Closing Recap

Friday, September 24, 2021

Equity Market Recap

·     Stocks finished the day with a late push to cap off a volatile week that had each of the four indices finish higher even after a large selloff to start the week. Market worries persist about the spillover from debt-laden China Evergrande which sunk stocks on Monday, as the company warned Friday it faced an uncertain future unless it got a swift injection of cash (Evergrande owes $305 billion) as investors are worried a collapse could pose systemic risks to China’s financial system. Sectors were mixed as oil energy stocks led behind another jump in oil, financials among leaders as Treasury yields hit highest levels since mid-July, and both industrials and metals outperformed. On the flip side, defensive and interest rate sensitive sectors such as REITs, utilities and telecom were among the top losers. U.S. Treasury yields rose in the wake of the Federal Reserve’s decision this week to soon begin tapering its massive bond purchases, a move that could lead to higher interest rates next year. Meanwhile, Cleveland Federal Reserve Bank President Loretta Mester said today the Fed should start to reduce its support for the economy in November and could start raising rates by the end of 2022 if labor markets continue to improve. Retailers were mixed, with footwear/sports apparel names dropping following a weaker outlook from Nike (NKE). In Washington, House Democratic leaders said they intended to forge ahead next week with U.S. President Joe Biden’s $3.5 trillion social agenda as well as a $1 trillion bipartisan infrastructure bill. However, with all the inner squabbling over details of the social spending, it was unclear when votes would occur.

·     Stock/sector movers: NKE stumbles on Q1 revenue miss and after cutting their full-year guidance as supply chain congestion, labor shortages, and Covid-related Asian factory shutdowns clouds their outlook, weighs on UAA, FL, SKX; cryptocurrencies and related stocks tumble after the People’s Bank of China said crypto-related transactions and businesses are illegal and forbade financial institutions from providing services Bitcoin, Ethereum fall dragging COIN, RIOT, MARA lower; U.S.-listed Chinese stocks slide (BABA, BIDU JD) after China Evergrande gave no signs of meeting a Thursday deadline for an $83.5 million coupon payment and as Beijing’s sweeping crackdown extended to cryptocurrencies; COST rises after reporting strong quarterly results; CCL among S&P leaders despite a wider-than-expected as 2H2022 bookings are ahead of 2019 levels, while MTN soars to record highs after beating consensus in reopen names.

Commodities

·     Oil prices pushed higher, with WTI crude up at 10-week highs (mid-July) $0.68 or 0.93% to settle at $73.98 per barrel (up nearly 3% for the week – and posts a 5^th straight week of gains), getting a boost amid lower production and inventory levels and a bounce in risk appetite across financial markets. Brent adds to gains after settling at 3-year highs the day prior, supported by global output disruptions and inventory draws. The weekly Baker Hughes (BLR) rig count came in at 521, up from 512 prior as the oil rig count rose to 421 from 411 while gas rigs slip to 99 from 100 (oil and natural gas rigs added for a 14^th straight month in a row.

·     Gold prices edge higher, rising $1.90 to settle at $1,751.70 an ounce, little changed from last week. Prices jumped earlier this week on debt crisis fears out of China but gave back gains as treasury yields rose and investors rotates back into risker assets and out of defensive/haven plays with stocks closing the week mostly higher. The dollar rose on Friday with the dollar index (DXY) up +0.2% around 93.30 posting its biggest daily percentage gain in a week, as uncertainty over Chinese property developer Evergrande helped the greenback bounce.

Currencies & Treasuries

·     U.S. Treasury yields rose on Friday but had no impact on broader stock markets despite the 10-year yield rising to highest levels since July, up at 1.46% at highs today (and much higher than the 1.3% closing levels on Wednesday). The Fed on Wednesday announced its decision to soon begin tapering its massive bond purchases, a move that could lead to higher interest rates next year (officials are now evenly split on hiking rates in 2022, up from 7 of the 18 members seeing rates rising next year at the June meeting). Cleveland Federal Reserve Bank President Loretta Mester said on Friday that the Fed should start to reduce its support for the economy in November and could start raising rates by the end of 2022 if labor markets continue to improve as expected.

