Closing Recap

Friday, September 17, 2021

Equity Market Recap

·     U.S. stocks slumped as the Dow, S&P 500, Dow Transports and Nasdaq slide amid option expiration “quad witching”, a weak consumer sentiment reading and internal disagreement inside the FDA if vaccine boosters are needed. In the final hour of trading, The FDA Advisory Committee decided not to recommend a booster for the Pfizer vaccine for people 16 years and older by a vote of 16-3 saying there was not enough data to determine the step-up effectiveness of the third shot. The concerns of no additional boosters weighed heavily on vaccine makers (MRNA, BNTX, PFE) as market rallies were met with selling pressure throughout the day.

·     The S&P 500 fought to stay above its rolling 50-day moving average 4,436 all afternoon before dropping below in final minutes (first close below since June 18^th) while most of the 11 S&P sectors were lower. Materials at the bottom again as iron ore futures slide, losing 20% this week on China concerns, while steel stocks tumbled after U.S. Steel (X) announced planned addition of a new steel mill, which will disrupt the current favorable supply and demand environment, and possibly apply downward pressure to steel prices. The moves in stocks and bonds also show investors grappling with mixed economic data in the U.S. and China, the spread of the Covid-19 Delta variant and concerns about inflation (ahead of the FOMC meeting next week – with rising expectations the Fed may hint it is moving toward scaling back monthly asset purchases following strong economic data this week). Treasury yields weighed on growth tech stocks as the U.S. 10-year treasury yield rises above 1.385% to touch two-month highs, while the dollar index (DXY) hits fresh three-week highs, sending precious metal prices lower again. Europe’s Stoxx 600 down 1.0% as posts 1% weekly decline and down for a third straight week while Germany’s Dax down 1.3%, Britain’s FTSE 100 down 1.2%, France’s Cac 40 down 1.0%, Spain’s ibex up 0.2%.

·     One of the top stores today was the debate over whether Americans should receive a booster dose of the Pfizer (PFE)/BioNTech (BNTX) COVID-19 vaccine moved to a panel of independent expert advisers to the U.S. FDA on Friday. While U.S. health officials, some other countries and vaccine makers have said boosters are needed, many scientists and vaccine experts disagree. Many of them say that while there is growing evidence that boosters provide increased protection against infection and severe disease to people aged 65 and older, there is not enough evidence that they are needed by younger ages. In the end, the PDA panel voted against.

·     Stock/sector movers: TMO soars to record highs after its Investor Day includes FY22 guidance above consensus; IVZ jumps after the WJS reports it is in talks to merge with STT asset-management business; X slides after setting Q3 guidance and announcing plans to build a new U.S. steel mill next year as other steel/metals names underperform (NUE, STLD); FANG rises after announcing a new $2B share buyback program, though broader energy sector lower with crude prices giving up some of its weekly gain; TTWO trades below $150 for the 1st time since last July after Bank of America downgraded it on less confidence in their previously street-high earnings estimates given video game release delays; SNPS, CRUS, CREE each sink over 4% after Bank of America downgraded them to Underperform on limited upside potential

·     FOMC Meeting coming up next week (no changes expected): Fed Taper timeline: The Federal Reserve will probably hint at its meeting next week that it is moving toward scaling back monthly asset purchases and make a formal announcement in November, according to a Bloomberg survey of economists. Meanwhile, Guggenheim said the Federal Reserve may hold off on its tapering announcement amid weak economic data and as the two political parties spar on raising the debt ceiling, sending Treasury yields further down.

Economic Data:

·     University of Michigan surveys of consumers sentiment prelim Sept 71.0 (consensus 72.0) vs final Aug 70.3; the current conditions index prelim Sept 77.1 vs final Aug 78.5 and the expectations index prelim Sept 67.1 vs final Aug 65.1

Commodities, Currencies & Treasuries

·     Oil prices slip on Friday as WTI crude -$0.64 or 0.88% to settle at $71.97 per barrel (roughly $3 bucks off its July 3-year highs), its 4th straight week of gains rising 3.3% following bullish inventory data mid-week thanks to the slow recovery in output after two hurricanes in the U.S. Gulf of Mexico. A report this afternoon from Baker Hughes showed a double-digit increase in the weekly US oil rig-count, the largest rise in more than a month. As of Thursday, about 28% of U.S. Gulf of Mexico crude production remained offline, two-and-a-half weeks after Hurricane Ida hit.

