Closing Recap

Tuesday, October 11, 2022

Equity Market Recap

·     Markets finish mixed, hitting new 52-week lows for the S&P 500 as a late afternoon decline, spurred by cautious comments out of the Bank of England, erased an early bounce for U.S. stocks as the losing streak extended to five-days ahead of potentially massive market moving catalysts in coming days. Bank of England Governor Bailey warned pension funds that they have “3 days left to get this done" for pension rebalance as he noted BOE “intervention in markets will be temporary, says “we will be out’ by end of the week". Markets did not take this uncertainty well, prompting a massive market reversal in the final hour of trading. Investors continue to try and maneuver around the “landmines” of Fed and Euro bank speakers over the last few weeks as every stock market rally has been met with stark warnings of rate hikes and aggressive QT policy to slow rampant inflation, leading to sharp stock retracements.

·     Important data points, Fed minutes, and the start of earnings season later this week were the focus most of the day until the BOE warning. Markets began to recover late-morning after the NY Fed reported year-ahead inflation is expected to be 5.4% in September, compared to 5.7% in August (lowest since Sept 2021) – the first glimmer of hope in a while on the inflation front. The headline comes ahead of tomorrow’s Sept Producer Price Index (PPI) data and Thursday’s Consumer Price Index (CPI) data. The minor bounce on Tuesday follows major averages hitting their lowest levels in 2-years on fears the Fed will “overshoot” with its rate hikes, as another 75-bps is expected at their next meeting (would mark the 4^th straight meeting of a 75-bps increase).

·     Overall, stock market anxiety remains high against the backdrop of what seems to be an escalating war in Ukraine, financial instability in the UK, continued high inflation, ongoing negative news flow from China, and suggestions that the world economy could roll into a nasty contraction as central banks around the globe lift interest rates at a record pace. Core yields remain very volatile, and energy prices continue to hurt. Oil prices fell, the dollar dipped; and precious metals rebounded.

Commodities

·     U.S. oil prices fall as WTI crude settled at $89.35 per barrel, down $1.78, 1.95%, extending the previous session’s almost 2% decline, as recession fears and a flare-up in COVID-19 cases in China raised concerns over global demand. A flood of fuel exports from China may provide some relief to a tight global diesel market before Russian oil sanctions. The WSJ reported that US officials asked Saudi Arabia to delay OPEC+ production cut for a month, according to sources (ahead of election). U.S. officials warned Saudi leaders that a cut would be viewed as a clear choice by Riyadh to side with Russia in the Ukraine war and that the move would weaken already-waning support in Washington for the kingdom https://on.wsj.com/3MlUlBh

·     Gold prices rebound as the US dollar eased into this week’s inflation data points. The dollar index (DXY) dropped -0.6% to 112.50, while Treasury yields end lower, providing some support for precious metals and commodity prices in general today. Gold prices rose over $10 to settle at $1,686.00 an ounce.

Currencies & Treasuries

·     Treasury yields were mixed as the 10-yr edges slightly higher at 3.93% (but off overnight highs around 4%), while the 2-yr yield dipped 1 bps to 4.29% as bond markets reopened after being closed for holiday on Monday. The US Treasury sold $40B in 3-year notes at a yield of 4.318% vs. 4.31% when issued prior; the bid-to-cover was 2.57 vs. 2.49 prior auction as primary dealers take 27.05% of U.S. 3-year notes sale, directs 19.55% and indirect 53.4%.

·     The U.S. dollar rises after edging lower initially in choppy trade, as dollar sentiment remains positive into inflation data points as worries about rising interest rates and geopolitical tensions unsettled investors. Risk appetite was also hurt as Russia continued to strike Ukrainian cities on Tuesday. The dollar touched a three-week high against the yen, just shy of the 24-year peak of 145.90, while Sterling hit 2-week lows below 1.10 after the late day BOE comments and the euro reversed lower in the last hour as well, falling below 0.97 vs. the buck.

Sector News Breakdown

Consumer

·     Retailers: mattress industry supplier LEG lowers full-year guidance and announces recent acquisitions; said full year 2022 sales guidance lowered to $5.1-$5.2B from prior $5.2B-$5.4B (est. $5.32b) and 2022 EPS guidance reduced to $2.30-$2.45 from prior $2.65-$2.80 (es.t $2.71) – shares of mattress retailers TPX, SNBR, PRPL active on guidance); LULU upgraded to overweight from neutral at Piper, noting the company’s momentum in the broker’s Spring 2022 Taking Stock with Teens survey; ANF’s Hollister Co. is rolling out a new system that lets shoppers pass their carts to someone else for payment – as the system, called Share2Pay, aims to smooth over a common point of friction for online Hollister shoppers; BSET rises after CSC Generation Holdings Inc. offered to buy the company for $21 a share; the National Retail Federation expects imports at the country’s big ports to fall 9.4% on year in October while further declines of 4.9% and 6.1% are expected for November and December, respectively.

