Closing Recap

Wednesday, November 02, 2022

Equity Market Recap

·     Stocks slammed as Fed Chairman Powell Q&A sinks market hopes of slowing rate hikes! As expected, the Fed delivered on its fourth straight jumbo rate hike of 75 basis points, lifting the target for the benchmark federal funds rate to a range of 3.75% to 4%, its highest level since 2008. Stocks jumped initially (yields lower) as text showed “it (Fed) anticipates ongoing interest rate increases will be appropriate to attain a ‘sufficiently restrictive’ policy stance to return inflation to 2% over time.” Those comments helped lower odds of a December 75-bps rate hike tumble from 41% before FOMC to 19% after and futures price in a terminal effective Fed funds rate around 4.97% in May 2023. Guggenheim’s Scott Minerd tells Bloomberg TV the "cumulative tightening" phrase is an "artful way" for the Fed to get "off the hamster wheel" of 75 basis points per meeting, per Bloomberg. That was all before Fed Chairman Powell spoke at 2:30…

·     The Fed showing their power and influence on world markets as just a few headlines from the Chairman in the Q&A crushed markets late day, erasing the initial (brief) rally. A key comment from Fed Chair Powell in his Q&A: “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive." Powell said he doesn’t believe the Fed has moved to fast and it been a good and successful program so far and that still is a need for ongoing rate hikes.

·     In a question about any evidence that inflation at risk of becoming entrenched? Powell replied point to expectations; if longer term expectations moving up, that would be troubling, were moving up in middle of the year. Shorter term expectations rose more recently, which is very concerning (stocks did not like these comments). The headlines that sunk markets end of day was Powell saying, "It is very premature to be thinking about pausing…. Very premature"

·     In other non FOMC, non-earnings news: China Covid lockdowns picking up steam and impacting some of biggest companies: China has ordered a 7-day lockdown of the area around Foxconn Technology main plant in Zhengzhou, a move that will severely curtail shipments in the world’s largest AAPL iPhone factory, while TSLA shut its flagship China showroom in Beijing last month, according to a person familiar with the matter, per Bloomberg.

FOMC Policy Meeting Headlines:

·     The Fed (as expected) raises key overnight interest rate by 75 basis points to 3.75%-4.00% range; says it will consider cumulative tightening, policy lags, and economic and financial developments in determining pace of rate hikes. Fed says it anticipates ongoing interest rate increases will be appropriate to attain a ‘sufficiently restrictive’ policy stance to return inflation to 2% over time. Fed says inflation remains elevated.

·     Fed Chairman Powell noted during press conference: real GDP has slowed considerably; lower real disposable income; housing has weakened considerably due to high mortgage rates; but labor market tight, wage inflation moderate – labor market out of balance; participation little changed; said PCE 6.2%, Core PCE 5.1% too high; said continue to anticipate ongoing rate increases will be appropriate; strongly committed to returning inflation to 2%; think ongoing increases in rates will be appropriate to get policy sufficiently restrictive; said at some point, it will become appropriate to slow pace of rate increases; Still have some ways to go, and incoming data suggests level of rates will be higher than originally expected. Time to slow may come in next meeting or time after that (this headline markets liked initially). When talking about a recession, Fed’s Powell: as rates go higher it’s hard to see a soft landing (those were the comments that the press conference ended on).

Commodities

·     ADP national employment report shows U.S. employment increased by 239,000 private sector jobs in October, above prior 208,000 and the estimate of 195,000 jobs – strongest gain since July, driven by leisure/hospitality (+210k); manufacturing sector lost 20k jobs

Commodities, Currencies & Treasuries

·     WTI crude oil rises $1.63 or 1.84% to settle at $90.00 per barrel, near highs of the day; Brent crude futures settle at $96.16/bbl, up $1.51, or 1.6%; Front-month gas futures rose 55.4c, or 9.7%, to settle at $6.268 per million British thermal units (MMBtu) – follows a rise of 12% on Monday and a drop of 10% on Tuesday. Gold prices rises +$0.30 to $1,650 an ounce, settling prior to the FOMC meeting results (prices slid following Powell Q&A). The dollar remained anchored around 111.50 during afternoon for dollar index (DXY) despite swings in stocks and bonds. Treasury yields popped, dropped, then popped again in several head fakes from Powell comments (10-yr highs 4.08%, lows 3.98% and back to 4.03% in end – which is where is started).

