Closing Recap

Friday, September 09, 2022

Equity Market Recap

·     U.S. stocks close out the week sharply higher, with the S&P 500, Nasdaq, and Russell 2000 all moving back above key technical levels (50-day MA) amid hopes next week’s inflation data (CPI, PPI) will show further deceleration and potentially ease the Fed’s aggressive rate cycle. All eleven S&P sectors finished higher, led by Energy, Communication Services, Info Technology, along with Discretionary while defensive Consumer Staples and Utilities were the weakest sectors. Today marked the last chance to hear Fed speakers before the blackout period ahead of their FOMC Policy meeting Sept 20-21. Today the Fed’s Waller, George and Bullard were among speakers, but had little impact on financial markets. The market is pricing in an 86% chance of a hike of 75 basis points now – with August CPI and PPI inflation data coming next week (Tuesday and Wednesday respectively), though the Fed appears determined for an aggressive “front loading” hike yet again, regardless of the outcome. The European Central Bank raised its key interest rates by 75-basis points on Thursday and promised further hikes. The last 2-days saw stocks “melt” higher throughout, snapping a 3-week losing streak for major averages in the process, boosted by oversold market conditions. The dollar jumped this week (down on day), hitting 24-year highs vs. the Japanese yen and fresh 20-year highs in the dollar index (DXY). With today’s advance the Nasdaq posted its first three-day gain since July. Stock buybacks continue to benefit stocks as CNBC noted S&P 500 buybacks still going strong: Q2’22 est. $226B after $281B in Q1 (which was a record), followed $270B in buybacks in Q4’21 and $178B in Q3’21. All eyes on inflation data early next week and then the Fed meeting the week after with earnings season behind us. S&P futures (ES) at their best level in 2-weeks and above its 50 and 100-day moving average resistance levels (4,031-4,032 levels), while the Russell 2000 tops its 1,857 50-day and the Nasdaq Composite also above its 50-day of 12,065, all with little effort today. Markets also overlooking any warning signs: late yesterday, chief investment officer Scott Minerd at Guggenheim Partners tweeted "Since 1960, P/Es have trended lower when #inflation is higher. With YoY core PCE now at 4.6% and S&P500 trading at ~19x, we should see stocks fall another 20% by mid-October … if historical seasonals mean anything." Minerd then followed up in a CNBC interview, "given the recent strength over the last few days, it just appears that people are ignoring the macro backdrop, the monetary policy backdrop, which basically indicates the bear market is intact."

Commodities, Currencies and Treasuries

·     Oil prices rose $3.25 or 3.89% to settle at $86.79 per barrel, rebounding nicely from yesterday’s seven month low of $81.20, but wasn’t enough to finish higher on the week. Prices were supported by real and threatened cuts to supply, but aggressive interest rate hikes and China’s COVID-19 curbs weighed on the demand outlook.

·     Russian President Vladimir Putin has threatened to halt oil and gas exports to Europe earlier this week if price caps are imposed and a small cut to OPEC+ oil output plans announced this week also supported prices. Brent down around the $92 level, well off the March close to its all-time high of $147 after Russia invaded Ukraine.

·     Natural gas prices rise 1% higher to $7.996/MMBtu, but down -9% this week, its third straight weekly decline. Prices are down from a 14-year closing high of $9.680 Aug. 22. This week’s declines were also driven by a continuation of what’s been a quiet hurricane season.

·     The weekly Baker Hughes (BKR) rig count showed US drillers cut oil and gas rigs for a second straight week, down another 5 to 591 after peaking at 605 on Aug 26.

·     Gold prices rose $8.40 or 0.5% to settle at $1,728.60 an ounce, getting a boost as the dollar weakened, for the day (off 20-year highs this week) but expectations of aggressive rate hikes kept a lid on prices. Gold managed a modest +0.4% advance on the week.

·     The U.S. dollar index (DXY) dropped as low as 108.35 on the day, more than 200-bps off its weekly highs (and 20-year highs) as the euro bounced 1% on hawkish commentary from ECB officials yesterday after raising rate by 75-bps. The yen strengthens to trade around the 142-handle after more verbal interventions from Japanese officials, down from 24-year lows above 145 just 2-days ago. Bitcoin jumping over 8% to $21K.

