Closing Recap

Wednesday, October 13, 2021

Equity Market Recap

·     U.S. stock markets were mostly higher as the tech-heavy Nasdaq Composite outperformed the S&P 500, while the Dow Jones Industrial Average underperforms behind weakness in big banks after JPMorgan earnings results and sliding Treasury yields. An in-line inflation reading (CPI) helped ease concerns about rising prices, but also boosted expectations for the Fed to step up its bond asset tapering plans to November from December (confirmed by FOMC Minutes today) with plans to be done with purchases by mid-2022. There were no surprises in the consumer price index (CPI) inflation report ahead of tomorrows producer price index (PPI) for Sept. Transports underperform after DAL posted a Q3 revenue miss noting rising energy costs. Gold prices jumped over 2% as the dollar Treasury yield pulled back off recent strength. Reports that Apple (AAPL) plans to cut production of the iPhone 13 series for 2021 by as many as 10 mln units due to the global semiconductor shortage failed to impact the shares or semiconductor suppliers this morning. President Biden met with executives from Long Beach ports as well as companies including Wal-Mart, FedEx, UPS, Target, and others to focus on the supply chain/port backups.

·     Stock & Sector movers: JPM slips despite beating on both the top and bottom line, while BLK jumps on its beat and increase in AUM to nearly $9.5T to kick off bank earnings; BAC, C, MS, USB, WFC scheduled to report pre-market tomorrow, GS, PNC, SCHW, TFC scheduled Friday; PLUG surges on a Morgan Stanley upgrade to OW, partnerships with PSX and EADSY; DAL sinks as its quarterly beat is outweighed by a warning that rising fuel costs will pressure profitability next quarter that also weighs on other airlines and cruise lines; AAPL drops after slashing its iPhone production goal due to the chip crunch, saying it expects to make 10M fewer phones than planned; shares of suppliers AVGO, TXN, SWKS also lower; CRSP rolls to YTD lows after reporting some patients suffered infections in its Phase 1 CAR-T cell therapy trial; SAP soars after raising its revenue guidance, providing a lift for the software space.

·     Positive China data overnight also helped U.S. listed China stocks and commodity names: China’s exports rose 28.1% to $305.7bn, up from 25.6% in August and above consensus +21.5%. Imports came in at 17.6% vs. consensus at +20.9%). China’s trade numbers for September were surprisingly strong despite concerns about power shortages and supply chain disruptions.

Economic Data, FOMC Minutes:

·     No major surprises in the CPI inflation report: Consumer Price Index (CPI) data for September showed headline prices rose 0.4% (in-line w ests), while on a YoY basis rose 5.4% vs. est. 5.3%; core CPI (ex Food & energy) rose 0.2% MoM and 4% YoY, both in-line with consensus views).

·     Federal Reserve officials last month reviewed plans to begin reducing their bond-buying stimulus program in November and to possibly end the asset purchases entirely by the middle of next year. Minutes of their Sept. 21-22 Fed meeting revealed a stronger consensus over how to start scaling back the $120 billion in monthly purchases of Treasury and mortgage securities amid signs that higher inflation and strong demand could call for tighter monetary policy next year. New projections released at the end of that two-day meeting showed half of the 18 officials that participated expected the economy to require an interest-rate increase by the end of 2022. In June, just seven officials anticipated raising rates next year. The projections also showed several officials expected somewhat higher inflation next year than in June, and nearly all penciled in more rate increases in 2023.

Commodities

·     Oil prices settle lower, but off the worst levels falling $-0.20 or 0.25% to settle at $80.44 per barrel (lows $79.42), taking a breather after a strong run to 7-year highs. Today the EIA cut its forecast for 2022 world oil demand growth by 150K Bpd, as now sees 3.48M Bpd Y/Y increase while 2021 forecast raised by 90K Bpd, as now sees 5.05M Bpd Y/Y increase. Oil price finish lower as expectations grew that oil demand growth will fall as inflation and supply chain issues strain major economies, though surging prices for power generation fuel limited losses.

·     Gold prices surge $35.40 or 2% to settle at $1,794.70 (4-week highs) an ounce as a retreat in the dollar and U.S. Treasury yields following in-line inflation data boosted the appeal of precious metals. Other precious metals (silver, platinum and palladium rising early as well).

Currencies & Treasuries

·     The U.S. dollar index (DXY) pulled back off a one-year high (94.56) amid rising expectations the Federal Reserve will announce a tapering of stimulus next month, potentially following with interest rate hikes by mid-2022. Recently, three Fed policymakers said that the U.S. economy has healed enough to begin to scale back the central bank’s asset-purchase program, including Vice Chair Richard Clarida. Rising commodity prices (energy, gas, food, cotton) has fueled inflation concerns and stoked bets that the Fed may need to move faster to normalize policy. The buck holds around 3-year highs vs. the Japanese yen and euro around 15-month low. Treasury yields were mixed as the two-year Treasury yields touched its highest in over 18-months overnight (above 0.36%) and rose during the day while longer dated yields slipped following the in-line CPI inflation report as the 10-yr fell over 2 bps to 1.55%, off late last week highs above 1.6%.