Sector News Breakdown

Consumer

·     Retailers: AMZN hits 52-week lows, extending losses post earnings last week; GOOS cuts FY sales, profit forecast sending shares lower early; SHOO cut its adjusted earnings per share guidance for the full year after modestly beating top and bottom line Q3 results; TUP tumbles as Q3 net sales declined 20% Y/Y to $302.8M, and says inability to maintain compliance with covenants in credit agreement raises substantial doubt about ability to continue as a going concern; BGFV Q3 EPS $0.29 vs guidance $0.22-$0.32 and revs $261.4M vs. est. $258.4M with comps (-9.8%)

·     Auto sector: TSLA shut its flagship China showroom in Beijing last month, according to a person familiar with the matter, per Bloomberg; RACE reported strong upside and raised guidance. Ferrari shipments rose 16% to 3188; Ford (F) Oct US sales fell -10% in Oct and truck sales -7.7%; SUV sales down -14.1% in Oct

·     Housing & Building Products: in building products, VMC Q3 EPS $1.78/$2.09B above ests $1.70/$2.0B and narrows FY22 adjusted EBITDA view to $1.64B-$1.68B from $1.6B-$1.7B; MLM Q3 EPS $4.69/$1.68B tops $4.63/$1.65B ests; lowers FY22 revenue view to $5.740B-$5.845B from $5.77B-$5.91B and sees FY22 Adjusted EBITDA $1.610B-$1.675B; flooring company LL tumbles after wide Q3 miss and no guidance; weekly housing data from the Mortgage Brokers Assoc showed purchase index falls 0.8%, refinancing index rises 0.2%as the average 30-year mortgage rate falls 10 bps to 7.06% in oct 28 week (DHI, KBH, LEN, TOL, MTH builders)

·     Consumer Staples: in food, MDLZ raised its full-year outlook as consumers continue to absorb higher prices for its snacks, though extra costs took a chunk out of its bottom-line in the third quarter – posted organic sales momentum (+12.1% vs Street 7.3%); in products, CLX reported solid Q1 topline/margin/EPS upside, but also maintained FY EPS guidance, with an incremental negative FX impact, supply chain uncertainty, and given it is still early in the year; beauty space pressured as EL posts better Q1, but Q2 guidance well below ests and cuts FY23 adjusted EPS view to $5.25-$5.40. from $7.39-7.54 (est. $7.39) and sales are forecasted to decrease between 8% and 6% versus the prior-year period

·     Restaurants: CAKE 3Q results were short of expectations on all fronts, with an adj loss per share of 3c vs Street estimate +28c, a function of modestly weaker sales but also the lowest store margins since 2020; EAT a mixed Q3 as PES of $0.57 misses by 4c on better revs up 9% y/y to $955M (est. $933M) on better operating margins; DIN 3Q adj EPS $1.66 vs est. $1.30 on revs $233.2Mm vs est. $228.3Mm; IHOP comps +1.9%, Applebee’s comps +3.8%; DENN Q3 EPS $1.66 vs est. $1.30 and revenue $233.2M vs. est. $228.8M on better EBITDA $63.6M and guides FY EBITDA $243M-$248M vs prior $235M-$250M; YUMC and YUM also with quarterly results

·     Lodging & Leisure sector: ABNB reported its “biggest and most profitable quarter ever,” said active listings rose about 15% in the Q3 compared to a year ago and gross bookings rose to $15.6B, up 31% y/y and beating analysts’ expectation of $15.37B, but said they see Q4 revenues to decrease relative to Q3

·     Casinos & Gaming: CZR reported an upside 3Q adj. EBITDA result of $1.01b vs. Street’s $929m. Las Vegas trends remain strong, with October a record month for CZR (~$200m EBITDA, up double digits y/y), 3Q Digital losses were -$38m, far better than expected; BALY downgraded to Hold ahead of Thursday’s earnings report, and lowering target price to $25 from $28 at Stifel; MLCO reported Q3 EPS that missed estimates on a -46% y/y drop in revs, also missing views

Energy

·     E&P and Majors: DVN delivered 3Q22 results ahead of estimates, driven by stronger production and pricing as FCF of $1.65B topped $1.45B est. and introduced 4Q22 oil and total production guidance of 319-326 MBbl/d and 640-660 MBoe/d, which was below projections; CRK reported 3Q22 EPS and EBITDAX that were in-line with estimates and reaffirmed FY22 capex guidance after two consecutive quarters of increases. Production for the quarter came in near the top end of the guidance range; PUMP Q3 EBITDA Beat; Accretive Wireline Acquisition

·     Refiners: Continuing the trend of strong refining results, PARR reported its second-best adjusted results on record, driven by increased refining capture and retail sales as adjusted net income was $2.88 vs. est. $2.00 and adj EBITDA was $214.1M vs. est. $163M)