Sector News Breakdown

Consumer

·     Retailers; Dow component and retail giant NKE slides after 1Q EPS of $1.16 came in ahead of est. $1.09 but top line +12% cc missed expectations (+14%) driven by weaker growth in N America due to supply chain issues and co cut F22 revenue guidance (from +LDD) to +MSD growth Yoy due solely to a significant increase in in-transit times and factory shutdowns in Vietnam and Indonesia (shares of UAA, ADDYY, FL, WWW moved in sympathy); COST 4Q GAAP EPS was $3.76, above consensus of $3.58 and operating income, which includes $84M, ($0.14 per share), of a write-off of certain IT assets increased 18% to $2,275M, above $2,168 consensus. Management now anticipates overall price inflation to be in the 3.5-4.5% range (ex-gasoline), which compares to their previous expectation back in May of 2.5-3.5%

·     Auto sector; automakers (GM, Ford) and tech companies were active after the White House pressed the firms during a meeting on Thursday to provide information on the semiconductor crisis. Secretary of Commerce Gina Raimondo told Reuters that strong action was necessary since the semiconductor situation was not improving; ALV upgraded to Equal Weight from Underweight with an $85 price target at Morgan Stanley as see little downside from the current share price.

·     Restaurants; Jefferies upgraded shares of BJRI, CHUY, CAKE, PLAY and RRGB as they are incrementally more positive on the full service category following delta/inflation selloff and cons forecasts being reigned in. With independents and small chains losing $72B sales during ’20, they see oppty for top public chains to see above-trend SSS and unit growth acceleration; CMG tgt raised to $2,200 from $2,110 and maintain Buy as they think that Chipotle has a healthy balance sheet ($1.7 billion in liquidity in 2Q21) along with robust mobile ordering and delivery platforms; Truist said the read-through from DRI results are largely positive for our full-service coverage as reiterate Buy on DIN ($118 PT, 38% implied upside), TXRH ($130 PT, 39% upside) and PLAY ($56 PT, 41% upside), and view DIN as particularly well set-up.

·     Casinos, Gaming, Lodging & Leisure sector; cruise line CCL posts Q3 adj net loss of -$1.99B vs. est. loss -$1.57B; MTN Q4 EPS loss ($3.49) vs. est. loss ($3.53); Q4 revs $204.2M vs. est. $170.91M; issued its fiscal 2022 guidance range and expects Resort Reported EBITDA to be between $785M-$835M; Pass; RCL pt raise from $95 to $111, reit Buy after mgmt meetings at Stifel

Energy

·     Energy stock movers; a strong week for energy stocks, not moving on any particular news, but more a function of the recent rebound in oil prices, with Brent crude touching its best levels in nearly 3-years supported by growing fuel demand and a draw in U.S. crude inventories as production remained hampered in the Gulf of Mexico after two hurricanes. Individual stock news quiet. In Utilities & Solar; CNP upgraded to Overweight at KeyBanc following a constructive analyst day saying CNP’s refreshed growth projections point toward the upper end of prior guidance and the peer-group average rate, and believe that the Company should be able to successfully reset and turn the corner in its regulatory relations in Texas; utilities overall bounce slightly after recent underperformance as investors bailed defensive sectors for riskier ones.

Financials

·     Bitcoin, FinTech & Payments; broad based weakness in the crypto currency world, with Bitcoin, Ethereum, Litecoin and others tumbling after the People’s Bank of China said all crypto-related transactions are illegal, crypto-related businesses are illegal financial activities and financial institutions are not allowed to provide services for crypto (shares of COIN, MARA, RIOT, MSTR, SI, BTBT, NCTY among others leveraged to Bitcoin were pressured)

·     REITs; SLG and VNO upgraded to Neutral from Underperform at Bank America as sees a more balanced risk-reward profile for the two office REITs with significant exposure to New York City; SR upgraded to Buy at Mizuho as believe the market is fully discounting a worst-case outcome to the STL Pipeline (STL) saga

Healthcare

·     Pharma movers; for PFE, the head of the CDC overruled a recommendation of advisors at her agency and endorsed the use of the Pfizer– BioNTech booster shot for front-line medical workers. A CDC panel had recommended boosters for Americans aged 65 and older and some people with underlying medical conditions, but didn’t recommend it for teachers or people with high-risk jobs; AZN positive results from Phase III PROPel trial evaluating Lynparza (Olaparib) in combination with abiraterone, demonstrating meaningful improvement in radiographic progression-free survival vs. standard-of-care as a 1st-line treatment for men with metastatic castration-resistant prostate cancer; CAPR announces positive final data from its phase 2 hope-2 trial in patients with Duchenne muscular dystrophy (DMD) treated with cap-1002; ONTX 5M share Spot Secondary priced at $4.20; VTVT said that its HPP737 psoriasis treatment showed favorable results

