Closing Recap

Monday, November 14, 2022

Equity Market Recap

·     Stocks bled into the close, a sharp sell-off in the final minutes ahead of tomorrow’s inflation reading and earnings from HD and WMT, with the S&P closing at lows. After a surge in US stocks last week on decelerating CPI data, a sharp decline in the dollar, and the end of a mixed earnings season mostly behind us, markets moved sideways, as the S&P bounced around the 4,000 level with hopes for a shot at the 200-day moving average around 4,080, a level not topped since April – but tumbled sharply the last 30-minutes on no apparent headlines. The Dow Jones Industrial Averages, Dow Transports, and Russell 2000 have all topped their respective 200-day levels in recent weeks, but the S&P and Nasdaq remain below. More inflation data tomorrow, with the October Producer price index (PPI) headline reading expected to show a rise of +0.4% m/m and +8.3% y/y, while on a core basis, (ex food & energy) expected to rise +0.3% m/m and +7.2% y/y.

·     With a lack of other market drivers, US equities were left with Fed speakers to determine market direction. Sunday’s more hawkish comments by Christopher Waller were mostly a reiteration that the pace of rate increases is less relevant than the terminal rate and that the terminal endpoint is likely, “a ways off.” That was enough to start the day with a cautious tone. Lael Brainard’s comments later in the morning were more balanced and included mention of more reassuring recent inflation data and an indication that a shift to a slower pace of rate increases could come soon. That was enough for a modest move higher. Investors sold the rally by mid-afternoon as there was little conviction with market breadth close to flat with a negative tilt.

·     Interesting tidbits. Morgan Stanley’s strategist Mike Wilson said he sees S&P 500 falling to 3000-3300 in Q123 while cutting its 2023 EPS forecasts by another $8 to $195 in the base case. Wilson says 2024 should yield "a strong rebound." Data-wise, Data Trek noted Fed Funds futures continue to suggest peak rates in 1Q23 and the potential for rate cuts as early as 4Q23. They also noted US Google searches for home and car buying remain above 2018-2019 levels, indicating the lag of higher rates may not yet have worked through to higher-ticket purchases.

·     Stats to ponder – last Friday, the University of Michigan’s Consumer Sentiment Index posted a reading below 60 for 7 consecutive months, the longest run of extreme negative sentiment that we’ve seen with data going back to 1952. The prior record was 4 straight months during the 1980 recession. Bears have outnumbered Bulls in the AAII sentiment poll for 31 straight weeks (since April). With data going back to 1987, the record for most persistent bearishness was 34 weeks from Feb-Oct 2020.

Commodities, Currencies & Treasuries

·     Oil prices slide with WTI crude -$3.09 or 3.47% to settle at $85.87 per barrel, dragged down by a firmer U.S. dollar while surging coronavirus cases in China dashed hopes of a swift reopening of the economy for the world’s biggest crude importer. Gold futures climbed, rising $7.50, or 0.4%, to settle at $1,776.90 an ounce, holding their ground at their highest finish since August despite a recovery in the U.S. dollar after a 4% decline. Natural gas prices rise 0.9% at $5.933/MMBtu in a market that’s become very focused on when Freeport LNG will restart its Texas plant that accounts for 17% of US LNG export capacity and has been closed since a June fire.

·     Bitcoin has continued its uneventful day, mired in the $16,500 range, the token is higher by less than 1% over the past 24 hours. Concerning the FTX collapse, the WSJ reported that FTX’s trading arm, Alameda Research, had purchased crypto tokens before they were listed on FTX over the past year and Visa (V) announced that they had ended their debit card pact with FTX. BlockFi, a "holistic crypto platform" has told users that they have paused withdrawals because the recovery of obligations owed to them by FTX has been delayed. Finally, a small crypto-only hedge fund, Ikigai Asset Management, announced that they had ‘large majority’ of their assets on the FTX platform, and it would be unclear whether they will be able to continue.

