Closing Recap

Tuesday, October 18, 2022

Equity Market Recap

·     Stocks finish strong into the close, with the S&P 500 bouncing twice off the 3,700 level amid healthy volume and strong market breadth day for a second day – but can it continue? U.S. stocks finished off their best levels, erasing strong earlier gains in another 2% swing from highs to lows before recovering in the final 30-minutes of trading into more earnings. The Dow Jones Industrial Average outperformed led behind Goldman Sachs (GS) after better earnings results and Salesforce.com (CRM) as activist investor Starboard revealed a stake in the company. Dow component JNJ also reported a beat for the quarter while only reaffirmed guidance. The tech space awaits Netflix (NFLX) earnings after the close tonight while semiconductor chip names slipped late day following a media report that Apple (AAPL) is cutting production of the iPhone 14 Plus (not Pro) less than two weeks after its debut. Overall markets remain choppy and uncertain, as every short-squeeze rally is met with another wave of selling pressure, keeping investors on edge. Outside of earnings season which continues in volume over the next 5-weeks, investors also await the upcoming FOMC rate decision and the mid-term elections in early November, while geopolitical situations in Ukraine, UK, and China also remain in the mind of many.

·     Wall Street sentiment (at least in the short-term) getting mildly bullish as a Bank of America October Global Fund Manager Survey said “FMS screams macro capitulation, investor capitulation, start of policy capitulation as cash levels 6.3% = highest since April’01, investors now 3sd UW equities – tasty morsels for another bear rally (so long as UST yields stay 40pps from lows); note huge 87% expect inflation to fall; CIOs message to CEOs: reduce debt 60%, increase CAPEX 17%, increase buybacks/dividends 17%. The survey followed long-time bear Mike Wilson of Morgan Stanley yesterday, as he turned short term bullish saying "this is a good spot to cover some shorts and let this bear breathe" and expects a rally that could send the S&P as high as 4,150 potentially. Stocks have bounced back-to-back days but follow through has been difficult.

Economic Data:

·     Industrial Production for Sept rose +0.4% vs. est. +0.1% and above Aug (-0.1%) as mining output +0.6%, utilities output -0.3%. Capacity Utilization rate 80.3% vs est. 80%. U.S. Sept manufacturing output +0.4% vs. est. +0.2%

·     October NAHB Housing market index dropped 8 points to 38 versus 46 in September (previous 46) and the 43 estimate (lowest since 2012) as confidence among U.S. single-family homebuilders fell for the 10th straight month. Soaring mortgage rates and bottlenecks for building materials made new housing less affordable for many first-time buyers

Commodities

·     Oil prices finish lower for a 3^rd straight session, with WTI crude down -$2.64 or 3.09% to settle at $82.82 per barrel (high of day $86.51 and low $82.09), while natural gas prices slide again, down over 4% to settle at $5.745 mln Btus (fell over 14% in Europe) as gas builds in storage at a greater rate. Brent crude futures settle at $90.03/bbl, down $1.59, 1.74%. OPEC+ oil producers group moved unanimously to cut output to prevent a crisis later and stem a tide of volatility, the secretary-general of OPEC told an energy conference in South Africa on Tuesday. President Joe Biden will speak about gasoline prices on Wednesday, the White House said, as his administration is reportedly moving toward a release of at least another 10 million to 15 million barrels of oil from the U.S. Strategic Petroleum Reserve. Bloomberg News and others report that such a release would be the latest in a 180-million-barrel program that began in the spring. Gold prices edged lower, slipping -$8.20 at $1,655.80 an ounce as the dollar edged higher.

Currencies & Treasuries

·     The US dollar hit fresh 32-year highs above 149 against the Japanese yen even after last month’s intervention by Japan’s finance ministry. To this point there is no indication the Bank of Japan will change its near-zero interest rate policy while other central banks raise rates aggressively. The dollar has strengthened around 3% against the yen in October. British Pound edged lower to 1.132 after surging almost 2% the day before, as investors scaled back some of their expectations for Bank of England interest rates hike following Britain’s dramatic U-turn on its fiscal plans. The euro moved closer back to parity vs. the US dollar at 0.985 after falling below 0.96 last week.

·     The U.S. 10-year Treasury yield was above the 4% level for most of the session (nearly closed above a 3^rd consecutive session, the first time doing that since 2008). US Treasury yields extended gains earlier after the Bank of England confirmed gilt sales, 10-year yield last up nearly 3 bps, to 4.04% before pulling back.

