Closing Recap

Tuesday, September 27, 2022

Equity Market Recap

·     U.S. stocks slip to near 2-year lows as another stock market rally petered out, led by another spike in Treasury yields as stocks continue to take their cue from the bond market. The S&P 500 extends losses to a 6^th day with no apparent relief in sight as the Fed “stays the course” on higher rates for longer. Several Fed speakers today/yesterday reiterated the hawkish commentary from the FOMC meeting last week when they boosted rates and see higher rates in coming months, with no pivot expected until 2024 according to the dot plots. Major averages are on track for declines of -7% to -9% this month (following a dismal August) with a few days remaining before quarter/month end. A couple of disinflation points worth noting (not that the Fed appears to care): US house prices drop M/M at fastest pace in history, US rents fall for the first time in nearly 2 years (WSJ), Lumber 70% off peak and back to pre-COVID (WSJ), Medicare Part B premiums to fall for 1st time in >10yrs.

·     Mohammed El Erian noted: “as feared, higher yields on US government bonds have eroded what was a 2% bounce in stocks. Serves as a reminder that a stabilization of the Treasury market is likely to be needed to establish a sustainable floor under stocks — all of which keeps the markets’ focus on the Fed.” Meanwhile the 30-year fixed mortgage rate popped above 7% for the first time in over 20-years. Absolute pain across the board with massive sell-off in stocks, bonds, commodity markets (oil, gold), while mortgage rates surge. If the Fed’s goal is for ultimate pain for Americans, they appear to be exceeding expectations. The Fed was too late to start rate hikes, keeping them at record lows for over a decade, and not trying to make up for it.

·     MKM’s Chief Economist Michael Darda said in a note today “as of yesterday’s close, the real interest rate on the five-year TIPS security (a market-determined rate) has surged nearly 400 bps from levels that prevailed late last year, the largest rise over a similar timeframe in the history of the TIPS market dating back to the late 1990s.”

Economic Data:

·     Durables Goods Orders for August fell -0.2% vs. consensus (-0.4%) and vs. July (-0.1%); Durables ex-transportation orders rose +0.2%, in-line with consensus and vs. July +0.2%; Aug Durables ex-defense orders (-0.9%) vs July +0.9 pct (prev +1.1%); Aug Machinery orders +0.3%, electrical equipment +1.0%, defense aircraft/parts +31.2%

·     Home prices are still higher than they were a year ago but continued to cool very quickly in July. Prices nationally rose 15.8% over July 2021, and while that is a wide gain, it was well below the 18.1% gain in the previous month, according to the S&P CoreLogic Case-Shiller Indices. The 10-City composite rose 14.9% year over year, down from 17.4% in June. The 20-City composite gained 16.1%, down from 18.7% in the previous month – CNBC

·     September consumer confidence index 108.0 vs. est. 104.6; consumer confidence index for august revised to 103.6 (previous 103.2)

·     New Home Sales for August rose 28.8% M/M to 685K, well above the 500K estimate and prior 532K; the Median Sale Price (Y/Y) up 8% to $436.8K from previous $439.4K; homes for sale at end of aug 0.461 mln units, vs July 0.459 mln units

Commodities

·     Oil prices rise, with WTI crude +1.79 or 2.33% to settle at $78.50 per barrel (but off highs of $79.51), bouncing from a nine-month low a day earlier, supported by supply curbs in the U.S. Gulf of Mexico ahead of Hurricane Ian. U.S. offshore oil producers said they were keeping an eye on Hurricane Ian’s track as the powerful storm shut-in at least 480K barrels of oil production as it entered the U.S. Gulf of Mexico and barreled toward Florida. Hurricane Ian cuts 11% of offshore oil production due to shut-ins, U.S. Government says and reduces offshore natural gas production by 8.6%. Gold prices edge higher, rising $2.80 to settle at $1,636.20 an ounce, its first gain in 3-sessions but off the morning highs around $1,650 an ounce. The bounce in the US dollar after morning losses pared the precious metal gains.

Currencies & Treasuries

·     Treasury yields rise (again) and stocks give up big gains (again), as equities remain hostage to the bond market. Just astounding stats and moves in bond markets: As per Charlie Bilello, the 10-Year US Treasury bond is on pace for its worst year in history with a loss of -17.4% (that data was before today’s move – so now worse). UK 30-year yields have risen as much as 47 basis points today to 5.01%, the highest since 2002. Yields popped to highs on weak 5-yr auction as the US Treasury sold $44B in 5-year notes at a yield of 4.228%, above the 4.202% when issued prior, as bid-to-cover ratio 2.27, below prior 2.30, as primary dealers take 21.72% of U.S. 5-year notes sale, direct 18.7% and indirect 59.58%. The U.S. Treasury 30-year yield hits 3.84%, highest since January 2014, the 10-year knocking on door of 4% and 2-year rises a 14^th straight day to 4.32%. The U.S. dollar index (DXY) reverses higher, up six days in a row and 9 of the last 11 and back above the 114 level. Bitcoin an aggressive roll this afternoon – falling back below $19K mid-afternoon after trading above $20,300 this morning – another risk asset failing to hold its rally.