·     While FTX contagion fears have largely been allayed today, many pundits warn the cryptos sector is not out of the woods yet, with insiders such as Daniel Vogel, CEO of Bitso (44th largest crypto exchange) stating "There is a chance that we will see other players start to have liquidity issues."

·     The U.S. Dollar Index (DXY) rebounded slightly, rising +0.4%, a small recovery after last weeks’ -4% decline following the better-than-expected CPI report. It marked only the fifth time since 1985 that the dollar fell over 4% in a single week.

Sector News Breakdown

Consumer

·     Retailers: big week for the retailers with results from WMT (11/15), HD (11/15), TGT (11/16), LOW (11/16) and a handful of others including TJX, KSS, M, ROST, BJ, FL double downgrade from Buy to Underperform at Bank America and clash tgt to $42 from $73 after conducting a deep dive on the company’s Magic: The Gathering business which accounts for roughly 15% of Hasbro’s revenue and 35% of EBITDA. Magic is a trading card game in which players collect cards to battle against each other; LOW downgraded at Citigroup ahead of earnings this week; PTON shares rose after Tiger Global Management increases stake in PTON to 920,717 shares as of Sept. 30, from 765,585 as of June 30, a regulatory filing showed

·     Consumer Staples & Restaurants: in earnings, TSN Q4 EPS $1.50 vs. est. $1.73; Q4 sales $13.74B vs. est. $13.5B; expect capital expenditures of approximately $2.5 bln for fiscal 2023; sees FY23 sales $55B-$57B vs. est. $53.6B; OTLY posted a wider than expected loss for Q3 while a modest 7% jump in revenue from the prior year to $183.03M came up $28.07M short of consensus estimates and cut year forecast

·     Casinos, Gaming, Lodging & Leisure sector: for cruise lines (CCL, NCLH, RCL), UBS raised estimates due to stronger demand since the lifting of Covid restrictions in the last 8 weeks, which has led to significantly higher booking volumes. Additionally, we are adjusting estimates following the release of RCL’s new "Trifecta" guide, which gives three long-term targets to hit by 2025.

Energy, Industrials and Materials

·     Energy stock movers: OPEC cuts full-year 2022 world oil demand growth forecast to 2.55 million bpd (down 100,000 bpd from prev. Forecast) in its monthly report. OPEC cuts full-year 2023 world oil demand growth forecast to 2.24 million bpd (down 100,000 bpd from previous); says world economy has entered a period of significant uncertainty and rising challenges in 4q; leaves 2022, 2023 econ growth forecasts unchanged. OPEC says its oil output fell by 210,000 bpd in oct to 29.49 million bpd led by Saudi cut

·     E&P and Majors: OXY upgraded to Equal Weight from Underweight at Wells Fargo and raise price Target to $74 from $59 saying OXY continued to deliver on cash flow priorities with balance sheet improvements and a focus on cash returns to shareholders; GTLS was cut to Equal Weight from Overweight at Wells and lower price Target to $148 from $248 which reflects a 50% cut in their 2024 EBITDA multiple to 9.0x on the altered growth outlook and risk assumptions accompanying the Howden acquisition.

·     Metals & Mining: steel stocks very strong early with STLD up over 5%, NUE gaining 4% late morning and CMC rising over 2% amid brad strength in industrials and materials; gold miners took a breather after strong gains last week on a plunging US dollar; Brazilian miners and energy names VALE, RIO, PBR advanced after reports Lula’s team to mull more conservative spending plan for Brazil

·     Utilities & Solar: ENPH to join Nasdaq-100 Index and Nasdaq-100 Equal Weighted Index effective Mon, Nov 21; ALE upgraded from Neutral to Buy at Bank America and raise tgt to $66 from $53 after Q3 update, as the company rolled forward its long-run capital plan now targeting $2.7B in aggregate investment over 2023-2027, an increase from $1.8B; AQN downgrade from Outperform to Sector Perform w/ $12 PT from $17 at RBC Capital

