Closing Recap

Tuesday, May 24, 2022

Equity Market Recap

·     As has been the pattern recently, equities reversed a nice gain yesterday. SNAP’s profit warning and more lackluster results from retailers were compounded by softer PMI and housing data to weigh on the equities complex.  The initial morning roll in both the S&P 500 and NASDAQ marked the daily lows, with both indices staging a late attempt but neither managing a meaningful recovery. The hit to social media-related names drove growth relative underperformance with the Russell 1000 Growth finishing down more than 2.5%, while the Value component slipped only about 0.25%.

·     More defensive sectors outperformed, with gains in Utilities (XLU +1.8% on strength in PNW, WEC, MCS, DTE) and Consumer Staples (XLP +1.25% led by CPB, PM, K, TAP). Energy also saw modest gains as oil and gas held up well in a down day (PSX, BKR EOG, HES all gained more than 0.5%).

·     SNAP warned last night it expects to miss its Q2 revenue, adj ebitda targets. The commentary raised concern about slowing ad spending for companies – shares of FB, GOOGL, TWTR, ROKU, BMBL, TTD, PUBM PINS, ETSY just a few of the hardest hit names as the S&P Communication Services sector slid by about 3%. Housing names also fared poorly after new home sales slid to the lowest since April 2020. XHB gave back more than 2%, with PHM, TPH, TOL all down at least 3% to pace the decline.

Economic Data:

·     S&P global May flash services PMI at 53.5 (vs 55.6 in April) and S&P Global May flash composite PMI at 53.8 (vs 56.0 in April); Manufacturing Index: 57.5 vs. 58.9 consensus vs. 59.7 prior

·     Richmond Fed composite manufacturing index -9 in May (weakest since May 2020) vs +14 in April; Richmond Fed manufacturing shipments index -14 in May vs +17 in April

·     April single-family home sales fell -16.6% to 591K unit annual rate well below the est. 750K and March 709K rate; April home sales Northeast -5.9%, Midwest -15.1%, South -19.8%, West -13.8%; the new home supply 9.0 months’ worth at current pace vs March 6.9 months; April median sale price $450,600, +19.6% Y/Y from $376,600

·     In Jan 2021, the 30-yr mortgage rate was 2.65% and average new home price in the US was $401,700. Today the 30-yr mortgage rate is 5.25% and average new home price is $570,300. Assuming a 20% down payment, that’s a 95% increase in the monthly payment (from $1,294 to $2,519), as per Charlie Bilello

Commodities

·     Gold gained overnight and continued to a fourth consecutive daily gain, settling at $1,865.40 an ounce (+$17.60, or +0.95%). Fading equities markets and long yields along with softer US S&P Composite Flash data and very weak new home sales data gave support to the safe-haven quality of the precious metal. Silver followed a similar pattern, settling at $22.06 an ounce (+$0.34, +1.57%) despite its relatively more industrial status.

·     WTI crude rode a roller coaster path to settle slightly lower, just -$0.52 (-0.47%) to $109.77/bbl.  Brent crude saw a modest gain of +$0.14 (+0.12%) to settle at $113.56/bbl. Oilpatch headlines were mixed: reports indicate Russia oil sanctions won’t be approved at the EU summit while the Saudi Foreign Minister indicated the kingdom has done all it can on oil, but that it is not seeing an immediate global shortage. Separately, natgas continued its march higher, settling +$0.52, or +0.59%, to $8.796/mmbtu and marking the highest level since 2008.

Currencies & Treasuries

·     On the heels of this morning’s weaker economic data points, both the dollar and Treasury yields both faded. DXY slipped almost $0.30 to about $101.80 after multiple tests of a $101.72 support level. Yields on 10-yr Treasuries eased by about 10bps to 2.75%, with the 2s/10s curve steepening to about 27bps as expectations for a +50bps hike by the Fed at the September meeting came in a little. The longer end of the curve performed about the same as the 10-yr, with both 20-yr and 30-yr Treasury yields also slipping about.

