Closing Recap

Thursday, May 19, 2022

Equity Market Recap

·     U.S. stocks did a whole lot of nothing today, trading in a somewhat narrow range (by recent standards at least), very choppy between gains and losses with the S&P dipping down to the 3,900-level led behind gains in technology, healthcare, industrials, and materials, while energy, financials, utilities, real estate, and consumer discretionary and staples lagged. Barring a massive bounce in tomorrow’s trading action, the S&P and Nasdaq remain on track for a 7^th straight losing week and the Dow an 8^th straight. Economic data once again renews economic concerns, as the Philly Fed Index fell in May fell to its lowest since the pandemic began, 2.6 vs. 15 est. & 17.6 in prior month as prices paid, employment, delivery times, and inventories fell. In a separate report, weekly jobless claims jumped, all while inflation is persistently high – all coming while the Federal Reserve is an upward rate hike cycle, with two more 50-bps hikes expected at upcoming meetings. A very rough week for consumer staples and retailers with massive earnings misses from Target and Wal-Mart, while a handful of lower tier retailers such as Kohl’s Children’s Place, and Bath & Body Works disappointed this morning.

·     Dow Transports hit again, down as much as 3% to 13,200 before paring losses after tumbling -7.4% on Wednesday (now down nearly 17% YTD and over 10% MTD) – yesterday it was freight and truckers falling (ODFL JBHT, LSTR) on record high gas pump prices and concerns of slowing consumer spending with TGT WMT warnings; today it is the rail space hit hard, with Citi downgrading UNP CSX NSC to hold and lowering ests, taking a more cautious scenario for 2023 across rails and LTLs

·     Over the last few days, several market strategists have lowered their S&P 500 targets for the year and economists have been lowering growth forecasts. S&P cuts U.S. growth forecast as now see US growth declining 80Bp to 2.4%. BTIG said after today’s move, their conviction is that the SPX tests 3,400-3,500 before this is over is now higher than our conviction for a rally to 4,200. Goldman Sachs recently cut their year-end S&P500 Target to 4300 (from 4700) to reflect higher interest rates, slower economic growth than we previously assumed, and a forward P/E of 17X. But raise their 2022 EPS growth forecast by 30bp to +8% following very strong 1Q22 results. Goldman also recently lowered its GDP growth forecast by 20bp in 2022 to 2.4%, and more substantially by 60bp in 2023 to 1.6%, following a steep tightening of financial conditions that we believe the Fed welcomes and will look to sustain to reduce inflation.

·     The amount of money that investors are parking at a major Federal Reserve facility climbed to another all-time high as funds sought out places to stash short-term cash. The U.S. Fed accepts $1.981 trillion in overnight reverse Repo bids, a new record; awards at 0.80% to 92 bidders which surpassed yesterday ‘a fresh record of $1.973 trillion

·     Sentiment remains weak as this week’s bull-bear spread in the American Association of Individual Investors (AAII) weekly survey was -24.4 vs -24.7 last week; Bulls rise to 26% from 24.3%; Neutrals fall to 23.6% from 26.6%; Bears rise to 50.4% from 49%

·     Philadelphia Fed President Patrick Harker said late yesterday he expects two more 50 bps rate increases, with the Federal Reserve continuing to raise the federal funds rate "until we’re confident that inflation is moving toward our target." The rate hikes are important because inflation "is a truly urgent problem," he noted. Currently the rate stands at 0.75%-1.0%.

Economic Data:

·     Weekly Jobless Claims hit 4-month highs, rising to 218,000 from downwardly revised 197K (from 200K) last week and above consensus 200,000; the 4-week moving average rose to 199,500 from 191,250 prior week; continuing claims fell to 1.317M from 1.342M prior and the U.S. insured unemployment rate fell to 0.9% from 1.0% prior

·     Existing Home Sales for April fell 2.4% to 5.61M annual unit rate vs. est. 5.65M and below March 5.75M; April inventory of homes for sale 1.03 mln units, 2.2 months’ worth; the national median home price for existing homes $391,200, +14.8 pct from April 2021

·     Philly Fed Survey for May disappoints with actual reading of 2.6 (lowest since May 2020), well below the forecast of 15.0 and prior reading of 17.6

Commodities, Currencies & Treasuries

·     Oil prices rose $2.62, or 2.39% to settle at $112.21 per barrel, a sharp reversal from morning lows of $105.13 per barrel

·     Gold prices rise $25.30 or 1.4% to settle at $1,841.20 an ounce (best 1-day % gain in a month), getting a big bounce after the dollar tumbled. The dollar index (DXY) dropped about 1% to around 102.75 (off recent highs above 105 on May 15th, which was 20-yr highs) on more weak economic data and a rotation out of perceived have assets as Bitcoin resumed its upward momentum after weeks of pressure, rising 3% back above $30K. Treasury yields opened higher overnight with the 10-year above 2.92%, fell to lows below 2.78% following economic data, and ended somewhere in the middle, down slightly on the day.