Financials

·     Bank movers: SI rebounded after a sharp decline last week after the crypto bank said its exposure to Sam Bankman- Fried’s FTX cryptocurrency exchange represented less than 10% of its total deposits from digital asset customers. FTX’s deposits with Silvergate represent less than 10% of the $11.9 billion in total deposits from all digital asset customers, said the bank. While that appears to mean an amount of $1 billion or more, those are deposits, meaning FTX is a creditor. BAC was downgraded to Neutral from Buy at Citigroup saying “we are in a tricky period for bank stocks as NII tailwinds seem fully factored in and see downside risk to 2023 NII largely from a catch up on deposit repricing and noninterest bearing deposit outflows outweighing the benefits of fixed rate assets repricing; OZK authorizes $300M stock repurchase program

·     REITs: Triple-net REITs SRC and NTST both downgraded to Neutral from Buy at Bank America, taking a more balanced view of net lease REITs heading into 2023; COLD upgraded to Buy from Neutral and raising our PO to $33.50 from $27.50 at Bank America driven by view that top line growth is recovering faster than expected as management pushes rate (to offset any inflation pressures) and occupancy continues to climb; Piper downgrading ALEX to Neutral from OW based on valuation; MPW upgraded to Buy from Neutral at Bank America citing valuation

Healthcare

·     Pharma movers: ASND shares slide after top-line results from the Ph2 ACcomplisH trial, as analysts note ASND’s Phase 2 appears to favor BMRN’s VOXZOGO – said data doesn’t seem v competitive vs Voxzogo (Piper said shares of BMRN should rally ‘meaningfully’ after Ascendis data and Jefferies said ASND’s data doesn’t seem v competitive vs Voxzogo (0.8 at highest dose vs 1.57 cm/year in 5yo+); STSA tumbles after saying its experimental migraine drug, STS101, did not meet main goals of freedom from pain and "most bothersome symptom" at two hours post-administration in a late-stage study; TEVA downgraded from Neutral to Underweight at JPMorgan saying the co has made significant progress in addressing its debt and cost structure over the past several years but they continue to struggle with the relative lack of growth in the portfolio over time (as again seen with 3Q results); STOK falls after saying a higher dose of its experimental drug for epilepsy reduced the frequency of convulsive seizures in children with the disease. However, the treatment effect was still too low to provide a meaningful benefit

·     Biotech movers: Roche (RHHBY) announced that the two phase 3 trials GRADUATE 1 & 2 evaluating gantenerumab (monthly sc. for 27 months) vs. placebo in patients with prodromal or mild Alzheimer’s disease did not meet their primary endpoints – shares of German partner MOR tumbled over -30% on the data; shares of Alzheimer drug competitors BIIB, LLY advanced in reaction to the data; IONS and Metagenomi announced that the companies have entered a collaboration; MGNX upgraded to Outperform from Market Perform with a Target of $16 (from $5.70) at BMO saying while maintain cautious view of MGC018 in prostate cancer, recent KOL feedback was positive, and like the prospect of the combination with lorigerlimab; OPNT shares jump as Indivior set to acquire overdose therapy maker for $145M  https://bit.ly/3ttVr5a 

·     Healthcare Services & MedTech Equipment: XRAY slides as Q3 revs $947M misses est. $1.02B and EPS of $0.41 below $0.59 est. saying quarter was impacted by "continued macroeconomic headwinds; cuts its ’22 guidance, now expecting revenue of $3.85B to $3.88B (from $4.1B to $4.2B prior) and adj EPS of $1.90 to $2.00 (from $2.35 to $2.55 prior); Morgan Stanley reshuffles its ratings on US health care providers, upgrading OSH and downgrading OSCR as it weighs their strategies to bolster profitability

Technology, Media & Telecom

·     Semiconductors: the sector rose for the 6^th time in the last 7-days; AMD upgraded to Buy from Neutral at UBS and raise tgt to $95 from $75 as anticipates "some replenishment" moving through FY23, adding that computer hardware "typically out-performs off the bottom; ASML was upgraded to Positive at Susquehanna after analyst day, saying they have gained "incremental" confidence in the long-term financial road