Sector News Breakdown

Consumer

·     Retailers: HAS Q3 adj EPS $1.42 vs. est. $1.52; Q3 revs $1.68B fell -15% y/y vs. est. $1.68B; reiterates full-year guidance of flat to slightly down revenue in constant currency, 50-basis point expansion of adjusted operating margin to 16%; JWN announced that CFO Anne Bramman has informed the company of her intention to step down from her role; CONN shares tumble after withdraws previous fiscal year 2023 financial guidance and said it expects 3Q revenue to be down 21% to 23% and expects operating margin for Q3 to be negative mid-single digits; TGT assumed and upgraded to Buy at Jefferies as subdued valuation and improvements in supply chain and inventory positioning support their bullish stance

·     Auto sector: BYD Co (BYDDY) forecast a huge jump in Q3 profit as mainland Chinese motorists increasingly make the shift to battery-powered vehicles; BYD outsold Tesla in the first half of 2022 (forecast helped boost EV sector); CVNA downgraded to neutral and cut tgt to $15 from $50 at Wedbush saying a further deterioration in market conditions, a bloated cost structure, and high cash burn make this potential less likely to achieve; new data from YipitData showed LYFT increased its published service fee for rides in virtually all U.S. markets in the first week of October, including around 150 markets expect for New York

·     Housing & Building Products: Bank America upgraded roofing co OC to Buy while downgraded shares of MAS, MHK, and HAYW in building products in 3Q22 preview saying they expect in-line 3Q22 earnings for most building products manufacturers but see growing risks to 2023 earnings from the deteriorating macro-outlook. On a relative basis, see the most risk in building products companies with high international exposure, volume well above 2019 levels, and destocking risk.

·     Consumer Staples: Goldman Sachs said they are broadly optimistic on Beverages stocks into 3Q earnings as survey points to strong topline growth driven by robust pricing and volume trends. Best positioned: MNST, STZ. For tobacco stocks, while they are incrementally more cautious on cig volumes & the tobacco consumer, see neutral-to-positive risk/reward for MO; CL shares popped higher this morning after CNBC report Dan Loeb’s Third Point took a stake in co

Energy

·     Energy stock movers: The Biden administration is moving toward a release of another 10 million to 15 million barrels of oil from the nation’s emergency stockpile according to newswire reports https://reut.rs/3TcLWmi ; Bloomberg noted two refiners in India have halted spot purchases of Russian oil that arrive after a key European Union sanctions deadline. European Union officials are seeking the power to impose an emergency cap on the price of natural gas on the bloc’s main trading exchange

·     E&P and Majors: AR to replace Alleghany in S&P 400 at open on 10/20; RNGR said it expects revenue to range between $330M-$340M and full year revenue is now anticipated to be between $610M-$620M; in research, EOG upgraded to Buy at Goldman Sachs as believe shares are not factoring in the upside from modest growth, improving cost positioning of its resource base following strong capex execution, and higher FCF (tgt to $143 from $125) and downgrade PDCE to Neutral on more balanced risk/reward

·     Utilities & Alternative power: EXC announced several changes to its senior management team as well as provided some clarity to the question of its longer-term succession planning; XYL was upgraded to Outperform and tgt to $105 from $85 at Cowen as survey work suggests municipal budget expansion at least through FY23 and our utility interviews highlight XYL as well positioned; DAR entered into a definitive agreement to acquire all of the shares of Gelnex, a leading global producer of collagen products, for approximately $1.2 billion

·     Solar: Truist lowered price tgts on several names in the group ahead of Q3 earnings but say they are generally positive on solar given we believe it’s the most immediate beneficiary of IRA – lower tgts for ENPH (Buy) to $290 from $265, SEDG (Buy) to $320 from $385, ARRY (Hold) to $17 from $23, GNRC (Buy) to $225 from $365, BE (Hold) to $20 from $31 and BLDP to $7 from $9

