Closing Recap

Wednesday, November 16, 2022

Equity Market Recap

·     Not a pretty day on Wall Street, with stocks opening negative and finished not far off the lows after an earnings miss from retailing giant Target (TGT) sunk shares, impacting consumer stocks, while energy names tumbled with a drop in oil and investors rotated into defensive sectors with Staples (food), Utilities, and Healthcare the leaders. Another revenue warning in the semiconductor chip space took the wind out of the sails for a group that had risen 18% MTD, as Micro (MU) guided lower and talk about lowering capex (ahead of NVDA earnings tonight). Also better-than-expected U.S. retail sales last month may force the Fed to retain its aggressive rate posture despite cooler than expected inflation data this week and last.

·     Much was noted about the strength in the October retail sales data this morning (Retail Sales for October rose +1.3% vs. est. +1.0% and Retail Sales ex autos/gas jumped +1.3% above the est. +0.5%), and that the consumer may be doing better than expected. However, data yesterday contradicts that argument after 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 and 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. So is economy strong? or are people just running up massive amount of debt out of necessity? And if so, with the latest surge in job cuts, specifically in the technology and consumer sector, how much higher will those numbers go?

·     One positive on the day was geopolitical tensions eased a bit after a missile that hit Poland was probably a stray fired by Ukraine’s air defenses and not a Russian strike, Poland and NATO said, easing global concern that the war in Ukraine could spill across the border. NATO said there was no indication the explosion in eastern Poland was a deliberate attack or that Russia is preparing offensive military actions against NATO but added that Moscow bore ultimate responsibility.

·     Goldman Sachs Group is revising its expectations for interest rates next year, saying it now expects an additional 25-basis-point rate hike in May. The additional rate hike pushes the firm’s forecast for the peak fed funds rate, or highest level at which the Federal Reserve will likely raise rates, to between 5% and 5.25%, up from a previous forecast of 4.75% to 5%. U.S. Federal Reserve Governor Christopher Waller, an early and outspoken "hawk" in the central bank’s efforts to confront inflation, said Wednesday he is now "more comfortable" with smaller rate increases going forward after recent data showed the pace of price increases slowing. In remarks prepared for delivery at an Arizona economic conference, Waller said it remains unclear how high the Fed will need to raise interest rates, and that he will not make a final decision about what to do at the Fed’s Dec. 13-14 policy meeting until reviewing the rest of the data between now and then. "I will not be head-faked by one report," Waller said.

Economic Data:

·     Retail Sales for October rose +1.3% vs. est. +1.0% and Retail Sales ex autos/gas jumped +1.3% above the est. +0.5% (and prior +0.4%); Oct gasoline sales +4.1% vs. Sept -3.7% and Oct Retail Sales ex-autos/gasoline +0.9% vs. prior +0.6%

·     Import Price Index for Oct m/m fell (-0.2%) vs. est. (-0.4%) and prior (-1.1%); Oct export prices fell (-0.3%) vs. est. (-0.4%) an vs. Sept (-1.5%); on a y/y basis, import prices +4.2% and export prices +6.9%; Oct petroleum import prices (-1.2%) vs sept (-7.2%)

·     Oct Industrial Output unexpectedly fell (-0.1%) vs. est. +0.2% and down from last month +0.1% and U.S. Oct capacity Utilization rate 79.9% (first reading below 80 since June) and well below consensus 80.4% and below Sept 80.3%

·     Sept Business Inventories +0.4% vs. est. +0.5% and prior month +0.8%; U.S. Sept inventory/sales ratio 1.33 months’ worth vs aug 1.33 months; Sept business sales +0.2% vs Aug +0.3%; Sept retail inventories ex-autos unrevised at -0.1% (prev -0.1%)

·     U.S. November NAHB Housing market index tumbled to 33 (lowest since June 2012) versus 38 in October, its 11-th straight month of declines; index of current single-family home sales 39 versus 45 in October and index of home sales over next six months 31 versus 35 in October

Commodities, Currencies & Treasuries

·     Oil prices stay lower, with WTI crude falling -$1.33 or 1.53% to settle at $85.59 per barrel despite the EIA reporting a large, 5.4M-barrel decline in US crude inventories compared with forecasts for just a 500,000-barrel fall. Meanwhile, the US Strategic Petroleum Reserve moved down for the 62nd consecutive week to its lowest level since 1984. The 34% decline in reserves this year is the largest on record by a wide margin. Gold prices slip -$1.00 to $1,755.80 an ounce in a quiet day hat say the dollar little changed.

