Closing Recap

Tuesday, October 12, 2021

Equity Market Recap

·     U.S. stocks teetered between gains and losses, struggling for direction as investors await key inflation data tomorrow and Thursday (CPI and PPI) as well as the start of earnings season with big banks reporting this week (JPM tomorrow, GS, Citi, MS, WFC among those later this week). The U.S. dollar added to recent gains, while oil prices rise a 4^th straight day and gold edged to its best level in over a week ahead of tomorrow’s CPI report (ests for core CPI to rise +0.2% MoM and +4% YoY). Tomorrow, President Biden said to meet with Wal-Mart, Home Depot and UPS while also meeting with port officials to discuss how to address delays at ports (which has been a cause for the ongoing spike in prices/lean inventory). Smallcaps and Transports were among the top gainers on the day. Markets overcame a lower growth outlook from the IMF which cut its 2021 global growth forecast to 5.9% from 6.0%, largely due to supply disruptions in advanced economies. Markets also ignored calls from Fed members that the Fed has all but met its employment goal to move ahead with reducing its bond buying program. Overall, another choppy day as markets await clearer direction from earnings, the Fed and the macro picture.

·     Stock and Sector Movers: Casinos outperform as MGM paces the S&P after a Credit Suisse upgrade, as CZR, LVS, WYNN strong in sympathy; PENN also among S&P leaders on Roth initiation at OW in the space; SIG opens strong after buying Diamonds Direct USA and raising its quarterly, FY revenue forecast, but shares turn red intraday; TSLA bounces to its highest levels in nearly 8-months after selling over 56K China-made vehicles in September, the most since starting production in Shanghai; in earnings: FAST rises on in-line results, AZZ soars to highest since May 2017; AAL green after prelim Q3 results are better than prior guidance; ABNB rebounds after Cowen upgraded the stock, $SQ higher on Atlantic upgrade to OW; in vaccine space, MRNA reverses early gains and rolls to red after the FDA does not take a stance on its booster shots ahead of its advisory committee meeting, while CVAC hits record lows after withdrawing its Covid vaccine from regulatory review after the EMA said it would not fast-track its approval process; MU, WDC among weakest in semi/memory sector after reports DRAM contract prices are likely to exit a bullish period and be on the downswing in 4Q21 at a QoQ decline of 3-8%.

·     Fed Speakers: The U.S. Federal Reserve has all but met its employment goal to move ahead with reducing its bond buying program, Fed Vice Chair Richard Clarida said. "I myself believe that the ‘substantial further progress’ standard has more than been met with regard to our price-stability mandate and has all but been met with regard to our employment mandate," Clarida said in prepared remarks to the Institute of International Finance virtual annual meeting. Atlanta Federal Reserve President Raphael Bostic said progress has been made in starting to wind down the Fed’s monthly asset purchases program, according to a Financial Times report.

·     In Washington D.C., the House was set to vote Tuesday for legislation raising the U.S. borrowing limit into December, as Democratic lawmakers wrestled with how to set a new ceiling for U.S. debt later this year over Republican resistance. House Speaker Nancy Pelosi (D., Calif.) called the House back from a week away from Washington to pass a debt-ceiling increase that cleared the Senate last week. The bill would increase the debt ceiling by $480 billion, an amount that the Treasury Department has said would allow the U.S. to pay its bills through Dec. 3, assuming it had also exhausted all its cash-conservation strategies.

Commodities

·     Oil prices bounced to settle higher by $0.12 or 0.15% at $80.64 per barrel ahead of weekly API inventory data tonight and EIA tomorrow morning, supported by a rebound in global demand that is contributing to energy shortages in big economies such as China. With demand growing as economies recover from pandemic lows, OPEC+ last week stuck to plans to restore output gradually rather than boost supply quickly. Brent prices dipped -$0.23 to $83.42 per barrel. Gold prices rise $3.60 to settle at $1,759.30 an ounce (off earlier highs $1,770) its best level in about a week but remains pressured by recent push higher for the U.S dollar amid rising expectations of the Fed tapering asset purchases next month. Natural gas prices rose about 3% to settle at $5.50 mln btus – note natural gas came into today down about -18% in less than a week since making its YTD high of $6.466 on October 6th

Currencies & Treasuries

·     Treasury yields end lower following two auctions today. The U.S. Treasury sold $58B in 3-year notes at a yield of 0.635%, well above prior at 0.447%, with the bid-to-cover at 2.36 vs. 2.45 prior and indirect bidders awarded 44.5%, down from 56.7% prior and directs 18.9% vs. 19% prior. The U.S. Treasury sold $38B in 10-year notes at a yield of 1.584% vs. 1.59% when issued prior, with the bid -to-cover (demand) at 2.58 vs. 2.59 prior auction and indirect bidders awarded 71.1%, same as last auction and directs awarded 17.7% vs. 16.6% prior. The U.S dollar extended recent gains, hitting one-year highs (3-yr high vs. the yen) with the index up around 94.50, rising vs. the euro (lowest since July 2020) and yen again. The buck extends gains on expectations the U.S. Federal Reserve will announce a tapering of its massive bond-buying program next month, and as concerns over soaring energy prices also sent investors to the safe-haven greenback.

