Closing Recap

Friday, November 18, 2022

Equity Market Recap

·     After an overnight rally, equities took a rest today with no market-moving earnings surprises, only one Fed speaker with relatively balanced comments, and a decidedly pre-holiday feel as stocks melted higher late day. NASDAQ modestly underperformed but overall market breadth was very close to flat. Energy was the biggest drag in the S&P, followed by technology, discretionary and communications (growth), while defensive utilities, REITs, Healthcare were the biggest gainers. Federal Reserve Bank of Boston leader Susan Collins said the central bank has more rate rises ahead of it as it seeks to lower inflation, adding that a 75-basis point hike was still on the table. As per Charlie Bilello, the 6-month growth rate in the Leading Economic Index fell further into negative territory in October and is at levels that have signaled a high probability of recession in the past (2020, 2008, and 2001). Bespoke Investment noted leading indicators down 2.7% y/y. Since 1960, when y/y reading first reached -2%, the US economy was either already in or within 5 months of a recession. The data certainly making things interesting for the Fed into the December meeting.

Commodities, Currencies & Treasuries

·     Oil prices end lower, with WTI crude down -$1.56 or 1.91% to settle at $80.08 per barrel after trading in a volatile/wide range (high $82.64 and low $77.24) amid expiration to front month, which likely explained a lot of weakness in the front month. Gold prices end the day down -$8.60 or 0.5% to settle at $1,754.40 an ounce, down roughly 1% on the week; copper underperforms metals, down around -8% for the week.

·     The U.S. dollar gained slightly on Friday for its largest weekly gain in a month (+0.4%) as investors continued to make bets on the U.S. Federal Reserve’s interest rate hiking path. The dollar also bounced back after falling nearly 4% the week prior! The euro dipped while the Pound rose after each had hit multi-month highs against the dollar earlier this week after inflation data. Treasury yields spike after comments by Fed’s Collins; 2-year rate trades at 4.5%, 10-year yield is at 3.81% as they overall bounced back after a recent pullback on tamer inflation data points.

Economic Data:

·     Leading indicators fell -0.8% vs. est. -0.4% weakest m/m since April 2020 – (February was the only positive month this year for LEI)

·     Existing Home Sales fell -5.9% m/m to 4.43M unit rate, down from 4.71M in Sept and vs. est. 4.43M; Oct inventory of homes for sale 1.22 mln units, 3.3 months’ worth; the national median home price for existing homes $379,100, +6.6% from Oct 2021

Sector News Breakdown

Consumer

·     Retailers: footwear and apparel retailer FL beat third-quarter sales and profit estimates and raised full-year sales and profit forecasts on resilient demand from well-to-do consumers for its footwear – sees sales down (4%-5%) vs. prior view of (6%-7%) decline; GPS 3Q came in better than expected driven primarily by stronger sales at ON (-1% vs. cons -7%), though all brands did sequentially better than 2Q. GM was also better than expected; for ROST, after reducing guidance significantly last qtr, trends improved in 3Q and the company beat the qtr and raised 4Q EPS forecast to $1.13-$1.26 from $1.04-$1.21 projected earlier, and FY EPS outlook to $4.21-$4.34 from $3.84-$4.12; FTCH missed Q3 sales and EBITDA and lowered FY guide below consensus saying weakness stems primarily from FX and macro headwinds while expects FY adj EBITDA margin of -3% to -5% vs previous forecast of breakeven adj EBITDA/also cuts FY forecast for GMV; RENT downgraded to equal-weight from overweight at Morgan Stanley and slashed tgt to $2.50 from $10 saying recent web traffic data indicates a slowdown ahead for the fashion rental company; DDS to pay special dividend of $15; GOOS launches share repurchase program

·     Housing & Building Products: according to Redfin, U.S. homebuyer must now earn $107,281 to afford typical $2,682 monthly mortgage payment, up 45.6% from $73,668 a year ago per; in home furnishing retail, WSM Q3 EPS beat with comps +8.1% above expectations, but gross margin missed (fell -220bps) on worse than expected supply chain pressure, B2B growth slowed to just 17% YoY (vs. 40%+ in 1H) and declined sequentially – OM was 15.5%, down -80 bps y/y; RH was downgraded to neutral at Wedbush, moving to the sidelines as evidence mounts of a course-correction to its strategy of "climbing the luxury mountain.”