·     Utilities & Solar; AVA downgraded to Neutral from Buy at Mizuho as believe the company will have very few levers to offset higher-than-expected inflation and interest rates in our forecast period (through 2025); EIX slips post earnings results; Utility sector was one of the early morning sector leaders

Financials

·     Bank movers: WSJ reported broken deal triggered currency losses for BCS, DB and Citi (C) as the damage, around $100 million for Barclays, related to hedges the banks provided on Prosus’ failed deal for BillDesk https://on.wsj.com/3h7lix7 ; Moody’s cuts outlook for European banks, including Germany’s, on credit woes; WSJ reported Oak Hill Advisors LP, a subsidiary of TROW that manages $56B and is best known as a corporate-debt investor, said that it led a consortium to pay about $1.8B for 1.7 million acres of forest, one of the largest U.S. timberland purchases in years; in exchanges, NDAQ downgraded from Outperform to Neutral at Credit Suisse following robust stock outperformance relative to exchange peers (NDAQ +7% vs -18% avg for group) and the SP500 (-14%); CME reported Oct. Avg daily contract vol. +11% and Avg daily volume 22.7m

·     Insurance: PRU adjusted operating income slid 46% to $803M from $1.49B, and it swung to a loss of $284M on a net basis, from net of $1.53B in the year-earlier period; AIG had losses from Hurricane Ian, but its property-casualty unit turned an underwriting profit; VOYA agreed to acquire cloud-based benefits administration tech platform BNFT, paying $10.50 per share in an all-cash transaction priced at around $570 million. https://bit.ly/3TX6L5x ; VOYA Q3 EPS core beat in Wealth on NII, Investment Mgmt Expenses and favorable Health Claims; UNM Q3 beat

·     Consumer Finance, FinTech & Payments: SQ added to Tactical Underperform List, reit Underperform w/ $49 PT at Evercore/ISI; CACC shares slide after reported last night with mixed quarterly results and large write-downs; MA, Visa (V), DFS and other card related names were pressured early ahead of the Fed

·     Financial Services: PAYC posted upside to revenue growth and EBITDA in the quarter, while 4Q growth was guided a solid ~360bps above the Street; INTU positively preannounced its FQ1 results in response to a Bloomberg News report about a Credit Karma hiring freeze and reiterated that the company is on track to meet its full-year FY23 bottom-line guidance; WU earning and announced a renewed five-year agreement with WBA in long-standing relationship; HRB F1Q23 revenue of $180M (-7% y/y) was relatively consistent with consensus of $182M, and Q1 adjusted EBITDA of -$172M (-24% y/y) was also in the neighborhood

·     REITs: for triple net REITs, Morgan Stanley said they expect them to cut acquisitions -20-40% in 23e as they wait for cap rates to rise as reduce ests with initial 23e AFFO growth +0.4% led by NNN (+2.2%)/ADC and BNL debt cost a headwind; EXR was among the top S&P decliners after results last night

Healthcare

·     Biotech & Pharma movers: GSK raised its 2022 guidance after stronger-than-expected sales in Q3 – said it now expects 2022 growth in sales 8%-10% at constant exchange rates, from 6%-8%; NVO raised full-year guidance and reported a Q3 net profit that beat expectations amid strong demand for its diabetes care and obesity treatments; sales rose 28% to DKK45.57 billion; ALKS announces intent to separate oncology business; ARCT announced it entered a collaboration with CSL Seqirus (subsidiary of CSL Limited,) for the development and global commercialization of vaccines; BPMC downgraded from Outperform to Perform at Oppenheimer

·     Healthcare Services: WBA and CVS have agreed to pay more than $10 billion in a landmark settlement to resolve opioid-crisis lawsuits brought by states, cities, and other governments, the WSJ reported https://on.wsj.com/3sRU0NC ; separately, CVS raised adjusted eps guidance range to $8.55-$8.65 from $8.40-$8.60 and boosted cash flow from operations guidance range to $13.5B-$14.5B from $12.5B-$13.5B after better quarterly results; BFAM reported a slightly adjusted EPS beat, driven by revenue outperformance and lower share count while reduced the high-end of 2022 guidance, mainly due to higher f/x, interest, and taxes; HUM posts 10% rev increase amid rise in Medicare membership and premiums

·     MedTech Equipment: IRTC cuts FY22 revenue view to $407M-$411M from $415M-$420M (est. $418.72M); Q3 adj EPS loss (-$0.63) vs. est. loss (-$0.83) and revs miss at $103.8M vs. est. $106.1M

