Closing Recap

Tuesday, April 12, 2022

Equity Market Recap

·     Stocks end lower after a “rug pull” on Bulls, as a strong start to the trading day evaporated quickly in the afternoon with major averages sliding back below key technical levels amid surging energy prices and rising inflation concerns. Rising tensions and no signs of peace between Ukraine and Russia pushed oil prices along with other commodity names higher on fears of more supply disruption (leading to high prices for consumers), boosting energy stocks. Growth stocks tumbled off earlier highs as technology shares reversed, while consumer staples saw strength (HSY KO MO). The unofficial start to earnings season is upon us with JPM earnings tomorrow and then Citi, GS, MS, PNC, USB and WFC on Thursday ahead of the 3-day holiday weekend. After choppiness early in the day, markets trended lower throughout the day finishing near the lows.

·     U.S. stocks opened sharply higher, pulled back off their best levels as the S&P held in the middle of its 200-day MA resistance (4,487) and 50-day MA support (4,419) before finally failing early afternoon to take out overnight lows (4,382.50). Many newswires/media reported noted that stocks jumped initially as inflation data was in-line with forecasts, possibly indicating that inflation was peaking. However, despite prices hitting a new 40-year high (CPI 8.4% in March), its was the 8^th straight monthly increase (last 8 months: Aug: 5.3%, Sept: 5.4%, Oct: 6.2%, Nov: 6.8%, Dec: 7%, Jan: 7.5%, Feb: 7.9%, Mar: 8.4%) and even if it is a peak, prices are likely to remain stubbornly high for some time. It appears that sunk into investors late day as stocks bled lower.

·     Stock & Sector movers: Energy, coal, gold, defense, and commodities rally as Ukraine fears renewed after Russian President Putin said peace talks with Kyiv had have reached a "dead end," as Moscow’s forces bombarded Ukrainian military/residential areas; BTU ARCH OXY GOLD RTX among gainers; ENSG, WELL, CTRE, OHI, SBRA -healthcare REITs, Skilled Nursing Homes stocks pressured after the federal government on Monday proposed its payment rate update to nursing home reimbursements for fiscal 2023, which includes a 4.6% cut related to the Patient-Driven Payment Model; in earnings, grocer ACI slides following lower outlook and weaker margins for qtr; auto retailer KMX posts earnings results and comp sales that missed consensus; LULU rises in retail on positive analyst comments ahead of investor day next week; KSS rises on new bidder; luxury stocks bounce RL CPRI after better results from LVMUY comps; CSCO downgraded by one analyst, while another lowered rating on HPE FFIV and NTAP in Hardware, Networking sector.

·     Fed Brainard comments took markets lower early afternoon (got the mkt ball rolling) saying: Fed goal is to bring inflation down to 2% over time while sustaining recovery; very high current inflation a result of a series of shocks related to pandemic and Russia/Ukraine supply shocks; Fed working to bring demand into balance; in a period of very high uncertainty, looking to month-to-month data in core inflation; very difficult to predict how long it may take to reach 2% goal given pandemic and Russia/Ukraine uncertainty.

Economic Data:

·     March Consumer Price Index (CPI) core (ex food & energy) reported at +0.3% below est. +0.5% and on a y/y basis, rose +6.5% vs. est. +6.5%; the headline CPI for March rose +1.2% (biggest monthly gain since Sept 2005), in-line with estimates while on a y/y basis, rose +8.5% vs. est. +8.4%; March real earnings all private workers -1.1% vs Feb -0.4%. Consumer price increases over last year: Gas: +48.0%, Used Cars: +35.3%, Gas Utilities: +21.6%, Meats/Fish/Eggs: +13.7%, New Cars: +12.5%, Electricity: +11.1%, Food at home: +10%, Overall CPI: +8.5%.

·     The U.S. government posted a $193 billion budget deficit in March, less than a third of the $660 billion gap a year earlier, the Treasury Department said, as COVID-19 relief outlays fell sharply, and tax receipts surged to record levels. The Treasury said March outlays were $508 billion, down 45% from March 2021, while receipts jumped 18% to $315 billion, a new March record.