Sector News Breakdown

Consumer

·     Retailers: after a shellacking in recent days behind weak WMT and TGT results, club warehouse BJ posts better results as Q1 adj EPS of $0.87 tops the $0.71 est. as revs rose 16% Y/Y top $4.5B vs. est. $4.22B and said FY22 outlook of flat year-over-year remains unchanged; department store KSS reported a wide Q1 miss with adj EPS of $0.11 vs. est. $0.71 and sales $3.47B missing the $3.7B estimate while lowered year sales and comp sales view – stock pared losses after saying continues to engage with multiple interested parties 9recall there were two proposals in April for the co: Franchise group offered $69 per share on 4/12 and consortium led by SPG on 4/25 for $68 per share); BBWI posted better Q1 EPS and sales but lowers FY EPS cont ops $3.80-$4.15, from prior $4.30-$4.70; Truist reducing estimates across the board for others that have yet to report 1Q, including BBY, COST, DG, DLTR, FIVE and OLLI.

·     Apparel retail: GOOS forecasts FY23 adjusted EPS of C$1.60-C$1.90 which is above consensus est. C$1.61, which followed mostly in-line Q4 revs of C$223.1M vs. est. C$223.9M; CATO posted Q1 EPS $0.46, down from $0.92 Y/Y and sales fell -3% Y/Y to $206.7M on weaker margins of 35.5% vs. 41.5% Y/Y; PLCE tumbles as Q1 adj EPS $1.05 missed the $1.41 estimate and sales fell -17% Y/Y to $362.4M vs. est. $402.5M and said tempering top line expectation for 2022 and we are now planning for a mid-single digit decline in sales for 2022; UAA downgraded at Morgan Stanley on tempered medium-term operating model assumptions, while the retailer announced a CEO transition overnight effective June 1st

·     Auto sector; Ford (F) recalls 39,000 Expedition and Lincoln navigator vehicles after reports of 16 fires, tells owners to park outside pending fix; auto parts retailers AAP and AZO will report earnings early next week. Bank America highlights industry data, weather maps, outlook. For AAP, they expect EPS of $3.60 on 2% comps (Pro +HSD, DIY down slightly). Mgmt has typically not updated guidance at 1Q. For AZO, they expect EPS of $25.33 on flat comps (Pro +LDD, DIY down LSD). Mgmt does not historically provide guidance; MNRO shares slide to 2-year lows after reports Q4 adj EPS +40.20 below est. $0.46 with margins down 320bps to 31.9% on lower net income due to "significant investments" in technician headcount

·     Casinos, Gaming, Lodging & Leisure sector; HOG shares fell after saying it took the decision to suspend all vehicle assembly and shipments (excluding LiveWire) for a two-week period. This decision, taken out of an abundance of caution, is based on information provided by a third-party supplier to Harley-Davidson late on Tuesday (5/17) concerning a regulatory compliance matter relating to the supplier’s component part; RV sector weak after Davidson downgraded THO to underperform ($60 PT), from Neutral and WGO to neutral ($52 PT), from Buy after visiting Elkhart, IN last week and conducting a fresh round of RV industry checks. While our checks indicate continued weakness at retail through mid-May, our trip to Elkhart, IN led us to question the narrative that OEMs are producing with greater discipline compared to 2018-2019

Financials

·     Insurance; ALL estimated catastrophe losses for month of April of $316M or $250M, after-tax saying April catastrophe losses included fourteen events, primarily wind, hail and tornados in Texas and southeast, estimated at $299M; ALL was added to Raymond James favorites list (removed WTW); RGA upgraded from Underweight to Equal weight at Morgan Stanley saying it is looking increasingly clear that the fog created by the pandemic is clearing faster than expected and upside in protection oriented results was a clear trend in the most recent quarter; PRI downgraded from Overweight to Equal weight at Morgan

·     FinTech & Payments; SQ stock reaction remained relatively muted yesterday after first investor day in 5-years according to UBS given many investors anticipated more color on Block’s medium-term growth outlook and potential Afterpay synergies, which were not quantified; MA and Fintech giant, OPay announced a strategic partnership for enabling OPay consumers and merchants in the region

·     Consumer Finance & Banks: just not let up in the weakness of banks, again a top decliner in the S&P 500; UWMC downgraded to Underweight from Neutral and cut tgt to $3 from $5 at Piper saying the company will struggle to generate earnings that exceed the current dividend run rate of 10c per share as production revenue declines at a rapid pace due to lower demand; AX, formerly Bank of Internet or BOFI, lost a lawsuit over allegations made in a 2015 lawsuit they failed to notify regulators of risky loans to dubious borrowers and didn’t disclose to regulators it had received grand jury and other subpoenas https://bit.ly/3NpGBEG

·     Bitcoin news; no real news other than investors taking an opportunity to get back into crypto after the latest shellacking on stablecoin fallout; Bitcoin jumped over 4% late morning to $30,400, nearly a $2,000 point move off overnight lows; Ethereum (ETH) jumped back above the $2,000 level, rising over 3%, all helping boost names leveraged to mining or investing in Bitcoins such as MSTR, MARA, RIOT and others; COIN also jumped back above the $70 level (off the May 12th low of $40.83 following weak earnings). Today Mizuho said a proprietary survey of Bitcoin traders on Coinbase sheds light on average cost basis and the threshold that could trigger investor liquidation of Bitcoin. Per our survey, the average investor’s Bitcoin cost basis is $21,000.