·     Treasury yields fall further, with the 10-yr yield down 8-bps to 3.72% as the U.S. yield curve inversion now at steepest since 1982; US 2-year yields are now nearly 63 basis points above rates on 10-year notes. The 10y yield is below both the federal-funds rate & the Fed’s targeted range. The US dollar index (DXY), after extreme volatility last week falling about 4%, dropped around 106.20, well off the Sept 28 highs of 114.78 (20-yr highs). As latest inflation data readings from CPI and PPI tempered expectations of an aggressive Fed, the dollar has pulled back after a strong 1H’22. The euro edged higher, holding just under the 1.04 level (700-bps move in just 3-weeks) and the yen was little changed.

·     Bitcoin and other Cryptocurrencies suffering continued, falling -2% to 416,500 and Ethereum down -3.6% to $1,200 as uncertainty surrounding FTX’s collapse continued to ripple through the crypto world. Today, Genesis said it was temporarily suspending redemptions and new loan originations at its lending business, the latest sign of the industry fallout from last week’s collapse of major crypto exchange FTX. Genesis’ parent Digital Currency Group, an investor which also owns crypto asset manager Grayscale, said that the decision to suspend redemptions "was made in response to the extreme market dislocation and loss of industry confidence caused by the FTX implosion. House financial services committee to hold hearing in December on collapse of FTX and "broader consequences for the digital asset ecosystem" – committee said.

Sector News Breakdown

Consumer

·     Retailers: TGT tumbles following a Q3 earnings miss lower operating margin miss – Q3 adj EPS $1.54 vs. est. $2.15; Q3 sales rose 3.3% y/y to $26.12B vs. est. $25.97B; Q3 Comparable sales +2.7% vs. estimate +2.51%; said it would launch a cost-cut plan to save $2 billion to $3 billion over three years; halved its operating margin rate forecast for the fourth quarter to about 3%; TJX Q3 adj EPS $0.86 tops $0.80 consensus and revs mostly in-line at $12.27B; Q3 US comp store sales fell (-2%), sees Q4 US comp sales flat to +1% and FY23 comp sales down (1%-2%); guides Q4 EPS $0.85-$0.89 below est. $0.94; maintaining high end of its outlook for adjusted pretax profit margin for FY23 but cuts year EPS outlook; in mattress retail (TPX ), Piper’s October Mattress Retailer survey saw a notable y/y sales decline of -14%/-22% on a mean/median basis, a big step-down from the last 3 months, and are more in-line with steep declines of May/June; LVLU posted softer than expected 3Q revenue and adjusted EBITDA results amid a difficult retail environment and adjusted FY guidance, accordingly, reducing top-line and adjusted EBITDA

·     Auto sector: auto retailers were pressured early as AAP reported Q3 EPS and rev miss while comp sales fell (-0.7%) y/y and lowered its year adj. EPS forecast to $12.60-$12.80 vs prior est. of $12.75-$13.25 (est. $13.02) saying cut in forecast reflects stronger dollar impact; ORLY increases buyback authorization by $1.5B

·     Housing & Building Products: a day after HD reported good earnings, but conservative guidance, rival LOW increased its annual earnings forecast to $13.65-$13.80 from previous $13.10-$13.60 range on steadying demand after quarterly results topped views; monthly NAHB Housing data worst in a decade (June 2012) and falls an 11^th straight month as housing industry remains in downturn; MBA mortgage applications index rose 2.7% in week ended Nov. 11, after falling 0.1% in prior week (first rise since Sept. 16), purchases up 4.4% and refis fell -1.6% while the avg. 30-yr fixed rate 6.90%, down from 7.14% in prior week; HD downgrade to Market Perform at Raja

·     Consumer Staples: defensive food stocks HSY, SJM, POST, CPB, CAG, MDLZ among top leaders in the S&P early; EL announced it has signed an agreement to acquire Tom Ford. EL has held the TF beauty license since 2006, growing the brand to almost $1B in sales; TTCF shares slide after lowers year revenue guidance to $235M-$245M from prior $280M-$295M after Q4 EPS loss (-$0.46) vs. est. loss (-$0.19) and revs $54.1M vs. est. $72.96M; QSR shares jump as appoints Patrick Doyle as Executive Chairman; The Board of Directors believe that Mr. Doyle will be an important contributor to unlocking growth in the company based on his proven track record doing the same at Domino’s Pizza.

·     Casinos, Gaming, Lodging & Leisure sector: CCL priced $1 bln 5.75% 5-yr convertible bonds (CBs) as part of 2024 refinancing plan with conversion price of $13.39 represents 20% premium to stock’s last sale; in leisure, PLNT hosted its first Investor Day and Jefferies said they came away incrementally positive on the company’s long-term growth prospects

Energy, Industrials and Materials

·     Oil inventory data: U.S. commercial inventories of crude oil fell sharply last week as refinery activity picked up speed, according to EIA weekly data. Benchmark U.S. oil prices that were lower before the moderately bullish report was released reduced those declines slightly afterward. Commercial crude-oil stockpiles dropped by 5.4 million barrels, to 435.4 million barrels, and are now about 4% below the five-year average, the EIA said.