Commodities, Currencies & Treasuries

·     Oil was one of the few places to hide today, with WTI crude jumping $6.31 or 6.69% to $100.60 per barrel, its highest level in a week, and erasing the 4% loss on Monday. Reports that China is beginning to lift some of their lockdowns, and a breakdown in negotiations between Russia and Ukraine appearing to have hit a dead end was enough to push prices higher. Separately, OPEC cut its forecast for growth in world oil demand in 2022 citing the impact of Russia’s invasion of Ukraine, rising inflation, and the resurgence of the Omicron coronavirus variant in China. Natural gas prices end 0.6% higher at $6.680 per mln Btu, highest since late 2008 and now up by more than 50% since the end of February amid supply fears due to Russia production.

·     Gold prices rise $27.90 or 1.4% to settle at $1,976.10 an ounce, its highest closing level in about a month as investors rotate further into the precious metal as inflation hedge. The U.S. dollar was on track to snap its 8-day win streak, but a late day rally in the buck pushed prices to fresh 2-year highs against most rival currencies on surging inflation concerns.

·     Treasury yields hit multi-year highs to start the day but faded off those best levels (10-yr hit overnight high of 2.835% before sliding below 2.7% after CPI inflation data). The U.S. Treasury sold $34B in 10-year notes at a yield of 2.72% vs. 2.69% when issued prior with a bid-to-cover at 2.43 and indirect bidders awarded 64.33% and directs 17%.

Sector News Breakdown

Consumer

·     Retailers; KSS shares jumped after Reuters reported FRG entered the race for KSS with a $9 billion indicative offer, saying it would be willing to pay $69 per share (which is still not the highest offer as Hudson’s Bay Company has indicated it is willing to pay at least $70 per share; Cowen said they view the April 20 LULU Investor day as a positive catalyst with expectations for an expanding TAM and above consensus multi-year guidance; luxury retailers active (RL ) after LVMUY reports earnings as fashion & leather goods organic sales +30%, vs. est. +23%

·     Auto sector; auto retailer KMX shares declined after Q4 EPS of $0.98 missed the $1.32 estimate while sales of $7.69B topped views (est. $7.41B) and said retail sales volume dropped 5.2% year over year and same-store sales in the fiscal fourth quarter fell 6.5%; in research, DAN downgraded to Equal Weight at Wells Fargo and upgraded APTV to Equal Weight saying inflation headwinds and the hawkish Federal Reserve have raised recession concerns; Jefferies said they favor both Buy-rated Aftermarket retailers ORLY and AZO as high used car values and increasing avg. vehicle age support parts and service demand, driving volumes

·     Consumer Staples; grocer ACI Q4 EPS $0.75 beats $0.65 est. on better comp sales of +7.5% vs. est. +4.7% and sales rose to $1.74B from $15.8B y/y (margins did slip to 28.7%), but guided year EPS $2.70-$2.85, below est. $2.95; in food research, Credit Suisse downgraded INGR to Neutral to take into account higher risk to margins on the horizon from rising corn input costs and slow progress on the company’s pea protein platform and cut UTZ to Neutral from Outperform saying it has yet to develop sufficient pricing power with customers or productivity programs to cushion itself from a hyperinflationary environment; POST reports avian influenza at a Co. Owned facility

·     Restaurants; at Citigroup DPZ upgraded to Buy from Neutral, but downgraded QSR to Neutral from Buy with $64 tgt, DNUT downgraded to Neutral from Buy with $16 tgt and SBUX downgraded to Neutral from Buy with $91 tgt and says more cautious on Neutral-rated MCD and SBUX in the near-term as do not think the Street is accurately modeling the impact of losing the Russia business at MCD; init sell on CBRL, buys on DPZ, TXRH, YUM, CMG, CAKE, WING, DRI, FWRG; Stifel cautious on WING shares saying see the potential for WING to report disappointing 1Q comps/EPS results, and we believe estimates may need to be revised lower for 2022

