Closing Recap

Wednesday, October 26, 2022

Equity Market Recap

·     It was a mixed day on Wall Street as outside of a handful of big tech related earnings disappointments dragging down the Nasdaq (MSFT, GOOGL, STX, TXN), market internals were generally positive with NYSE advancers leading decliners and having most of the eleven S&P sectors finishing in positive territory, led by a jump in Smallcap stocks. So unlike years ago when it was a handful of big names (the old FAANG) that kept broader averages higher while internals fell apart – today we saw the opposite – with some concern heading into META results tonight and both AAPL and AMZN results tomorrow night. The S&P 500 topped its 50-day moving average early of roughly 3,870 before reversing and closing well-below it (3,914 is the 100-day MA resistance). In addition to several 52-week highs in the energy sector on the NYSE, there were a handful of Healthcare, Food, and Industrial names as the list expands – while technology and communications sectors were the biggest drag by far. The 2-year yield fell a 4^th straight day, following Fed comments last week that eased fears of aggressive future rate hikes. The 10-year yield on track to snap its 12-week streak of higher closing yields. The Bank of Canada raised rate by 50 bps to 3.75% vs est. 4.00% – ahead of FOMC next week.

Economic Data:

·     September International Trade in Goods (Advance) -$92.22B vs. -$87.8B consensus and -$87.28B in August. Wholesale inventories 0.8%, vs. est. 1.0%; retail inventories 0.4% vs. est. 1.2%

·     September New Home Sales fell -10.9% m/m to 603K vs. 585K consensus and 677K prior (revised from 685K); -17.6% from September 2021. The median sales price of new homes sold was $470.6K, up from $436.8K in August. The average sales price was $517.7K vs. $521.8K in August

·     US mortgage rates rose to 7.16% last week for the 30-year fixed loan, the highest since 2001. Rates have gone up for ten consecutive weeks in the Mortgage Bankers Association survey and have doubled over the past 12 months. Applications for purchase loans are down 42% YoY

Commodities

·     U.S. crude oil futures settle at $87.91 per barrel, up $2.59, 3.04%, while Brent crude rose $2.17 or 2.32% to settle at $95.69 per barrel. Weekly oil inventory data from the Energy Information Administration showed crude oil inventories rose +2.6M barrels vs. +1.029M consensus (bearish) and vs. -1.725M last week, while gasoline stockpiles fell -1.5M barrels vs. -0.805M consensus and distillates rose +0.2M vs. -1.138M consensus; US SPR crude stocks last week fell to lowest since May 1984. Gold prices rise $11.20 or 0.7% to settle at $1,669.20 an ounce.

Currencies & Treasuries

·     Treasury yields fell and the dollar extends slide, giving relief rally for US markets. Treasury yields fell amid renewed speculation that the Federal Reserve may slow its rapid pace of raising interest rates to tackle high inflation. The move was sparked after the Bank of Canada delivers smaller-than-expected 50 bps rate hike, raising hopes other Central banks will follow suit. The Fed is expected to raise rates by 75-bps next week, but comments last week from a few Fed members (Daly) suggested a more “wait and see” approach in 2023. US Treasury sold $43B in 5-year notes at a yield of 4.192%, below the 4.21% when issued with the Bid-Cover Ratio 2.48 vs. prior auction 2.27 as directs receive 15.6% and indirects 68.0% vs. prior 59.6%. The 10-yr fell below 4% after hitting 15-year highs above 4.3% last week and the 2-yr dropped 5-bps to 4.41%.

·     The U.S. dollar extends decline with the dollar index (DXY) now down more than 400-bps from October highs and at lowest level in a month, sliding below 110. The buck hits session low versus yen, down 1% at 146.445 yen (recall topped 150 level last week – 32-year highs). The Canadian dollar weakens vs. the greenback after the BoC smaller rate hike. The euro climbed back above parity against the dollar for the first time in a month. The British Pound jumps 1.25% at 1.1618; strongest level for sterling since Sept. 13 (well off Sept record low $1.0327) as change in Prime Minister this week, third time in 2-months, easing liquidity fears in UK. Bitcoin +3.25% to $20,850 and Ethereum outperforms up over 5% to $1,550.

