Closing Recap

Friday, May 27, 2022

Equity Market Recap

·     U.S. stocks finally put in a good week, closing at the highs of the day amid a squeeze into the 3-day holiday weekend, with more than 6% weekly advances for the Nasdaq (semis rose 7%), Russell 2000, Dow Transports, and S&P 500 and more than 5% advances for the Dow. With this week’s gains, the S&P and Nasdaq broke their 7-week losing streaks (much talked about in media recently) and the Dow snapped its 8-week streak. Many of the recent losers put in the biggest gains this week, namely consumer discretionary and technology despite very mixed to disappointing earnings results from several of them this week (signs a near-term bottom in perhaps, rallying on bad news). The other factor that changed was the stance on interest rates. Stocks took off Wednesday afternoon following the Fed May policy meeting minutes as expectations remain for back-to-back 50 bps hikes from the Fed at upcoming meetings, but the picture after that appears cloudy (slowing hikes or a pause), which has given markets a boost off YTD lows. Covid-19 lockdowns in China and the war in Ukraine have exacerbated supply-chain woes while inflation fears have greatly impacted companies in the U.S., and until today had risen all sort of recession fears. Was today just a continued big bear market rally, jumping from the 3,900 level last week (to 4,140 today) and recovering off the -20% ATH levels for the benchmark index….or could be the start of something bigger perhaps.

Economic Data:

·     Inflation data better than feared: April PCE Price Index rose +0.2% M/M vs. +0.3% expected and +0.9% prior, while on a Y/Y basis rose +6.3% (in-line) and +6.6% prior. Core PCE Price Index rose +0.3% M/M (in-line w ests and prior reading), while rose +4.9% Y/Y (in-line) and +5.2 % prior.

·     Personal Income for April rose +0.4% M/M below the +0.6% expected and +0.5% prior, while Personal spending rose +0.9% M/M vs. +0.7% expected and +1.4% prior. The personal savings rate crashes from 5.0% to 4.4%, the lowest since Lehman filed for bankruptcy back in 2008

·     Advance International Trade in Goods for April reported at -$105.94B vs. -$118.0B expected and -$125.94B prior (revised from -$127.12B)

·     Advance Wholesale Inventories for April rose +2.1% to $860.8B vs. 2.0% expected and +2.7% in March (revised from +2.3%); while on a Y/Y basis, +23.8%; Advance Retail Inventories rise +0.7% in April to $696.3B vs. prior +0.5%.

·     University of Michigan surveys of consumers sentiment final May 58.4 (consensus 59.1) vs preliminary May 59.1 and final April 65.2 (and worse since 2011); current conditions index May-F 63.3 vs prelim May 63.6 and final April 69.4 and expectations index May-F 55.2 vs prelim May 56.3 and final April 62.5

Commodities

·     Oil prices make it 5-straight weeks of gains ahead of Memorial Day weekend and the unofficial start of the summer driving season, with WTI crude rising $0.98, or 0.86% to settle at $115.07 per barrel. U.S. drillers cut oil and gas rigs for first time in 31 weeks as Baker Hughes said U.S. total rig count dipped one rig to 727 as gas rig count rose 1 to 151 but oil rig count was down -2 to 574. Iranian forces seized two Greek tankers in the Gulf on Friday, shortly after Tehran warned it would take "punitive action" against Athens over the confiscation of Iranian oil by the United States. For first time ever, RBOB gasoline and diesel futures end session above $4-a-Gallon. Gold prices rise $3.70 to settle at $1,851.30 an ounce.

Currencies & Treasuries

·     The U.S. dollar posts its biggest weekly drop in nearly 4 months as rate bets cool but rebounds late day. The dollar index (DXY) bounced off morning lows around 101.50 to turn higher but posts 2nd straight weekly decline after hitting 20-year high 2-weeks ago. Traders have recently lowered Federal Reserve rate hike expectations amid signs the U.S. central bank might slow or even pause its tightening cycle in the second half of the year given slowing economic data and easing inflation. The dollar index fell as low as 101.43 for the first time since April 25. On a weekly basis, it was down 1.3%. Minutes from the Fed’s May meeting this week showed most participants believed 50 basis-point hikes would be appropriate at the June and July policy meetings, but many thought big, early hikes would allow room to pause later in the year to reassess. The euro has benefitted from the dollar’s decline, along with rising rate hike expectations by the ECB.

·     Treasury yields slipped to lowest levels in weeks, with the 10-year hitting lows around 2.71% before rebounding. Data showed that inflation eased in April, boosting hopes that the economy will suffer less damage if the worst of soaring price pressures have passed. Following the FOMC May policy meeting minutes mid-week showing the Fed plans to raise rates in the next few months but may look to data after that has ease interest rate fears. Inflation continued to increase in April, but not at same magnitude as in recent months. The personal consumption expenditures (PCE) price index gained 0.2% last month after shooting up 0.9% in March. Yields have dropped from 3-1/2-year highs of 3.203% reached on May 9 on concerns that the Federal Reserve’s aggressive tightening could tip the economy into recession.