·     Industrials, Machinery and Transports: The American Institute of Architects’ Architecture Billings Index (ABI) was 47.7 in October. The October result represents an inflection below 50, which comes after a 20 consecutive month run above 50 that followed a nearly year-long, pandemic-driven, sub-50 lull in 2020; UAL said it expects to carry 5.5 million passengers during the Thanksgiving travel period, up about 12% over 2021.

·     Chemicals: CBT was upgraded to Buy from Hold at Deutsche bank saying with FY’23 numbers de-risked following last week’s rolling out of FY’23 guidance, they believe Cabot is one of the more visible and attractive growth stories in chemicals; CTVA downgraded to Neutral at UBS saying following a year of stock outperformance (CTVA shares up ~40% YTD) now see a more balanced risk/ reward (recall Loop Capital downgraded yesterday on valuation as well);

·     Utilities & Solar: AQUA downgraded to Perform from Outperform at Oppenheimer saying near-term risk/reward now appears less favorable and we look for a better re-entry point on the name; XYL was upgraded to Overweight from Neutral at Atlantic Equities

Financials

·     Insurance: LNC upgrade from Neutral to Buy at Goldman Sachs and raised tgt to $50 from $46 driven by view that the company should be able to rebuild its capital base and display its relatively strong underlying capital generation faster than investors are expecting; UNM was downgrade from Buy to Neutral at Goldman predicated on the strong performance relative to the S&P 500; PGR reported combined ratio for October of 95.9% vs. 97.2% y/y with net premiums earned $4.87 billion, +11% y/y and net premiums written $5.19 billion, +19% y/y

·     Lending, Payments, & Consumer Finance: DFS among top S&P 500 gainers after saying to resume repurchases under existing share repurchase program authorizing up to $4.2 bln of share repurchases through June 30, 2023 after investigation relating to its student loan servicing practices and related compliance matters has been completed; RKT, the second largest U.S. mortgage originator, with approximately 5% of the overall market was downgraded to sell at Argus; DLO tumbled more than 25% midday after short-seller Muddy Waters has a short position on DLO saying it is "skeptical of DLO’s reported TPVs," adding that co’s disclosures about its TPV and accounts receivable "flatly contradict one another."

Healthcare

·     Biotech & Pharma, Services movers: NVS is weighing sales of non-core assets as it seeks to raise money to invest in cutting-edge medicines, sources say; Ophthalmology business alone could fetch about $5 billion – Bloomberg reported https://bloom.bg/3EBjZ2v ; DNA announces $100M Class A common stock offering; OSCR was upgraded to Overweight from Equal Weight at Wells Fargo saying while the range of outcomes remains wide, they believe risk/reward skews to the upside following significant YTD underperformance

·     MedTech Equipment: MDT downgraded to hold from Buy at Deutsche Bank on the back of disappointing RDN results last week and what they expect to be another challenging quarter and guide down when it reports F2Q next week (they tweaked F2Q #s lower and cut year ests); NTRA public offering of 11.43 mln common shares priced at $35.00 per share; ALC reported F3Q results, with inline revenue (w/ better Surgical balanced by worse Vision Care) and a penny beat on EPS at $0.50 while raised the bottom end of its underlying CC net sales growth to 10% to 11% (from 9% to 11%), though lowered its reported sales guide

Technology, Media & Telecom

·     Semiconductors: MU said it reduced DRAM and NAND wafer starts by approximately 20% versus fiscal fourth quarter 2022 – said was looking to cut capex, which hurt shares of equipment names LRCX, KLAC, AMAT; NVDA earnings tonight; QCOM during Snapdragon Summit 2022, introduced latest premium mobile platform, Snapdragon 8 Gen 2; WOLF announces offering of $1.3B of convertible senior notes; TER announces CEO succession; current CEO to retire 2/1/21; Credit Suisse initiates on the sector w/ an overweight view; top pick NVDA; most positive on handsets (most de-risked) and LT growth names (AMD, MRVL, MPWR, NVDA) despite short-term risk; Neutral on analog/auto (has yet to experience broad weakness w/ little conviction that semi suppliers in those areas will be able to fully escape the downturn); AMKR increases its dividend 50% (from 5c to 7.5c) and commits to returning 40-50% of FCF to shareholders

·     Software, Hardware, Components & Services: CSCO to report earnings tonight after the close in routers and networking sector; Bank America said this morning Routing Trends (ANET) show solid 1H22 trends for edge routing, yet core routing growth is decelerating. Said core routing only grew 1.6% in 2Q, representing major deceleration and suggesting growth has returned to historical averages; ZI shares sunk over 20% midday after guidance for roughly 4% seq growth into ’23 at RBC which would suggest YoY growth just under 20% (high teens)- would equate to 6% lower revs than where street modelling