Industrials & Materials

·     Industrial & Machinery; HXL downgrade from Buy to Neutral at Seaport Global saying they think shares are close to fully valued and while they don’t see major negatives ahead, think their investment thesis has played out; PWR tgt raised to $139 from $122 at UBS to reflect the announced acquisition of Blattner Holding Company and reiterate positive view on the expected electric grid investment cycle; BA cautious at Wells Fargo as they lower tgt to $238 from $258 as expect BA’s delivery outlook to slip to the right given low recent 737 MAX/787 deliveries; Housing & Building Products; Cleveland Research lower 2H numbers for FBHS, MAS to reflect weaker cabinet and plumbing demand in near-term and pressure on margins. Now at low-end of guide and below consensus for 3Q/4Q; INVH 12.5M share Spot Secondary priced at $40.00

·     Transports; after a rough start to the week for the Dow transports after FDX earnings/guidance pressured the sector and pushed the index to 6-month lows, stocks have been steadily bouncing back; airlines a nice bounce as “reopen” stocks getting a boost late week; DAL named a short-term catalyst call buy at Deutsche bank saying they believe the underperformance so far this year will flip to outperformance in the coming months.

Technology, Media & Telecom

·     Internet; U.S.-listed Chinese U.S.-listed Chinese stocks slide (BABA, JD, NTES, BIDU) after China Evergrande gave no signs of meeting a Thursday deadline for an $83.5 million coupon payment and as Beijing’s sweeping crackdown extended to cryptocurrencies; BIDU slips after Reuters reports China’s antitrust regulator is unlikely to approve BIDU’s $3.6 bln acquisition of JOYY Inc’s (YY) video-based domestic live streaming business YY Live; GOOGL is seeking to negotiate search deals for TikTok and Instagram (FB) videos, The Information reported; BABA is responding to Chinese government divestment pressure with a plan to dispose of its minority holding in Mango Excellent Media, a unit of state-run Hunan TV.

·     Semiconductors; MU tgt and ests lowered at JPMorgan, KeyBanc, and Mizuho ahead of earnings next week as they expected in-line to beat for current quarter, but say the Dec/FebQ could see possible headwinds, with slowing consumer/WFH demand driving weaker memory industry trends; AEHR rises after lifting its annual sales forecast by 80% and as Q1 sales more than doubles to $5.7M on a smaller-than-expected loss of (-$0.02) saying they are confident on growth based on record bookings, semiconductor test and burn-in solutions

·     Software movers; PRGS reported 3Q revenue and EPS ($153M/$1.18) ahead of consensus ($131M/$0.82) as ARR came in at $444M (25% Y/Y, cc), driven by an improvement in net retention to 101.4% from 100.2% in 2Q and raised FY21 top- and bottom-line outlook ($548-552M/$3.68-3.70) above Street expectations ($533M/$3.48)

·     Hardware, Components & Services; DOCN tgt raised from $70 to $100 at Oppenheimer citing accelerating metrics such as retention and ARPU; valuation and capex spending trends versus competitors and short-term catalyst of the lock-up expiration; NET downgraded to Perform from OP at Oppenheimer saying competition is slowly increasing as the FAANGs (MSFT), also build out edge; and think Street estimates are too high due to CDN price competition; CAMP slips on mixed Q2 (EPS slight beat, sales slight miss) as co notes persistent component shortages in supply chain have limited ability to fully ship against backlog (didn’t give outlook for Q3)

·     Media & Telecom movers; ROKU downgraded to Equal weight from Overweight at Wells Fargo and cuts tgt to $350 from $488 saying combined with a pick-up in competition and high penetration of CTV (Connected TV), they see limited multiple market expansion; ICLK received a preliminary non-binding indicative proposal from PAG Pegasus Fund LP and Oasis Management Company Ltd. for $6.75 per ADS in cash https://bit.ly/3AFUclx ; MDP rises after the WSJ reported that IAC is in advanced talks to acquire the company, which is expected to be valued at more than $2.5B https://on.wsj.com/3u8ClB0 ; RBLX launched Roblox Listening Party, where musicians can premier new albums as part of different experiences available on its online platform; SEC says WPP charged with violating anti-bribery, books and records, internal accounting controls provisions; WPP agrees to pay more than $19M to resolve charges