Sector News Breakdown

Consumer

·     Retailers; strength in shares of department stores early (KSS, M, JWN); CPRI rises after luxury retailer LVMH posts better than expected Q3 earnings; SIG said it is buying Diamonds Direct USA for $490M in cash and boosted its Q3 and FY 2022 outlook for revenue; expects total revenue for the full year between $7.04B-$7.19B, up from its prior range of $6.80B-$6.95B and Q3 same-store sales to rise in the range of 10%-12% vs previous forecast between a 3% fall and a 1% jump; NKE was initiated Buy and $172 tgt at Goldman Sachs based on a healthy industry backdrop, room to expand its DTC initiative and a high cash balance which should enable additional investments/returns to shareholders

·     Auto sector; TSLA sold 56,006 China-made vehicles in September, up 26.5% M/M from August’s sales of 44,264 units, and the highest since it started production in Shanghai about two years ago, Reuters reports; GM said LG Electronics agreed to reimburse GM for costs and expenses associated with the recall of Chevrolet Bolt EVs and EUVs due to manufacturing defects in battery modules; Automobile sales in China declined 19.6% Y/Y in September to 2.07M vehicles, falling for a fifth consecutive month; sales of passenger cars in September fell 17% Y/Y to 1.58M vehicles, the China Passenger Car Association said; VRM has agreed to acquire California based United Auto Credit Corporation for $300M in cash

·     Housing & Building Products; TREX downgraded to Neutral from Outperform at Baird and cut tgt to $108 from $116 saying decking channel checks suggest sell-through demand will be slower in Q3 and Q4; Loop Capital reduced MHK tgt from $200 to $190 and cut Q4 and beyond EPS estimates given more enduring supply-chain cost pressure than we had modeled previously; Truist also weighs in on the building products sector saying they are buyer of FBHS and MHK on benefits from import supply chain disruption while raising BECN estimates on mid quarter residential roofing rebound but lowering MLM, VMC on transitory weather issues. Said import supply chain issues could hurt importers HD, LOW, SNPO but benefit domestic producers FBHS (raising est.) and MHK

·     Restaurants; Loop Capital said their latest DPZ U.S. franchisee checks indicate same-store sales growth came in ahead of sell-side and especially investor expectations in 3Q21 (while noting most investors are expecting DPZ’s reported comps for 3Q to miss sell-side expectations); PXXA tgt raised from $132 to $140 at KeyBanc as believe 3Q domestic systemwide SSS trends likely finished in the MSD+ range, implying upside to 4.1% consensus; on SBUX OpCo maintains an Outperform rating but take a more balanced near-term stance as EPS estimate revisions now become less obvious

·     Casinos, Gaming, Lodging & Leisure sector; in casinos, MGM upgraded to Outperform from Neutral at Credit Suisse and up tgt to $68 from $33; in leisure and travel, ABNB was upgraded Neutral to Outperform at Cowen and upped tgt to $220 from $160 as expect step-up of Alternative in Lodging mix to be permanent and believe Street underestimating ABNB at 17% bookings growth in 22E; BKNG tgt raised to $2950 from $2700 at Cowen and increased 22-23E gross booking value (GBV)

Energy

·     Energy stock movers; TALO preliminary Q3 estimates are for average daily production 56-56.5k MBoe/d, inclusive of several weeks of downtime due to Hurricane Ida that represents 10-11 MBoe/d compared to pre-hurricane projections, realized prices of approximately $68/barrel of oil, $30/brl of NGLs, $4.50/Mcf of natural gas, and realized hedge losses of approximately $72M for the quarter; WFRD sees its Q3 earnings to outperform its July guidance, now expecting EBITDA to rise at least 25% from Q2, adj EBITDA margins to increase by at least 350bps, operating income to rise at least 50%, and revenue to rise 4-5% from Q2 (vs est. rise of ~3%), and separately announced intentions to issue $1.5B of senior notes due 2030 in a private offering; FTI awarded a substantial long-term charter and services contract of $250-500M by PBR for the pipelay support vessel Coral do Atlântico

Financials

·     Top stories Bank movers; all about upcoming earnings as banks kick off the start of earnings season tomorrow: JPM, BLK kicking off earnings this Wednesday (10/13), BAC, C, MS, USB, WFC on Thursday (10/14) and GS, PNC, SCHW, TFC on Friday 10/15; in news today, one banking deal as COLB and UMPQ announce merger in an all-stock combination as UMPQ shareholders will receive 0.5958 of a share of Columbia stock for each Umpqua share they own.

