Closing Recap

Friday, May 20, 2022

Equity Market Recap

·     The benchmark S&P 500 briefly entered “bear market” territory on Friday, defined as -20% from its January 4^th intraday record peak, but following a late day spike, did not close there. Investors sold stocks early amid worries about whether the Federal Reserve will be able to effectively slow inflation without causing a recession (soft land vs. hard landing), but buying ensued the final hour, pushing major averages well of the lows on hopes of a low. Following today’s market action, the S&P closed lower for a 7^th straight week, its longest such streak since the dot.com bubble of 2001, while the Dow dropped for an 8^th straight week, a feat not seen in 90 years (1932) while the longest losing streak in history is 9-weeks (in 1923). The Nasdaq Composite also falls for a 7^th straight week, a streak last seen in February-March 2001. Investor sentiment has turned very glum in a few months, with inflation remaining stubbornly high and no real signs of abating yet while the Federal Reserve remains vigilant about raising rates to try and slow it (talks for 50-bps hikes at each of the next 2-meetings after raising 75bps thus far in 2022).

·     There were more than 1,000 new lows today vs 3,000 last week, as large caps and major indices are now catching up with the bear market in the rest of the market. Big declines this week in large cap giants such as AAPL, NVDA, AMD, AMZN and MSFT, while consumer discretionary tumbled behind weak earnings/outlook from WMT and TGT (as well as lower tier retail) saying their profits were hurt by rising costs and supply-chain disruptions and transports were decimated, falling almost 10% this week alone led behind rails and truckers (slowing consumer spending means less traffic while national gasoline prices hit all-time highs). A perfect storm this year currently for markets: 40-year high inflation, rising interest rates, slowing economic data, rising jobless claims, China lockdown has hurt its economy, Ukraine/Russia war has hurt commodity prices and food supply, and a gov’t administration reeling from it all (port delays again, supply chain issues, baby formula outages).

·     Noted technician Tom DeMark told Fundstrat’s head of technical strategy Mark Newton that key markets are on the verge of reversing. The S&P 500 DeMark says, will see one more sell-off, with a close below 3,863, before a "shocking rally" lifts the index between 4,400 and 4,500 – https://on.mktw.net/3ahAvIx

Commodities, Currencies & Treasuries

·     Oil prices rise at WTI crude gains $1.02 or 0.91% to settle at $113.23 per barrel, Gasoline June futures settle at $3.8370 a gallon and Diesel June futures settle at $3.7391 a gallon, Natural Gas June futures settle at $8.0830/MMBtus. Oil prices edged up on Friday as a planned European Union ban on Russian oil and easing of COVID-19 lockdowns in China countered concerns that slowing economic growth will hurt demand.

·     Gold prices end little changed at $1,842.10 an ounce, slightly above yesterday’s closing level of $1,841.20 and off the morning lows of $1,830, registering roughly a 1.8% weekly advance and snapping its 4-week losing streak as the dollar index (DYX) tumbled.

·     The dollar index (DXY) posted its worst week since early February, sliding to around the 103 level, pulling back from 20-year highs last week just above the 105 level in a bout of profit taking and positioning after weaker economic data and rising expectations of back-to-back 50-bps interest rate hikes from the Fed in upcoming Fed meetings. Treasury yields slipped on the day, as investors sought the safety of bonds, as the ten-year US Treasury yield falls to 2.785% from 2.854% yesterday, with investors continuing to look for safety as stocks tumble.

Sector News Breakdown

Consumer

·     Retailers: the week that wasn’t for retail, with miss after miss (for most part) on earnings or guidance – WMT, TGT, KSS, ROST, just a few of the biggest losers – with DG, DLTR, JWN, DDS, M earnings coming next week; ROST tumbles as F1Q results were below consensus, gross margin remains pressured and declined 295 bps in F1Q, inventory spiked 58% YoY and provided a lower outlook for F2Q and FY2022 from a top- and bottom-line perspective; FL reported Q1 EPS $1.60 vs. est. $1.54 on lighter revs. Comps -1.9% vs est. -4%. GM 34% vs. est. 31.8% and guides FY EPS upper end of $4.25 to $4.60 vs. est. $4.42; DECK crushed it with Q4 EPS $2.51 vs. est. $1.32 and revs rose 31.2% Y/Y to $736.0M which tops consensus $639.2M along with upbeat guidance FY23 EPS $17.40-$18.25 well above Street at $15.08; sees FY23 revenue $3.45B-$3.50B vs. est. $3.05B as UGG sales increased 24.7%, HOKA brand +59.7% and Teva brand net sales -18%; VFC mixed miss on top and bottom line while guides FY23 EPS $3.30-$3.40 below est. $3.57; Piper said heading into discount retailer earnings next week, see buying opportunities for DG, we remain very bullish on OLLI for 2022, and we remain cautious on BIG upgraded to Buy at Bank America as research suggests that the availability of closeouts has meaningfully improved