Fed Speakers

·     St. Louis Fed’s James Bullard spoke in Bloomberg interview saying rates after catching up will be more flexible Bullard says labor market tight, lots of wage pressure Bullard says good CPI report shouldn’t affect sept. Fed call Bullard urges more front-loading: `sooner is better’ Bullard repeats he favors 3.75-4% rates by end of 2022 Bullard says markets underpricing `higher for longer’ rates Fed’s Bullard says leans `more strongly’ to 75 basis-point hike. Kansas City Fed President Esther George said the US inflation rate remains far too high and policy makers have a “clear-cut” case for continuing to remove monetary support

Sector News Breakdown

Consumer

·     Retailers: RH 2Q results were better than expected (benefiting from better conversion on its backlog), but management guided 3Q and 2022 lower, partly due to the timing of openings pushed to 2023; ZUMZ slides after Q2 miss (2Q EPS $0.16/$220Mm vs est. $0.47/$231.5Mm) and lower guidance (guides 3Q sales $220-228Mm vs est. $277.2Mm); TPR histed investor day today as introduced ‘25 targets and EPS of low to mid-teens CAGR which is slightly better than estimates, said it plan to retire $3B to shareholders through FY25, sees Revs of $8B representing a +6-7% CAGR; HBI insider buys revealed last night; CEO Bratspies buys 30K shares @ $8.65, Dir Ziegler buys 5,800 @ $8.41 per form 4 filings; in gun/ammo space, shares of SWBI and AOUT both pulled back after Q1 results each fell short of consensus on top/bottom line

·     Auto sector: Manheim Consulting released its Used Vehicle Value Index for August. The overall headline result was down 4.0% vs. July levels. On a y/y basis, used vehicle prices rose 8.4% on a +18.8% comp. By class type (y/y change): Compact +15.9%, Midsize +10.9%, Luxury +4.4%, Pickups +5.4%, SUV/CUV +6.6%, and Vans +14.0%. The rental risk index rose 15.7% y/y and was down 0.8% m/m. TSLA is considering setting up a lithium refinery in Texas, as it looks to secure supply of key component used in batteries amid surging EV demand; the Co says, decision to invest in Texas will also be based on the ability to obtain relief on local property taxes; KMX downgrade to underperform and tgt to $100 from $146, AXL cut to Neutral from Buy and tgt cut to $13 from $16 and SAH cut to Underperform from Buy in the auto sector at Bank America

·     Housing & Building Products; higher rates remain a concern for housing sector/home improvement names. Note the 15-year mortgage rate in the US rises to 5.16%, its highest level since December 2008 (a year ago it hit an all-time low of 2.10%); 30-year mortgage rate in the US rises to 5.89%, its highest level since November 2008 (last year it hit an all-time low of 2.65%)

·     Consumer Staples: it has been a rough week for consumer product names as a handful of companies have negatively pre-announced, mainly on deteriorating demand trends, with KHC, NWL, CHD, KHC, REYN and HRL late last week among them; this morning KR Q2 adj EPS $0.90 vs. est. $0.83; Q2 sales $34.6B vs. est. $34.5B; Q2 Identical sales w/o fuel rose +5.8%; authorized a new $1B share buyback program; raises FY adj EPS to $3.95-$4.05 from prior view of $3.85-$3.95 and lowers FY CAPEX to $3.4B-$3.6B from $3.8B-$4.0B prior

Energy

·     Solar; few more downgrades in the solar sector as Guggenheim downgraded ENPH to Neutral from Buy based on belief that the stock is now fairly valued and that upside to our estimates is unlikely and they also cut SHLS to Neutral from Buy on valuation as well (follows downgrades of SHLS yesterday at Goldman Sachs (which also upgraded FSLR); Guggenheim raised its tgt on FSLR from $135 to $187 citing its unique position as the only largescale manufacturer of solar panels in the US is continuing to grow

·     Utilities: the defensive sector lagged other growth names, but still among top performing sectors year-to-date; AWK upgraded from Underweight to Neutral at JPMorgan saying YTD underperformance leaves it currently standing at a +64% premium more consistent with the 58% average P/E premium enjoyed by water utilities; NJR downgraded from Neutral to Underweight at JPMorgan saying it faces a narrowing window to recapture CEV’s solar development momentum in the face of PJM interconnection delays; NFE downgraded to neutral at BTIG noting shares up ~150% YTD and growth in their downstream industrial end-user business is stalling.