Sector News Breakdown

Consumer

·     Retailers: NLS launched a comprehensive review of strategic alternatives, which may include a potential sale of the company, to identify opportunities to accelerate the company’s digital transformation under its previously announced North Star plan and enhance shareholder value; Hugo Boss (BOSSY) downgraded from Buy to Hold at Deutsche Bank saying the positive factors over recent months could wear off or even turn into disadvantages in the near term; Adidas (ADDYY downgrade to Neutral at Goldman Sachs as Adidas will struggle to push through pricing

·     Auto sector: HTZ signed a deal with BP to develop electric vehicle charging network in North America – BP Pulse, BP’s EV charging business, to power and manager HTZ’s charging infrastructure per memorandum of understanding; LCID initiated with an overweight rating and $23 price target at Cantor Fitzgerald; Ford (F) is asking a Georgia court for a new trial, after a jury reached a $1.7 billion verdict against the auto maker last month over a truck rollover accident that left two people dead – WSJ

·     Housing & Building Products: the WSJ reported lumber prices have fallen to their lowest level in more than two years, bringing two-by-fours back to what they cost before the pandemic building boom and pointing to a sharp slowdown in construction. August apartment asking rents nationally dropped -0.1% from July, the first monthly decline in rent since December 2020 – WSJ. Mortgage rates have gone from 3.15% to 6.87% in a year, while home prices are up 20% in a year. A $500k mortgage a year ago at 3.15% was $2148/month, now a $600k mortgage (20% higher) at 6.87% is $3,939/month. That is a 83% higher mortgage than a year ago.

·     Consumer Staples: UNFI Q4 adj EPS $1.27, in-line with consensus as sales rose 8% y/y to $7.27B vs. est. $7.34B; guides 2023 adjusted EPS $4.85-$5.15 vs. estimate $5.07 and sees year revs $29.8B-$30.4B vs. est. $30.11B and sees FY23 adjusted EBITDA $850M-$880M; KDP downgraded from Buy to Neutral at Goldman Sachs and trim tgt to $37 from $39 as see a more balanced risk/reward given our expectation that brewer household penetration starts to normalize

·     Restaurants: Citigroup opens a 90-day negative catalyst watch on MCD, citing valuation and earnings risk form European exposure – said sees increasingly less favorable risk-reward in shares, with FX & macro challenges in Europe looming over EPS estimates heading into 3Q/the winter months; SBUX to open 6,000th door in China 30-Sep; expects to operate 9,000 stores across 300 cities in China by 2025; DPZ tgt cut to $362 from $410 at Cowen and remain sidelined as are increasingly cautious given industry checks suggesting a plateauing of driver staffing levels in 3Q, after slightly improving in 2Q22, and risk that 2023 openings trail 6%-8% LT guidance; CBRL Q4 adj EPS $1.57 on revs $830.4M vs. est. $1.38/$$836.93M and comp sales +6.1%

Energy

·     Energy stock movers: SLCA said its Industrial and Specialty Products business will raise prices by 9% to 20% beginning Nov. 1, to help offset "significant and continuing" cost increases in labor, transportation, materials, and manufacturing; TTE said further efforts would be needed in terms of decarbonization, as it presented its ‘Energy Outlook 2022’ document, and that new oil projects would still be needed until the mid-2030s; KMI announces sale of equity interests in Elba Liquefaction Company to an undisclosed buyer for ~$565M

Financials

·     Bank movers: on merger deal as PFS announced this morning that they are acquiring LBAI for $1.3B in an all-stock transaction valuing LBAI at 1.54x TBV and 11.4x 2022 consensus estimates (8.0x when including cost savings as per KBW); in brokerage, Deutsche Bank said with the Fed rate cycle steeper than their previous published forecasts, are adjusting our EPS and price targets for the Trust Banks, SCHW and HOOD as broadly lower numbers for 2023 below the street, with the exception of SCHW where we are above consensus.

·     Insurance: shares of ALL, PGR, TRV, CB, UVE, AIG, AIZ, UIHC among those active as Hurricane Ian is a category 3 moving over western Cuba located about 5 miles south of the city of Pinar Del Rio Cuba. Ian will then emerge over the southeastern GoM later this morning, pass west of the Florida Keys later today, and approach the west coast of Florida within the hurricane warning area on Wednesday and Wednesday night

·     Bitcoin, FinTech & Payments: FLT announces departure of CFO; appoints Chief Accounting Officer Vickery as interim and reiterates 3Q guidance. Voyager Digital said crypto exchange FTX, whose bailout proposal the bankrupt lender had rejected earlier this year, has won its assets in a $1.42-billion bid at an auction. The FTX bid comprises a fair market value of all Voyager cryptocurrency, at a to-be-determined date, which is pegged at about $1.31 billion at current market prices; shares of names leveraged to the price in Bitcoin COIN, RIOT, MARA, MSTR, SI rose as Bitcoin jumped to breach the closely watched $20,000 level.