Sector News Breakdown

Consumer

·     Retailers: SKX slides on Q3 miss and lower guidance (3Q EPS 0.55 vs est. $0.70 on sales $1.88B vs est. $1.79B; guides 4Q sales $1.725-$1.775B vs est. $1.79B); MAT falls on mixed Q3 results (EPS beat, sales miss) and cuts FY22 EPS view to $1.32-$1.42 from $1.42-$1.48; WHR downgraded to Underperform at Bank America as industry and company data suggests a severe drop in appliance demand and softening of pricing, while costs remain elevated, pressuring margins; Puma confirmed its full-year guidance but flagged uncertainty in the global market as reiterated its full-year operating result and sales outlook, after saying Q3 was best in its history.

·     Auto sector: DDAIF raised its full-year profit forecast to rise at least 15% this year, compared with a previous forecast of 5%-15% growth; HOG Q3 revenue $1.65B tops $1.37B estimate as motorcycle shipments rose 19% to 57,100, estimate 54,611 on better margins 34.1%; DRVN reports Q3 EPS and rev beat with +11.9% comp while guidance mixed; MNRO reports Q2 adj EPS and comp sales below consensus; for auto suppliers, Guggenheim said heading into 3Q earnings, we are lowering estimates for our supplier coverage (APTV, GNTX, LEA, VC), driven by weaker LVP (NA and Europe) and F/X impact.

·     Housing & Building Products: US 30-yr fixed mortgage tops 7% for first time in 20 years: MBA reported in its weekly assessment; in earnings, roofing company OC mixed Q3 with EPS $3.57 topping $3.19 est. but sales $2.5B miss $2.55B and sees Q4 net sales, adjusted EBIT growth vs. prior year; MAS Q3 adj EPS and sales miss estimates an cuts year EPS view to $3.70-$3.80 from prior $4.15-$4.25 and estimate $4.15

·     Consumer Staples: in food, KHC Q3 adj EPS $0.63 vs. est. $0.56 and sales rose 2.9% to $6.5B vs. est. $6.27B; qtrly organic net sales increased 11.6% versus the prior year period and reaffirms full year outlook for organic net sales and raises lower end of previous adjusted ebitda range; BG beat and raise – Q3 adj EPS $3.45 vs. est. $2.43; Q3 revs $16.76B vs. est. $16.43B; raises FY22 adjusted EPS view to at least $13.50 from at least $12.00; EPC downgraded to Neutral from Conviction Buy at Goldman Sachs on outperformance in shares; in beverages, beer names weak early as Heineken (HEINY) reported Org. beer volume +8.9% vs. Bloomberg estimate +11.8% as Americas organic beer volume +3.4%, estimate +6%

·     Restaurants: CMG same-store sales grew 7.6% in Q3 y/y as higher prices helped drive some of the increase, with EPS topping expectations but revs just below; WING rises on results as 3Q EPS $0.45 vs est. $0.36 on revs $92.7Mm vs est. $89.7Mm, domestic comps +6.9%, domestic AUV $1.6Mm; guides FY $1.61-1.63 vs prior $1.55-1.57

·     Casinos, Gaming, Lodging & Leisure sector; in lodging, WH posts lower Q3 net income while revs declined, but still topped consensus and raised its year outlook; HLT reported a 44% rise in third-quarter profit, coming in above ests but revs of $2.37B missed estimates; in gaming, BYD 3Q adj EPS $1.48 vs est. $1.35 on revs $877.3Mm vs est. $865.6Mm; LYV shares slipped after a Reuters headline that Administration is looking at fees involving concert tickets, resort fees

Energy

·     E&P and Majors: NEX Q3 adj EPS $0.52 vs. est. $0.47; Q3 revs $896M vs. est. $924.63M; sees Q4 revenue down 2%-4% sequentially; MTDR Q3 adj EPS $2.68 vs. est. $2.49; Q3 revs $840.9M vs. est. $765.75M; HLX was upgraded to Buy at BTIG; RRC was upgraded to Positive from Neutral at Susquehanna after the co generated another record quarter of FCF, tripled its buyback authorization to $1.5B, and initiated a base dividend; CHX 3Q EBITDA of $166MM vs the Street’s $154MM and guidance of $148M-$156MM. FCF was $167M vs the Street’s $96M; revs were $1.02B vs guidance of $925MM; WFRD 3Q EBITDA of $214M vs the Street’s $197M, and FCF was very strong at $133M as North America led the way w/ 11% q/q growth; HES posts higher Q3 profit as crude prices remain high and reported two new discoveries with partner XOM at the Sailfin-1 and Yarrow-1 wells in the Stabroek block offshore Guyana