Financials

·     Bitcoin news; COIN upgraded to Buy w/ $100 PT at Daiwa as believe Coinbase holds close to 15% of all circulating ETH on its platform, making it one of the largest holders of ETH globally; other Bitcoin related names rally with crypto bounce today (MARA, SI, MSTR, RIOT); FTX Ventures, the investment arm of Sam Bankman-Fried’s crypto exchange FTX, said it will buy a 30% stake in SkyBridge Capital, the investment firm founded by Anthony Scaramucci. SkyBridge will use some of the cash from the investment to buy $40 million worth of cryptocurrencies to hold on its corporate balance sheet as a long-term investment, the companies said

Healthcare

·     Pharma movers: European Society for Medical Oncology (ESMO) Conference this weekend with several companies in focus; ALLK announces topline phase 3 data from the EoDyssey study in patients with eosinophilic duodenitis as lirentelimab met histologic Co-primary endpoint but missed symptomatic Co-primary endpoint; BHC confirmed today the FDA tentative approval of the Norwich Pharmaceuticals rifaximin 200 mg product late yesterday; HZNP announces $500 million share repurchase program; ADCT downgrade from Overweight to Equal weight at Morgan Stanley as see higher upside elsewhere in their coverage

·     Biotech movers: ALLK with mixed trial results – meets Co-primary goal of improvement in tissue specimen following biopsy, but other main goal of improvement in symptoms was not statistically significant; REGN upgraded at Morgan Stanley and Jefferies citing high-dose Eylea data, with one analyst saying results on Q16W looks "encouraging" and safety looks "clean"; IMCR shares slip after presents promising initial Phase 1 data for first off-the-shelf TCR therapy targeting PRAME at the ESMO 2022 Congress (meeting this weekend)

·     MedTech Equipment & Healthcare Services; PEN was upgraded to Buy at Needham, lifting shares early, saying it is seeing stronger revenue growth in Q3 due to improvement in hospital staffing, among other reason

Industrials & Materials

·     Aerospace & Defense; SPCE downgraded to Underperform from Market Perform at Bernstein saying Q2 results follow a pattern over the last two years that has meant delay of future flight operations, redesign of elements of its platform, and a need to raise more cash; Cowen said BA’s weak MAX deliveries in Aug puts its 2022 forecast and Wall Street Q3 EPS, FCF estimates at risk

·     Materials, Industrial & Machinery; MMM upgraded to Neutral from Sell as analysis now suggests the equity fully accounts for both UBSe litigation liability and broader overhang / discount – and raised tgt to $126 from $118; overall broad strength in metals (AA, CENX, FCX, RIO, VALE) with big bounce in stock markets as investors scoop up cyclical stocks

·     Transports: Dow Transports outperform early, moving back above 14K (its 50-day MA slightly higher at 14,080 and 100-day 14,130 roughly); a railroad strike or lockout could cost the U.S. economy $2 billion per day in output, threaten supplies of food and fuel, and stoke already red-hot inflation, according to an industry report released on Thursday. The two sides have until just after midnight on Sept. 16 to reach a deal based on the board’s recommendations

Technology, Media & Telecom

·     Media, Internet; for PINS, Piper said, US mobile users are driving the improvement, up +7% y/y in August. International also looks better, partly due to new countries added to the Ads Manager; in online dating (IAC, BMBL) Deutsche bank said their data indicates early positive signals from Tinder, on track to beat 3Q Street revenue estimates of mid-single digit growth and street net additions of 200k. On the other hand, at BMBL, we see trends pointing to modestly decelerating y/y revenue growth below street expectations

·     Software movers; DOCU shares rallied after posted Q2 revenue and profit above consensus ests as revs rose 22% to $622.2M above the $602.2M estimate as sub revs rose 23% y/y and guided Q3 revenue between $624M-$628M vs. est. $625M; ZS rises after strong F4Q results, with billings growth reaccelerating to +57% y/y vs. the Street at 41% and 54% last quarter, and FY23 billings were guided $1.93bn at the midpoint vs. the Street at $1.88bn