Healthcare

·     Pharma & Biotech movers: ENTA shares fall after saying its experimental treatment for respiratory syncytial virus did not meet the primary endpoint in a Phase 2b clinical trial; therapy did not reduce symptoms when compared to placebo; cannabis stocks outperformed in the day while Whitney Tilson monthly newsletter recommended going long cannabis name CRLBF after being short the sector once upon a time (rest of group higher today – CGC, GTBIF ); EXEL shares slipped on day four of Cabometyx patent trial judge in the case appeared to telegraph that he will find that the 776 patent, which goes to October 2030, won’t be infringed so MSN wins on this count, traders said, citing comments at the court hearing https://bit.ly/3PvHzBj

·     MedTech & Services: Wells Fargo said based on the Libre 3 data presented at ATTD last month, they expect ABT to present strong Libre 3 data at the American Diabetes Association (ADA) meeting on June 5. Specifically, they believe the Libre 3 data will show accuracy (as measured by MARD) that is like or even slightly better than DXCM‘s G7; in services, hospital stocks were market laggards today THC ; NURO jumped after the FDA gave authorization to market the Quell neuromodulation device as an aid for reducing the symptoms of fibromyalgia in adults with high pain sensitivity

Energy, Industrials & Materials

·     Materials, Industrial & Machinery; SQM rises following better quarterly results as revs jumped to $2.02B from $528.5M Y/Y and above ests $1.39B on better net income of $796.1M; SCHN downgraded to Sector Weight from Overweight at KeyBanc saying global ferrous scrap and aluminum trends have grown surprisingly bearish since our last update, supporting the shift in rating, while maintain OW on CMC, RS and TMST announces long-term contract for renewable power to support 2024 restart of San Ciprián aluminum smelter

·     Transports; index slammed for a second day in a row as railroads CSX and NSC all downgraded to neutral from Buy at Citigroup and lowering ests in rails and LTL saying while general trends across Transportation remain relatively stable, with pockets of weakness isolated to TL spot rates and ecommerce package volume, they think it’s prudent to factor in a more cautious scenario for 2023 across rails and LTLs; yesterday, its was weakness in freight and truckers (FDX ODFL LSTR JBHT) that sent the Dow Transports down over 7%); in airlines, SAVE’s board urges its shareholders to reject a hostile takeover offer from JBLU, saying it was "a cynical attempt to disrupt" its merger with ULCC. JetBlue says its $30 a share offer is far superior to Frontier’s cash-and-stock offer and insists regulatory concerns are not a reason to reject its bid

Technology, Media & Telecom

·     Hardware, Components & Services; CSCO an entire drag on the comm services, EMS, networking sector after the company posted Q3 revs of $12.8B, missing the $13.34B estimate and guided Q4 below views – sees Q4 revs down 1%-5.5% Y/Y vs. est. $13.87B and guides Q4 EPS $0.76-$0.84, below the $0.92 estimate. Citi noted the deceleration in orders from +33% last quarter to +8% this quarter and enterprise order growth from +37% to zero concerned the

·     Cisco impact: shares of networking equipment makers drop after Cisco cuts outlook, with JNPR, ANET, NTGR, CIEN all weak on results. Stifel noted for EMS/PCBs: Cisco remains a key customer for EMS providers FLEX and JBL as well as PCB manufacturer TTMI. For IT Distributors: Cisco accounts for ~40% of sales for PLUS which is scheduled to report earnings next week. For Hardware OEMs: HPE and PSTG all report April-Q earnings on June 1. Based on our read-through from major channel players during Q1 earnings season, as well as key EMS providers, supply disruptions appeared to worsen in the quarter

·     Internet, Media & Telecom movers; GOOGL shares active after the WSJ reported a bipartisan group of senators led by Utah Republican Mike Lee introduced legislation that would take aim at conflicts of interest in the advertising technology industry and force Google to break up its dominant online-ad business; GRAB shares jump posting earnings results – Q1 Revenue of $228M (+5.6% Y/Y), beat estimates by $86.34M and GMV reached $4.81B, increase of 32% Y/Y.

·     Semis and Software movers; SNPS quarter results were above consensus expectations with strength across all product groups and geographies and materially raised its FY22 outlook for revs, earnings, and cash flow; ZI shares tumbled following a negative mention by BearCave related to its business practices; AVGO shares dropped on fear of exposure to CSCO as SMBC Nikko noted estimate that CSCO accounts for 5-7% of sales for both AVGO and MRVL