·     Futures on the federal funds rate, which track short-term interest rate expectations, on Wednesday has priced in a 25-bps tightening by the Federal Reserve by September next year after data showed an increase in U.S. consumer prices last month. The fed funds market showed a roughly 90% chance of a rate hike by September 2022, fully pricing a Fed tightening by October next year. That’s earlier than what the market priced of a November 2022 hike.

Sector News Breakdown

Consumer

·     Retailers; Cowen reveals Gen Z/Millennial stocks in 4th annual proprietary survey of 18-34 year old consumers, with WSM said to be well positioned to benefit from a greater focus on sustainability, said NKE and LULU showed robust positioning in Cowen’s category level surveys and said are optimistic about POSH and REAL’s growth prospects long-term; SIG upgraded to Neutral at Bank America and raise tgt to $88 as the co continues to stabilize on strong jewelry demand and has elicited positive customer response to new product launches; HAS CEO Brian Goldner passed away just days after stepping down for health concerns; KOSS rises after Patent Trial and Appeal Board declined to institute a review of AAPL’s two patent challenge against the company

·     Housing, Home Furnishing & Products, & Building Products; Wayfair (W) downgraded to Hold from Buy at Jefferies saying 3Q web traffic ended weak & 4Q started slow and against a backdrop of supply chain disarray, 2H Street estimates are too high; GRWG cuts FY21 revenue view to $440M-$452M from $455M-$475M (est. $471.64M) citing termination of the planned acquisition of HGS Hydro – the acquisition was assumed to provide about $20M of revenue for 2021

·     Consumer Staples; FRPT was upgraded to Buy from Hold at Truist and upped its tgt to $175 from $150 saying the hyper-growth story is about to enter its next chapter in which expanded production capacity enables it to meet full growth potential; BRBR was downgraded to Hold from Buy at Truist and cut its tgt to $30 from $35 as believe the dynamics of the proposed spinoff from POST are and will continue to be an overhang on the stock until at least late C1Q22; in beverages, MNST was downgraded to Hold from Buy at Jefferies and lower tgt to $92 saying its U.S. market share losses are worrisome as emerging brands disrupt the energy drink category and supply chain issues likely into ’22 w/category pricing still on-hold

·     Casinos, Gaming, Lodging & Leisure sector; for lodging (HLT, MAR, PK), Truist previews space saying they see the combination of initially conservative expectations plus continued strength in summer and post-Labor Day leisure travel resulting in most companies at least modestly beating 3Q earnings expectations; in gaming, DKNG said it has agreed to a deal with the NHL to become an Official Sports Betting, Daily Fantasy Sports, and iGaming Partner of the league

Energy

·     Energy stock movers; CLR downgraded at MKM to Neutral with a higher $54 PT from $47; RTLR, a subsidiary of FANG, announced it invested $104M in cash for a strategic Midland Basin gas gathering & processing joint venture; VST announced a $2B share repurchase program; GTE said Q3 production 28,957 barrels of oil per day, up grew 53% YoY from 18,944 barrels and from 23,035 barrels a day QoQ, and it expects the gains to continue in Q4; Cowen raised their price targets across the board in the sector given a confluence of absent supply growth and rebounding demand that has driven commodity prices to a point where E&P names are set to deliver outsized FCF yields, and their top ideas into earnings: FANG, WLL, CTRA, OVV, MTDR

·     Utilities & Solar; PLUG upgraded to OW at Morgan Stanley due to several strategic partnerships, ~$4bn of cash and cash equivalents on its balance sheet, accelerating revenue growth, and the potential for significant upside from legislative support; separately, announced partnerships with PSX to explore ways to deploy their technology within PSX’s operations to advance green hydrogen and collaborate on development of low-carbon hydrogen business opportunities and with EADSY on a de-carbonization study that will build deployment scenarios for green hydrogen infrastructure at airports with Airbus to provide insight on hydrogen aircraft characteristics; Goldman upgraded XEL to Buy on an attractive opportunity to gain exposure to an above-average EPS/DPS growth story driven by generation fleet transformation and NI to Buy given its attractive entry point and downgraded SRE to Neutral due to few positive catalysts on the horizon; solar names in general extend recent gains (FSLR, SPWR, SEDG, ENPH), benefitting from concerns over the power outage issues around the globe.

