Closing Recap

Friday, April 08, 2022

Equity Market Recap

·     Equity indices rallied off pre-market lows but still finished in the red. The S&P 500 rallied to see gains through early afternoon, but couldn’t hold on late in the day, while the NASDAQ never made it to positive territory and generally underperformed. The day was paced by energy names on the upside (S&P energy gained more than 3%) and by semiconductors to the downside (SOX and SMH both fading by about 2%). Financial and materials also rallied to finish with gains, while industrials and materials were generally weaker. The Dow outperformed behind strength in financials GS, JPM energy CVX and Healthcare UNH. Ukraine/Russia, inflation and the Fed aggressive positioning toward higher rates pushed stocks lower this week as Bespoke noted that the odds of 125 basis points of tightening by the June meeting (a combo of a 50-bps hike and 75 bps hike) are up from 18% to 32% over the last week, impacting growth stocks.

·     Stock & Sector movers: GS SCHW RJF DFS banks rebound after falling this week ahead of earnings season start for large cap banks next Thursday; HOOD falls after Goldman Sachs downgrades to Sell; CTRA OXY EOG HAL HES energy stocks pace S&P 500 gains while several utilities making new 52-week highs today CNP D DUK ETR ES VST WEC, as both sectors remain top gainers in 2022, extending gains; MPWR NVDA NXPI AMD KLAC semi stocks fall as Truist lowered tgts and ests in sector saying they learned this week of a sudden negative shift in demand signals; FTCI SHLS lead declines in solar after analyst downgraded following decision by the U.S. Department of Commerce to investigate anti-dumping and countervailing duty circumvention in certain Southeast Asian countries will cause project delays.

Economic Data:

·     Wholesale Inventories MoM for February Actual 2.5% above prior and forecast of 2.1%; Wholesale Sales MoM Actual 1.7% vs. Forecast 0.8% and the prior reading of 4.0%

Commodities

·     WTI crude broke a string of down days, finishing +$2.23 (2.32%) to $98.26 per barrel. WTI gained about $1.50 in the last hour, but still logged its second consecutive down week (-1.2%) as multiple countries announced strategic reserve releases. U.S. natural gas gave back some recent gains, finishing -$0.081 (-1.27%) to $6.278 per MMBtu.

·     Gold added modestly to yesterday’s gains, finishing +$7.80 (+0.4%) to $1,945.60 an ounce despite strength in Treasury yields and the U.S. dollar. Analysts continue to attribute the strength to the metal’s traditional role as an inflation hedge

Currencies & Treasuries

·     The U.S. dollar continued to show strength on the back of recent, more hawkish comments from Federal Reserve board members and rising Treasury yields. In the cryptocurrency arena, Bitcoin swung between gains and losses, ultimately finishing lower, but off the low around $42,571.

·     Treasury yields again saw gains in the 10-year, trading again above 2.7% to the highest level since March 2019. The curve steepened slightly vs the 2-year, as analysts continue to debate whether it’s, “different this time” and recent inversion may be less relevant as a recession indicator

Sector News Breakdown

Consumer

·     Retailers; DBI boosted its FY22 profit outlook to between $1.80-$1.90 from prior $1.75-$1.85 and plans to double sales of its owned brands primarily in its DTC channels by fiscal 2026; PSMT 2Q EPS $1.03 vs est. $1.00 on revs $1.04B vs est. $1.04B, comp net merchandise sales +10.3%; TGT was upgraded to Buy with $300 tgt at Gordon Haskett; auto retailers close out a good week with both AZO and OR:Y posting 10% gains last 5-days

·     Housing & Building Products; Another week of 5-10% declines has left nearly every homebuilder in extreme oversold territory and down 20%+ YTD while a few IBP – are down 40%+ YTD; homebuilders rebounded after the dreadful week while home improvement names also found a bounce after an awful Q1 (LOW, HD, TSCO)

·     Consumer Staples; KR was upgraded to Buy from Neutral at Bank America and CAG downgraded to Neutral from Buy; KR tgt to $75 from $61 as see significant EPS upside drivers: Elevated food inflation should continue: the Finished Consumer Foods PPI, various commodity indices, & even fertilizer prices imply elevated/accelerating; WDFC shares rise after earnings as net sales rose 16% top $130M above ests of $126M while net income rose to $19.5M, prompting an upgraded at Davidson; HSY, KO, GIS hitting 52-week highs today