Financials

·     Bank movers: GS the latest bank/broker with good results as Q3 EPS $8.25 tops consensus $7.69 on better revs of $11.98B (still down -12% y/y) vs. est. $11.41B while also confirmed a broad reshuffling in how it is organized – investment banking revenue fell 57% to $1.58 billion; Q3 trading revenue $6.2B; Q3 FICC sales and trading revenue $3.53B; SBNY Q3 EPS $5.57 beats $5.40 estimate but driven by lower tax rate – Morgan Stanley notes stripping out tax benefit associated with sustainable finance lending, EPS missed vs Cons driven by lower NII (-34c vs est.) and NIM miss (2.38% vs 2.46% est.); TFC Q3 adj EPS $1.24, in-line with consensus and revs $5.85B vs. est. $5.93B; STT Q3 adj EPS $1.82 above $1.78 est. but down from $1.96 y/y as revs down -1% y/y to $2.96B, in-line with ests while net interest income (NII) rises 36% y/y to $660M

·     Fintech, Consumer Finance: for MA, V as reported midday Monday, the card co’s are coming under scrutiny from the FTC over whether security tokens restrict debit competition; ALLY announced that CFO Jennifer LaClair departs the company; FIS names mgmt change as CEO to switch roles to chairman, Stephanie Ferris to succeed and expects Q3 results to be within guidance range; GPN downgraded to Neutral from Outperform at Exane and cut its PT to $115 from $176 on concerns of downside risks in remainder of 2022 and 2023

·     Bitcoin news: SI shares tumble after Q3 EPS miss (Q3 EPS $1.28 vs. est. $1.38) as U.S. dollar transfers on the Silvergate Exchange Network (SEN) slowed more than expected on a sequential basis. SI’s average digital asset deposits during the quarter fell short of consensus expectations amidst the ongoing downturn in the Cryptocurrency market

·     REITs: DRH upgraded to Outperform from In Line, SHO downgraded from Outperform to In Line at Evercore/ISI saying largest positive revision to 3Q22 EBITDA is on HST (+12%), largest + for FY22 is on DRH (+6%), while PK, PEB move lower by ~3%; in commercial mortgage REITs, Raymond James said given benefits of increasing interest rates, they expect strong 3Q results from commercial mortgage REITs and view the risk-reward for the sector as compelling. Updating estimates across the sector to reflect 1) 3Q CECL reserve builds, 2) lower new investment activity in 2H, and 3) more conservative 2023 leverage assumptions. We are also trimming our price targets to reflect lower valuation multiples given the current environment

Healthcare

·     Pharma movers: Dow component and Pharma giant JNJ reported Q3 adj EPS $2.55 vs. est. $2.48; Q3 revs rose 1.9% y/y to $23.8B vs. est. $23.34B; Sales at pharmaceuticals rose 2.6% to $13.21B and reaffirmed the midpoint of its full-year adj profit forecast range; AVEO agreed to be acquired by South Korea’s LG Chem Ltd. for about $566M, with holders getting $15 a share in cash, a roughly 43% premium to Monday’s closing price of $10.48 https://on.mktw.net/3VzJLL2 ; AKUS to be acquired by LLY for $12.50/shr in cash + CVR worth up to $3.00/shr in transaction valued at approximately $487M plus a contingent value right for amount up to about $610M https://bit.ly/3yLSD6I ; TEVA said ARC-HD results show treatment with AUSTEDO had safety, tolerability profile comparable with first-HD 12-week study

·     Healthcare Services: DOCS, GDRX, TDOC, OMCL, and VEEV estimates lowered in Healthcare IT sector earnings preview at KeyBanc, where they see the most downside risk to near-term and/or longer-term estimates. Conversely, they are maintaining or raising our mostly above-consensus estimates for RCM, PGNY, and PHR, where they think "beat and raise" quarters are likely in the quarter and beyond

Industrials & Materials

·     Aerospace & Defense: WSJ reported the FAA has asked BA to launch a review of its safety paperwork for the 737 MAX 7, another setback for the plane maker’s push to win approval for the jet before a year-end legal deadline; in earnings, LMT shares surged as Q3 adj EPS $6.87 tops $6.72 estimate on revs $16.6B vs. est. $16.66B while still sees FY EPS about $21.55 vs. est. $21.77 (lifted shares of GD, RTX, LHX); ahead of earnings, KeyBanc said 2022-2025 commercial aero OEM production recovery growth thesis (>15% CAGR from ~20%) is directionally intact, driving our view of staying the course on ATI, HAYN, and HWM, although we reduce price targets and estimates; BA is offering 737 MAX jets once slated for Chinese customers to Air India as the plane maker tries to offload some of the roughly 140 aircraft it’s currently not allowed to deliver