Financials

·     Shares of major U.S. banks dropped as a closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes fell to 117.13 basis points, its lowest in almost two weeks. A flattening of yield curve dents banks’ profitability, raising borrowing costs in the short-term, while making less money through lending in the longer term

·     Bank movers; Dow component JPM Q3 revs $30.44B vs. est. $29.8B and EPS better at $3.74 vs. est. $2.97; said Q3 results included $2.1B net credit reserve release firmwide; said provision for credit losses was a net benefit of $1.5B, reflecting a net reserve release of $2.1B; qtrly fixed income markets revenue was $3.7B, down 20%, while qtrly equity markets revenue was $2.6 billion, up 30%; Q3 net interest (NII) income was $13.2 billion, up 1%; Q3 net charge-offs $524M, vs. est. $1.03B; BLK Q3 adj EPS $10.95 vs. est. $9.35 on revs $5.05B vs. est. $4.9B, quarterly long-term net inflows $98B billion, AUM at quarter-end $9.46 trillion vs $7.81 trillion YoY; FRC reported Q3 EPS $1.91 vs est. $1.84 on revs $1.3B vs est. $1.27B; PNFP Q3 EPS $1.75 vs est. $1.55 on revs $341.6M s vest. $328.8M; AB AUM at end of September $742B, down from $761B at August-end; Stephens downgraded MSBI to EW as it has outperformed other Midwest banks and the Nasdaq Bank Index YTD; OpCo upped their PT on JEF to $54 from $41 as they say yesterday’s Investor Day shows the Street needs to start viewing the company as one of the better secular growth stories in financial services instead of a value stock; After yesterday’s merger announcement, COLB was upgraded to Buy at DA Davidson and UMPQ was downgraded to Hold at Truist and EW at Stephens; CATC initiated at Buy at Janney; The Financial Times reported DB is facing a EUR500M lawsuit from a Spanish hotel chain following the bank’s derivatives scandal; CME Q3 international average daily volume was 5M contracts, +13% YoY

·     Services & Consumer Finance; EFX launched Digital Identity as a Service that gives consumers greater control over what information is shared, enhances protections against synthetic identity fraud and third-party account takeover, and strengthens user profiles with differentiated data, and announced an innovation partnership with Bonifii as the first adopter of the solution; WEX upgraded to Buy at Bank of America; EFC commenced an underwritten public offering of 5M shares of common stock at $18.25-18.45

·     Bitcoin news; The United States has overtaken China to account for the largest share of the world’s bitcoin mining, data published on Wednesday by Britain’s Cambridge Centre for Alternative Finance showed. China’s share of the power of computers connected to the global bitcoin network, known as the "hash rate", had fallen to zero by July from 44% in May, and from as much as 75% in 2019, the data showed

·     REITs; Wells downgraded CONE to EW with a $78 PT from $80 as they believe the stock is trading more on M&A potential than fundamentals in the near-term and they do not like the risk/reward of a potential deal as they see a takeout price of $80-85, which is only 5-12% upside from current levels; TCN was rated at Outperform by BMO who sees a multi-year opportunity for FFO and BVBP growth and reiterated as a high-conviction Outperform at RBC who raised their PT to $15.50 from $14 after its upsized U.S. IPO last week, dual listing on the NYSE, and executed private placement to Blackstone REIT; DBRG announced it acquired a controlling stake in Vertical Bridge, the largest private owner and operator of wireless communication infrastructure in the United States, and Cowen separately reiterated the stock as their top SMid-cap idea with an attractive entry point after management meetings last week

Healthcare

·     Pharma movers; the NYTimes reported the FDA has questioned the robustness of clinical data submitted by JNJ in support of authorization of its COVID-19 vaccine as a booster shot; ATRA presents new magnetization transfer ratio imaging data and two-year clinical data from the open label extension of ata188 for progressive multiple sclerosis at Ectrims 2021 saying interim analysis from randomized phase 2 Embold study on track for h1 2022; BMY announces interim results from the Phase 3 open-label extension trial DAYBREAK, demonstrating the long-term efficacy and safety profile of Zeposia (ozanimod) in patients with relapsing forms of multiple sclerosis (MS).; ARDX said it intends to reduce its workforce by 65% as part of a broader restructuring plan; in cannabis, Cantor said top picks are CURLF, GTBIF, and TCNNF saying they think this is the time to buy the US group (but be selective) as believe the letter sent by Senators Warren/Booker to AG Garland (including a 10/20 deadline for action) is indicative of the pressure felt by Democrats sponsoring federal cannabis reform.