·     Insurance; Truist lowers ests on GSHD based on the sharp deceleration in mortgage originations in 2H21, which should have a negative effect on new business volumes and are trimming 2021 EPS estimate to $0.49 from $0.50 and our 2022 forecast to $0.82 from $0.85; ACGL said Q3 results will be negatively impacted by the effects of Hurricane Ida and the July flooding events in Central Europe, as well as from other minor global events; sees pre-tax catastrophe losses of $330M-$345M in Q3 across its property casualty insurance and reinsurance segments

·     Asset managers with monthly AUM data: APAM prelim assets under management as of September 30, 2021 totaled $173.6 billion; CNS preliminary assets under management of $97.3 billion as of September 30, 2021, a decrease of $3.2 billion from assets under management at August 31, 2021; BEN prelim month-end assets under management of $1,530.1 billion at September 30, 2021, compared to $1,572.1 billion at August 31, 2021; IVZ preliminary month-end assets under management of $1,528.6B, a decrease of 2.2% versus previous month-end. Total net inflows were $4.2B; TROW preliminary month-end assets under management of $1.61 trillion as of September 30, 2021; VRTS prelim assets under management (AUM) as of September 30, 2021 of $177.3 billion as the decrease in AUM from June 30, 2021 reflected market performance and open-end fund net outflows

·     FinTech & Payments; SQ was upgraded to Overweight from Neutral with a $300 price target at Atlantic Equities; MOGO announced a new partnership with CI Investment Services, wholly owned subsidiary of CI Financial, for providing a range of back-office services to support MogoTrade, Mogo’s upcoming commission free stock trading app; the Financial Times reported

·     REITs; Evergrande Group once again misses payment on the firm’s 9.5% note due 2022 and its 10% bond due 2023. Also adding to concerns, Shanghai-based developer Sinic Holdings Group said that it doesn’t expect to pay the principal or interest due Oct 18 for a $250 mln bond

Healthcare

·     Vaccine news: MRNA released briefing documents to the FDA in advance of a Thursday advisory committee to discuss the company’s request to authorize COVID-19 vaccine boosters and said that its data shows that six to eight months after a second dose, antibody titers against the beta, gamma, and delta variants decreased six- to seven-fold; MRK announces plans to double supply of molnupiravir, its COVID-19 antiviral pill, on rising demand, as per the Financial Times;

·     Pharma movers: TEVA tgt raised to $12 from $10 and reiterate Buy at Argus ahead of 3Q results as believe that the stock is undervalued based on the company’s recent product launches, pipeline progress, and commercial partnerships; Bloomberg reported GSK’s consumer healthcare unit is drawing buyout interest from private equity firms such as Advent, CVC and KKR, ahead of the drugmaker’s planned separation from the unit next year; AERI announces topline results for its Phase 3 study in Japan of Netarsudil, with the study showing Netarsudil was superior to ripasudil in lowering intraocular pressure at week four, the primary endpoint of the study; OCGN said an expert panel in India recommended giving emergency use authorization for Covid-19 vaccine Covaxin for children between 2 and 18.

·     Biotech movers; CVAC slides after saying it is withdrawing its first experimental COVID-19 vaccine from European regulatory process and focus on second shot it is developing with GSK; TARA rises as the FDA cleared its IND application for TARA-002, an investigational cell-based therapy being developed for treatment of bladder cancer; VTVT said the company’s mechanistic study for TTP399 in patients with type 1 diabetes (T1D) reached the primary endpoint indicating non-inferiority of key blood ketone levels compared to the placebo; INBX announced interim results from a Phase 1 clinical trial evaluating the safety and pharmacokinetics of INBRX-101, in patients with alpha-1 antitrypsin deficiency, or AATD

·     Healthcare Services & MedTech Equipment; QTRX announces that its Simoa phospho-Tau 181 (pTau-181) blood test has been granted Breakthrough Device designation by the U.S. FDA as an aid in diagnostic evaluation of Alzheimer’s Disease (AD)

Industrials & Materials

·     Industrial & Machinery; FREY announces a joint venture in the U.S. with Koch Strategic Platforms to evaluate Gigafactory production of next- generation battery cells; FAST said Q3 net income rose to $243.5M or 42c a share from $221.5M or 38c in the year-ago quarter, while sales rose by 10% to $1.55B (est. $1.54b), while employee-related costs increased by 16.8%; Citigroup lowered estimates for most companies (CAT, PCAR, CMI, TEX) in coverage to reflect well-telegraphed increases in operating costs and operating inefficiencies, and supply chain challenges; AZZ reported missed Q2 with EPS beat but revs miss (raises year EPS view while narrows its revenue outlook for the year) saying its infrastructure solution segment saw modest improvement in 2Q due to improving end-market conditions for both its industrial and electrical products and services, which were hurt by Covid-19 last year.