·     Auto sector: Mercedes-Benz brand 3Q sales up 21% to 517,800 vehicles saying sales increase despite chip shortage, supply disruptions; VLDR announced a multi-year agreement to provide its lidar sensors to Yamaha Motor for eve autonomy, a joint venture between Yamaha Motor and Tier IV, Inc. CVNA pushing back against a decision by Michigan authorities to suspend operations at one of its vending machine-like dealerships due to alleged violations of state law – Bloomberg; GOEV signs deal with fleet leasing provider Zeeba to sell at least 3,000 units of the Lifestyle Delivery Vehicle and Lifestyle Vehicle models through 2024

·     Consumer Staples: ELF upgraded to Overweight from Neutral at Piper and price target $46 from $35; in beverages, Wedbush initiated in non-alcoholic names with KDP named Top Pick; KO and PEP Also Rated Outperform and rate MNST and CELH Neutral saying they are bullish on soda, snacks, and coffee; cautious on competitive dynamics in energy. In alcoholic beverages, Wedbush initiated STZ Top Pick; MGPI and NAPA also rated outperform and neutral on BF; BTOG said investor sentiment in BYND appears to be at an all-time low as the company burns through cash and has recently lost key executives less than a year after they joined; APRN said its meal kits were not available for purchase through AMZN in the U.S., without a subscription; PEP to kick off earnings in the consumer staples space tomorrow

Energy, Industrials and Materials

·     Transports: DAL invested $60M in air taxi startup JOBY for a 2% equity stake as partnership to initially offer passengers air taxi transport to and from airports in New York and Los Angeles; AAL said it expects to post Q3 revenue 13% higher than in the same quarter in 2019 (had previously guided for quarterly revenue to increase by 10% to 12% from 2019 levels); the New York Times reported a proposed rule that would make it harder for companies to classify workers as independent contractors (negative for likes of UBER, LYFT, DASH) https://nyti.ms/3COGwrO

·     Industrial, Aerospace & Defense: GE tgt cut to $78 from $84 and LMT to $425 from $440 at Cowen in Commercial Aerospace – Q3 A&D Preview saying supply chain/labor/pension issues suggest mixed Q3 results and guides for defense and commercial aero stocks. They like oversold BA for upcoming investor day and favors RTX, HWM, ATI. In defense, they’re cautious on LMT into the print, preferring HII for multiple expansion given its "low beta" sales outlook; LASE gets order for its handheld LPC-1000CTH CleanTech Laser Blasting System from the U.S. Navy for delivery this month; BA said deliveries rose in September to 51 airplanes, while orders rose by 90 as the plane maker continues to see strong demand for new aircraft.

·     E&P and Majors: NOG said it will buy non-operated interests in Northern Delaware Basin from private seller for $130M in cash and is offering privately $350M convertible bonds due 2029; PSX reported a crude oil spill at a rail loading facility in Mountrail County on Oct. 10, the North Dakota Department of Environmental Quality said; SPWR downgraded to Underperform from Neutral at Bank America, and cut tgt to $18 from $22 as sees underappreciated risks of panel supply (solar names giving back recent big gains in prior months)

Financials

·     Bank movers: big bank earnings kick off earnings season – starting this Friday: with JPM, WFC, C, PNC, USB, and MS; then next week on Monday 10/17: BAC, BK, on Tuesday 10/8: GS, STT, TFC, on Wednesday 10/19: ALLY, CFG, CMA, NTRS and Thursday 10/20: FITB, KEYsaid it would begin receiving clients’ Cryptocurrencies on Tuesday, becoming the first large U.S. bank to safeguard digital assets alongside traditional investments on the same platform, WSJ reported; COIN said it was selected by Google to take cloud payments with Cryptocurrencies and will use its custody tool

·     REITs: AGNC said for qtr ended September 30, comprehensive loss per common share was estimated to be between $1.99 and $2.03 per share; for qtr ended sept 30, Co’s net spread and dollar roll income was estimated to be between $0.82-$0.86; BKD said Sept sequential occupancy increased 50 basis points both on a weighted average and month-end basis