·     Consumer Staples & Restaurants: CAG upgraded from Neutral to Buy at UBS and raise tgt to $41 from $35 as believe CAG is in the early innings of a positive estimate revision cycle; SPB turned in a mixed FQ4 earnings report as organic sales fell (-7.3%), significantly impacted by lower replenishment orders due to higher retail inventory, softer demand, negative forex; in beauty, Oppenheimer previewed ULTA earnings, calling for the 7th consecutive beat-and-raise delivery; BRBR Q4 sales missed but EBITDA beat on GM; POST posted top and bottom line beat for Q4 and guided FY EBITDA $990M-$1.04B vs consensus $1.01B and CapEx $300M-$325M

·     Casinos, Gaming, Lodging & Leisure sector: LYV shares slipped midday after the Justice Department Said to Investigate Ticketmaster’s Parent Company, which predates the botched presale of Taylor Swift tickets this week and is said to focus on whether Live Nation has abused it power in the live music industry; DKNG was initiated at Overweight and $21 tgt at Piper saying DraftKings is a leader in the online sports betting market with a growing presence in iGaming, which combined represent an $80B and with profitability expectations reset after the initial 2023 guide, believe current levels represent an attractive long-term entry point; DKNG announced today that, following a mandatory early access test period from November 21-22, 2022, it expects to launch its online sportsbook in Maryland, pending approvals, on November 23, 2022

Energy, Industrials and Materials

·     E&P and Majors: oil stocks, which remain the biggest 2022 gainers by far, saw profit taking on the day as oil extended losses this week on demand concerns; solar stocks underperformed after rising yesterday on better NOVA guidance; utilities (SRE, ED) outperform as investors rotate into defensive assets; PNW upgraded to Neutral from Sell at Guggenheim and raise tgt to $70 from $54 saying the regulatory construct in Arizona has improved following the election loss of Commissioner Sandra Kennedy and the victories of two Republican commissioners; NEP signs a deal to acquire solar and wind assets for $805M, to take a 49% stake in Emerald Breeze; Baker Hughes (BKR) data show a 3^rd straight weekly climb in active US oil rigs

·     Metals & Mining: RIO said it would plough ahead with a $3.3 billion bid to buy the 49% of Canada’s TRQ that it does not already own, after it ended separate talks with dissenting minority shareholders; HAYN revealed 4Q22 (September) diluted FIFO EPS of $1.30 vs. Street’s $1.28 given higher pricing/mix, more than offset by higher costs, while margins were weaker

·     Chemicals: in TiO2 sector, Citigroup said TiO2 demand has softened, and see 4Q down ~15-20% Q/Q compared to a more typical seasonal decline in the low teens. TiO2 producer managements noted demand was weakest in China, followed by Europe while the US held up. Producers have cutback utilization to match demand levels associated with lower Consumer Confidence, higher interest rates and COVID-19 lockdowns in China. – VNTR, KRO, TROX names in TiO2)

·     Paper & Containerboard: for shares of IP, PKG, WRK, BMO noted this evening Pulp & Paper Week (PPW) will report estimated November containerboard prices and they expect domestic containerboard prices will take their first step downward from. BMO said based on industry checks, both domestic and export markets have taken a meaningful “leg down” in the past four to six weeks.