Sector News Breakdown

Consumer

·     Retailers; BBY Q4 EPS miss ($1.57 vs. est. $1.61) on better revs of $10.65B vs. est. $10.41B while comp sales fell -8.5% Y/Y vs. est. -9.4% – lowers year EPS and rev view to $8.40-$9.00 from prior $8.85-$9.15 and revs $48.3B-$49.9B from prior $49.3B-$50.8B and Q1 gross margin 22.1% vs. 23.3% Y/Y; NLS slides as Q4 sales rose 28% to $120M, vs. the $121.6M estimate; guides Q1 sales $45M-$55M and year sales $380M-$460M below est. $521M; apparel retail sees ANF Q1 EPS loss (-$0.27) vs. est. $0.08 on better sales $813M vs. est. $799.3M while sees Q2 net sales down low-single-digits, and FY net sales flat to up 2%; WMT to expand drone deliveries across six states; RL Q4 adj EPS $0.49 vs. est. $0.38 and revs rise 18% Y/Y to $1.52B vs. est. $1.46B – forecast FY23 revenue to increase in high single digits on a constant currency basis vs. est. 3.6%

·     Auto sector; auto retailers out with earnings: AAP posts modest EPS ($3.57 vs. $3.59) and comp sales miss (increased +0.6% y/y, modestly missing consensus +0.7%, though were still up +25.3% on a 2-year stacked basis) – RBC says modest comp miss should not be too surprising given ORLY, W, and WMT all flagged an unseasonably cool/wet start to spring; AZO Q3 EPS of $29.03 beats the $26.05 estimate on revs $3.9B vs. est. $3,71B as comp sales +2.6% vs. est. +0.24% saying inventory rose 13.9% Y/Y; CRMT Q4 EPS $4.01 vs. est. $3.10; Q3 revs rose 26% to $352M vs. est. $297.23M; the average sales price increased 24% to $17,860 and unit sales volume dropped 1%; UBER is freezing hiring, but not planning layoffs according to one report; TSLA tgt cut to $800 from $1,150 and trims 2022 deliveries estimate to 1.2 mln units from 1.4 mln units at Daiwa

·     Housing & Building Products; homebuilding stocks (TOL ) tumbled following a sharp decline in monthly existing home sales data; SKY F4Q’22 Adj. EBITDA came in at an impressive $121 MM, well ahead of Street $84 MM, driven by both stronger sales and margins while sales came in $638 MM (+43% y/y), vs. Street $562 MM (+25%) driven by both price and deliveries; Truist noted pricing has surged throughout Building Products given shortages and material inflation and a potential volume slowdown from rising rates has investors asking who can hold these prices (mentions AZEK, FBHS )

·     Consumer Staples & Restaurants: defensive food stocks outperformed (CPB, HSY, CAG, SJM, GIS) in a flight to safety as risker assets were sold this morning; BYND announces to feature Kim Kardashian in their new campaign; DOLE sees FY22 revenue $9.4B-$9.7B, consensus $9.7B; sees FY22 capital expenditures $125M

Energy, Industrial and Materials

·     Energy stock movers; energy stocks held up better than most other sectors given rotation out of high growth tech and discretionary; PBR falls after Brazil’s right-wing president Jair Bolsonaro fired the chief executive of oil producer Petrobras – the second in two months – after the company refused to sell fuel at a discount to consumers warning it would lead to diesel shortages

·     Aerospace & Defense; HEI reported fiscal 2Q22 EPS of $0.62 compared to consensus of $0.61 while total revenues were $539M (up ~15%) led by a 33% increase in FSG sales. Commercial aero sales were up 31% organically, better than expected, with defense sales down in the quarter

·     Industrial & Machinery; ETN downgraded to Underweight from Equal Weight at Barclay’s and cut tgt to $120 from $145, shifting preferences in the multi-industry sector and says Eaton screens among the least attractive in a recession, while OTIS upgraded to Overweight saying Otis screens among the most attractive in a recession scenario

·     Transports: in truckers, (ODFL, LSTR, JBHT, CHRW) Truckload spot rates for dry van freight (NTI) have plummeted 18% since the start of the year, but if you remove fuel (NTIL), it nearly doubles to 32%. From an annualized perspective, those numbers moderate to -7% and -22%, respectively, but are still impressive, nonetheless. The big takeaway from all this is that carriers that rely on spot market freight have seen their margins erode faster than the rates alone imply https://bit.ly/3wF5xm4

·     Metals & Materials; lithium stocks active after ALB raises year sales to $5.8B-$6.2B from prior view $5.2B-$5.6B; sees FY22 adjusted diluted EPS $12.30-$15.00 (up from prior view $9.25-$12.25) – other lithium names LAC, LTHM, SQM active; Global crude steel output falls 5.1% to 162.7 mln t in April 2022 vs April 2021 – WorldSteel reported

