Closing Recap

Tuesday, November 15, 2022

Equity Market Recap

·     Stocks finished higher in another volatile trading day that saw the S&P 500 and the Nasdaq pare gains mid-afternoon after reports that at least two were dead after Russian missiles land in NATO state Poland on Ukraine border, raising concerns of ramped up tensions in the region. The Polish news outlet, Wiadomosci said Poland has convened a national security committee meeting in response. The headlines boosted shares of defense stocks (GD, LMT, RTX, NOC) and oil initially. Follow up reports indicated what fell near Hrubieszów in eastern Poland today were likely the remains of a Russian missile, that was shot down by the Ukrainian air defenses. Stocks began to pare losses after that and resumed the upward momentum in brief pullback but at this point, still no confirmation from the US to exactly what happened – stay tuned. Prior to the swoon, not many bearish bets as the Put/Call ratio was around .67 at midday (bounced above 0.8 late), which would be lowest since 11/9/21. Positive earnings results from retailing giant Wal-Mart (WMT) and another inflation reading (Oct PPI) showing decelerating prices helped boost the market buying sentiment to start the day. Major averages finished broadly higher.

·     Warning signs: In between another good bounce for US stock markets to start the day (prior to the Poland headlines), there were several under the radar warnings signs of a struggling consumer market. 1) Households increased debt at the fastest pace in 15 years as Q3 total household debt rises by 2.2% to $16.51 trillion and credit card balance collectively rose more than 15% from the same period in 2021; 2) monthly credit card delinquency and charge-off data from COF, BAC, DFS, Citigroup showed sharp rises in payments delinquent by 60-days or expected to never be received; 3) and while WMT quarterly results topped views, results in food and beaty helped, and WMT seen as more recession play, with shoppers able to afford more discount prices. This is what the Fed’s objective has been, to slow the economy, and given the recent run-in jobs cuts, especially in big tech, the soaring mortgage rates back above 7% for the 30-yr and the steadily higher prices of everyday goods, debts are rising.

·     China’s monthly (October) data dump showed the lockdowns, and the declining property sector are continuing to have a dampening impact on economic activity. China’s retail sales -0.5% (YoY) and property investment YYD -8.8% (YoY) were both weaker than expected. China factory output 5.0% vs 5.3% est., jobless rate 5.5% vs 5.5%. China markets rallied behind the data on hopes for my stimulus hopes to help the struggling economy – US listed China stock up big too (BABA BIDU)

Economic Data:

·     Tamer October PPI inflation reading: October Producer price index (PPI) headline reading showed a mm/ increase of +0.2% vs. est. +0.4% and on a y/y basis rose 8% vs. est. +8.3% (and prior reading +8.5%); on a core level, ex food & energy, m/m PPI was flat vs. est. +0.3% and on a y/y basis rose +6.7%, below the +7.2% est. (and prior 7.2%)

·     Empire Manufacturing for November reported at 4.5, above the est. for -6.0 and previous -9.1; index for new orders dropped 7 points to negative 3.3 in November; shipments index jumped 8.3 points to a reading of 8; unfilled orders slipped 3.1 points to negative 6.8 in November

·     Households increased debt at the fastest pace in 15 years due to hefty increases in credit card usage and mortgage balances. NY Fed: Q3 Total Household Debt Rises By 2.2% To $16.51 Trillion. The credit card balance collectively rose more than 15% from the same period in 2021, the largest annual jump in more than 20 years, according to the New York Fed.

Commodities, Currencies & Treasuries

·     Oil prices climbed to afternoon highs of $88.68 briefly, reversing earlier losses following reports that one or more missiles strayed into NATO member Poland along its border with Ukraine, killing two people (reports still being verified) Prices since pared gain, with WTI crude rising $1.05 or 1.22% to settle at $86.92 per barrel. Oil price remained near a three-week low earlier after OPEC reduced its global oil demand forecasts for the fifth time since April. Gold prices were steady, little changed from the day prior close.

·     The U.S. dollar slipped about -0.3% as Sterling rose 0.8% to $1.1850, trading not far from a 2-1/2-month top at $1.1855 from Friday ahead of a tough government budget plan later this week. The euro rose +0.2% in volatile trading after the Poland headlines, around 1.035. The dollar looking to recover some of last week losses when the index tumbled 3.9%, its worst performance since March 2020, after U.S. consumer prices rose less than expected, stoking speculation a peak in rates might be near. Today’s softer PPI data point helped build on those thoughts.

·     Treasury yields dipped on the PPI data with the 10-year yielding 3.8%, down 55 bps from its recent high and now 21 bps below the upper bound of the Fed Funds Rate. The yield on the 2-year Treasury slipped to 4.336% from 4.406% on Monday.