Healthcare

·     Pharma movers: for LLY U.S. finds new quality problems at Lilly drug factory; ALBO reports positive topline data from phase 3 trial of Bylvay® (odevixibat) in Alagille syndrome as sees highly statistically significant improvement in pruritus primary endpoint; RIGL announced that it will reduce its workforce by 16%, resulting in the elimination of 30 positions primarily in development and administration; UTHR said first patient has enrolled in a late-stage study to evaluate its drug Tyvaso in adult patients with idiopathic pulmonary fibrosis (IPF) at sites outside the United States and Canada

·     Biotech movers: AMGN upgraded to overweight from equal weight by Morgan Stanley, which highlighted the unappreciated upside in the biopharma’s mid-term pipeline; SGEN upgraded to Outperform at BMO Capital as see meaningful upside on stand-alone value from here; CRSP initiated with an Underweight with PT $37 at Morgan Stanley; DICE surges as reported positive topline data from its Phase 1 clinical trial of DC-806, an oral small molecule antagonist of the pro-inflammatory cytokine IL-17; DNA announces collaboration with MRK to improve active pharmaceutical ingredient manufacturing

·     MedTech Equipment; OFIX said it agreed to combine with SPNE in an all-stock merger of equals. Under the terms, shareholders of SeaSpine will receive 0.4163 shares of Orthofix for each share of SeaSpine owned. Orthofix shareholders will own about 56.5% of the combined company, while SeaSpine investors will hold a roughly 43.5% stake. https://bit.ly/3rHJB6N ; TMO files for five-part, senior notes offering; size not disclosed – SEC filing

·     Healthcare Services: ABC was upgraded to Buy from Neutral and tgt to $169 from $160 at Bank America saying its core U.S. business remains on steady footing and should be poised for ongoing mid-to-high single digit EBIT growth across its U.S. segment; BHG reaffirms previous 2022 Adjusted EBITDA guidance at midpoint and accelerates Adjusted EBITDA profitability to 2023, a year earlier than previously anticipated. Said will no longer offer Individual and Family Plan products through Bright HealthCare in 2023, or Medicare Advantage products outside of California and Florida

Technology, Media & Telecom

·     Media, Internet: META downgraded from Overweight to Neutral w/$160 tgt at Atlantic Equities as now believe Meta’s growth outlook is increasingly challenged given strengthening macro headwinds, rising competition for advertising dollars; separately, META announced $1,500 Quest Pro virtual reality headset; ANGI CEO Oisin Hanrahan steps down, effective immediately; Joey Levin, CEO of IAC and Chairman of Angi has been appointed as CEO; US listed Chinese stocks continue to get hammered (BABA, JD, BIDU); broader Internet names lagged the market (NFLX, PINS, ETSY all lower)

·     Semiconductors: Heavy selling overnight again in semiconductors carried over into today on indications of weakening demand as Gartner’s Q3 PC update showed historic YoY unit declines (prelim PC data from Gartner (down -19.5% y/y) and IDC (down -15% y/y) indicates a sharp decline in unit shipment in 3Q22) and 2) the White House restrictions that were announced last week; KLAC this morning said they would be cutting off the sale of certain semi products/services to various different semis to comply w/ the WH order; in research, MRVL upgraded to Overweight at Wells Fargo as think a healthy amount of pessimism is priced in; and downgraded shares of QRVO (tgt to $85 from $130) and SWKS (tgt to $95 from $130) from OW to EW

·     Software movers: FORG shares surge after agreeing to be taken private by Thoma bravo for $23.25 per share, in deal valued at $2.3B in cash https://on.mktw.net/3MmXoJi ; NEWR said it expects 2q adj. Operating profit to exceed guidance and expects 2q revenue to exceed high end of guidance; ZM downgrade from Overweight to Equal Weight w/ $90 PT (from $130) at Morgan Stanley saying current valuation is more sensitive to direct business performance, where they do not expect improvement until next year; ZS announced that Amit Sinha has accepted a CEO position at a privately held technology company and will resign from Zscaler effective October 21

·     Hardware, Components & Services: latest Gartner data showed worldwide shipments of PCs sank 19.5% YoY to 68M units in Q3’22; HPQ saw units plunge ~28% while DELL was ~in line w/ cons (-21.1%) and AAPL fared bit better (-15.6%); back to school sales disappointed despite massive promotions and price drops due to a lack of need (many clients purchased new PCs in the last two years); on the business side, geopolitical and economic uncertainties led to more selective IT spending, and PCs were not at the top of the priority list; for AAPL KeyBanc raises revenue ests for Apple’s iPhone business on CC data, saying the demand for high-end smartphones is increasing the average selling price while noting that the tech giant has an additional week of sales this quarter; reit OW, $185 PT; Evercore ISI downgraded CIEN, FFIV, RXT to in-line from OP