Industrials & Materials

·     Industrials & Transports: MAERSK reports Q3 underlying net income $8.82B vs consensus $7.96B; confirms FY22 guidance; but now sees global container demand falling by 2% to 4% this year, citing an unfolding economic slowdown expected to continue into 2023, down from prior view for an outcome towards the lower end of a range of minus 1% to plus 1%; in truckers, CHRW Q3 EPS miss of $1.78 vs. est. $2.17 and revs $6B vs. est. $6.34B as said Income from operations decreased 7.5% to $287.6 million (weighs on truckers/freight names); BA shares rebounded after CFO said co expects to generate $3 bln-$5 bln in free cash flow in 2023

·     Metals & Mining: ATI Q3 adj. EPS of $0.53 was in line on sales of $1.032B (vs. Street’s $943MM). HPMC beat on sales/EBITDA on aero ramp, outweighing softer than expected AA&S results. Q3 FCF was ~$77MM (slight W/C source after a heavy H1 build); CLF downgraded to Underperform from Peer Perform at Wolfe with a $12 price target as believes auto contract prices will "fall sharply" year-over-year into 2023

·     Chemicals: DD terminated its $5.2B buyout of ROG, after DuPont said the termination of the deal was agreed with Rogers as they have been unable to obtain timely clearance from all the required regulators. https://bit.ly/3Wmvr90 ; LTHM reported an in line Q3 but a slight FY guidance increase did not meet Street expectations and weighed on shares; FMC reported 3Q adj. EPS/EBITDA of $1.23 / $261mm, beating consensus $1.11 / $245mm and narrowed FY EPS/EBITDA guidance to $7.10-$7.60 (vs. $7.00-$7.70) and $1.37-$1.43bln (vs. $1.36-$1.44bln), respectively, implying a touch weaker 4Q; ENVX tumbles after Q3 rev miss, below expectations

Technology, Media & Telecom

·     Media, Internet: streaming names weak as PARA reports Q3 EPS miss $0.39 vs. est. $0.46 on weaker revs $6.92B vs. est. $7.06B as DTC revs $1.23B vs. est. $1.26B – said its advertising revenue declined 2%, citing macroeconomic headwinds; sales at TV Media, its biggest reporting segment, fell -5%; MTCH jumps after reports better-than-expected Q3 revenue as users looking for matches and connections took paid subscriptions on dating app Tinder, though did guide Q4 revs $780M-$790M, below estimates of $809.2M; NYT tops profit estimates for Q3 as subscriber base grows to 9.33 million while is expecting Q4 digital-only sub revs to rise about 20%, total sub revenue to rise about 10% to 13% and digital ad and total ad revenue to fall about 10%; LBTYA 3Q22 results beat consensus; FY22 guidance reiterated; committed to FY23 buyback target

·     Semiconductors: AMD guided Q4 data center revs of $5.2B-$5.8B and said sees data-center segments expected to grow for year at $23.2B-$23.8B for the year and gross margins of about 51% 9recall AMD lowered guidance last month); CRUS delivered beat/raise results as F2Q (Sep.) sales/EPS of $541M/$1.99 bested consensus by 16%/37%, respectively while guided F3Q (Dec.) up 2% Q/Q (flat Y/Y) to $550M, 2% above Street; ENTG Q3 results miss estimates and guides Q4 PS $0.75-$0.80 below ests $1.04 and said estimates U.S. government’s new export controls will reduce sales by $40M-$50M

·     Software movers: video game publisher EA reduce yearly target for revenue and bookings, but push earnings forecast higher; AYX Y/Y ARR growth of 33% was a point ahead of guidance, while net expansion rates were up a point Q/Q overall (to 121%) and in the G2K (to 129%), and deal sizes were up 30% Y/Y; TWLO double downgraded to Underperform at Bank America and slash tgt to $85 from $175 based on recent DevSecOps survey where 52% of respondents expect to spend the same or less with TWLO in 2023 and channel checks indicate greater competition; ZI slides as delivered revenue ahead of consensus, the miss on billings ($257M vs est. $284M) and commented about the worsening macro backdrop with weak Q4 guidance sent shares down

·     Hardware, Components & Services: for AAPL, China Locks down area around ‘iPhone city’ in blow to Apple as local government ordered a 7-day lockdown starting noon. China has ordered a 7-day lockdown of the area around Foxconn Technology main plant in Zhengzhou, a move that will severely curtail shipments in the world’s largest iPhone factory https://bloom.bg/3sOMnYa ; VSH, TRMB guided lower after results for each

·     Telecom movers: BAND posted solid Q3/22 results ahead consensus expectations with total revenue of $148M ahead of $141M forecast and profitability was also better-than-expected; DISH Q3 EPS $0.65 vs. est. $0.56; Q3 revenue $4.1B vs. est. $4.15B; Q3 net Pay-TV subscribers increased approximately 30,000 in Q3 compared to a net decrease of approximately 13,000 y/y