Sector News Breakdown

Consumer

·     Retailers: the largest retailer in the world and Dow component WMT approved a new $20B share buyback authorization, posted top/bottom-line beat $1.50/$152.8B vs. est. $1.32/$147.75B, raises FY outlook as sees smaller than expected loss of down 6% to 7%, from prior down 9%-11% sending shares higher (which also boosted other retails TGT, AMZN, and discounters DG, DLTR). WMT Q3 U.S. comp sales grew 8.2% and 17.4% on a two-year stack. e-commerce growth was 16% and 24% on a two-year stack; TDUP posted a slight revenue beat and largely in-line adjusted EBITDA results against a difficult macro backdrop; 4Q and 1H23 are expected to be softer; tomorrow earnings from TGT and LOW as well as TJX, BBWI

·     Auto sector: TSLA slashes delivery waiting time for all Model 3, Model Y cars to minimum one weeks; TRUE gets an early bounce as AN announces 6.1% minority stake in the company; in bikes, HOG was initiated at Underperform and $39 tgt at Jefferies saying shares have rallied out of a strong 3Q, but dealer checks suggest the recent retail inflection lacks legs

·     Housing & Building Products: home improvement retailing giant and Dow component HD reported Q3 beat as EPS $4.24 tops est. $4.13; Q3 revs $38.87B vs. est. $38.01B; Q3 comp sales rose +4.3% vs. est. for +3.1% and comparable sales in the U.S. increased +4.5%, while said merchandise inventories of $25.72B was down 1.4% from the end of July but up 25.0% y/y

·     Consumer Staples: grocery stocks saw an early bounce (KR, SFM) after better grocery related results from WMT this morning; in tobacco, PM upgraded to Buy from Hold at Argus with a $110 price target noting the company is working to become a mostly smoke-free business by 2025 by phasing out cigarettes and replacing them with higher-margin alternatives such as HTP; in packaged Foods: BNP Paribas initiated CAG ($42), GIS ($90), and MKC ($94) at Outperform; HSY ($235), KHC ($39), and MDLZ ($68) at neutral; CPB ($48), K ($66), SJM ($138) at Underperform; STZ 3.7M share Block Trade priced at $240.50

·     Restaurants: DNUT misses Q3 profit estimates, hurt by a strengthening dollar and higher promotional activity while revs rose 10.1% to $377.5M above ests. of $362.6M; PTLO 8M share Spot Secondary priced at $22.90

·     Casinos, Gaming, Lodging & Leisure sector: in gaming, AGS 8.21M share Spot Secondary priced at $5.25, CRSR 4.5M share Spot Secondary priced at $16.50, GAN downgraded to Hold from Buy at Jefferies; FXLV 3Q adj EBITDA $6.1Mm vs est. $4.8Mm on revs $29.3Mm vs est. $25.2Mm, comps +16% globally and +11% US; UBER and LYFT shares jumped after higher taxi rates expected to go into effect by year-end, first increase since 2012

Energy; Industrials and Materials

·     Solar: positive solar sector analyst initiation at Deutsche Bank, underpinned by considerable growth opportunities for the US residential market and the most powerful and positive regulatory environment the industry has ever seen and said they believe tailwinds will outshine any short-lived negatives. Initiated Buys on NOVA ($36 tgt), RUN ($36 tgt), FSLR ($180 tgt), ENPH ($330 tgt), with holds on SPWR and SEDG; SHLS rallies on better Q3 results as Q3 adj EPS $0.10 vs. est. $0.08; Q3 revs rose 52% y/y to $90.8M vs. est. $83.1M; raising low end of 2022 outlook to reflect recent performance and improving business conditions

·     Metals & Materials: LPX shares rally as Warren Buffett-led Berkshire Hathaway Inc said in a regulatory filing on Monday that it has bought LPX shares worth $297M; lithium producers ALB, LTHM, SQM, LAC declined after Bloomberg noted shares of lithium-related firms fall in Asia as Credit Suisse says rumors of an output forecast cut at a Chinese cathode maker have sent Wuxi lithium carbonate futures tumbling – would be the first sign of soft demand this year; In metals, steel, HAYN was downgraded to Sector Weight from Overweight at KeyBanc following recent price appreciation more than their prior $51 tgt no change to their fundamental outlook

·     Chemical movers: several analyst calls today on Wall Street as Loop Capital downgraded CTVA to Hold from Buy calling it a "valuation call" as positive thesis on the stock has now "played out" while they upgraded FMC from Hold to Buy and raise tgt to $149 from $132; WLK downgraded from Overweight to Neutral at JPMorgan and cut tgt to $109 from $135 prices for PVC are under pressure due to seasonally weaker demand, higher rates, weaker offshore demand, and improved supply availability; LYB downgraded to Neutral from Buy at Mizuho saying shares appear correctly priced vs. core peers, while expect recessionary pressures to limit upside