·     The U.S. dollar climbed to a three-week high on Friday, as the dollar index (DXY) touched highs of 93.20, while Treasury yields were up across the board with the 10-yr hitting highs above 1.38% (highest levels in a week) ahead of the FOMC meeting next week and after bullish economic data this week (tamer inflation, stronger retail sales). 

·     Iron ore, which hit a record high above $230 a tonne in May, traded at $100.80 on Friday, down 22% over the week. Amid simmering diplomatic tensions with Australia, the world’s biggest producer of iron ore, the Chinese government is taking a more active role in curbing steel output as the year’s end approaches

·     Gold prices slip -$5.30 or 0.3% to settle at $1,751.40 an ounce (lowest settlement in about 5-weeks), falling 2.3% on the week as Treasury yields rise (10-yr hit highs of the week above 1.38%) and as the dollar trades 3-week highs following better economic data this week and ahead of the FOMC meeting next week.

Sector News Breakdown

Consumer

·     Retailers; NKE reports earnings next week and Cowen said it raised Q1 sales and EPS estimates above consensus w/inventory likely to be lean, and full price sell through levels and gross margin likely to be robust while lowering FY estimates to account for disruption from COVID, supply chain pressure due to Vietnam exposure and China tensions (cut FY22 Nike sales estimate by 300bps to 9% growth but with a robust recovery expected into FY23); SHOO tgt raised to $59 at BTIG citing strong demand and says production concerns are non-existent as Vietnam accounts for less than 5% of SHOO’s production and its shift of ~50% of production to Mexico/Brazil earlier this year is helping ease some supply chain pressures; ZUMZ approved repurchase of up to an aggregate of $150 mln of its common stock; LULU tgt raised to $520 at Oppenheimer as highlighted LULU as one of the most compelling near- and longer-term growth opportunities

·     Auto sector; Bank America restacks ratings for auto aftermarket companies in Retailing-Hardlines coverage as upgrade MCW to Buy from Neutral, maintain Buys on AAP and DRVN and downgraded ORLY to neutral; from Buy and SNA from Neutral to Underperform, while maintaining Underperform ratings on AZO and GPC; WPRT said it restates second quarter 2021 financial statements due to accounting error, but sees no impact on gross margin, net income, or the company’s statement of cash flows

·     Consumer Staples; IFF said it now expects FY 2021 sales to grow greater than 8% on a combined company basis, to about $11.55 bln with double-digit growth anticipated for Q3 and expects adj operating Ebitda margin for FY about 21.5%; USNA increases share repurchase authorization to $150M and guides Q3 EPS $1.28-$1.33 vs. est. $1.44 on sales $265M-$270M. below est. $302.9M; said Q3 sales have been softer than anticipated, largely because of increased disruptions and lockdowns due to pandemic

·     Lodging & Leisure; boat retailer MCFT slides after cutting its Q1 rev outlook saying growth "approaching" the 30% range, compared with guidance provided two weeks ago of the mid-30% range, citing a temporary delay in the shipment of a key component from an engine parts supplier (other boat makers BC, MBUU also active); MANU said Q4 loss widened to GBP107.7 million ($149 million) from GBP36.5 million, while revenue climbed 15% to GBP94 million while declined to provide current year guidance

·     Casinos and Gaming; for negative analyst sentiment in the casino and gaming sector following the Macau Government’s announcement to tighten its casino regulatory oversight this week; WYNN downgraded to hold from buy at Argus as less optimistic view reflects heightened scrutiny by the Macau government as it begins a 45-day consultation in which it overhauls regulations, reviews the number of casino licenses it will grant and scrutinizes supervisory requirements; LVS downgraded at Jefferies driven by three factors: 1) the persistent restrictions from COVID, which could continue in a zero-tolerance context; 2) the pending uncertainties around the Macau concession and its growth and return prospects; and 3) the divestiture from the fundamentally positive US market without alternative avenues of growth (recall JPMorgan downgraded LVS, WYNN, MLCO yesterday); WYNN gets $1.5B credit line as Macau comes under scrutiny

