Closing Recap

Thursday, October 06, 2022

Equity Market Recap

·     US markets finish lower in another consolidation type day, as investors weigh the impact of continued hawkish fed-speak (Kashkari, Evans, Cook, Waller and Mester all appeared or will speak today – pounding the rate hike drum again), higher oil prices (up 10% this week on OPEC+ production cuts), and impending jobs data (Sept nonfarm payroll data tomorrow at 8:30 AM w ests +245k) with markets chopping back and forth most of the day before fading late. The S&P 500 failed to top the 3,800 level after briefly doing so yesterday, while markets also keeping a watchful eye on the CBOE Volatility Index (VIX) around the 30 level, with many market pundits saying markets likely haven’t seen a bottom until VIX spikes further. Most sectors fell on the day as defensive Utilities and REITs (sectors leveraged to interest rate movements) saw the biggest moves to the downside while Energy was the standout to the upside – but major averages higher by over 5% this week so far, looking to snap strong of bad weeks. Many strategists have been bearish on the markets of late, Bank America among the most, though Citigroup said today they are expecting global equities to rise about 18% from now through the end of 2023, saying beaten down valuations from a relentless selloff this year may attract investors, although it warned of "considerable risks" of an economic slowdown. Dollar bounced, Treasury yields bounced, oil rose, and gold was steady into the all-important jobs data – stay tuned!

Economic Data:

·     Challenger layoff data showed U.S.-based employers announced 29,989 cuts in September, a 46.4% increase from the 20,485 cuts announced in August. It is 67.6% higher than the 17,898 cuts announced in the same month last year.

·     Weekly Jobless Claims rose to 219K in latest week from 193K prior, and above consensus 203K; the 4-week moving average rose to 206,500 from 206,250 prior; continued claims rose to 1.361M from 1.346 mln prior week and US insured unemployment rate rose to 1.0% from 0.9%.

Commodities, Currencies & Treasuries

·     Oil prices held near three-week highs, with WTI crude rising $0.69 or 0.79% to settle at $88.45 per barrel extending weekly gains to +10% after OPEC+ yesterday agreed to tighten global crude supply with a deal to cut production targets by 2 million barrel per day, the largest reduction since 2020. The White House threatened to join with Congress in efforts to reduce the cartel’s control over energy prices, including suing it on antitrust grounds. Russia could cut its oil production by as much as 3m b/d if the EU and US proceed with a plan to cap prices. A crime scene investigation of the Nord Stream 1 and 2 gas pipelines from Russia to Europe has strengthened suspicions of "gross sabotage" involving detonations, Sweden’s Security said today.

·     Treasury yields rose on Thursday ahead of the nonfarm payroll report, with the 10-yr at 3.82% late day. Yields briefly moved lower after the data that said initial jobless claims rose by 29,000 to a seasonally adjusted 219,000 versus expectations for 203,000 applications.

·     Gold prices finish little changed on the day, settling at $1,720.80 an ounce despite a sharp recovery in the dollar, as investors position themselves ahead of the September jobs data tomorrow morning that could spice up currency, Treasury, and stock markets.

·     The US dollar edged higher, extending its gains from the previous day as investors looked ahead to U.S. labor and inflation data for any softness that could signal slowing U.S. rate hikes and weaken the greenback after months of strength. The euro dropped -0.7% to around $0.98, while Sterling dropped -1.25% to $1.185 and steady vs. the Japanese yen.

