Closing Recap

Monday, October 17, 2022

Equity Market Recap

·     U.S. stock markets finished firmly higher, erasing Friday’s losses as investors prepare for the onslaught of corporate earnings kicking into full gear this week with roughly over 13% of the SPX expected to report led by Financials, Industrials and Consumer. The stock market rally held up most of the day with a notable absence of Fed speakers on the calendar to pour “cold water” talking about higher interest rates to cool inflation. The lone piece of economic data was weaker, but earnings remain the key driver for a handful of sectors this week. China said Monday it will delay the release of economic growth figures, as the country’s leadership gathers for a meeting set to hand President Xi Jinping a historic third term in office. Today’s stock market rally was broad based as all eleven S&P sectors rose more than 1%. There were a couple of factors for market rebound today after more selling pressure last week:

·     1) another strong round of financial earnings results with BAC and BK shares leading higher, following better results from JPM, Citi and WFC on Friday (MS outlier lower) and into a big week for tech, banks, and industrial earnings: TSLA, NFLX, IBM, SNAP, T, VZ in tech, BAC, BK, GS, SCHW, AXP in financials, and AAL, UAL, LMT, HAL, KMI, AA, NUE in industrials/energy.

·     2) stock market long time bear Mike Wilson of Morgan Stanley said this morning US stocks could rally in the short term as the 200-week moving average provides a "serious floor of support" until companies flag an earnings capitulation, or a recession arrives. Wilson said inflation has likely peaked and "could fall rapidly next year." Notes that history points to the next 3-4 months as the window to fully discount the earnings recession. Expect major earnings cuts in 4Q rather than 3Q and the strategists see the S&P 500 rising to as high as 4,150 points in this rally — suggesting an upside of 16% from its latest close. However, if the index falls below the 200-week moving average, there could be no rally and stocks could decline straight to 3,400 or lower.

·     3) UK backtracking tax fiasco that crumbled currency and bond markets just a few weeks back. Britain’s new finance minister Jeremey Hunt, who replaced Kwasi Kwarteng, who Prime Minister Liz Truss sacked following the so-called "mini-budget" on Sept. 2, ditched most of the raft of fiscal measures, saying it was "not right" to borrow money to fund tax cuts. Long dated GILT prices went higher (yields lower) and the pound soared 2% after Hunt announced a series of tax changes that he said would raise 32 billion pounds ($36.19 billion) a year in extra revenues.

·     Interesting stat of the day: According to data from Charlie Bilello, with total return data going back to 1928: Years in which both the S&P 500 and 10-Year Treasury Bond were down? 5 –> 1931, 1941, 1969, 2018, 2022. The number of years in which both the S&P 500 and 10-Year Treasury Bond were down more than 10%? 1 –> 2022. The 10-Year US Treasury bond is on pace for its worst year in history with a loss of 18%. 1, 2, 3, 5, and 10-year Treasury bonds are now all yielding 4% or more. The last time we saw that was in October 2007.

Economic Data:

·     N.Y. Fed’s factory index weakens in October with third straight negative reading as NY Fed’s empire state current business conditions index -9.1 in October vs -1.5 in September. New orders index +3.7 in October vs +3.7 in September; prices paid index +48.6 in October vs +39.6 in September; employment index at +7.7 in October vs +9.7 in September; and NY Fed’s empire state six-month business conditions index -1.8 in October vs +8.2 in September

Commodities, Currencies & Treasuries

·     Gold prices rise $15.10 or 0.9% to settle at $1,664.00 an ounce, getting a boost from a 1% drop in the US dollar, rebounding after hitting its lowest price of the month on Friday. Oil prices finish modestly lower, with WTI crude down -$0.15 or 0.18% to settle at $85.46 per barrel, not rallying with the broader “risk-on” trade today in stocks or benefit from the decline in the dollar (WTI crude off earlier highs of $87.12 per barrel). Prices have now posted declines in five out of the last six trading sessions.

·     The U.S. dollar index (DXY) down -1.1% at the 112 level, holding there most of the afternoon, weighed down against the British Pound (which rose around 2% to $1.1385) after the new UK finance minister ditched most of the government’s "mini-budget," sparking a rally in U.K. and U.S. government bonds and reducing demand for the safe-haven U.S. currency.

·     Traders are watching for any intervention from the Bank of Japan after the yen fell to a 32-year low (approaching 149). Japan last month intervened to buy the yen for the first time since 1998. The euro jumped over 1% to 0.9845 but has held below parity vs. the US dollar a few weeks now. Treasury yields in the US dipped initially with GILTs but found themselves near highs late afternoon as the 10-yr topped the 4% level again and the 2-yr just below 4.5%.