Financials

·     Bank & Asset Manager movers; a massive surge on Monday for banking and insurance stocks after JPM investor day. Note coming into yesterday, the BKX had posted a -28% drop (30% for JPM) from January 13th to last Friday (BKX and JPM underperforming the S&P 500 by 12 and 14 percentage points, respectively), but reassuring comments from CEO Jamie Dimon and mgmt eased investor sentiment for now (note Treasury yields have been falling which could slow the rebound); BCS said it restarted a 1 bln pound ($1.25 billion) share buyback; ENV shares fell more than 8% on Monday, after a Barron’s article published late on Friday afternoon indicated that buyout interest from several private equity firms (which has been written about in various press reports since late February) may be waning

·     Insurance; Citigroup initiates coverage on several names with Buy ratings on MET and HIG and Sell ratings on PFG , with pair trades: VOYA over PFG, MET over PRU, ALL over PGR, HIG over TRV saying they prefer Life over P&C currently, despite the market suggesting a preference for the opposite based on valuation

·     Bitcoin, FinTech & Payments; MQ upgraded to Overweight with $15 tgt at Morgan Stanley saying its diversified set of vertical exposures, competitive moat, and stable unit economics have them turning incrementally bullish on the platform’s long-term trajectory – entry point looks attractive

Healthcare

·     Pharma movers; PFE announced detailed results from two pivotal studies that make up the ELEVATE UC Phase 3 registrational program evaluating etrasimod, a once-daily, oral, selective sphingosine 1-phosphate (S1P) receptor modulator for the treatment of moderately-to-severely active ulcerative colitis (UC); SWTX rises initially after saying a late-stage clinical trial evaluating its treatment for patients with progressing desmoid tumors met its primary endpoint and also met all secondary endpoints

·     Biotech movers: INMB said the FDA placed the company’s investigational new drug application to start a Phase 2 trial of XPro in patients with Alzheimer’s disease on clinical hold; ILMN announced that the company has suspended patient enrollment in its Phase 2b study of Xowna, known as the FREEDOM trial, for the treatment of coronary microvascular dysfunction

·     MedTech Equipment & Services: PODD rises after Bloomberg reported DXCM is in talks to acquire Insulet (PODD) to create a diabetes device giant, citing people with knowledge of the matter https://bit.ly/3yUB7hq; WOOF Q1 sales rise 4% to $1.48B, topping the $1.45B estimate and reports net income of $24.7M vs $7.6M Y/Y and comparable sales grow 5% Y/Y while company maintains its 2022 revenue outlook of between $6.15B-$6.25B

Technology, Media & Telecom

·     Internet, Media & Telecom movers; social media stocks tumble after SNAP said they believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range (FB, PINS, TWTR, GOOGL among decliners); RBC noted the announcement will sound the alarm on the deteriorating macro’s evolving effects on digital advertising; shares of other Internet peers such as BMBL, MTCH, FVRR also active on fears for impact on ad-supported digital platforms; in telecom, VZ CFO said at a conference today that stiff competition, and inflation “temper” 2q outlook

·     Semiconductors: Samsung (SSNLF) to spend $360 billion on chips, biotech over 5 Years, Bloomberg reported. The Samsung group plans to raise spending by more than 30% to 450 trillion won (about $360 billion) over the half-decade to 2026; LSCC upgraded from Neutral to Positive and up tgt to $65 from $58 at Susquehanna saying with shares down -35% YTD, they are using any macro weakness to selectively upgrade our third semiconductor company this year.

·     Software movers; ZM rises after better Q1 and guidance as 1Q adj EPS $1.03 vs est. $0.87 on revs $1.074B vs est. $1.073B; sees 2Q adj EPS $0.90-0.92 vs est. $0.87 and revs $1.115-1.12B vs est. $1.11B; sees FY adj EPS $3.70-3.77 vs est. $3.53; WKME posted a modest 1Q rev beat, but an ARR miss, decline in quarterly enterprise DBNRR, slowing RPO growth, and -3% 2Q rev guide miss (downgraded at KeyBanc); SNOW upgraded to Buy at Rosenblatt while cut tgt to $255 from $325 ahead of earnings results this week

·     Hardware, Components & Services; UBS reduced their 2022/23 global PC shipment forecasts as they see downside risks to PC demand as well as supply constraints due to inflation, the Russia/Ukraine war, and China’s lockdowns. Trims 2022/23 global PC shipment forecasts, excluding Chromebooks, by 5.2% each and project global PC units excluding Chromebooks to decline 4.4% in 2022 and -3.7% in 2023. Cut 2022 and 2023 regular notebook (NB) estimates both by 7% to 213.3m and 205.2m units (-4% and -4% YoY), respectively (HPQ, DELL, GOOGL).