Mid-Morning Look

Tuesday, June 14, 2022

U.S. stocks try and snap their 4-day losing streak, helped early following slightly “tamer” inflation data (PPI) and positioning ahead of tomorrow’s FOMC rate policy meeting, where expectations have grown to a possible 75-bps hike from the Fed after the latest CPI inflation report last Friday and likely “hawkish” commentary for future rate meetings. The bounce comes after the S&P 500 confirmed it was in a bear market (down 20% from highs), as investors took relief from a smaller-than-expected rise in core producer prices. Dow Transports outperform, up as much as 3%, led by gains in component FDX after saying it will add 3 new directors to its board in an agreement with D.E. Shaw, and hikes its dividend by 53%. Treasury yields take a slight breather after surging yesterday (2-yr jump about 30-bps to 3.35). Commodity prices mixed as oil surges to best levels in 3-months while Natural gas prices plunged after Freeport LNG said its Gulf Coast export facility, one of the largest in the U.S. (and provides about 20% of U.S. LNG processing), will take at least three months to resume partial operations after an explosion last week. The delay from the earlier estimate of a three-week downtime has raised the risk of gas shortages in Europe and led to a 16% drop in U.S. Henry Hub natural gas futures to $7.22 per million British Thermal Units. All eyes on the FOMC tomorrow with rate hike on tap and comments from Fed Chairman Powell afterwards. CNBC noted that the biggest market risks, as per Bank America global fund manager survey, are: 1) hawkish central banks at 32%, global recession at 25%, inflation at 22%, systemic credit event at 9% and the Russia/Ukraine conflict at 6% (a month and a half ago was the biggest concern). Oil prices marching higher again, with brent topping $125 per barrel to highest level since early March.

Economic Data

·     Producer Price Index (PPI) m/m for May rises +0.8%, in-line with est. +0.8% while headline PPI on y/y basis jumps +10.8% vs. est. +10.9%. On a core basis, or ex food & energy, PPI rose +0.5% vs. est. +0.6% m/m and rose +8.3% (which was lowest since Nov ’21) vs. est. +8.6% y/y.

Sector Movers Today

·     Transports; FDX announced a series of long-planned business and corporate governance actions consistent with efforts to drive long-term value creation for all stakeholders, including a dividend increase and new board members; Canadian rails CNI and CP added as catalyst call Buys at Deutsche Bank; for truckers (LSTR ), KeyBanc said their proprietary spot rate index was again below typical seasonal variations last week, while the Market Demand Index continues to move lower, potentially signaling further weakness in coming periods

·     Metals & Materials; DOW files mixed securities shelf; Akzo Nobel (AKZOF) warned on Q2 citing lockdowns in China and weak demand for decorative paints in EU; CC downgraded to Neutral from Buy at Bank America with a price target of $44 down from $48 and downgraded HUN to Underperform and cut tgt to $34 from $45 noting as the demand function slows, they are seeing pricing power top out across most commodity chemicals – this is true for fertilizers, MDI, PVC, TiO2, PE, siloxanes, acrylics, epoxies, etc.

·     Retailers; ANF hosted its investor day today, setting a long-term annual sales goal of $5 billion, with an operating margin rate goal at or above 10%. By 2025, the retailer expects to hit annual revenue of $4.1 billion to $4.3 billion with an operating margin rate at or above 8%; BBY downgraded to Neutral from Buy at Bank America as increasing uncertainty around 2023 earnings makes valuation look incrementally less attractive and upgrade TSCO to Buy from Neutral as expect consumables such as pet and animal feed and home/vehicle maintenance essentials to earn a higher share of wallet among rural consumers; in mattress retailers, Piper said its May Mattress Retailer Survey showed a disappointing decline of -15%, representing a notable y/y deterioration from April at -10%, lowering ests on LEG and SNBR

·     E&P and Majors; CLR announces receipt of “take private” proposal from Hamm family in deal for $70.00 per share/says Board intends to establish a special committee consisting of independent directors of board to consider proposal https://on.mktw.net/3Qk7LPA ; SLCA upgraded from In Line to Outperform at Evercore/ISI with $20 tgt with shares down 27% since their April 30 downgrade; natural gas prices plunged after an incident occurred at the Freeport LNG liquefaction plant on Quintana Island, Texas that resulted in the release of LNG, leading to the formation and ignition of a natural gas vapor cloud, and subsequent fire at the facility

Stock GAINERS

·     BABA +5%; U.S. listed Chinese stocks rising after Axios reported the Biden Administration is leaning toward easing some of Trump China tariffs

·     CLR +14%; announces receipt of “take private” proposal from Hamm family in deal for $70.00 per share/says Board intends to establish a special committee consisting of independent directors of board to consider proposal https://on.mktw.net/3Qk7LPA

·     FDX +13%; said it will add 3 new directors to its board in an agreement with D.E. Shaw following activist push, and hikes its dividend by 53%

·     KAVL +42%; announced it reached an agreement with Philip Morris Products, or PMPSA, a wholly owned affiliate of PM, for the development and distribution of electronic nicotine delivery system

·     ORCL +8%; following quarterly results as 4Q adj EPS $1.54 topped the est. $1.37 on revs $11.8B above est. $11.66B, cloud revs $2.9B – Cloud license and on-premises license revs +18% Y/Y to $2.54B, Hardware revenue fell -2.9% Y/Y to $856M

·     TWI +6%; said it sees FY adj EBITDA $225M-$240M to be “the strongest performance in history” and sees 2Q sales “at or exceeding” 1Q sales, “while margins are expected to be stronger”

Stock LAGGARDS

·     AWK -2%; among leading decliners in utilities, with group broadly lower NRG, AES, PNW

·     COIN -5%; as bitcoin and ethereum hit lowest 18-month lows (Bitcoin overnight low of $20,834), was downgraded to Neutral from OW at JPMorgan, and the company also announced an 18% reduction in workforce (by about 1,100 jobs)

·     OM -30%; halted shipments on its Tablo Hemodialysis System for home use and suspended guidance for the year

·     RRC -5%; tumbles along with other natural gas producers (AR ) after nat gas falls over 16% after Freeport LNG said its Gulf Coast export facility will take at least three months to resume partial operations