Sector News Breakdown

Consumer

·     Consumer Staples: CHD and CLX upgraded to equal-weight from underweight in Consumer Staples at Morgan Stanley, while cutting EPC to underweight from equal-weight – expect strong Q3 EPS in beverages with pricing power/modest demand elasticity, with upside confirmed by PEP’s exceptional 16% org. sales growth, but more mixed HPC results; HAIN expects FY 23 results to be in line with FY23 guidance for adjusted EBITDA on a constant currency basis; in food, ACI downgraded to neutral from buy at Guggenheim to reflect limited potential upside post the October 24 special dividend record date and lower KR tgt to $50 from $57 as believe the proposed merger has strategic merit, but timing dynamics create medium-term uncertainty; TPB slides early after announces resignation of CEO as COO to take over top job and cuts FY adj. EBITDA forecast to $96M-$99M from $97M-$103M and lowers sales outlook

Energy

·     E&P and Majors: two M&A deals in energy today as CLR announced it was being bought by Omega Acquisition, an Oklahoma company owned by the founder of Continental Resources, Harold Hamm at $74.28 a share; LFG entered an agreement to be acquired by BP for about $4.1B in cash including about $800 million of debt; cash consideration of about $26 per share https://on.mktw.net/3CLneCC; non deal news, SM said expects full year production to range between 52.5 and 53.0 MMBoe, or about 144-145 MBoe/d down from prior 148K-151K view

·     Pipelines: SMLP said it agreed to acquire Outrigger DJ Midstream and the operating subsidiaries of Sterling Energy Investments for a combined $305M in cash which will triple its DJ Basin gas processing capacity and add 505K leased acres under dedication in Weld County, Colo.

·     Utilities & Solar: tgt changes at Guggenheim as RUN tgt cut to $41 from $59 and NOVA cut to $50 from $72 considering the rising interest rate environment and the outcome of several recent deals in the solar ABS market; Piper said entering 3Q earnings, they believe investors will remain focused on the implications of the IRA to our coverage and highlight FSLR and ENPH as favorites

Financials

·     Bank movers: BAC Q3 EPS $0.81 tops consensus $0.77 helped by a jump in net interest income (rose 24% to $13.8b) as Q3 revs $24.5B tops est. $23.57B – added $378M to its loan-loss reserves as it braces for a weakening economy (down from $1.1B y/y) – consumer business reported a 12% jump in revenue, helped by higher balances and a rise in interest rates; BK Q3 EPS $1.21 topped the $1.10 estimate as revs of $4.28B topped the $4B est. – boosted by higher interest rates that fueled growth in net interest revenue – said qtrly provision for credit losses was a benefit of $30M; FRC upgrade from Market Perform to Strong Buy w/ $143 PT at Raymond James; GS is planning a major reorganization, with plans to combine its flagship investment-banking and trading businesses into one unit, while merging asset and wealth management into another – WSJ https://on.wsj.com/3EMzNQx ; earnings tomorrow from GS, STT, TFC, on Wednesday 10/19: ALLY, CFG, CMA, NTRS and Thursday 10/20: FITB, KEY

·     Consumer Finance: MA introduces Crypto Source, a new program to enable financial institutions to bring secure crypto trading capabilities and services to their customers; DFS credit card delinquency rate 1.12% at Sept end vs 1.07% at Aug end; credit card charge-off rate 1.14% at Sept end vs 1.15% at Aug end; GDOT announces CEO terminated (CFO to replace), postpones inventor day, and said it expects that preliminary Q3 results will be at or near high end of guidance ranges it previously communicated; AXP preliminary UCSC card member loans net write-off rate-principal only 0.8 % at Sept end vs 0.8% at Aug end; the WSJ reported midday that the FTC is investigating whether Visa Inc. (V) and MA’s security tokens restrict debit-card routing competition on online payments; Citigroup Inc (C) credit card delinquency rate 0.85% at Sept end vs 0.82% at Aug end and charge-offs 1.12% in sept vs 1.33% in Aug

Healthcare

·     Pharma movers: MIST said its Ph 3 RAPID clinical trial of Etripamil nasal spray in patients with paroxysmal supraventricular tachycardia met its primary endpoint (company plans to submit an NDA to the U.S. FDA in mid-2023); MGNX and GILD entered into an exclusive option and collaboration agreement to develop MGD024, a potential treatment for certain blood cancers, and two additional bispecific research programs; NERV tumbles after saying it has received a refusal to file letter from the FDA regarding its New Drug Application for roluperidone for the treatment of negative symptoms in patients with schizophrenia.

·     Biotech movers: NGM shares tumble after saying its mid-stage trial testing its drug NGM621 in patients with geographic atrophy failed to meet main goal as it did not show a statistically significant reduction in the rate of change in disease area over 52 weeks; REGN downgraded to In Line from Outperform with $760 tgt at Evercore after rally in shares; ENTA announced that it has dosed the first subject in its Phase 1 clinical trial of EDP-323, a novel, oral L-protein inhibitor in development for the treatment of respiratory syncytial virus (RSV).