Energy

·     Energy stock movers; oil prices rebound along with gas prices early, extending the strong week for energy names which paced the rebound in the S&P 500; shares of Dow components CVX and XOM with three-day win streaks helping lead the oil stock advance along with E&P names PXD EOG and services HAL , while nat gas levered names outperform CTRA as natural gas prices closed at highest levels since 2008 this week; 52-week highs for SD, PBR, MPC, HES, AR in the energy complex. US oil-drilling activity shows a significant uptick in the latest week, with the number of active oil-targeted rigs climbing by 13 to a two-year-high 546 rigs, says oilfield services company Baker Hughes

·     E&P and Majors; Mizuho raised its long-term natural gas price forecast to $3.65/mcf from $3.30/ mcf prior driven by a greater expected call on US natural gas exports as Europe seeks to displace Russian gas imports. They believe the U.S. will need to support 2bcfd+ annual export growth longer-term, with persistently high global gas prices providing an opportunity for gas producers able to take on international price exposure.

·     Utilities & Solar; in solar, SHLS downgraded to Neutral from Overweight and tgt cut to $16 from $26 and FTCI downgraded to Neutral from OW and cut tgt to $ from $9 saying the decision by the U.S. Department of Commerce to investigate anti-dumping and countervailing duty circumvention in certain Southeast Asian countries will cause project delays; a tremendous week for defensive utilities, as the XLU hit fresh 52-week highs today above $77 with 52-week highs for CNP, D, DUK, ETR, ES, VST, WEC

Financials

·     Bank movers; a rough week for banks despite rising yields and prospect of surging interest rates; in research, CFR upgraded to Neutral from Underperform, TFC and HBAN downgraded to Neutral from Buy at Bank America; UBS upgraded shares of FRC to Buy from Neutral, with $194 tgt saying the macro outlook has become significantly cloudier over the last month, with investors fretting over a US slowdown at best – says this is the type of environment where FRC can outperform. UBS also downgraded shares of USB to neutral from Buy and cut tgt to $56 from $64 saying a fast-moving Fed is not necessarily a positive for USB, as 15% of its deposits are custody — which can be quite sensitive to rising rates

·     Brokers, Investment sector: HOOD downgraded to sell from neutral at Goldman Sachs, saying softening retail engagement levels and profitability concerns will likely limit any outperformance; cuts the price tgt to $13 from $15; VRTS downgraded to Underweight (from Overweight) at Morgan Stanley and cut tgt to $240 as see deteriorating fund performance that could further weigh on the flows outlook, leading them to cut EBITDA forecast by 25%

·     Consumer Finance; ahead of earnings season start next week, Credit Suisse with auto Lending Q1 Preview as reduce ALLY Q1 estimate modestly due to our expectation for slightly higher opex, but continue to expect strong originations, origination yields, credit and capital return; firm maintained estimates at CACC but reduce tgt from $460 to $440 to account for a decline in the market multiple; in mortgage lending/services, Wedbush cut estimates for 1Q22, 2022, and 2023 for most of mortgage companies under coverage, given all of the headwind as primary-secondary spreads continue to narrow, rates are up significantly, capacity/competition has yet to abate, and estimates of expected volumes for 2022 continue to fall – said one positive remains servicing (COOP, NRZ), which should continue to see increasing profitability throughout the year

Healthcare

·     Pharma movers; big week for healthcare names with strong gains this week LLY, BMY, CNC, ANTM, UNH, ABBV, PFE; GMAB said an arbitral tribunal has ruled in favor of JNJ’s Janssen Biotech in both matters related to royalty payments under their license agreement related to cancer drug daratumumab; KLDO tumbles as the company says its board has voted to wind down immediately and cease all operations

·     Biotech movers; BIIB with neg news as CMS, in its final coverage decision limited Aduhelm coverage to clinical trials, although it slightly relaxed requirements for types of covered trials. This will leave Aduhelm’s coverage limited to patients in 1,000s range, thereby significantly limiting its potential; BCRX pauses enrollment in bcx9930 clinical trials – patients currently enrolled in trials are continuing study drug at this time

·     Healthcare services & MedTech Equipment; QDEL guides Q1 revs $990M-$1.0B vs. est. $817.3M or growth of 164% to 166% from the first quarter 2021 revenue of $375.M; Mizuho lowers its Q1 revenue estimates for contract research organizations IQV and ICLR to reflect headwinds from forex and Ukraine/Russia conflict, but said HMOs and managed care names (CI ) are set to report strong Q1 profits, based on its survey of 208 physicians

Industrials & Materials

·     Aerospace & Defense; MRCY downgraded to Hold from Buy to reflect a less favorable risk-reward balance after 30% rally in shares; BA shares slipped early after reports that a Boeing 757 cargo jet broke in half while landing; EADSY reported 63 deliveries in March, down around 12.5% Y/Y from 72 deliveries in March 2021.