Energy

·     Energy stock movers: OPEC cuts 2022 global economic growth forecast to 3.9% (previously 4.2%) as sees considerable further downside risks to its GDP forecast, standing at more than half a percentage point. OPEC cuts 2022 non-OPEC oil supply forecast by 320,000 bpd to 2.7 mbpd; lowers Russia liquids production forecast by 530,000 bpd; cuts forecast of 2022 world demand for its crude 100k bpd; oil stocks in general resume upward momentum on spiking oil prices with OXY, CVX, APA, MRO among leaders

·     Ethanol – President Joe Biden plans to allow expanded sales of higher-ethanol gasoline to lower fuel prices and counter the political blowback from them. Biden is set to unveil the initiative during a Tuesday visit to a Poet LLC ethanol mill in Iowa — the top U.S. corn state. The change, which would apply on a temporary basis over the summer months, would waive anti-pollution restrictions that effectively block warm-weather sales of E15 gasoline in areas where smog is a problem – shares of GPRE, ANDE, ADM moved on ethanol headlines

·     Utilities & Solar; the defensive sector (XLU) with gains early today after a brief pullback yesterday from recent 52-week highs for several names in the sector; Wells Fargo reiterated Overweight ratings on CEG as the backdrop for nuclear power continues to improve, prompting them to increase earnings outlooks for both companies; solar stocks pulling back as broader energy names outperform; coal names BTU, ARLP, ARCH rise as Ukraine fears renewed today as Russian President Vladimir Putin said peace talks with Kyiv had have reached a "dead end," as Moscow’s forces on Tuesday bombarded Ukrainian military positions and residential areas

Financials

·     Bank movers; Deutsche Bank (DB) and Commerzbank (CRZBY) shares dropped after an investor sold stakes worth a total of 1.75 euros billion ($1.90 billion) in Germany’s two biggest lenders; SCHW upgraded to Buy at Compass Point on higher rate expectations; broader banks failed to rally as treasury yields slumped after hitting 3-year highs prior; several brokerage previews in alt managers, asset managers as Citi downgraded FHI to Sell from Neutral and cut BEN to Neutral from Buy on BEN while close 90-Day Positive Catalyst Watch on Buy-rated CG and establish 30-Day Negative Catalyst Watch on Sell-rated TROW as continue to favor Alts over Traditionals

·     Monthly asset manager assets data (AUM): AB announced that preliminary assets under management decreased to $735 billion during March 2022 from $740 billion at the end of February due to market depreciation and firm-wide net outflows; APAM preliminary assets under management as of March 31, 2022 totaled $159.6 billion; CNS preliminary assets under management of $102.1 billion as of March 31, 2022, an increase of $3.2 billion from assets under management at February 28, 2022; BEN prelim month-end AUM of $1,477.5 billion at March 31, 2022, compared to $1,486.9 billion at February 28, 2022; IVZ prelim month-end assets under management (AUM) of $1,555.9B, +1.6% MoM; LAZ assets under management $252.68 billion, -4.6% y/y while total equity assets under management $201.03 billion, -6.7% y/y

·     Bitcoin, FinTech, Payments: shares of companies exposed to cryptocurrencies rise early as risk appetite improves following U.S. inflation data that was in line with estimates; OSTK rises as tZERO ringing the opening bell today, note ICE an investor; Bitcoin tried to hold the $40K level all day, bouncing above and below all morning while Ethereum remained above $3K; in payments, FISV downgraded to Market Perform at Cowen reflecting less of a change in thesis as opposed to a clear preference for other payment processors namely GPN where see a more favorable risk/reward given higher long-term total return opportunities.

·     Services, Lenders: Sharp rises in mortgage rates likely to fuel abrupt end to refinancing wave for consumer lending firms, says Barclays, adds refinance outlook has deteriorated in recent weeks with the 30-year rate increasing 96 bps off March lows; the analyst said expects 1H22 to present a challenging environment, cuts PTs on multiple consumer lending firms in its coverage including COOP, LDI, PFSI while expects PC insurers FNF and FAF with a healthy quarter.

