Mid-Morning Look

Tuesday, March 22, 2022

U.S. stock market momentum continues to the upside, rising for the 5^th time in the last 6-days (with only modest declines on Monday), with zero market fear (VIX down a 6^th straight day) despite surging Treasury yields (10-yr tops 2.36%, 2-yr 2.18%), ongoing uncertainty in the Ukraine/Russia conflict (and its impact on commodity prices), rising inflation, and the Fed getting more aggressive in its interest rate hike stance/outlook after Fed Chairman Powell yesterday said, “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.” Those comments boosted bets the Fed could raise rates by 50 bps in the May meeting. Better-than-feared earnings results from Dow component Nike (NKE) helping retail and discretionary names while tech moves higher as Nasdaq pares YTD losses. The S&P 500 is currently above its 200-day moving averages (4,471 for SPX) after recently topping the 50-day MA, slicing through those levels like butter as markets in full “risk-on” mode without any hesitation. Banking stocks leading today after recent underperformance, with large caps pacing the gains (WFC, BAC). The S&P 500 (SPX) is up nearly 350 points from last Monday’s low (3/14) of 4,161 and Nasdaq nearly a 1,500-point recovery from 3/14 lows of 12,555 in a surge of epic proportions in such a short time frame). In Europe, Ukrainian President Volodymyr Zelenskyy said a meeting Vladimir Putin face-to-face is necessary to negotiate an end to the war, Reuters reported, while he also said is prepared to discuss a commitment from Ukraine not to seek NATO membership in exchange for a ceasefire, the withdrawal of Russian troops and a guarantee of Ukraine’s security. Once a ceasefire is reached, Zelenskyy would be ready to discuss the status of Crimea and the eastern Donbas region held by Russian-backed separatists.

Sector Movers Today

·     Specialty Chemicals: ECL upgraded to Buy from neutral while lower tgt to $196 from $210, SHW upgraded to Buy from Neutral while lower tgt to $296 from $325, and upgraded UNVR to Buy from Underperform at Bank America, but the firm downgraded shares of FMC, LYB and VNTR to Underperform in the chemicals sector as persistent raw material inflation and a shift in interest rate policy has driven a rerating in specialty chemical equities; SON boosted its base Q1 earnings to $1.70-$1.80, from $1.25-$1.35 and expects operating results to be significantly better than previously expected due to strong price/cost recovery

·     Fertilizers, MOS reports January-February Potash sales $604M vs. $295M y/y and reports sales volume 1.05M tons vs. 1.24M tons y/y; in research, Citigroup rank order is NTR, CF and MOS (Neutral) and among Ag chemicals prefer CTVA over FMC. Firm maintains bullish stance on Ag, which we started last year. The Russia-Ukraine conflict has caused fertilizer prices to spike on supply concerns in already tight NPK markets. Urea prices are up ~24% YTD, DAP is up ~33% and Potash is up ~14%. We are raising base-case estimates on fertilizer names on extended high-price environment and stress-test our models for bull/bear scenarios. Grain markets are also tight and high prices should continue to support demand for fertilizers

·     Consumer Staples; in tobacco, MO upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $57 from $48 as sees a better relative risk/reward for the tobacco company relative to PM, which was downgraded to Neutral. Views Altria as an attractive investment in the current risk-off environment as investors become increasingly concerned about stagflation; in staples, PG upgraded to Buy from Hold and raise tgt to $175 from $165 at Truist while KDP downgraded to Hold from Buy with $40 tgt saying thesis is straightforward saying when the coffee systems segment puts up an uneven performance, investors value the stock as a hybrid vs. beverage stocks; FAT reports Q4 EPS ($1.16) vs consensus ($0.29) and revenue $74.2M vs consensus $57.5M and prior year $6.5M as system-wide sales growth +308% y/y

·     Semiconductors; NVDA hosted its 2022 Analyst Day on Tuesday, in conjunction with the company’s GTC conference; Citigroup cut tgts on SWKS to $152 and QRVO to $142 and lowering Mar/Jun-Q estimates below Street on continued China smartphone weakness according to February CAICT monthly data. Moreover, our supply chain discussions indicate Chinese smartphone makers Oppo/Vivo, with high 70% market share in Russia, are cutting orders on lower demand and currency devaluation. World Semiconductor Trade Statistics shows global semiconductor market sales at $556B in 2021 – an increase of 26.2% from 2020, but said Worldwide semiconductor market is expected to increase by only 10.4% in 2022 which corresponds to sales of $613.5B.

Stock GAINERS

·     BABA +12%; increased its share repurchase program to $25 billion from $15 billion

·     KWEB +8%; U.S. listed China stocks rising after Reuters report that China asks U.S.-listed firms for more audit disclosures, while news of an increased stock buyback from BABA has shares higher – Asian markets outperformed overnight as well with Hang Seng up over 3%

·     NKE +4%; beat on the top and bottom line, while reporting progress on supply chain congestion and better than feared trends in key growth region Greater China (to -8% YoY from -24% in F2Q), while North America & Europe were at/above expectations

·     SQ +6%; Mizuho positive- raise PT to $190 from $180 and reiterate Buy saying survey of more than 200 parents with teenage kids found that Cash App is rapidly emerging as a leading financial app for teenagers

·     WFC +5%; as banking stocks outperform on surging Treasury yields, follows recent underperformance due to yield curve inversion (SBNY, BAC, C, rising)

Stock LAGGARDS

·     KO -1%; weakness in defensive consumer staples given surge in broader markets, more momentum-based sectors

·     OKTA -8%; after saying it has found no evidence of continuing malicious activity after hackers circulated images they said were of the company’s internal systems

·     ORIC -12%; downgraded by two analysts (Citi and Opco) following discontinuation of ORIC-101

·     OXY -2%; energy sector underperforms with rotation back into tech, financials, discretionary

·     PFE -2%; as defensive large cap pharma slips – LLY, ABBV

·     UPST -4%; downgraded to Underperform from Neutral at Wedbush and cut tgt to $75 from $110 based on weakening delinquency trends on recent 2021 vintage securitizations that appear to be deteriorating at a faster pace than its 2018, 2019, and 2020 vintages