Mid-Morning Look

Thursday, September 22, 2022

U.S. stocks on track for another sharp decline after the Fed’s call on rates yesterday “higher for longer” was much hawkish then even some of the most aggressive outlooks on the Street (including dot plot showing no rate cuts until 2024), catching markets by surprise and raising fears the June lows could be seen soon (just 3% away for S&P). Surging Treasury yields also weighing heavily on growth related companies as the 10-year treasury yields rises 15 bps to 3.66%, highest since 2011 and the 2-yr up 12 bps to 4.11%. The Fed outlook is raising the probability of an economic recession (if we aren’t already in one), which likely requires further earnings discounting. Several companies have warned of the global slowdown and impact of inflation in recent weeks in technology, industrials, materials, retail, and staples sector, lowering guidance. Sentiment is overly bearish as Bespoke noted AAII‘s Bearish Sentiment reading crossed above 60% this week for only the 5th time in its history since 1987. The last time it happened was March 5th, 2009 (note this is usually a contrarian indicator). September to October is historically one of the weakest periods for stocks, fulfilling that view again this year. Will markets partially recover heading into the mid-term election in November? Or will we see further lows as the Fed appears on a path to get inflation down, no matter the cost or pain as Fed Chairman Powell has stated in recent comments. There were also a ton of other central bank actions today overseas (SNB, BOE, among those raising rates) as the macro picture completely dominates market actions

Economic Data

·     Weekly Jobless Claims rose to 213K in latest week vs. est. 218K and prior week revised to 208K from 213K; the 4-week moving avg fell to 216,750 from 222,750 prior; continued claims fell to 1.379M from 1.401M and the US insured unemployment rate unchanged at 1%

·     U.S. Q2 current account balance (-$251.1B) vs consensus (-$260.6B) and vs q1 balance (-$282.5B)

·     August leading indicators down 0.3% vs. last month, consensus 0.0%

Sector Movers Today

·     Bank movers: HOOD VIRT, SCHW all rise after Bloomberg reported the SEC is poised to let Wall Street keep payment-for-order-flow deals; for regional banks, Wells Fargo noted following the Feds 75bp rate hike, their confidence increases that NII should show the fastest growth in 4+ decades, as favors PNC, RF, and FITB in regionals (and BAC in large cap); DB shares rise early after mixed CFO comments; CS is considering plans to resurrect a “bad bank” to hold risky assets, as it seeks a turnaround from losses and scandals, the Financial Times reported.

·     Housing & Building Products: earnings in homebuilders as both noted steep drops in demand, traffic etc. as rates rise and the macro environment softens 1) KBH Q3 EPS was $2.86, above $2.67 while FQ4 guide components indicate a miss vs consensus across metrics as implied EPS is roughly $3.00 vs $3.66 consensus; LEN Q3 EPS $5.03 vs. est. $4.88; Q3 revs rose 29% y/y to $8.9B vs. est. $9.0B while new orders decreased 12% to 14,366 homes, with a new order value of $6.7 billion, down 11%.

·     Chemicals: FUL reported F3Q22 adjusted EBITDA of $138M, above Street at $136M, revenues of $941M were also ahead of estimate, with 18.4% organic growth, effectively all from price (up 18.7%) with volumes relatively flat (down 0.3%) on cooling demand; it has been a rough two-weeks for chemical names with CC, DOW, EMN, HUN and OLN all cutting their outlooks citing headwinds from a softer European and Asian macro backdrop

·     Software movers; CRM sets FY26 revenue target of $50 bln at Dreamforce investor day on Wednesday; aims 17% compound annual growth rate; Ubisoft (UBSFY) downgraded from Buy to Hold, at Stifel to reflect a combination of factors, including what they view as overly ambitious FY2023 guidance, execution risk around the company’s slate over the intermediate/longer-term, and reduced expectations for a takeout scenario; in video games overall, Stifel said see 2022 as a down year for the global industry, including a -6% decline in the U.S.; UPWK reaffirming Q3 2022 guidance previously announced on July 27, 2022 after announces CFO transition plan

Stock GAINERS

·     CRM +2%; sets FY26 revenue target of $50 bln at Dreamforce investor day on Wednesday; aims 17% compound annual growth rate

·     HOOD +2%; along with gains in VIRT, SCHW after Bloomberg reported the SEC is poised to let Wall Street keep payment-for-order-flow deals

·     LEN +3%; Q3 EPS $5.03 vs. est. $4.88; Q3 revs rose 29% y/y to $8.9B vs. est. $9.0B while new orders decreased 12% to 14,366 homes, with a new order value of $6.7 billion, down 11%.

·     LLY +3%; upgraded to Buy from Neutral at UBS with a price target of $363, up from $335 as now views Eli Lilly as the most attractive name in large cap pharma

·     RCL +1%; after saying demand remains strong, bookings outpacing 2019

·     TCOM +5%; posted a strong set of 2Q22 results with a better-than-expected outlook for 3Q22

Stock LAGGARDS

·     AA -3%; falling to 52-week lows after downgraded to Peer Perform at Wolfe and cut 2022E/23E aluminum forecast on challenges that led to a global surplus rather than deficits

·     CZR -4%; leisure and discretionary names again seeing broad weakness on rising recession concerns and higher interest rates as it cuts into spending for consumers (LYV, EXPE)

·     DBVT -9%; disclosed that the FDA has placed a partial clinical hold on its Phase 3 VITESSE clinical study of Viaskin Peanut

·     DRI -4%; on mixed results as EPS in-line, revs miss, and comp sales disappoint; Q1 comparable sales +4.2% vs. estimate +5.16% as Olive Garden comps +2.3% misses +5.5% est. and LongHorn comps sales +4.2% vs. +4.84% est.

·     FDS -7%; Q4 EPS of $3.13 missed the $3.20 estimate though revs topped views, and guided FY23 $14.50-$14.90, with the mid-point missing the $14.76 estimate but revs above views

·     NVAX -9%; downgraded to Underweight from Neutral at JPMorgan and slash tgt to $27 from $132 with revised longer-term outlook for Nuvaxovid demand and related revenue, as well as development prospects of the pipeline

·     SCS -7%; slides on mixed qtr and lower guidance as 2Q adj EPS $0.21 vs est. $0.13 on revs $863.3Mm vs est. $882.75Mm; guides 3Q adj EPS $0.17-0.21 vs est. $0.23 with revs $825-850Mm vs est. $856.7Mm

·     SQ -5%; downgraded to Neutral from Buy at Mizuho and slash tgt to $57 from $125 as believe user fatigue, plateauing inflows, loss of the best-of-breed POS status, and BNPL mis-execution are blocking SQ’s growth