·     Auto sector: TSLA shares fell as much as 10% to its lowest since July 2021 in another market downtrend; Overnight, TSLA CEO Elon Musk took to Twitter to denounce as "utterly untrue" claims in a news report that he had sexually harassed a flight attendant on a private jet in 2016. Business Insider reported on Thursday that Musk’s SpaceX paid $250,000 in 2018 to settle a sexual harassment claim from an unnamed private jet flight attendant who accused Musk of exposing himself to her; NIO successfully listed its Class A ordinary shares on the Main Board of the Singapore Exchange Securities Trading Limited on Friday; auto dealers GPI and ABG downgraded to Underweight at Morgan Stanley as see conditions building for ‘mean-reversion’ in GPUs and SG&A/Gross across the auto dealer complex

·     Consumer Staples; no place to hide as the generally defensive sector was among the worst performers this week, with household products, to tobacco, to food all decimated in a broad market dump of stock yet again; DANOY has stepped up shipments of infant formula from Europe to address a shortage in the United States according to Reuters; FLO Q1 adj EPS $0.44 vs. est. $0.39; Q1 revs $1.44B vs. est. $1.4B; lowers FY22 adjusted EPS view to $1.20-$1.30 from $1.25-$1.35 (est. $1.28); raises FY22 rev view to $4.76B-$4.85B from $4.660B-$4.695B; FRPT downgrade from Overweight to Neutral at Atlantic Equities and cut tgt to $70 from $130 noting shares have fallen sharply YTD, caught up in both the market sell-off and the reaction to its launch of a $350m equity offering.

·     Restaurants, Casinos, Gaming, Lodging & Leisure sector; this sector had been performing well to start the year, rising on expectations of “pent-up-demand” with Covid behind us and that vacations would be plentiful, leading to jumps in online travel names (BKNG ), hotels (HLT ) cruise lines (CCL ), casinos (WYNN ) RVs, (CWH ), theme parks (SIX ) and more spending on going out to dinner/restaurants (DRI ). But as inflation has continued to ramp, with the Fed well behind the curve at this point, and several top retailers’ warnings about shifts in spending, this group has been crushed in recent weeks and well off 52-week highs. Stifel was positive on casinos this morning saying Las Vegas is currently witnessing record spend, visitation, demand, forward booking (Macau excluded) levels

Energy, Industrials and Materials

·     Aerospace & Defense; BA’s Starliner spaceship is orbiting earth on its way to the International Space Station after taking off Thursday night from Cape Canaveral, Florida, atop a United Launch Alliance Atlas V rocket. This is an uncrewed test flight for the spacecraft; the WSJ reported BA won a key order for 737 MAX aircraft from the owner of British Airways, in a boost for the plane maker after losing a series of sales from longtime customers to rival Airbus SE; in earnings, BAH reported mostly in-line quarterly results

·     Industrial & Machinery; DE reported Q2 profit and revenue that topped expectations citing strong demand helping offset supply-chain pressures; sales grew 10.9% to $13.37B above est. $13.23B while gross margin contracted to 33.3% from 34.3% and affirmed year sales – shares of DE tumbled to lowest since Feb 2021, taking down machinery and equipment names

·     Metals & Materials; Iron ore futures in Singapore are on track for their first weekly gain in five, as China slashed its benchmark reference rate for mortgages by more than expected on Friday, lifting hopes for further support to revive its economy (lifts CLF, BHP, VALE, RIO); other metals were more mixed with steel, copper, and aluminum names down

·     Energy stock movers: no specific stock news in the energy sector today but energy was one of the better performers with oil prices and investors continuing to exit high growth sectors such as energy and discretionary for more cyclical names. Active drilling rigs in the U.S. rose for the ninth consecutive week, surging by 14 to 728, according to Baker Hughes’ (BKR) latest weekly survey. The number of rigs drilling for oil jumped by 13 to 576, gas rigs added 1 to 150.

