Mid-Morning Look

Tuesday, September 28, 2021

A brutal day for stock markets, with the Nasdaq down over 2% with tech among the worst performers as Treasury yields hit their highest levels in months (10-yr topped 1.56%). The S&P, Dow and Russell 2000 also falling sharply with energy stocks one of the few bright spots as oil prices extend gains on rising demand and softer supply. Another market concerns remain the U.S. Treasury is likely to run out of cash if Congress doesn’t raise or suspend the debt limit by Oct. 18, Treasury Secretary Janet Yellen said in a letter to Congress. At that point, we expect Treasury would be left with very limited resources that would be depleted quickly, she said. It is uncertain whether we could continue to meet all the nation’s commitments after that date. Meanwhile, fear that inflation expectations on both sides of the Atlantic soared on anxiety over when central banks might raise interest rates. Recall U.S. Federal Reserve policymakers last week projected policymakers are ready to raise rates in 2022 and that the bank is likely to begin reducing its monthly bond purchases as soon as November. U.S. Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen testify at a congress hearing today. Economic data today also disappoints with a miss in consumer confidence and manufacturing. Not too many places to hide today with bonds and stocks both lower and precious metals remain weak amid the rising buck/yields.

Economic Data

·     Consumer Confidence index 109.3 below consensus 114.5 vs. August revised 115.2 (previous 113.8); the present situation index at 143.4 in Sept vs. Aug revised 148.9 (previous 147.3) and the expectations index 86.6 in Sept vs. Aug revised 92.8 (previous 91.4)

·     Advance Goods Trade Balance for August deficit -$86.4B (vs. est. -$87.3B and previous -$86.4B; Wholesale Inventories (M/M) Aug P: 1.2% vs. est. +0.8% and prior +0.6%); Retail Inventories (M/M) for Aug +0.1% vs. est. +0.5% and prior +0.4%

·     Richmond Fed composite manufacturing index -3 in sept vs +9 in August and the shipments index -1 in sept vs +6 in August

·     July S&P CoreLogic Case-Shiller HPI Composite: -20 was +1.5% M/M vs. +1.6% consensus, +1.8% prior; HPI Composite -20 was +1.5% M/M vs +2.0% prior and HPI Composite: -20 was +19.9% Y/Y vs. +19.7% consensus, +19.1%

Sector Movers Today

·     Retailers; CHWY upgraded to outperform from peer perform at Wolfe Research saying the decline in net new customer additions through 2021 should reverse in 2022 with expectations for strong growth ahead; ETSY reiterated Buy and tgt raised to $245 from $220 at Loop Capital and slightly increasing GMS this quarter and increasing the long-term GMS growth rate based on management’s recent comments on TAM and trends at competitor conferences; Macy’s (M) upgraded from Hold to Buy with $33 tgt at Gordon Haskett; DBGI announces $37.5M-$42.5M for 2022 revenue guidance, an increase of 350% from 2021; PRPL downgraded t Hold from Buy at Hallum in mattress sector as believe near term expectations are too high

·     Bank movers; sector has been an outperformer amid rising Treasury yields the last week (comes into today with yields up 5-straight days) after hawkish FOMC outlook last week; Morgan Stanley downgraded WFC to EW as they are delaying their base case asset cap removal from 3Q22 to 4Q23 following new OCC consent order, recent Powell comments that the cap “will stay in place until the firm has comprehensively fixed its problems,” and a tougher expense outlook, though they say rate hikes provide a partial offset; Berenberg downgraded MS to Hold as they see the stock fairly valued after re-rating to 14x 2022E earnings, doubling its dividend and increasing its buyback since their upgrade in April; Into Q3 earnings, JPMorgan says this is an ideal time to be overweight regional banks as the rate, credit, and growth outlooks are poised to improve with the stocks also trading at a very cheap valuation vs pre-pandemic, and they prefer to pay up for loan growth leaders (FRC, SIVB, SBNY, MCB, PNGP are top picks, HBAN, BKU, FHN included in their small hope trade basket), and separately said yesterday’s selloff in WFC was overdone as the issue had been disclosed for years and was settled for a small amount, though political risk remains; The Wall Street Journal reported bank mergers are on pace to hit their highest level since the financial crisis with more than $54B in deals already announced this year

