Closing Recap

Wednesday, October 19, 2022

Equity Market Recap

·     Stocks slide alongside soaring Treasury yields, as rising inflation fears again sink market sentiment. Stocks tumbled following a spike in bond yields as the 10-yr yield made new 14-year highs above 4.13% and the 2-yr up over 11 bps to 4.55% as stocks follow bonds lower (jump in yields again took mortgage rates above 7% – 20-year highs). Markets took another leg lower midday after a weak 20-year Treasury auction, prompting more risk aversion. The global inflation problem remains, as the U.K. reported 10.1% inflation y/y for September, underscoring a difficult path ahead for the Bank of England. Meanwhile, Canada’s annual inflation rate, was 6.9% in September, slightly above ests. Every time the market appears to find a little groove, this time on better earnings results in a handful of names (NFLX, PG, TRV, UAL, ASML), the attention turns back to rising interest rate cycle by the Fed and prompts additional selling pressure. There were also some negative reports today with GNRC, MTB, LAD, ALLY, OLPX tumbling following quarterly outcomes. Tonight, we get TSLA and IBM earnings in consumer and tech. In geopolitical news, Russian President Vladimir Putin declared martial law in the four regions of Ukraine that Moscow illegally annexed and given additional emergency powers to the heads of Russian regions. Stat of the day: 35 years ago, on October 19, 1987, on a day known as “Black Monday,” the Dow Jones Industrial Average dropped 22.6%.

Economic Data:

·     The Federal Reserve’s latest Beige Book: "Employment continued to rise at a modest to moderate pace in most Districts. Several Districts reported a cooling in labor demand, with some noting that businesses were hesitant to add to payrolls amid increased concerns of an economic downturn. There were also scattered mentions of hiring freezes. Overall labor market conditions remained tight, though half of Districts noted some easing of hiring and/or retention difficulties. Competition for workers has led to some labor poaching by competitors or competing industries able to offer higher pay. Wage growth remained widespread, though an easing was reported in several Districts. Some businesses said elevated inflation and higher costs of living were pushing wages up, coupled with upward pressure from labor market tightness.

·     U.S. housing starts for September declined (-8.1%) to 1.439M, weaker than forecast, after bouncing 13.7% to 1.566M in August from 1.377M in July which was the lowest going back to August 2020. Most of the slump was in the multifamily sector where starts tumbled -13.2% after August’s 32.1% surge. Single family starts dropped -4.7% following the 4.0% increase prior.

Commodities

·     Oil prices rose on Wednesday, with WTI crude up $2.73 or 3.3% to settle at $85.55 per barrel as bullish signals like falling U.S. crude stocks in a generally tight market were countered by bearish factors such as uncertain Chinese demand growth and U.S. stocks releases. Today’s pop in oil came despite the Biden administration confirming plans to release 15Mm-barrels of oil from US emergency reserves (SPR) and may consider significantly more this winter to reduce prices. Natural gas futures slid about 5% to a fresh three-month low, part of an eight-week trend. Gold prices extend downward trend, falling -$21.60 or 1.3% to settle at $1,634.20 an ounce, with no let-up in selling pressure amid a stronger dollar and surging Treasury yields.

Currencies & Treasuries

·     Treasurys sell off, sending yields higher, as the US housing market shows signs of a slowdown. The two-year hit highs above 4.55% up 11-bps, a level not seen since July 2007, and the 10-year reaches 4.13%, a new high since December 2007 (and on track to rise for a 12^th consecutive week – longest streak since 1980). Treasurys sold off as the US housing market showed further signs of a slowdown. An ugly 20-year Treasury auction accelerated the pressure in bond selling, pushing yields to highs of day. UK inflation jumps more than expected, matching 40-year high of 10.1% – the data a reminder to investors of aggressive rate hike cycle by Central banks. The US dollar extends gains vs. the Japanese yen, topping the 149.50 level for the first time since 1990.

Sector News Breakdown

Consumer

·     Auto sector: auto dealer LAD the latest to issue weak results (recall KMX warning a few weeks back that sunk the industry) as Q3 EPS of $11.08 missed the $11.84 estimate as revs missed views as well as gross margin 18% vs. 19.3% y/y (AN, PAG, SAH, CVNA move in reaction); ALLY said in its results that Q3 consumer auto originations were $12.3B, below $12.85B estimate (watch CACC, LAD, PAG, AN, CVNA auto retailer AAP downgraded to In Line from Outperform at Evercore as their reduced industry growth outlook and lingering share loss is likely to constrain upside; Used car prices per Manheim are tanking; year/year rate (-10.4%) is worst since GFC; max drawdown during pandemic (-9.1%) has now been surpassed; in auto suppliers preview, Deutsche Bank said ALV, APTV, BWA, and VC are favored auto supplier names into the print and see potential earnings downside risk from smaller subset of suppliers including DAN and AXL; The Biden administration will announce on Wednesday it is awarding $2.8 billion in grants for projects to boost U.S. manufacturing of electric vehicle batteries and domestic mineral production, a White House official told Reuters (+ for likes of EVs TSLA )