Financials

·     FinTech & Payments: STNE reported strong 3Q22 results, as total revenue grew 71% YoY to R$2.5B, 4.5% above management’s guidance floor of R$2.4B which mgmt attributed the strong 3Q22 top line to successful cross-selling and take rate expansion – total MSMB client base increased 73% YoY to 2.3MM

·     Bitcoin news: a week to remember given the ongoing nightmare of FTX and SBF and its impact on the crypto world, taking down several companies and funds levered to them. COIN was downgraded at bank America today saying it likely faces several new headwinds, but says they feel confident that COIN is not "another FTX" (only $15M of deposits on FTX platform per a Coinbase blog post and $5B of cash on hand as of 9/30), but that does not make them immune from the broader fallout; shares of SI extended weekly decline to over -25%, falling further amid weaker mid-quarter update and the FTX bankruptcy fallout – talks of a central bank digital currency (CBDC) could negatively impact SEN transfer vols, which Wedbush discussed this week

Healthcare

·     Pharma movers: PFE said their Omicron-tailored shot produced higher virus-neutralizing antibodies in older adults against the emerging subvariant BQ.1.1 than its original vaccine; ISEE shares rise after the FDA granted breakthrough-therapy designation to its investigational product avacincaptad pegol for a degenerative eye disease; on its PDUFA date of Nov. 17, the FDA approved PRVB’s lead drug Tzield (formerly teplizumab) for delay of at-risk Type 1 diabetes (T1D) – shares pulled back (stock had run up 23% in the month prior to approval); ALT shares fell the day prior as investors were not impressed with the 12-week weight loss in the Phase 1 NAFLD study (JMP said they are more interested in the Phase 2 MOMENTUM data in 1Q23); RAPT 4.05M share Spot Secondary priced at $18.50; GTHX 7.7M share offering priced at $6.50; IOVA slides on skin therapy app delay – said it plans to address the FDA’s comments "promptly," and the application is now expected to be completed in the first three months of next year; SAVA shares fell after entered into a definitive agreement with several investors for the purchase of 1,666,667 shares of its common stock, at a purchase price of $30 per share

·     Healthcare Services & Medical Equipment: EVH to buy CNC’s specialty benefit management business for $650M upfront; managed care stocks UNH, ELV, HUM, CI among top S&P movers amid rotation into defensive healthcare

Technology, Media & Telecom

·     Semiconductors: in equipment stocks, AMAT the latest to report a good OctQ Rev/EPS of $6.7B/$2.03, and guided JanQ to $6.7B/$1.93 (above consensus $6.3B/$1.79) despite China restrictions. AMAT noted C23E WFE down y/y and China export rules a potential ~$2.5B F23E top line and 100bps GM impact, though could be mitigated by $500M-$1B; AMBA rises after Continental is now integrating Ambarella’s high-performance, low latency, and low-power processing chipset into their assisted driving solutions.

·     Software movers: Internet security names get a bounce after PANW delivered consensus beating 1Q23 revenue and EPS, strong cashflow, and improved guidance – led by billings growth of +27% y/y, NGS ARR growth of +67% y/y (vs +60% last qtr), and Adj FCF margin of 76.6% while kept or raised previously established longer-term guidance metrics; SAP downgraded to Underperform at Jefferies saying mgmt is responding to the softer macro through strict cost control to deliver FY22 guidance and similar control is required in FY23; JD rises after earnings results; KEYS delivered clean F4Q22 results / upside and provided better-than-expected guide

·     Hardware, Components & Services: several Wall Street analysts making estimate changes in PC demand heading into earnings, with HPQ downgraded to neutral from outperform at Credit Suisse on macro risks to its near-term revenue and margin outlook; Citigroup said PC weakness getting worse; Enterprise remains resilient for now, but warning signs are flashing as they cut estimates on HPQ and DELL based on weakening conditions in PCs; and Bank America taking a more cautious view on PC, Print demand; lowering F23 ests, PO to $27 for HPQ; CLFD posts 3^rd straight quarterly beat as backlog continued to increase albeit at a slower rate, up to $161M organically vs $157M last Q, and up 149% y/y