Sector News Breakdown

Consumer

·     Retailers: COST reported total and U.S. core September comp growth of 8.6% and 8.0%, respectively, compared to consensus of 7.2% and 7.3%. Sales growth remains strong, with the 2-year US core comp CAGR accelerating ~15bps sequentially, though 90bps below Q4 rate; AMZN is hiring 150,000 employees to help deliver great holiday experiences; BKE comparable store net sales, for 5-week period ended October 1, 2022, increased 2.7%; PTON to cut workforce according to report from the WSJ; LEVI to report earnings after the close tonight

·     Auto sector: Ford (F) said it was raising the price of its F-150 Lightning Pro for the 2023-year model by nearly 11% to $51,974 compared to $46,974 earlier; in auto dealers, JPMorgan upgraded shares of GPI and SAH, while downgraded AN saying the setup for franchise dealers into 3Q22 earnings is the most negative they have encountered since the pandemic, fueled further by KMX results – they expect results to come in-line with consensus on net with the highest upside at GPI followed by PAG, and least at LAD and NIO price targets were trimmed by Mizuho in the wake of the EV’s announcing production and delivery numbers

·     Housing & Building Products: in decking sector, Truist raised 2H22 estimates for TREX above management’s very bearish guidance in early August on less than expected weakening of sell through; Stifel said they conducted a proprietary survey of North American composite decking dealers and highlight a sequential improvement in growth rates, quoting activity, and outlook relative to the 2Q22, but growth remains below 2020 and 2021 levels (AZEK, TREX, UFPI)

·     Consumer Staples: in beverages, STZ reported Q3 results above consensus with EPS/revs $3.17/$2.66B vs. est. $2.81/$2.51B and raised the lower end of FY23 comp basis EPS outlook to between $11.20-$11.60 from prior $11.20-$11.50; in food, MKC Q3 adj EPS $0.69 above ests and revs in-line at $1.6B while reaffirms year profit and sales outlook; CAG Q1 adj EPS $0.57 vs. est. $0.52 as sales rose 9.5% y/y to $2.9B above ests $2.84B, benefiting from price hikes even as consumer demand wanes – co said higher average selling prices boosted organic sales by 14.3%, offsetting a 4.6% decline in sales volumes; KDP announces strategic partnership with Red Bull

·     Casinos, Gaming, Lodging & Leisure sector: GAME announced that it has commenced a process to explore and evaluate strategic options to enhance and preserve shareholder value; IGT wins 10-yr scratch ticket manufacturing contract with the Texas Lottery Commission; PENN was initiated at Buy and $50 tgt at Canaccord, with online sports betting and casino expected to drive a majority of the industry’s growth in the US over the next decade; in ride sharing, BTIG said UBER is outpacing LYFT in the US rideshare category, and the Gap is widening; in cruise lines, NCLH investor day today – Slides say liquidity is $2.2B (v $2.9B as 6/30) which implies $1.2B of cash (Bofa models $1B by end of 3Q)

Energy

·     Energy stock movers: energy was the broad outperformer this week as oil prices jumped 10% the first 3-days of the week on OPEC+ production cut headlines; in news today, SHEL said refining margins look to drop to $15 a barrel compared with $28 a barrel in the previous three months, and indicative margins for chemicals dropped to negative $27 per tonne versus a positive $86 in Q2; XOM rises a 4th straight day, above the $102 level, highest since June 10^th; BRY shares popped midday after Reuters reported the co is exploring strategic options that could result in a sale of the California-focused oil producer; in research, OII downgraded to MP from OP at Raymond James and tgt to $10 from $15 as believe OII is more of a defensive name given the diversified nature of its businesses; Barclay’s upgraded FTI to overweight in equipment and RIG to Overweight in drilling (tgt raised to $5) while downgraded shares of CHK, OII and WHD; solar has went from among most loved sectors to source of funds quickly, with extended declines for FSLR, ENPH, SPWR, SEDG

Financials

·     FinTech & Payments: SI was double downgraded to Underweight (from Overweight) at Wells Fargo and cut tgt to $70 from $115 saying continue to believe these are early days of broader digital asset adoption, but the growth outlook for SI as a pure-play crypto banking solution is significantly limited in the current environment; RBC Capital said they remain cautiously optimistic heading into Q3/22 earnings for payments universe (MA, V, PYPL, SQ) as payment volumes within the quarter, as seen in July and August data trends, support a relatively stable quarter; however, FX headwinds have worsened relative to when companies last gave guidance in Q2/22, and underlying transaction volumes are beginning to slow.