·     Utilities & Solar: ENPH Q3 net income rose to $114.8M from a year earlier and revs up 80% to $634.7M, helped by strong demand worldwide as EPS and revs topped estimates and guides Q4 revs $680M-$720M vs. $662.2M estimate; FE 3Q adj EPS $0.79 vs est. $0.78 on revs $3.1B vs est. $3.1B; guides FY GAAP EPS $2.01-2.21, affirms operating guidance; POR 10.093M share Spot Secondary priced at $43.00; FSLR to supply Swift Current Energy with 2 GW of thin film solar modules in 2025 and 2026

Financials

·     Asset managers, Brokers & Exchanges: VRTS, SF, CME (beat on higher revs) among those reporting earnings this morning; AMP EPS $6.43 vs. est. $5.85 on better Advice & Wealth Management +$0.30 on meaningful NII upside, driving pre-tax margins to 27.8%; IVZ downgraded to underperform from neutral at Credit Suisse following the company’s third- quarter earnings, saying there are too many adverse moving parts; EVR Q3 adj EPS $2.20 vs. est. $1.37 and revs $576.9M vs. est. $477.48M

·     Insurance: CB reported EPS beat, improvement in sector that has seen many negative pre- announcements from its peers (TRV, ALL) – Q3 operating EPS $3.17 vs. est. $2.43; Net premiums written $12.02 billion, +14% y/y; AIZ preannounced a miss and lowered guide – 1.01 vs 2.42 Ex-cat operating earnings missed consensus by about 15% and lowered full-year AEBITDA guidance by about 7%

·     Consumer Finance & Lending: Dow component Visa (V) posts better-than-expected Q4 profit helped by a jump in payment volumes, boosts quarterly dividend to 45c and authorized a new $12.0B share buyback; DFS upgrade from Equal Weight to Overweight at Morgan Stanley and raise tgt to $116; ALLY files mixed securities shelf; NAVI posts EPS miss due to lower revs and higher provisions, partially offset by higher other income – Private Student Loan originations were -74% YoY – Consumer Lending NIM beat

Healthcare

·     Biotech & Pharma movers: sectors outperformed overall as CAH, CI, ELV, HUM, LLY, MCK, MRK, MOH among Healthcare names hitting 52-week highs today; BMY reported a beat for Q3 profit and sales but only reaffirms its year outlook for both; for PRGO the FDA AdCom postpones a planned joint meeting of two of its advisory committees to review the Opill application, giving them more time to review more information; REGN downgraded to Underperform from Market Perform at Raymond James saying the life cycle extension benefit of 8mg aflibercept is likely over-estimated and that the oncology portfolio is likely to continue to struggle

·     MedTech Equipment: TMO Q3 adj EPS $5.08 vs. est. $4.81; Q3 revs rose 14%% y/y to $10.68B vs. est. $9.91B and raised its forecast for year profit and revs; BSX Q4 EPS of $0.43 misses ests on better revs $3.17B vs. est. $3.12B and guides Q4 EPS $0.45-$0.48 below the $0.49 est. and lowers year view to $1.71-$1.74 from $1.74-$1.77

·     Healthcare Services: in hospitals, UHS performed better in quarter than rivals THC and HCA which reported weak results last week as Q3 adj EPS of $2.54 topped the $2.43 est.; PCVX 15M share Secondary priced at $32.00; HUM upgraded to Buy from Hold at Deutsche Bank and raise tgt to $576 on the back of their recent AEP-Palooza event, where six regional independent MA brokers confirmed to US the solidifying of Humana’s leading position in MA

Industrials & Materials

·     Aerospace & Defense: Dow component BA Q3 core EPS loss (-$6.18) after taking $2.8B loss on fixed-price development programs, vs. est. $0.02; revs of $16B misses the $17.8B estimate; Q3 adj free cash flow $2.91B vs. est. $1.02B; qtr-end total backlog of $381 bln; including over 4,300 commercial airplanes; operating cash flow improved to $3.2B; cash and investments in marketable securities increased to $14.3B – shares tumbled midday after saying they may discontinue MAX 7 and/or MAX 10 if certification not achieved; GD posts ~5% rise in Q3 profit on strong demand for chartered flights as EPS of $3.26 topped year ago

·     Industrial & Machinery: ROP 3Q adj EPS $3.67 vs est. $3.46 on revs $1.35B vs est. $1.32B, adj EBITDA $555Mm vs est. $520.5Mm; sees 4Q adj EPS $3.72-3.76 vs est. $3.53; CNHI downgrade from Mixed to Negative at OTR Global