Financials

·     Banks came into Friday weak, with the XLF falling for the 9th time in 11 days closing at 32.98, trading 14.1% below its 200DMA – today wasn’t any better; the SEC said it had charged WFC with anti-money laundering related violations; LPLA said Total advisory and brokerage assets at the end of April were approximately $1.10 trillion, a decrease of $67 billion, or 5.8%, compared to the end of March 2022. Total net new assets for April were $1.9 billion, translating to a 2.0% annualized growth rate. Chinese banks cut 5-year loan prime rate by 15bps, most since 2019 interest rate revamp, to boost weak mortgage demand amid a property slump, while keeping the 1-yr rate unchanged

·     Insurance: ALL downgraded to Hold from buy at Argus saying the carrier is facing pressure in its auto insurance business due to rising costs for parts, repairs, and replacement vehicles, and expects these costs to remain elevated in the near term; CB authorizes a new $2.5B repurchase program through June 30, 2023; this group was pressured all week – AIG

·     Lending, Bitcoin, FinTech & Payments; UPST shares weaken after Wedbush reiterated its Underperform and cut tgt to $15 from $20 citing new underwriting model introduced and that new ABS deal has higher expected losses; a weakening; growing recession fears, headlines about big box retailers paring back hiring (AMZN ) raising fears of slowing spending by consumers, weighing on lending and credit card names

Healthcare

·     Pharma movers; ABBV submits New Drug Application to U.S. FDA for Investigational ABBV-951 for the Treatment of Advanced Parkinson’s Disease; ATRA slides as receives notification of Bayer’s intention to end exclusive worldwide licensing agreement for next-gen CAR T-cell therapies (collaboration included funding and development of two of ATRA’s CAR-T cell anti-tumor treatments0; FHTX said the FDA placed a partial clinical hold on its Phase 1 dose-escalation study of FHD-286 in R/R myelogenous leukemia (AML) and myelodysplastic syndrome; LLY, INCY Olumiant get EMA panel nod for hair loss disorder alopecia areata; vaccine names that focused on smallpox and monkeypox therapies saw interest this week as monkeypox cases popped up globally the last few days (SIGA among movers)

·     MedTech Equipment; WAT hosted their 2022 analyst day Thursday where senior management detailed a number of these new initiatives including: 1) new product momentum 2) advantages of Empower informatics 3) expansion into high growth industrial markets like battery technology and polymer sustainability and 4) their continued push into biologics

·     Healthcare Services: CVET rises after disclosing that Clayton, Dubilier & Rice, LLC, and TPG offered to buy all of the outstanding shares of common stock of the company for $21.00 per share in cash https://bit.ly/3z5x563 (shares of comps IDXX, ZTS active on news)

Technology, Media & Telecom

·     Internet, Media, & Telecom: U.S. listed China stocks rallying after China 5-year loan prime rate cut by Chinese banks (KWEB, FXI, NTES, JD, BIDU, BABA); WIX downgrade from Overweight to Equal Weight at Morgan Stanley as continue to view Wix as having a best-in-class product portfolio and are encouraged by the focus on improving profitability, but see the benefits skewed to FY23 and beyond; MTCH rises after saying it won some concessions from GOOGL has and withdrawn a request for a temporary restraining order in response.

·     Semiconductors; AMAT reported AprQ Rev/EPS of $6.2B/$1.85 (slightly below consensus $6.4B/$1.91) and guided JulQ softer to $6.25B/$1.77 (consensus $6.7B/$2.05), and $150M AprQ impact from Covid-related supply constraints sustaining into the JulyQ; QCOM announced an update to its flagship processor on Friday, the Snapdragon 8+ Gen 1, as well as a wireless version of its augmented reality design, Smart Viewer

·     Software movers: in security software, PANW reported a better-than-expected F3Q, led by total billings growth of 40% Y/Y topping the Street’s roughly 25% forecast while product revenue growth of 22% Y/Y was very strong, and raised its billings, revenue, and next-gen ARR outlook; the better results from PANW helped boost comps FTNT, OKTA, CRWD initially

·     Hardware, Components & Services; HPE and PSTG downgraded to Neutral from Buy at Bank America and adjusting estimates to account for increased risk of slowdown. Said they see some risk to HPC revs from slower customer acceptance and associated margin pressure. Also lowers tgt for DELL to $65 from $76 and NTAP to $75 from $96