Energy

·     E&P and Majors; FANG accelerates capital return to stockholders and initiates share repurchase program, announces $2B share buyback; KeyBanc said BSM, KRP stand to benefit the most from higher gas prices among minerals; In European majors, JPMorgan remained OW on RDS, BP, upgraded E (Eni), REP to OW, and downgraded TTE, OMV to N and EQNR, GLPEY (Galp) to UW; Baker Hughes (BKR) weekly rig count 512 as U.S. gas rig count down 1 to 100 and U.S. oil rig count up 10 to 411; NOG is the front-runner to buy a stake in CRK Bakken assets in North Dakota, three sources familiar with the matter told Reuters. Northern Oil has bid about $170 million for a non-operated working interest in the assets, according to the report; Reuters also reported that PXD is seeking buyers for Delaware assets, aiming for $2 bln valuation

·     Refiners: Mizuho said MPC remains their favorite sub-sector idea supported by its massive cash return potential and see higher Q3 earnings for inland refiners (HFC) that can offset lost production in the Gulf Coast following Hurricane Ida

·     Utilities & Solar; PCG says filed application with CPUC requesting cost recovery of approximately $1.47 bln of recorded expenditures; ENPH remains Piper’s favorite solar name as they continue to anticipate improving supply in 2H21 in the near-term while app downloads support the thesis of growing demand and CA state data supports the thesis of storage share gains; SOL shares active as the European Solar Energy Development, a joint venture between SOL and Eiffel Investment Group, completes the acquisition of its first batch of solar projects

Financials

·     Bank movers; China injected more cash into its banking system in a sign authorities are seeking to avert a funding squeeze amid a seasonal rise in financing demand and the intensifying debt crisis at China Evergrande. The People’s Bank of China added 90 billion yuan ($14 billion) of funds on a net basis through seven-day and 14-day reverse repurchase agreements on Friday; in the U.S., SIVB upgraded to Outperform at Wedbush owing to its high growth, above-average interest rate sensitivity, market leading position, and our above-consensus 2023 EPS estimate; Goldman Sachs said seeing near-term risks to consensus net interest income (NII), expecting nearly 4% average downside across the Street if rates remain low– says ZION, KEY, and MTB the most vulnerable

·     Asset Managers/Brokers/Insurance; IVZ rises as WSJ reported the company is in talks to merge with STT’s asset-management business, saying a deal isn’t imminent, and the discussions might not result in an agreement https://on.mktw.net/3ErHusF ; LNC announces reinsurance transaction with Resolution Life and significant capital deployment in transaction that will generate approximately $1.2B in capital and expected to be approximately 5% accretive to adjusted operating eps

·     Bitcoin, FinTech & Payments; Guggenheim said its review of SQ’s web traffic data for August/3QTD indicates continued strong trends in merchant engagement; we believe the data bodes well for Seller; Bitcoin prices were higher most of the day above the $47,000 level in what was a generally quiet week for crypto assets.

·     REITs; RBC started coverage on net-lease REITs with a positive view given their strong returns, large market, competitive cost of capital, and wider spread vs bond yields, and on individual stocks rate O, ADC, WPC at Outperform saying they have total return potential of around 10% per year given higher annual AFFO/share growth and average 4.5% dividend yield, and GTY, NNN, SRC at Sector Perform

Healthcare

·     Vaccine related news: shares of Covid-19 vaccine manufacturers BNTX, PFE, MRNAsaw selling pressure initially ahead of a key vote of an FDA advisory panel regarding the suitability of Pfizer/BioNTech vaccine as a booster shot. At the end of the ongoing meeting (hearing held between 8:30 AM and 4:45 PM), the panelists are expected to vote on whether to recommend the vaccine as an additional shot for those aged 16 years and above.

