Mid-Morning Look

Monday, August 15, 2022

U.S. stocks open lower amid concerns over an economic slowdown in China following weak data overnight, ramped up tensions with the country as well after five U.S. lawmakers, led by Senator Ed Markey, arrived in Taipei on an unannounced visit late on Sunday and a sign of manufacturing weakness in the U.S. economy. Stocks quickly pared losses as momentum remains clearly to the upside. China overnight showed China’s retail sales grew by 2.7% in July from a year ago—well below the 5% growth forecast and down from growth of 3.1% in June and the PBoC also cut its one-year lending facility rate by 10 bps to 2.75% and cut the seven-day lending rate the same amount to 2%. Tech was an early leader while energy and material related stocks pressured the S&P 500 following a sharp decline in oil prices (fell over 5% to 6-month lows) after the weaker China data hit commodity prices. Retailers in focus this week with earnings expected from WMT, TGT, LOW, HD, KSS, and several others. Economic data showed the Federal Reserve Bank of New York’s Empire State business conditions index, a gauge of the state’s manufacturing activity, plunged into negative territory, posting its 2^nd worst reading of all-time. Treasury yields fall, along with precious metals while the dollar rises. U.S. stocks are trying to build on gains after stocks booked gains last week, with the S&P 500 and Nasdaq notching their longest weekly win streak since November 2021 (4-weeks).

Economic Data

·     U.S. Manufacturing data weak as NY Fed’s empire state current business conditions index -31.3 in August (second-largest monthly decline in the index on record) vs +11.1 in July and vs. an expected +5.0 reading by economists. New orders index -29.6 in August vs +6.2 in July, prices paid index +55.5 (lowest level in a year) in August vs +64.3 in July, employment index at +7.4 in August vs +18.0 in July and six-month business conditions index +2.1 in August vs -6.2 July

·     U.S. August NAHB Housing market index 49 versus 55 in July; August index of current single-family home sales 57 versus 64 in July; index of home sales over next six months 47 versus 49 in July; NAHB August index of prospective buyers 32 versus 37 in July

Sector Movers Today

·     Auto sector; TSLA has produced over 3 million cars to date, with 1 million of them made in its Shanghai factory as CEO Elon Musk said “production is a much bigger challenge than demand” for the EV maker; LI Q2 EPS loss (-$0.05) vs. est. loss (-$0.06); revenue grew 73.3% to RMB8.73 ($1.30 billion), but missed consensus of $9.49 billion and sees total revenue of RMB8.96 billion to RMB9.56 billion, vs. RMB14.26 billion consensus; VRM and SFT both downgraded to Underweight from Neutral at JPMorgan, turning bearish on the online auto buying platforms, citing an expected continued challenging backdrop for the used car industry.

·     Retailers; big week coming up for retail earnings with WMT, TGT, HD, LOW, and KSS among those expected to report; DG downgraded to Market Perform at DMO Capital (ahead of earnings) as believe valuation is close to peak levels on recessionary comps; AEO mentioned positively in Barron’s saying shares are trading at a third of their all-time high reached in April 2021, but the company could be in a better position by the holidays as logistics headwinds ease; WEBR reported Q3 earnings loss vs. profit y/y and sales fell to $527.9M from $668.9M y/y which was mostly in-line with estimates and suspends its dividend

·     Consumer Finance: monthly credit card data out as COF reported charge-offs for July of 2.36% vs. 1.45% y/y; Charge-offs 2.36% vs. 1.45% y/y; Delinquencies 2.56% vs. 1.71% y/y; DFS credit card delinquency rate 1.05% at July end vs 1.03% at June end; credit card charge-off rate 1.16% at July end vs 1.19% at June end; JPM charge-offs for July of 1.02% and delinquencies 0.66%; SYF July net charge-offs 2.51% vs. 2.09% m/m and delinquencies 1.6% vs. 1.6% m/m

·     Metals & Materials; TRQ rejected an offer by majority shareholder RIO to buy the 49% stake it doesn’t already own for $2.7 billion, as it did not reflect the Canadian company’s full and fair value; in containerboard (IP, PKG, WRK) KeyBanc noted the market is under increasing pressure, and the softwood pulp market is starting to come under pressure as well as supply chains are normalizing, and Chinese demand remains poor; in gas space, APD upgraded to Outperform at BMO Capital on accelerating H2 growth, improved execution & defensive ops

Stock GAINERS

·     ILMN +7%; rebounds after weak guidance crushed shares last Friday

·     IS +15%; Unity Software (U) said it won’t accept APP’s merger proposal now that its board of directors has completed a thorough financial and strategic evaluation and instead voted in favor of Unity’s planned deal to buy IS for $4.4 billion https://bit.ly/3QGDji8

·     MRNA +4%; as UK MHRA approves a booster dose of its COVID-19 vaccine that is tailored to target the Omicron variant, the first such approval ever

·     TISI +51%; after results and agreed to sell its energy tech unit Quest Integrity to oilfield services firm BKR for $280 mln in cash

·     VRDN +63%; as reports positive initial data from an early-stage trial of its antibody candidate, VRDN-001, in patients with active thyroid eye disease

·     WEBR +12%; despite reported Q3 earnings loss vs. profit y/y and sales fell to $527.9M from $668.9M y/y which was mostly in-line with estimates and suspends its dividend

Stock LAGGARDS

·     DVN -4%; broad weakness in energy stocks (APA, MRO, HAL, HES) with oil prices tumbling to 6-month lows below $87 per barrel

·     LI -2%; Q2 EPS loss (-$0.05) vs. est. loss (-$0.06); revenue grew 73.3% to RMB8.73 ($1.30 billion) but missed consensus of $9.49 billion and sees total revenue of RMB8.96 billion to RMB9.56 billion, vs. RMB14.26 billion consensus

·     ROOT -5%; as its 1 for 18 reverse stock split takes effect

·     TRQ -11%; rejected an offer by majority shareholder RIO to buy the 49% stake it doesn’t already own for $2.7 billion, as it did not reflect the Canadian company’s full and fair value

·     U -7%; after rejected APP $58.85 per share takeover offer

·     VRM -10%; and SFT both downgraded to Underweight from Neutral at JPMorgan, turning bearish on the online auto buying platforms