks the conviction that Medtronic will resume to reliable, single-digit top-line growth.

·     PEN was downgraded to Hold from Buy at Needham saying they believe that the bull case has been mostly priced into its stock.

·     SHCR slides following mixed Q4 as co posted a slight beat to Q4 revenue and slight miss to EBITDA and guides 2023 below views.

·     UBS initiated coverage of the U.S. Medical Supplies and Devices sector (MedTech) with a cautious view despite what they believe are strong underlying fundamentals. Said they favor stocks with the most exposure to higher-growth markets that could support sales and EPS upside as top picks are: ABT in large-cap and DXCM and INSP in SMID-cap. Least favored names are those with the most exposure to lower-growth markets and/or the lowest WAMGRs (Weighted Average Market Growth Rates), MDT and ZBH, both of which we rate Sell.

 

Technology

Hardware & Software movers:

·     In AI space: the WSJ reported several tech executives and top artificial-intelligence researchers, including Tesla Inc. CEO Elon Musk and AI pioneer Yoshua Bengio, are calling for a pause in the breakneck development of powerful new AI tools. A moratorium of six months or more would give the industry time to set safety standards for AI design https://on.wsj.com/3nzAtC4

·     In software: PRGS reported FQ1 (Feb) results marked by good organic ARR growth of 4%, and quarterly revenue, which grew 14% y/y in CC on a reported basis and about ~11% y/y in CC organically; sees FY adj revs $680-688Mm vs prior $675-685Mm and est. $679.4Mm.

·     In 3D printing: NNDM said it increased its bid to buy the fellow 3D printer maker SSYS to $19.55 a share, which represents a 38.6% premium to Tuesday’s closing price of $14.11, and is up from the previous bid of $18 a share https://on.mktw.net/40O0MmF

·     In optical: CIEN downgraded OW to EW, at Morgan Stanley. With Ciena noting some digestion from cloud customers, they think it would be challenging to see revenue upside not tied to backlog release, which is unlikely to get rewarded in multiple expansion in the near term.

·     In internet security: Wedbush reiterated their call from the beginning of the year that they believe tech stocks will be up 20%+ and still have nice upside this year with 1Q earnings season set to calm Street demand fears. Cyber security names such as PANW, CHKP, CYBR, TENB, ZS and CRWD remain favorites with stalwarts MSFT, DDOG, MDB and CRM top cloud picks for 2023. Apple firmly remains our top tech pick for 2023 with Tesla our favorite disruptive tech name.

 

Semiconductors:

·     The astounding run in semiconductor chips to start 2023 continued, with a near 4% rally in the Philly semi-index (SOX) as even a huge miss and lower guide from MU could dent optimism.

·     MU reported Feb-Q results and May-Q outlook that was missed consensus as inventory corrections/demand weakness continue to put pressure on ASPs and margins at least in the near term; cost cuts include layoffs and cuts to capex (down 40%+ in FY23 to $7B vs $7.25B previously) and fab utilization (down 25% vs down 20% previously).