·     REITs; MGP downgraded to EW from OW in triple-net REITs at KeyBanc and updating estimates for several net lease & gaming REITs in coverage (EPR, GLPI, GTY, MGP, NTST, STOR, VICI) universe primarily to account for 2Q21 earnings; MITT upgraded to Market Outperform at JMP Securities saying with the complete exit from pre-COVID-19 commercial investments now complete, MITT is a pure-play residential credit investment strategy, which is the sector of the market we remain the most bullish on with best peers including CIM, EFC, MFA, and RWT; Truist self-storage monthly survey => September 2021, showed net rents increased +26.8% (+23.5% street rates, promotions -3.3%), which is which is lower than the prior 3 months’ average of +43.1% net rents as easier comps burn off; Loop said MGM’s $5.65B purchase of The Cosmopolitan from BX has positive read-throughs for gaming REITs VICI and GLPI as they expect them to re-rate higher as the cap rate in the deal is the lowest on record for a casino real estate transaction, and for CZR who is expected to sell one of its Las Vegas Strip assets next year as this deal has a relatively rich trailing EBITDA multiple

Stock GAINERS

·     EDR +2%; to acquire OpenBet, a leading content, platform, and service provider to the sports betting industry, from SGMS for $1.2 billion

·     F +2%; unveiled plans to team with South Korean battery maker SK Innovation to spend $11.4B to build an electric F-150 assembly plant and three battery plants in the U.S

·     GOGO +19%; now expects revenue growth at a CAGR of ~15% from 2020 to 2025 vs. a prior target of at least 10% and targets annual adj EBITDA margin rising from 40% in 2021 to 45% in 2025 vs. prior view 35%-40%

·     HUN +6%; as Starboard Value disclosed a 8.4% activist stake in Huntsman, which represents over 18.6M shares in a 13D filing last night

·     SLB +2%; energy stocks among best performers again as oil prices extend gains

·     SNOA +36%; said it launched its over the counter Regenacyn Advanced Scar Gel and Ocucyn Eyelid & Eyelash Cleanser on Amazon.com

·     THO +8%; Q4 profit topped views (EPS $4.12 vs. est. $2.92) on better sales $3.59B and posting YoY sales gains as demand for recreational vehicles remand strong and said FY ended with inventories down 44% on a two-year basis

·     UNFI +18%; reported net sales of $6.74B below est. $6.85B, generating adjusted EBITDA of $203mn above est. $173mn and better EPS of $1.18 (est. $0.80) while forecast FY22 adjusted EPS of $3.90-$4.20 (above rest. $3.38) on sales of $27.8B-$28.3B (est. $27.8B)

Stock LAGGARDS

·     ALT -25%; after the company released results from its 12-week phase 1 clinical trial for pemvidutide, formerly known as ALT-801 for weight loss

·     KL -6%; AEM and Kirkland Lake Gold Ltd. (KL) entered into an agreement to combine in a merger of equals, as Kirkland Lake Gold shareholders will receive 0.7935 of an Agnico Eagle common share for each Kirkland Lake Gold common share held

·     MRNA 7%; as vaccine related names pressured, shares breakdown technically

·     SNX -9%; posted a decline in Q3 revenue for its legacy SYNNEX Corp. business, the last earnings period before its merger with Tech Data Corp. while Q3 EPS topped views (sales $5.21B below $5.31B YoY and below est. $5.32b)

·     TER, AMAT -5%; weakness in semiconductors overall as growth related sectors slide amid the recent uptick in treasury yields (note the Philly semi-index – SOX – came into the day about 1% off its all-time highs)