·     Industrial & Machinery; DOV downgraded to EW from OW at Barclays’ and cut tgt to $160 from $190 saying if the company’s orders decelerate, the stock’s outperformance versus peers will compress given the disconnect in multiples that has emerged; APOG downgraded to Hold from Buy at Hallum citing valuation along with current headwinds and uncertainty as to the potential impact of higher interest rates on projects; ITT was upgraded to Buy at UBS saying the recent correction (-22% YTD underperform vs. XLI) provides an attractive entry point

·     Transports; the Dow Transport Index snapped its 6-day losing streak yesterday; Bank America downgraded several names in sector given deteriorating demand outlooks and rapidly falling freight rates, as cuts: UPS to Neutral from Buy, Railroads UNP and CP to Neutral from Buy, Truckload/Intermodal carriers SNDR to Underperform from Buy, and WERN to Underperform from Neutral, Less-than-Truckload carriers SAIA, TFII, and ARCB to Neutral from Buy, and container lessor RTN to Underperform from Buy; CHRW upgraded to Overweight from Neutral at JPMorgan; in airlines, SAVE said it would engage in discussions with JBLU over its $3.6 billion cash offer for the ultra-low-cost airline ($33 per share)

·     Metals & Materials; AA downgraded to Neutral from Outperform at Credit Suisse while raise tgt to $82 from $68 as believes London Metal Exchange aluminum prices are near peak and says Alcoa continues to deal with inflationary pressures; palladium (PALL) rises as London platinum and palladium market says suspends Russian refineries from its good delivery lists; In the packaging sector, Citigroup lowered tgts and estimates for group AVY, BLL, BERY, CCK, GPK, IP, OI, PTVE, SEE, SLGN, ahead of earnings season as expects the results to be generally OK, but says weaker consumer sentiment, sharper than expected inflation, and uncertainty around Europe/China have the potential to put fiscal guides at risk; palladium names rise as London platinum and palladium market says suspends Russian refineries from its good delivery lists

Technology, Media & Telecom

·     Semiconductors; Truist lowered tgts and ests in sector saying they learned this week of a sudden negative shift in demand signals from a wide swath of compute, consumer, and communications OEMs to at least some of their semi suppliers – lowered ests/tgt for ON ; TSM March sales were NT$171.9B, up 17% M/M and 33% Y/Y (vs. February’s NT$146.9B) which represented 35% of Q1 revenues for TSMC versus typical linearity of ~37% said Wedbush; UMC March sales lifted 6% M/M to NT$22.14B; IMOS consolidated revenue increased 4% Y/Y to NT$6.752B or $235M in Q1; revenue for March rose 0.5% Y/Y and 12.3% M/M to NT$2.355B or $82.3M; SIMO said it expects its Q1 revenue to be "slightly above" the high end of its previous guidance of between $225M-$238M; ACMR said now sees Q1 revenue expected to be significantly below previous internal plan as subsequent lockdown of Pudong region has impacted operation of Chuansha production facility

·     Software movers; CRWD hosted an Investor Briefing including product demos and several discussion topics e.g. an FY26 ARR Target of 5B and a potential FY25 TAM of 126B; TEAM investor meeting viewed positive by analysts saying co presented a series of data points that underscore solid business momentum and guidance for ~50% cloud revenue growth in both FY23 and FY24 was much stronger than expected; APPF upgraded to Overweight with $143 tgt at KeyBanc given incrementally positive views of property rental markets and alleviated competitive concerns

·     Hardware, Components & Services; HPQ was downgraded to neutral at UBS given the confluence of factors including incremental signs of softness in low-end Consumer PCs following recent checks over the past month along with the likelihood of a slower buyback next year; RXT downgraded to Perform at Oppenheimer and cut ests and tgt to $18 saying prior positive stance was based on RXT’s pure-play cloud focus, but it is increasingly clear that reselling AWS/cloud is low margin