·     Pharma movers; BMY said the European Medicines Agency’s Committee for Medicinal Products for Human Use recommended expanded approval of its cancer drug Opdivo in certain cancers of the stomach and esophagus; MRK wins positive opinion in EU for KEYTRUDA plus chemotherapy for breast cancer; NVS announces positive health-related quality of life (HRQoL) data from its Phase III VISION study evaluating 177Lu-PSMA-617 plus standard of care for metastatic castration-resistant prostate cancer (mCRPC) vs standard of care alone; GLPG announces positive CHMP opinion for Jyseleca® (filgotinib) for the treatment of adults with moderately to severely active ulcerative colitis; ABCL confirmed that the U.S. FDA expanded its emergency authorization to use a LLY-partnered Covid-19 antibody cocktail for post-exposure prevention of infection or symptomatic disease; CRVS surges after saying regulators in China accepted an application to start an early-stage trial of CPI-818, its oral treatment for relapsed/refractory T-cell lymphomas – Privately held drug developer Angel Pharma has licensed the rights from Corvus to develop and sell CPI-818 in greater China, as per Reuters

·     Biotech movers; PTGX shares fall over 50% early after disclosing its Rusfertide clinical development program has been placed on clinical hold, following the reporting of a non-clinical safety signal in a mouse model study; TCRR announces positive trial results from the ongoing Phase 1 portion of the GAVO-cel Phase 1/2 trial for mesothelin-expressing solid tumors

·     MedTech Equipment; TMO shares surged as hosts investor day today, as sees FY22 adj. eps $21.16 vs. $19.68 est. and sales $40.3B vs. $34.29B est.; managed care stocks were mixed, with CNC , HUM, CI and ANTM mostly higher while hospitals were weaker

Industrials & Materials

·     Industrial & Machinery; MTZ and PWR both initiated with buys at Goldman Sachs and favors their exposure to long-term secular growth trends within modernization of America’s aging utility infrastructure, transition to renewable power generation, and evolution of 5G infrastructure; Goldman initiates CHX with a sell and finds that although their defensive, production exposure supports return of capital, the stock screens relatively expensive compared to EBITDA growth offered by the rest of his coverage list.  

·     Transports; UAL said it experienced technical system issues Friday morning that impacted operations and have since been resolved; CNI outlines details of strategic plan targeting C$700 million of additional operating income, as well as a 57% operating ratio for 2022; CNI to resume share repurchase program previously authorized by Board of Directors with remaining C$1.1 billion in share repurchases to be completed by end of January 2022

·     Metals & Materials; U.S. Steel (X) said it plans to build a new steel mill in the U.S. starting next year, as the company chases rising demand/issued preliminary 3Q21 EBITDA guidance of $2.0B vs. the Street’s $1.9B, and EBITDA of $1.3B in 2Q21/announces $3B investment plans; Iron ore, which hit a record high above $230 a tonne in May, traded at $100.80 on Friday, down 22% over the week. Amid simmering diplomatic tensions with Australia, the world’s biggest producer of iron ore, the Chinese government is taking a more active role in curbing steel output as the year’s end approaches (CLF, VALE, RIO among iron ore producers)

Technology, Media & Telecom

·     Semiconductors; CREE, CRUS, SNPS downgraded to Underperform as we see limited potential upside relative to our PO compared to other stocks in our coverage – downgrade SNPS (high valuation, prefer semicaps instead), CRUS (content benefits baked in, offset by pricing pressure), CREE (rising capital intensity and competition offsets long term EV benefits) to Underperform; the firm also ups NVDA tgt to $275 from $260, ON to $60 from $55, rising cost/complexity of chipmaking, rising govt. stimulus for re-shoring offset by memory volatility: KLAC top pick (PO to $450 from $425), also like AMAT, LRCX, TER top small-cap top pick (to $125 from $120); the semiconductor index (SOX) pulling back after hitting new all-time highs yesterday of 3,484 with broad weakness on the day.

·     Software movers; TTWO downgraded to market perform from outperform at BMO and cut tgt to $150 from $225 saying they have grown less confident in our previously high on the Street earnings estimates after a series of video game release delays; ISS recommends vote against ZM’s deal to acquire FIVN with vote on September 30^th (ZM’s decline has brought deal value to $153, well below price of FIVN before deal was announced on 7/18)