Financials

·     Bank movers: big bounces in some banks with SIVB , among S&P leaders most of the morning; Berkshire Hathaway Inc takes share stake of 433,558 shares in JEF has entered into definitive transaction agreements to sell a significant part of its Securitized Products Group SPG and other related financing businesses to Apollo Global Management, according to statement; in Brazilian banks, ITUB upgraded to OW from EW at Barclay’s while firm downgraded BBD to EW from OW and BSBR to UW from EW saying as the Brazilian private banks have overheated significantly faster than the market anticipated, they turn more cautious

·     Consumer Finance: Monthly charge offs and delinquency data weaker as COF Oct domestic credit card net charge-offs rate 2.93 % vs 2.23% in sept; 30+ day performing delinquencies rate for domestic credit card 3.17% at Oct end vs 2.97% at sept end; 30+ day performing delinquencies rate for auto 5.29% at Oct end vs 4.85% at sept end; DFS credit card delinquency rate 1.17% at Oct end vs 1.12% at Sept end and credit card charge-off rate 1.17% at Oct end vs 1.14% end Sept; BAC credit card delinquency rate was 0.98% at Oct end vs 0.92% at Sept end and credit card charge-off rate was 1.37% in Oct vs 1.30% in Sept; Citigroup Inc (C) credit card charge-offs 1.32% in oct vs 1.12% in sept and delinquency rate 0.90% at oct end vs 0.85% at sept end

Healthcare

·     Pharma movers: ARQT rises after saying its experimental cream meets main goal in a late-stage study for treating mild-to-moderate atopic dermatitis in patients aged six and above; CALA downgraded to Neutral at Ladenburg as the company announced a slower than anticipated enrollment in both programs, mivavotinib and sapanisertib

·     Biotech movers: TWST shares slide after Scorpion Capital, an activist short seller, described the company as a "cash-burning inferno" https://on.mktw.net/3hyV7zm ; IMGN rises after saying the FDA granted accelerated approval for its drug Elahere to treat a type of ovarian cancer; DNA Q3 EPS loss (-$0.41) vs. est. loss (-$0.30); Q3 revenue fell -14% y/y to $66.4M vs. est. $60.36M; revised its expectation for total revenue from $425M-$440M to $460M-$480M in 2022

·     MedTech Equipment: AZTA shares jump as beat estimates with $138M revenue vs. $131M consensus and adj. EPS of $0.16 vs. consensus of $0.05 and announced a new $1.5B share buyback program; TNDM was upgraded to Equal Weight from Underweight at Wells Fargo saying that consensus estimates have reset to what look like more realistic levels following the Q3 call

Technology, Media & Telecom

·     Media, Internet: several positive headlines in space today as Bank America reinstated NFLX with a Buy and $370 tgt saying their valuation accounts for Netflix’s leading position within the shift towards non-linear video viewing, a strong runway for subscriber growth outside of the US and upside from the initial advertising video on demand (AVOD) offering; PARA got a boost as Berkshire Hathaway raises share stake by 16.3% to 91.2M shares; in another 13F filing, Elliott Management boosted its stake in PINS to 15M shares from 5M; TME beats Q3 revenue estimates as more paying users signed up on its music-streaming platform; MSGE downgraded from Buy to Hold at Jefferies and halve tgt to $49 from $100 saying the real estate trophy value for MSGE becomes obfuscated by the pending alignment in the proposed spin; GOOGL midday bounce after the WSJ reported Activist hedge fund TCI Fund Management, which is based in London, said it owned Alphabet shares worth more than $6B and made requests in a letter to CEO Sundar Pichai to aggressively cut costs and reduce losses in long-term bets https://on.wsj.com/3AgTXPG

·     Semiconductors: big story today was Warren Buffett’s Berkshire Hathaway taking a new 60MM share position in TSM as quarterly 13F filings were released; overall, a massive bounce the first 2-weeks of November as the Philly semi index (SOX) rises as much as 3% – within 50-points of its 200-day MA resistance of 2,885 (hasn’t been above since late March), on track for an 17% gain MTD (just half-way thru the month), but still down -30% YTD

·     Software movers: SE shares jumped after the company posted a flat loss for the third quarter and a higher-than-expected rise in revenue, up 17% to $3.16B vs. est. $3B; PATH announced preliminary revenue ahead of expectations and disclosed further moves to restructure its business/sees Q3 revs $260M vs. est. $246.3M and ARR of roughly $1.108B vs. est. $1.093B; ATVI upgraded to outperform at MKM Partners; MNDY reported strong 3Q22 results, with $6.5M, $22M, and $1M in rev, EBIT, and billings upside vs. cons, despite a -3pts FX headwind on growth.