Sector News Breakdown

Consumer

·     Discount & Specialty Retailers: BIG reports unexpected Q1 EPS loss of (-$0.39) vs. est. $0.93; Q1 revs $1.37B misses the $1.46B estimate; 3-year comparable sales growth of 2% with significant slowdown in April; HIBB missed earnings expectations for Q1 after sales dropped without the spending boost from government stimulus money that consumers received a year earlier; ULTA posted a better-than-expected F1Q and raise annual guidance by 7% to $19.20-$20.10 and boosted FY22 comp store sales view to 6%-8% from 3%-4% (upgraded to Buy at Jefferies); COST F3Q sales beat consensus by $1.2B and core comp sales grew 11% on top of 15% in the year-ago period – Total company comp sales ex: fuel, in c/c +10.8% vs. +15.1% Y/Y

·     Apparel Retailers: GPS falls after cuts FY forecast as inflation rips demand – guides FY adj EPS $0.30-0.60 vs est. $1.34, EBIT margin 1.8-2.8%, revs -low-to-mid-single digit % vs est. -2.3%; AEO slides on EPS and sales miss (Q1 EPS $0.16 vs. est. $0.25; Q1 revs $1.05B vs. est. $1.14B) as qtr-end total ending inventory at cost increased 46% to $682M compared to $467M last year and slashed its operating income outlook (downgraded to Neutral at JPM as see potential markdown risk tied to supply vs. demand imbalances); FTCH Q1 GMV grew just 2% YoY (vs. consensus +16%), adjusted EBITDA loss of $36 million was far worse YoY ($19 million loss in 1Q21) and lowered FY digital GMV growth to 5-10% (from 28-32% prior)

·     Auto sector: broad strength in OEMs with TSLA, F, GM rising; DIDI rises initially after a Bloomberg News report that state-owned automaker China FAW Group is considering acquiring a significant stake in the ride-hailing company; NIO is looking to hire for vehicle manufacturing-related positions in the U.S., suggesting that it may be planning a new plant in the country according to local media outlet; LI has cuts this year’s sales target by 15%, according to local tech outlet

·     Housing & Building Products; homebuilders were mixed after a good week, as group benefitted from better TOL earnings and sliding Treasury yields (taking mortgage rates a bit lower); RH tgt cut to $315 from $360 at Wedbush, staying sidelined into 1Q22 earnings on June 2 as headwinds have grown since the company’s 4Q21 earnings report in March when they delivered somber news of a 1000-1200 bps slowdown in demand growth in the four weeks following the start of the Ukraine War and 2022 guidance below expectations.

·     Consumer Staples & Restaurants; RRGB 1Q results reflected slightly better than expected sales and higher EBITDA due primarily to lower than expected advertising costs (timing), while store margins were in-line; Reckitt Benckiser is pursuing a sale of its infant-formula unit, WSJ reported citing sources saying received did From Clayton Dubilier & Rice this week; SAFM rises after earnings, topping $200 per share to all-time highs (TSN higher in sympathy)

Energy, Industrials and Materials

·     E&P and Majors; Union Steelworkers signed a tentative agreement to end a nine-week-old strike at CVX’s Richmond, California, refinery, Reuters reported; BP and SHEL a focus after the new U.K. 25% windfall tax on oil-and-gas production profits. BP is the most exposed to this windfall tax through its oil and gas projects in the U.K. North Sea. However, these fields account for just 7% of BP’s production and 4.3% of total profits, Biraj Borkhataria, as per CNBC; VLO added to analyst current favorites list at Raymond James

·     Packaging & Materials: GPK upgraded to Outperform from Market Perform at BMO Capital saying its positioned as among the most defensive of the paperboard packagers as produces a full array of carton-board substrates, as well as downstream folding cartons/food service packaging. GEF was downgraded to Underperform at BMO saying it is the most industrially oriented company in our packaging coverage

·     Chemicals & Materials; LTHM and LILM said they plan to collaborate on the advancement of lithium metal technology for use in high-performance battery cells; LYB announces special dividend of $5.20/share; Fertilizer producers such as MOS, CF, NTR remained pressured after tumbling Thursday as nitrogen prices reportedly plunged 30%, partly due to demand destruction. According to Bloomberg yesterday, the June spot price in Tampa, Florida, for ammonia nitrogen fertilizer settled at $1,000/metric ton, a 30% drop from May’s $1,425/ton

Financials

·     Lending: The Washington Post reported the Biden administration is planning to forgive $10K in student loan debt per borrower amid historically high levels of consumer price inflation, citing three people familiar with the matter. Biden was initially prepared to make the announcement this weekend at the University of Delaware commencement, but the school shooting in Texas has delayed the timing, according to the people

·     Consumer Finance: KBW Inc. said given the move in mortgage rates so far in 2Q, most of the originators (in several 1×1 meetings, with participation from PFSI, UWMC, COOP, FBC, and OCN) adopted a slightly more cautious tone on volumes (relative to the time of their earnings calls). It appears that gain-on-sale margins have found their footing as many originators continue to focus on profitability, willing to cede some market share