·     Financial Services & Consumer Finance: ALLY downgraded from Outperform to Market Perform at Raymond James as believe the bank faces several relative headwinds in the current backdrop (rising interest rate hikes and believe NIM expectations remain too high as its liability sensitive balance sheet will likely drive NIM compression in the near-term); COMP rises early after Business Insider reported Vista Equity Partners is considering a deal to take Compass private; though Bloomberg reported Compass denied reports of takeover interest https://bit.ly/3CfAJtW

·     REITs: BMO Capital updated models across REIT coverage to incorporate the recent meaningful move higher in rates, reducing earnings (’23 AFFO -2.1%), NAVs (-11.4%) & DCFs (-12.5%) and in stock specific news, said continue to generally favor higher-quality names as per top pick list, which include: HST, IRT, PSA, REG, VTR (adding: VTR removing DLR, WELL) while downgraded EQR and GMRE to Market Perform; Credit Suisse lowered tgts and ests in data center REITs EQIX (to $571 from $716) and DLR (to $98 from $146) while RBC Capital also lowered tgts for DLR (to $122 from $151) and EQIX (to $668 from $820); AGNC, NLY, MFA all pressured again as mortgage REITs continue downtrend

Healthcare

·     Pharma movers: LLY said the FDA granted fast-track designation to its diabetes drug tirzepatide for the treatment of adults with obesity or who are overweight with weight-related comorbidities; ENTX announces FDA agreement for a single phase 3 trial to support an NDA for EB613 for the treatment of osteoporosis; ALDX said it achieves primary endpoint in part 1 of phase 3 guard trial of adx-2191 in proliferative vitreoretinopathy – ADX-2191 observed to be well tolerated with no safety concerns noted; ABBV guides Q3 EPS negative impact of $0.02 adj EPS to include acquired IPR&D and milestones expense of $40M on a pre-tax basis; PRVB said it has entered into a co-promotion agreement with SNY ahead of the anticipated U.S. launch of Provention’s diabetes drug candidate teplizumab; cannabis stocks jumped (MSOS, CGC, GTBIF, CURLF, CRON, TLRY) mid-afternoon after U.S. President Joe Biden overhauls U.S. policy on marijuana and asks review on federal classification of cannabis

·     MedTech Equipment: ITGR reduced its full-year 2022 outlook for revenue, operating income, and EPS due to supply-chain challenges; ANGO posted Q1 EPS and revs slightly below consensus estimates while reaffirms its year outlooks; PLSE reported positive clinical data from its new treatment for certain carcinoma lesions; NVRO shares tumbled late day after Truist noted a recent coverage policy update issued by UNH, which has an effective date of December 1, "raises concerns" around the trajectory of Nevro’s core U.S. spinal cord stimulation

·     Healthcare Services: MPW announced that it has entered into definitive agreements for the sale of three Connecticut hospitals to Prospect Medical Holdings, the current lessee (separately, shares were mentioned as negative call by BearCave); in virtual care, Guggenheim said they see a modest tailwind for AMWL and a potential headwind for DOCS and TDOC following survey of 76 healthcare provider executives who are decision-makers for the selection of and contracting with IT vendors, with a specific focus on virtual health solutions.

Industrials & Materials

·     Transports, Industrial & Machinery: GNRC was downgraded to Neutral from Buy at Bank America calling it one of the most highly contested stocks in their renewables coverage universe; GE is laying off workers at its onshore wind unit as part of a plan to restructure and resize the business, which is grappling with weak demand, rising costs and supply-chain delays, Reuters reported; UBS said they take a favorable view on HVAC into Q3 EPS and early ’23, favoring Commercial exposure (JCI, CARR, HON, ROK are HVAC names); Baltic Dry Index Falls 0.2% to 1,992 in London.