·     MedTech Equipment: PKI said it sees Q3 adj. EPS to exceed prior guidance and anticipates organic revenue growth, non-COVID organic revenue growth, and total revenue to be near the high end of the range of prior guidance; MDT said the FDA has allowed expanded use of its pacemaker device SelectSecure MRI SureScan Model 3830

·     Healthcare Services: HIMS downgraded to neutral from overweight at Piper Sandler, hesitant to recommend buying the stock, noting the need for greater marketing spend to retain subscriptions; U.S. sues insurer CI for artificially inflating payments from Medicare program, submitting false information; CANO shares tumbled after reports CVS has walked away from a potential acquisition of the primary care provider. https://bit.ly/3MBEBKk

Industrials & Materials

·     Transports, Industrial & Machinery: shares of Swedish maker of metal-cutting tools and mining gear Sandvik reported core earnings that beat analysts’ expectations and said strong demand had lifted order bookings in Q3 (positive for US comps such as KMT); XPO downgrade from Buy to Hold at Deutsche Bank and cut tgt to $50 from $78 which reflects lackluster service improvement off 2021 low levels, which they think makes volume and profit resiliency more difficult in the near/medium term; Stifel says macro backdrop to be less conducive to growth for U.S. railroads amid looming recession fears, rising interest rates, cost inflation and persistent supply chain chaos (cuts tgts for CP, NSC); in airlines, DLAKY (Lufthansa) raised forecast as now sees FY adj Ebit of over 1b EU and ups forecast for earnings, cash

·     Metals & Mining: gold miners AEM, AUY, GOLD, NEM advance as gold rebounded after slight pullback in the U.S. dollar and Treasury yields, even as fears lingered about more hefty Federal Reserve rate hikes to tame soaring inflation; CCJ mentioned positively in Barron’s saying its time buy the uranium miner after pullback in shares on M&A deal; industrial metals also saw broad strength with major averages – FCX, X, AA

·     Chemicals: Mizuho lowered DOW and LYB estimates to reflect recent guidance cuts due to slower demand in Europe / Americas, a more muted rebound in Asia post China lockdowns, supply / logistics challenges (FX, capacity outages); WLK downgrade to Hold at Deutsche Bank saying rising rates will likely result in slowing building and construction activity, lower polyethylene, and PVC prices, weakening epoxy in North America and Europe; Deutsche also lowered tgts in other chemical names with AXTA to $25 ECL to $165, IFF to $115

·     Containerboard & Paper: for WRK, PKG, IP, KeyBanc noted global box demand continues to deteriorate, rapidly in some cases; demand in North America "Has Basically Fallen Off a Cliff." Firm notes citing Fastmarkets RISI’s PPI Pulp & Paper Week this weekend on the U.S. containerboard export; long story short, global box demand is deteriorating seemingly by the week as the global economy does the same. U.S. kraft linerboard export prices appear likely to fall for the fourth month in a row in October, and suppliers reported that an expected October pickup in global demand isn’t materializing

Technology, Media & Telecom

·     Media and Telecom: Kanye West agrees to buy conservative social-media platform Parler https://bit.ly/3ENn8wA ; Rupert Murdoch explores recombination of FOXA and NWSA the WSJ reported. A special committees established at both to study possible deal. Deliberations are at an early stage; Murdoch family has large voting stakes in each company; Murdoch split up his holdings into two companies in 2013 https://on.wsj.com/3MxoKwl ; FOXA was downgraded downgrade from Outperform to Neutral w/ $36 PT (from $41) at Credit Suisse; META initially aimed to reach 500,000 monthly active users in Horizon Worlds by the end of the year, but the current figure is less than 200,000, per WSJ

·     Internet & Tech: US listed Chinese tech stocks BABA, BIDU, PDD rises early after comments from a high-profile speech by President Xi Jinping that was supportive of the country’s technology sector; NET upgraded to an Overweight rating from Equal Weight at Wells Fargo and raise tgt to $65 after 65% YTD decline and believe is benefiting from the increasing focus on consolidation to reduce costs and gaining share from point product vendors

·     Semiconductors: AVGO will seek early European Union antitrust approval of its proposed $61 billion buy of cloud computing company VMW by pointing to competition from AMZN, MSFT and GOOGL, Reuters reported this weekend; KeyBanc said given more restrictive USG trade policies and recent negative commentary from chipmakers, they are reducing estimates and expect potentially significant cuts to consensus EPS and WFE expectations (AMAT, KLAC, LRCX)

·     Software movers: SPLK shares rise after activist investor Starboard Value LP has built a just under 5% stake in Splunk (SPLK) and plans to push the software maker to take action to boost its stock price – WSJ https://on.wsj.com/3S0Klys ; ORCL mentioned positively in Barron’s saying the stock looks cheap again; RBLX soars following September metrics as Daily active users (DAUs) were 57.8 million, up 23% y/y, hours engaged were 4.0 billion, up 16% y/y, and estimated bookings were between $212 million and $219 million, up 11%-15% y/y

·     Hardware, Components & Services: AAPL has put on hold plans to use memory chips from China’s Yangtze Memory Technologies in its products, after Washington imposed tighter export controls against Chinese technology companies, the Nikkei reported on Monday; CDW added to Tactical Outperform List, reit Outperform w/ $120 PT at Evercore