Healthcare

·     Biotech & Pharma movers; IOVA tumbles after announced new clinical data for its experimental melanoma drug, including a 29% objective response rate in one cohort of patients; AMRX and Kashiv Biosciences’ Fylnetra was approved by the FDA, a biosimilar to AMGN’s Neulasta; in cannabis, CGC shares slide after reports a bigger adjusted Q4 core loss, as demand for cannabis fell from COVID-19 lockdown-induced highs; ACB 51.1M share Spot Secondary priced at $2.45

·     MedTech Equipment; ZBH was downgraded from Buy to Hold at Needham as expect recon market growth, and ZBH’s growth, to revert to the low-single digits after above-normal growth in 1Q22. In addition, ZBH has been losing share in its hip and knee business, and we’re not sure what will reverse this trend. Needham upgraded BSX from Hold to Buy saying they are less concerned about WATCHMAN given its 1Q22 growth, and sensitivity analysis that shows BSX could likely sustain high single digit growth even assuming a moderate WATCHMAN slowdown.

·     Healthcare Services: Bernstein upgraded HCA to Outperform from MP with $271 tgt while downgraded CVS ($112 tgt) and UNH ($561 tgt) to Market Perform, positive on the group and sees it well positioned in an inflationary environment – positive on HCA ability to pass through labor costs and resulting earnings recovery – also resumed ANTM, CNC at Outperform and CI, HUM at Market Perform

·     Abstracts were released yesterday post market close ahead of next week’s American Society of Clinical Oncology (ASCO) 2022 meeting, 6/3-6/7, in Chicago:

·     ACET said data from early-stage trial of its CAR-T cancer therapy showed 4 of 6 lymphoma patients taking treatment had no signs of cancer at 28 days

·     IMGN presented preliminary median overall survival of 13.8 months for SORAYA in the ASCO abstract, which Canaccord viewed as positive

·     LEGN – ASCO published 5 abstracts on LEGN’s Carvykti (BCMA autologous CAR-T) in multiple myeloma (MM)

·     MRTX registrational adagrasib 2L NSCLC data was updated in the ASCO abstract – data is in line with a previous data cut and efficacy is like approved sotorasib

·     PMVP said it would be presenting data from its lead program, PC14586, at the 2022 American Society of Clinical Oncology meeting next month.

·     SWTX tumbles after shared initial data from a Phase 1/2 trial involving its lead product candidate nirogacestat in patients with relapsed or refractory multiple myeloma – initial response rate of 38% below recently elevated expectations and monotherapy arm outperforming hitting shares

·     XNCR reported initial data from DUET-3, a Ph 1 dose-escalation study of XmAb-104 (PD-1 x ICOS bispecific antibody), in patients with advanced solid tumors from its ASCO abstract

Technology, Media & Telecom

·     Internet; a string of better-than-feared results by Chinese internet giants including BABA, BIDU, JD have helped the sector rebound and boost optimism that the outlook is shifting in favor of them; PDD added to the beats in the space today as revenue 23.79 billion yuan, +7.3% y/y, vs. estimate 20.65 billion yuan; for TWTR the SEC said it is looking into Elon Musk’s disclosure of his stake in Twitter Inc in early April, according to a letter the agency sent to him in April.

·     Semiconductors: MRVL 1Q results and 2Q outlook were both better as demand continues to be strong outside of Consumer (~12% of sales), as bookings strength continued in the quarter and Data Center and Carrier fared particularly well; Citi cuts DRAM forecasts for 2H on weaker demand but thinks players will be rational and cut production; cites macro-driven demand uncertainty, disciplined supply strategy

·     Software movers; WDAY slips after Q1 EPS of $0.83 missed by $0.03 on in-line revs of $1.43B, as analysts cut tgt prices saying Q2 backlog forecast implies further growth deceleration; ZS delivered an impressive quarter/guide, highlighted by 54% y/y billings growth and 76% y/y CRPO growth, and we believe that a long runway for growth remains; SUMO beat expectations in the Q as revenue/ARR accelerated driven by continued traction in large customers and sizable upsell/cross-sell deals; ADSK rallies after posted Q1 results/guidance that topped expectations.

·     Hardware, Components & Services; DELL rises as Q1 adj EPS $1.84 tops est. $1.40 and Q1 revs rose 16% Y/Y to $26.1B vs. est. $25B while posting record revs for infrastructure solutions group and Client Solutions Group; Japanese buyout firms Japan Industrial Partners (JIP) and Polaris Capital Group are each considering participating in bids for Toshiba (TOSYY), two people familiar with the matter said on Friday, Reuters reported

·     Media & Telecom movers; ROKU upgraded from Sell to Hold at Pivotal with $80 tgt as the shares have recently reached what they view as our reasonable – though continue to believe the backdrop for results is tough (as partly highlighted by SNAP’s recent disappointing outlook); LGF CEO said yesterday expects Starz spinoff announcement by end of summer; DIS looking for big streaming numbers this weekend with its “Obi Wan” on Disney+, NFLX looking for big numbers from release of new “Stranger Things” and PARA ahead of “Top Gun Maverick”