·     Transports: last of major railroads reported as NSC reports headline adj EPS of $4.10 vs cons of $3.60 on better revs of $3.34B vs. est. $3.22B and sees FY22 rev growth 13% vs prior 12%+ and cons of 12.7%; CNI strong Q3/22 earnings and increased F2023 guidance stand out within the transportation sector where earnings/guidance have generally been less than inspiring; ALK said adding 52 Boeing aircraft with rights for an additional 105, setting US up for long-term growth; ODFL 3Q profit surges nearly 32% to $377.4M as pricing gains offset sliding demand in the trucking’s less-than-truckload sector and $3.36 EPS beats estimates of $3.16

·     Metals & Materials: in chemicals, CC Q3 adj EPS $1.24 vs. est. $1.04; Q3 revs rose 6% y/y to $1.8B vs. est. $1.67B but lowered its adjusted EPS $4.74-$5.00, from prior $5.09-$5.59; AVY 3Q adj EPS $2.46 vs est. $2.46 on sales $2.3B vs est. $2.3B; sees FY adj EPS $9.70-9.85 vs est. $9.88; AXTA reported 3Q22 EBITDA of $210M, compared to consensus of $209M while EBIT of $148M came in slightly below the midpoint of its guidance range of $140M-$165M

Technology, Media & Telecom

·     Internet: GOOGL shares fall on top/bottom line miss as Q3 revenue rises 6.1% to $69.09B, missing expectations of $70.58B (5^th straight qtr of slowing sales growth) as Q3 YouTube ads revenue falls -1.9% to $7.07B from $7.2B y/y; META earnings expected tonight, AMZN on deck tomorrow night – group pressured from falling advertising revenue so far reported by SNAP and GOOL last few days; NFLX extending recent gains post earnings/better subs – back above $300 for the first time since April

·     Media & Advertising: SPOT posted a better-than-expected rise in revenue and users for the latest quarter, 456 million monthly active users, up 20% from a year earlier and above the company’s guidance, but posted larger loss than last year; in advertising, WPP Q3 organic comp sales +3.8% vs. est. 5%, raises lower end of year comp sales view to 6.5%-7% and lowers FY op margin to up 30-50 bps from around 50 bps prior (OMC, IPG comps); DIS tgt cut to $143 from $154 at KeyBanc and lower media sector ests saying DIS remains only OW, believe FOXA’s core business is undervalued for relative outperformance, and we see risk for PARA

·     Semiconductors: TXN posted Q3 EPS and revs beat, but shares slipped overnight as guides 4Q EPS $1.83-2.11 vs est. $2.21 and revs $4.4-4.8B vs est. $4.9B – analysts noted the co now seeing weakness in Personal Electronics spreading into Industrial and other applications (ex-Auto), spreading beyond PCs and smartphones; MBLY priced its 41M share IPO at $21.00 per share (opened at $26.71); MXL delivered beat and raise, with 3Q revs ~in-line with expectations (despite a tough quarter in Broadband) and 4Q revs guided +3%; TER beat and raise for qtr/guidance; SK Hynix guided for ~50% YoY CAPEX cuts for 2023, substantially more aggressive than the earlier 20-30% indication; STX said reducing worldwide headcount by about 3,000 employees, announces restructuring plan, reported Q1 rev miss of $2.04B vs. est. $2.11B and said it was warned by the U.S. government that the company may have violated export control laws

·     Software movers: MSFT posted a 1Q revenue and EPS beat despite a 5-point FX headwind, with 16% constant-currency revenue growth at the top of the guidance range but Azure growth decelerated 4 points to 42% in constant currency and revenue guidance implies Y/Y growth of 6-8% in constant currency, below estimates – MSFT slow rev growth hit software space early with MDB, TWLO, DDOG, SNOW, etc. among names pressured early before mkt rebound; TENB outperformed following its quarterly results

·     Hardware, Components & Services: Foxconn said it has seen a “small number” of COVID cases at its main campus in China, but the co is aiming to maintain production; JNPR shares rose early as Piper noted post earnings the co grew at one of its highest rates in ~7 years, backlog relatively holding, GPMs showing stability, and profitability metrics having upside; LG Display said to cut capex by more than KRW1T in 2022; to exit domestic production of LCD TV panels, as planned, posted bigger-than-expected Q3 loss on sluggish device sales; FFIV tumbles in results