·     Transports: MATX guided Q3 EPS $6.67-$6.79 below est. $7.67; sees Q3 operating income for ocean transportation to be $310M-$35M as achieved lower y/y Q3 consolidated operating income, saw lower demand for expedited ocean services in the transpacific trade lane; XPO sees 3Q revs approx $3.04B vs est. $3.09B and adj EBITDA $348-352Mm vs est. $341.2Mm; MRTN Q3 EPS $0.32 vs. est. $0.33; Q3 revs rose 29.1% y/y to $324.45M vs. est. $321.41M; railroad data showed (CSX, NSC, UNP), Total traffic +3.1% y/y, accelerating versus +0.4% YoY last week. Intermodal volumes were +3.7% YoY, accelerating from +0.8% YoY last week.

·     Chemicals, Metals & Materials; in steel producers (X, NUE, STLD), BMO Capital said U.S. spot HRC prices continued to drift lower over the past two weeks, with prices -2.6% to $760/st, with mills reportedly offering larger volumes at prices as low as $680/st. They say persistently low US lead times and Capacity Utilization rates (both indicative of soft demand), and falling global prices suggest no obvious catalysts for a near-term price recovery; RIO forecast annual iron ore shipments at the lower end of its guidance after Q3 iron ore deliveries fell amid weak global demand (sees annual iron ore shipments at the low end of its 320M-335M mt range); RPM downgraded to Neutral at UBS on valuation

·     Containerboard: IP and PKG downgraded to Sell at Deutsche Bank and keep WRK at Hold saying given weakening demand and upcoming capacity additions, they anticipate containerboard prices will fall by $100 per ton in total over the next year. This would bring domestic kraftliner prices down to $835 per ton for a 10.7% reduction from current levels at $935.

·     Paper & Packaging: Morgan Stanley updated SEE, BERY and ATR Estimates and tgts which primarily reflects weaker growth assumptions across food and protective segments reflective of a weak macro; marking to market FX assumptions; lower 2H22 margins due to energy and supply chain headwinds, partially offset by higher prices and seasonality benefits and higher interest expense to reflect rate increases.

·     Pulp, Forest products: at RBC Capital, upgraded PCH to OP from SP and downgraded ratings on WEF.CN and RFP to Sector perform – said best-positioned commodities into Q322 earnings are 1) paper and 2) pulp and least-preferred commodities into Q322 earnings are 1) containerboard and 2) wood products. In Canada, our favorite names are Cascades, Canfor, Canfor Pulp, Interfor and in the US, favorite names are Louisiana-Pacific, West Fraser, Sylvamo and PotlatchDeltic

Technology, Media & Telecom

·     Media, Internet: NFLX earnings after the close tonight, shares are down roughly -59% YTD into the print; FUBO posts prelim Q3 revenue as well as North American paid subscriber growth, which exceeds its previously issued outlook and said it will close its Fubo Gaming unit and cease operation of Fubo Sportsbook effective immediately

·     Semiconductors: the sector slipped late day after a report in The Information that Apple is cutting production of the iPhone 14 Plus less than two weeks after its debut, according to two people involved in the company’s supply chain; INTC’s Mobileye unit (MBLY) sees IPO of up to 41 mln shares priced between $18-$20 per share as per SEC filing; Global smartphone market fell 9% y/y in Q3, recording its third consecutive decline this year and worst Q3 since 2014, according to data from research firm Canalys – AAPL improved its market share to 18% in Q3 from 15% a year earlier; SWIR shares slipped early and SMTC rose after receive DOJ second request on deal

·     Software movers: CRM shares rose on a report that activist Starboard Value has taken a "significant" stake in the company https://bit.ly/3TwvVaE ; RNG downgraded from Buy to Neutral at BTIG given mounting pressure in the market from competition and potential macro headwinds, which is based on their recent round of comprehensive fieldwork in the space; MSFT laid off more employees this week, becoming the latest tech company to show signs of concern about future demand.

·     Hardware, Components & Services: JNPR upgraded to neutral from underweight at Piper with the expectation that management can continue to increase product revenue numbers in full-year 2023 by around 10% year-on-year; Cowen reduced ests for handsets based on latest supply chain field work and signs of muted C2H22 seasonality, reducing smartphone market growth expectations for CY22/23 to -9% and -3% Y/Y (prior -6% / -2%)