·     Housing & Building Products: the average 30-year fixed mortgage rate hit 6.94% last week, the highest level since 2002, according to the Mortgage Bankers Association (MBA) – rates are up by more than 3% over the last year, and purchase-loan applications are down 38% in that time. Mortgage demand, which has suffered four straight months of declines, fell last week to the lowest level since 1997, as interest rates continued to rise. Homebuyers’ demand for mortgages dropped 4% for the week, applications to refinance a home loan fell 7% w/w

·     Consumer Staples: PG Q1 core EPS $1.57 vs. est. $1.54 and Q1 revs $20.6B vs. est. $20.33B; sees FY23 EPS ‘towards the low end’ of guidance range and reduced its guidance for FY23 all-in sales to be down three percent to down one percent versus the prior fiscal year and maintained its outlook for organic sales growth in the range of 3%-5%; Nestle (NSRGY) posted its strongest nine-month sales growth in 14 years and raised its full-year guidance as it was able to pass on price increases without losing many cash strapped customers; OLPX tumbles as guides prelim 3q adj net $71.3M-$73.3M below est. $91.9M; sees FY adj EBITDA $425M-$431M, from prior $504M-$526M; lowers FY adj net $303M-$307M; SAM downgraded from Outperform to In Line at Evercore ISI with $330 tgt as believe that estimates for FY23 are too high and that the stock may need some time for investors to regain confidence

·     Casinos, Gaming, Lodging & Leisure sector: in casinos (MLCO, WYNN, LVS, MGM), Bloomberg noted Macau VIP sector gaming revenue fell 81% in Q3 from a year earlier to 1.16 billion patacas ($142.9 million), citing data from the city’s gaming inspection and coordination bureau – this was the lowest since at least 1Q 2005 and – VIP revenue -42% q/q – 3Q total gaming revenue -70% y/y to 5.55 billion patacas; in leisure, PII downgraded to Neutral from Buy at Citigroup saying checks suggest a retail environment substantially worse than previously anticipated, and while the near-term earnings impact is likely muted, this condenses the inventory replenishment opportunity; in towable, WGO says it expects uncertain market conditions to persist in FY23 though posted Q3 top/bottom line beat; Fluidra (FLUIF shares fall as the pool and wellness co cut its sales forecast for the year and slashed its EBITDA view for the full year to above EU500m, well below prior estimates of EU600M-EU630M (shares of US comps POOL, LESL, PNR weak)

Energy, Industrials and Materials

·     E&P and Majors: In oil services, BKR reported mostly in-line quarterly results for EPS/revs, sees 4q oil-equipment sales flat to slightly higher vs 3q and sees 4q OFS sales up mid-single digit range vs 3q; LPI guided Q3 prelim results, oil production averages ~35.0 thousand barrels of oil per day, below guidance of 35.5-37.5 MBOPD and said capex stands at $140M above prior view of $120M; in research, EOG upgraded from Equal Weight to Overweight at Morgan Stanley saying it now trades at an in-line valuation vs peers after averaging a >1x EV/EBITDA premium over the past decade; PXD downgraded to Underweight at Morgan Stanley calling it the most expensive large-cap US focused E&P under our coverage, trading ~1.5x above the peer median 2023 EV/EBITDA

·     Aerospace & Defense: in research, BAH downgraded from Outperform to Market Perform at Raymond James noting shares H have substantially outperformed the broader market and peers, as its multiple has expanded to near peak levels, and comps and competition make sustainable positive earnings revisions more challenging; HUBB double downgraded from Overweight to Underweight at JPMorgan as believe that the valuation more than fully reflects potential upside from utility growth and price/cost benefits; more strength in the defense sector following LMT earnings beat yesterday – NOC, GD, etc.

·     Industrial & Machinery: GNRC cuts full-year 2022 net sales growth guidance range to 22 to 24% as compared to the prior year and down from its prior view of up 36%-50%, which includes approximately 5%-7% net impact from acquisitions and foreign currency; guides prelim Q3 Ebitda $184M vs. est. $308M; ST, AME, IEX, ROP, XYL favorites into results; PH, TEL, APH, WTS, MWA, AQUA more challenging; ROK unknowns and interesting relative value trade long ST vs TEL according to Cowen in Diversified Industrials, Automation & Robotics – 3Q Preview

·     Transports: adding to an already strong run of gains for Dow Transports (came into the day up 6 of last 7 sessions), as airline UAL posted an EPS and rev beat for Q3 (EPS $2.81 vs est. $2.28 on revs $12.9B vs est. $12.75B) and forecasts Q4 EPS of $2.00-$2.25, more than double the $0.98 estimate citing strong demand (lifts DAL, JBLU, LUV, AAL shares early); SAVE shareholders set to approve $3.8B JBLU deal according to Bloomberg after the carriers agreed in July to combine under JetBlue in cash sale; in truckers, JBHT topped expectations, with intermodal pricing holding as costs moderated, combined with favorable dedicated fleet growth and margins