·     Biotech movers; SRPT announces $500M common stock offering and guiding Q3 revs about $166.9M vs. est. $172M; had approximately $1.6 bln in cash, cash equivalents and investments as of September 30, 2021; CRSP shares slipped after announcing updated results from the company’s early-stage trial of its CAR-T cell therapy CTX110 – this coming a week after ALLO roiled the cell therapy field with news of an unexpected safety problem, but CRSP said its competing CAR-T cancer treatment is leading to remissions without any signs of similar concerns; NTLA announces a collaboration with private co SparingVision to develop treatments for various eye diseases; NRBO rises after an independent Data Monitoring Committee recommended continuing with the company’s Phase 2/3 trial of ANA001 as a potential treatment for COVID-19 without modification;

·     MedTech Equipment; STIM announced preliminary Q3 revenue of ~$13.8M, well below guidance of $15M-$16M and our consensus’ and also meaningfully cut its full year revenue guide from $59M-$63M to $53.3M-$54.3M, a $5.5M cut at the midpoint on top of the Q3 miss; SRNE received clearance from the U.S. FDA to proceed with clinical trials for the company’s anti-TROP-2 antibody drug conjugate ESG-401; ALGN among top decliners in the S&P 500 as Stifel said 3Q21 checks came back soft, view risk/reward for the upcoming print differently versus the last handful of quarters

Industrials & Materials

·     Aerospace & Defense; Blue Origin launches rocket successfully as William Shatner becomes the oldest person to go to space; BA is the latest federal contractor to mandate COVID-19 vaccinations for all employees by December 8 under the Biden administration’s new rules saying its 125K U.S. employees must show proof of vaccination or have an approved religious or medical exemption by the deadline; CMTL awarded $4.6 mln in orders from U.S. army for mobile satellite equipment

·     Industrial & Machinery; Deutsche Bank positive on machinery names as ETN on near-term Catalyst Call watchlist as a BUY saying they have seen inbound interest in the name rise dramatically, while AGCO also named a Catalyst Call buy as think the company is in a position to beat/raise full year guidance; in autos, GM said it will extend a production halt of its electric vehicle Chevrolet Bolt for two additional weeks as it works to accelerate production of new battery modules and prioritize recall repairs.

·     Transports; airline DAL the first to report earnings this quarter as posted a quarterly profit as travel demand began to recover in recent weeks, but revs of $8.28B missed the $8.4B estimate and warned of a pre-tax loss for Q4 due to a sharp rise in fuel prices; for rails (CSX, NSC, UNP), Cowen out with a Shipper Survey as expect rail price increases of 4.2% flat sequentially and above the survey s 5-year average. Business trends in 3Q ticked down sequentially while 70% of shippers cited concerns around rail capacity

·     Paper & Packaging: IP announces up to $2B share repurchase program; Truist initiates coverage on containerboard and boxes saying they are cautious based on moderating e-commerce demand and declining operating rates as initiated Hold ratings on IP, WRK and PKG, though picked up GPK with a Buy and Street high $26 tgt

Technology, Media & Telecom

·     Hardware and components; AAPL shares fell overnight after Bloomberg reported the iPhone maker plans to cut production of the iPhone 13 series for 2021 by as many as 10 mln units due to the global semiconductor shortage, noting chip producers TXN and AVGO are struggling to meet AAPL’s component requirements

·     Semiconductors; QCOM announces new $10.0 billion stock repurchase authorization; SWKS downgraded from Outperform to Neutral with $165 tgt at Baird saying they expect a secular slowdown in RF content growth in high-end smartphones, from 30%+ last year to 10% this year and lower in outer years; AAPL suppliers in general (CRUS, QRVO, QCOM, SWKS, AVGO) weaker on reports the iPhone maker to cut production of the iPhone 13 series for 2021; SGH posted a top and bottom line beat for Q4 EPS and revs and guided Q1 above views as well (EPS $1.80-$2.20 vs. est. $1.49); AMD launches AMD Radeon RX 6600 graphics card

·     Software movers; SAP raised its 2021 projections for non-IFRS cloud revenue at constant currencies to range from EUR9.4B to EUR9.6B, up from its earlier view of EUR9.3 billion and EUR9.5 billion; also boosts cloud and software revenue at constant currencies view to EUR23.8 billion to EUR24.2 billion from its earlier view of EUR23.6 billion to EUR24 billion; HUBS price tgt raised by several analysts this morning (Canaccord, Jefferies, Needham all over $850) after comments at its investor day meeting yesterday sent shares surging; INFY FY22 revenue growth guidance raised to 16.5%-17.5% from 14%-16% after reporting in line Q3 results; video game maker EA slips after the NYTimes reported FIFA and EA talks stalled over gamer’s exclusive rights

·     Media & Telecom movers; IAC reports September ANGI total revenue up 18% from last year with Dotdash revenue up 25%, and its Search business revenue up 74% from last year and Emerging & Other revenue was up 33% from last year; VMEO total revenue for september 2021 up 33%; subscribers for september 2021 up 14%; ARPU for september 2021 up 16%; DISCA was one of the top gainers in the S&P 500 early in media space; AT trades at lowest levels since July 2010, while VZ touch its lowest levels since March of last year, as defensive telco names lag