Healthcare

·     Pharma movers: MRK’s KEYTRUDA® (pembrolizumab) receives four new approvals in Japan, including in high-risk early-stage triple-negative breast cancer; AQST rises after saying it saw positive topline results from a trial for its allergy drug AQST-109, its treatment for anaphylaxis in competition with Viatris Inc.’s EpiPen; EQ announces positive interim results from EQUALISE study as continues to demonstrate favorable safety and tolerability through 6-months of treatment; VRTX and CRSP announce global exa-cel regulatory submissions for sickle cell disease and beta thalassemia in 2022

·     Biotech movers: OCUL said its experimental medical implant to treat patients with wet age-related macular degeneration was well tolerated with a favorable safety profile in an early-stage study; to initiate a mid-stage study in the experimental treatment in the third quarter of 2023; RNA slides after an FDA partial clinical hold on its Phase ½ MARINA trial of AOC 1001 in adults with myotonic dystrophy type 1, with the hold limiting new participant enrollment though currently enrolled patients may continue in their current dosing; BIIB agreed to pay $900M to resolve allegations that it violated the False Claims Act by causing the submission of false claims to Medicare/Medicaid by paying kickbacks to doctors to induce them to prescribe Biogen drugs

·     MedTech Equipment: Goldman Sachs assesses the 3Q utilization calculus across hospitals, MedTech and managed care saying barring a significant rebound in, this puts risk to Street 3Q volume estimates for all three hospitals, given Street models assume a roughly 2.5-3.5% increase in total admissions Q/Q vs. firms’ analysis pointing to declines of that magnitude.

Industrials & Materials

·     Transports; railroads CSX, NSC downgraded to Neutral from Buy at UBS saying with the macro backdrop deteriorating, Consensus 2023 EPS estimates appear too high for the U.S. rails and we expect downward revisions to industrial-related and intermodal volume assumptions in the near term; in trucking, KeyBanc reiterates Overweight and $135 tgt on CHRW considering current fundamentals along with the potential for further operational efficiencies while remain SW on LSTR given spot exposure (notes spot rates have underperformed seasonality 3Q22 to-date); Ryder (R) shares jumped late day following a Bloomberg report that Apollo is weighing a takeover of the company

·     Metals & Materials: uranium names higher (URA, UUUU, CCJ) after German Economy minister comments – German nuclear power expansion has grown more likely; gold miners modest rebound as prices rise; AVNT lowered its FY22 adj EPS view to $2.70 from $3.50 and lowered its Q3 adj EPS outlook citing impact from the Ukraine conflict and related energy supply concerns that have further eroded consumer sentiment and demand in Europe; MOS and CF shares jumped as Bloomberg noted Hurricane Ian is poised to hit the nation’s production of phosphate fertilizer, threatening supply. Florida is home to Mosaic Co.’s phosphate rock assets, where they mine product, and to facilities where they turn that rock into fertilizers like diammonium phosphate and monoammonium phosphate, commonly known as DAP and MAP

Technology, Media & Telecom

·     Semiconductors: U.S. Vice President Kamala Harris will meet on Wednesday with heads of semiconductor-related businesses in Japan, a senior U.S. administration official said. Harris will address potential investments by Japanese firms in semiconductor manufacturing in the United States, the official also told reporters; Digitimes reported TSM sees major fabless clients scale back orders for 2023 – TSMC has seen its major fabless customers start cutting back wafer starts for 2023, which may prompt the pure-play foundry to revise its sales outlook at an investors conference in January, according to industry sources; for MU, Digitimes reported drops in NAND flash prices will still be significant in 4Q’22, as demand for data centers and enterprise storage starts weakening, w/ the memory prices set to continue falling but at a slower pace in 1H’23

·     Hardware, Software movers: SPLK announced that CFO Jason Child will be leaving the firm in early November to become CFO at privately held semiconductor company Arm – and with that, SPLK did reiterate its F3Q and FY23 outlook; GMRN said its unit Garmin International launches satellite SOS device inReach Messenger for $299.99 – the device allows two-way texting, location sharing, and has SOS capabilities; JBL Q4 core EPS $2.34 tops the $2.14 consensus and revs beat at $9.03B vs. est. $8.39B; announces new $1B share repurchase plan; guides Q1 EPS $2.00-$2.40 vs. est. $2.10 and revs $9B-$9.6B vs. est. $8.93B; SNX Q3 EPS mostly in-line with estimates at $2.74 on revs $15.36B vs. est. $15B and guides Q4 EPS $2.70-$3.10 vs. est. $2.73