·     Transports; in airlines, LUV cancelled more flights today after over 1,900 didn’t fly this weekend as the carrier struggles to balance worker shortfalls, packed planes and a busy flight schedule; AAL said it sees a smaller-than-expected adjusted net loss for Q3, guiding to loss between $620M-$675M vs. estimates for loss of $741.7M while sees Q3 revs down about 25% vs 3q 2019; MATX guides Q3 diluted EPS $6.39-$6.58 above est. $4.39 saying they continued to see strong demand with higher year-over-year volumes compared to the largely pandemic-reduced volumes in the third quarter of last year; KEX was upgraded to Buy from Hold at Stifel as believe there should be meaningful upside as market conditions normalize or even shift to bull market territory

·     Metals & Materials; uranium stocks (CCJ, DNN, UUUU, UECmoves higher early with some noting headlines Finland lobbies nuclear energy as a sustainable source; GEF announces a $60 per ton price increase on all uncoated recycled paperboard (urb) grades and a minimum 7% increase on tube and core and protective packaging products; HL posted a 24% Y/Y decline in silver production to 2.67M oz. from 3.54M oz. in the prior-year period, citing lower grades at Greens Creek based on mine sequencing, partially offset by Lucky Friday production

·     Aerospace & Defense; BA said airplane deliveries rose to 35 in September as it benefited from an uptick in domestic travel, but its 787 program remains hobbled by structural defects. That was 13 more planes than in August and 24 more than in September last year. Of the 35 jetliners delivered last month, 26 were 737 MAX passenger jets and one was a P-8 maritime patrol aircraft to the U.K. Royal Air Force.

Technology, Media & Telecom

·     Digital media: Truist out with an Earnings Preview for several names saying for NFLX, expect 3Q inline, view 4Q achievable, nudge-up estimates/PT on content/ pricing/gaming, acknowledge EV/S near high; says SPOT 2H set very reasonable, 3Q MAU could see upside, valuation hair below average; ROKU Platform/EBITDA low hurdles, Accounts/Players slightly high (investors aware), faster Intl (or other) needed to shift TV competition narrative; DIS consolidated and segment revs and profit very reasonable, 2.5/0.5/1.0/2.0m D+/Hotstar/Hulu/E +, DTC strengthens C4Q; WMG F4Q very reasonable, lift PT on growth at low vol and for LGF, F2Q set reasonably, subs likely solid, slate sets up well F2H

·     Semiconductors; memory stocks declined (MU, WDC, STX) after TrendForce said DRAM contract prices are likely to exit a bullish period that lasted three quarters and be on the downswing in 4Q21 at a QoQ decline of 3-8% https://bit.ly/2X8T1MW ; MXL named as short call from Jehoshaphat Research saying organic growth is 0% while the Street models double-digit growth. Separately, the company later guided Q3 revs $225M-$230M above est. $219.7M); NVDA’s prospects of getting regulatory approval for its $55 billion acquisition of microchip designer Arm Holdings from SoftBank are looking increasingly imperiled, the Information reported, according to two people involved in the process. https://bit.ly/3Dy20Xn

·     Hardware, Components & Software movers; Oppenheimer raises price tgts on CYBR (to $195), FTNT ($345), MDB ($510), PANW ($550), and SNOW ($360), and also adjusting our Fortinet FCF and Okta cRPO estimates saying they are comfortable with our group’s positioning heading into September/October earnings seeing attainable targets and upward revisions to forward guidance (bit notes YoY comps are getting tougher along with macro concerns present); LITE downgraded from Strong Buy to Outperform at Raymond James considering both Pros and Cons for the stock including expectations for a lower than consensus outlook in December (says remains favorite play on optical components); CTXS downgraded to Market perform at William Blair saying discussions speak to a dire and deteriorating situation at Citrix, which reduces their confidence in consensus estimates; HUBS shares surged after the company said it has launched the open beta for HubSpot Payments, an end-to-end payment service (held virtual co meeting today); On Tuesday, software developer Gitlab (GTLB) said it would offer 10.4 million shares at $66 to $69, up from its prior range of $55 to $60.

·     Media & Telecom movers; cable company CHTR receives its 3^rd analyst downgrade in as many days after Deutsche Bank cut it to Hold from Buy and tgt to $725 from $825 saying the period of favorable conditions for the cable industry is now transitioning to a more competitive environment (also cut tgt on ATUS to $22 from $40) – the downgrade follows recent cuts from Raymond James and Wells Fargo on CHTR and cable names; RRD to be acquired by Chatham Asset Management, LLC for $7.50 per share (had held about 14.9% of the outstanding common stock prior to announcement)