·     Metals & Mining: STLD upgraded to Buy from Neutral at Goldman Sachs and downgrades RS to Neutral from Buy as does not see raw material cost push or supply/demand fundamentals that would be supportive of near-term price increases with scrap prices softening and the macroeconomic environment remaining uncertain; MT downgraded to Neutral from Buy at UBS noting the co has accelerated the rate of blast furnace closures in Europe ahead of expectations, while cost inflation has been far higher than expected; gold miners giving back some recent gains as gold prices dip amid a rebound in the US dollar.

·     Paper & Packaging: Deutsche Bank noted implications from drop in OCC for Packaging (IP, PKG, WRK) and Waste (RSG, WCN, WM) saying Fastmarkets RISI reported U.S. average Old Corrugated Containers (OCC) pricing for October at $38 per ton represents a 51% decline m/m and a 77% decline y/y and said since July, prices have collapsed and declined 70%. Firm views declining OCC prices as a positive for GPK and SON given lower input costs; a negative for containerboard group (IP, PKG) as it likely implies that demand has materially slowed, and a clear negative for Waste group given lowered revenue from the sale of recycled fiber (WCN, RSG, WM). Separately, WRK announced that it will permanently shut the corrugating medium operations at its St. Paul, MN.

·     Chemicals: group has been hammered last few weeks with companies lowering outlooks due to rising costs, macro environment (DOW, OLN, CC, HUN, EMN) and analysts still playing catch-up; VNTR downgraded to Sell (from Neutral) at UBS as believe mounting pressure from declining TiO2 demand, higher cost structure, and weak FCF weigh on the stock; WLK upgraded to Neutral at UBS noting share are down ~40% from mid-year highs, and while risks remain around the housing cycle and PVC demand, they see risk/reward more balanced; RPM was upgraded to Overweight at JPM after reported above-Consensus profit growth for 1Q:F23; ag chemicals MOST, NTR, CF saw strength with reports that Barge lines are starting to force majeure loads as lower Mississippi River levels continue to drop which is causing lighter loads/restricted transit/etc. (note may be bad for fertilizer whose season is coming quickly).

Technology, Media & Telecom

·     Media, Internet: more drama in the TWTR deal news as Elon Musk asked a Delaware judge to pause further action in Twitter Inc.’s lawsuit against him, saying the social media company “will not take yes for an answer” after he revived his $44 billion bid; PINS was upgraded to Buy from Neutral at Goldman Sachs and raised tgt to $31 from $24 saying they see a more positive risk/reward skew at current levels; FOXA upgraded to Buy from Hold with $43 tgt at Argus saying Fox has differentiated itself from its Hollywood peers by not following the stampede into subscription video-on-demand (SVOD), thereby saving millions in costs.

·     Software movers: SPLK downgraded to Neutral from Buy at UBS post a fresh round of industry checks that helped clarify the root cause of Splunk’s recent $250m FY23 ARR guidance cut; in video games, TTWO upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $165 from $131 saying the building long term industry themes should emerge in 2023/2024; Bank America noted HCP at is user conference that mgmt presented a LT rev target of $2bn, which assumes a reasonable 2K+ base of enterprise customers w/ average ACVs of $800K+

·     Semiconductors: sector has outperformed broader tech this week with the Philly semi-index (SOX) up 9% thru Thursday, but down -36% YTD as investors look to buy beaten up chip names; Memory chip giant SK Hynix plans to slash capital expenditures as much as 70-80% next year, media report, citing Korean media. The move comes amid a market glut, as firms try to shore up memory chip prices; SMTC announced proposed private offering of $250M notes

·     Telecom, Hardware, Components & Services; for AAPL, UBS said they see over 25% upside potential as iphone demand remains strong; VZ upgraded to Outperform and introducing a $50 price Target at Oppenheimer saying the catalyst is what we anticipate will be gradual stabilization-to-growth of its subscriber base, although near-term trends could remain volatile