Financials

·     Bank & Brokers: CMA shares tumble after results – did post a higher-than-expected rise in net interest income for Q3 on the back of higher interest rates and growth in loan balances; MTB shares slide as Q3 EPS of $3.53, broadly misses consensus estimates of $4.04 while Q3 provision for credit losses was $115M vs. a $20M provision y/y; CFG reports Q3 underlying EPS $1.30 vs. est. $1.22; IBKR EPS beat of $1.08 vs. $0.96 on better revs helped by higher NII on higher yields on cash and margin balances and lower int expense; other earnings beats from HWC, PNFP, WTFC, FNB, UCBI SBNY downgraded to MP at KBW saying Risk/Reward is underwhelming

·     Insurance: Dow component TRV Q3 core EPS $2.20 tops consensus $1.60 on better revs of $9.3B vs. est. $8.98B; Q3 core income fell to $526M from $655M y/y hurt by hurricane-related claims and lower returns on its investments – posted record net written premiums growth of 10% to $9.02 billion in the quarter

·     Finance, FinTech & Payments: in online brokers (HOOD, SCHW), the WSJ reported individual investors are placing fewer trades at Charles Schwab, Morgan Stanley and Robinhood as day traders go back to their day jobs as stock market swoons; ALLY Q3 adj EPS $1.12 missed the $1.68 Street estimate and revs $2.02B below the $2.16B estimate, reporting a day after the CFO announced her departure

·     Financial Services: EFX assumed coverage and downgrading to Hold from Buy at Jefferies as expect the mortgage business to remain a sizable headwind over the next year and core portfolio growth, primarily EWS, to slow further as unemployment increases; TRU assumed Buy at Jefferies saying the focus on new product offerings, including identity and fraud, have helped increase diversity and lower cyclicality, which should allow mid-single digits earnings growth in ’23; NDAQ lowered its year op expense outlook after in-line Q3 revs

·     REITs: BTIG with Q3 Office REIT Preview saying they expect earnings "beats," but uncertainty could drive stagnation. downgrading BXP, HPP, and PGRE to Neutral from Buy – notes Office REITs continued to trend down in 3Q22, underperforming the REIT industry overall by (680 bps)

Healthcare

·     Biotech & Pharma movers ZYME and JAZZ enter into exclusive licensing agreement for ZYME’s cancer therapy, zanidatamab as Zyme to receive $50M upfront payment, a second payment of $325M at Jazz’s option; ABEO announces database lock for pivotal phase 3 VIITAL study of eb-101 in patients with recessive dystrophic epidermolysis bullosa; PTCT adds to yesterday losses after saying enrollment in its ongoing mid-stage study testing its experimental treatment in patients with Huntington’s disease has been paused in the U.S. by the FDA, requesting more data; NVAX said the FDA authorized its COVID-19 vaccine, NVX-CoV2373, for use as first booster dose in adults

·     MedTech Equipment: sector gets a boost after ISRG posted Q3 EPS and revenue beats as qtrly worldwide Da VINCI procedures grew approx 20% vs 3Q21 and raises FY22 procedure growth view to 17%-18% from 14%-16.5%; SILK 2.33M share Secondary priced at $43.00; ABT Q3 EPS of $1.15 topped the $0.94 estimate while sales fell -4.7% y/y to $10.4B, driven by declining sales in its nutrition business but was above the $9.67B est.

·     Healthcare Services: in managed care, ELV Q3 adj EPS $7.53 vs. est. $7.15; Q3 revs $39.6B vs. est. $39.09B; raises FY22 adjusted EPS view to greater than $28.95 per share above prior view of $28.70

Technology, Media & Telecom

·     Media, Internet: NFLX shares jumped after posting better-than-expected subscriber growth for Q3 at 2.41M new net subscribers, topping its prior forecast of 1M for the quarter while guiding Q4 subscribers to up 4.5M new adds – posted revenue of $7.93B and EPS $3.10, both ahead of current estimates while next quarter revs was below views (ROKU, DIS, PARA rise in reaction); Citigroup opened a 30-day Positive Catalyst Watch on SNAP given the potential for upward revenue provisions given an improving online ad environment

·     Semiconductors: semi-equipment names get a little good news as ASML posted Q3 sales and profit above expectations and record new bookings (Q3 net profit of 1.7B euros vs. est. 1.4B euros and sales of $5.8B euros vs. est. $5.41B) – helps shares of AMAT, KLAC, LRCX early; SK Hynix (HXSCL) double downgrade from Buy to Underperform at Bank America due to potential earnings miss, longer downturn and weaker 2H23 turnaround; WSJ reported that TSM is considering expanding its production capacity in Japan to reduce geopolitical risks

·     Software movers: ADBE forecasts FY23 revenue $19.1B-$19.3B on EPS $15.15-$15.45 vs. est. $19.82B and EPS of $15.53 while reaffirms outlook for FY22; for NOW, Deutsche Bank said 3Q checks point to a relatively stable demand environment after a softer 2Q, but with elevated levels of optimism and line-of-sight to a seasonally robust 4Q; VEEV upgraded to Neutral from Underperform at JPMorgan saying while the growth profile has decelerated, and macro headwinds are pressuring the near term, they don’t see this name as structurally broken; BL downgraded to Hold from Buy with a $60 price target at Berenberg