Healthcare

·     Healthcare REITs, Skilled Nursing Homes stocks pressured after the federal government on Monday proposed its payment rate update to nursing home reimbursements for fiscal 2023, which includes a 4.6% cut related to the Patient-Driven Payment Model. That cut from the Centers for Medicare & Medicaid Services (CMS) amounts to a total loss of $320 million, according to the agency – shares of ENSG, WELL, CTRE, OHI, SBRA, LTC, NHI effected. RBC Capital said they are concerned the government is pulling back SNF reimbursement/financial support faster than operators can recover to a stabilized post-COVID operating environment.

·     Pharma movers: TAK said a phase 3 study of Takhzyro for preventing hereditary angioedema (HAE) attacks in children ages two years to <12 years, met its goals; AGLE reported additional data from late-stage trial of its lead drug candidate, pegzilarginase, that supports it as a treatment for Arginase 1 deficiency; AQST announced positive results from part 2 of the ongoing AQST-109 epinephrine product, with part 3 to be completed in 2Q22; MYOV and partner PFE noted FDA has identified deficiencies that preclude discussion of labeling and/or post-marketing requirements and commitments at this time; in cannabis, TLRY said it would will acquire Hexo Corp.’s remaining $193 million balance of senior secured convertible notes

·     Biotech movers: GILD announced that the FDA is removing the partial clinical hold on several studies of magrolimab in combination with azacitidine, allowing the enrollment in its MDS and AML studies to resume; PCRX guides prelim 1q revs $157.4M-$158.4M vs. est. $162.2M; BCDA said the U.S. FDA has cleared its application to start clinical trial of its experimental cell therapy, BCDA-04, in adult patients recovering from Acute Respiratory Distress Syndrome

·     MedTech Equipment; ICLR upgraded to buy from Hold at Deutsche Bank as believe the company is poised to make market share gains post-merger and see upside to out-year estimates with 2025E earnings power of $21 vs consensus of $18.

·     Healthcare Services: ABC downgraded to EW from OW with $178 tgt, and CAH upgraded to OW from EW with $74 tgt at Morgan Stanley. Said for ABC, new European risk takes them to Equal-weight as growing European exposure following the Alliance acquisition in 2021 adds complexity to the story. For CAH, they see long term value creation opportunities that could help drive earnings acceleration and multiple re-rating over the next 12to 24 months; SLQT added to Tactical Underperform List and ALGN added to Tactical Outperform List @ Evercore

Industrials & Materials

·     Aerospace & Defense; AL said that aircraft investments totaled about $490 million in Q1 and the company fleet as of March 31, 2022, included 391 owned aircraft and 93 managed aircraft, with 451 new aircraft on order from Boeing (BA) and Airbus expected to be delivered through 2028; BA announced major program deliveries across its commercial and defense operations for the first quarter of 2022, reporting 95 total deliveries from its commercial airplanes’ programs; ASTR said it won a contract to supply electric propulsion systems for satellites to LeoStella

·     Industrial & Machinery; WM downgraded to market perform at BMO saying while solid waste industry fundamentals remain favorable and the company has previously outlined a robust pipeline of organic capital expansion projects, they believe the current share price captures this upside and we struggle to find near-term catalysts that could push the stock higher; JCI said it expects companies to ramp up their investments in energy efficiency, renewable energy, or smart building technology; Jacobs (J) subsidiary CH2M Hill enters A$640M settlement with JKC Australia LNG Pty

·     Transports; in airlines, AAL said it sees Q1 revenue down 16% vs. 1Q19, consensus $8.73B, which is better than the company’s recent guidance of down approximately 17%; for rails, Total traffic implies growth at +3.5% YoY in Week 14, an acceleration versus +0.8% YoY in Week 13. Intermodal volumes were +0.7% YoY compared to -2.3% YoY reported last week; weakness in shares of trucker JBHT and parcel co UPS

·     Metals & Materials; gold miners outperformed AEM, NEM, AUY, GOLD as gold prices jumped amid hedge against inflation; in chemicals, Wells Fargo said they see the current PE environment as supportive for earnings for DOW, LYB, and WLK, and see room for incremental upside from exports, should supply chain issues improve

Technology, Media & Telecom

·     Semiconductors; Taiwan iPhone maker Pegatron suspends production at its Shanghai and Kunshan plants in China because of the government’s Covid-19 lockdowns; SWKS downgraded to hold from a buy, lowers price target to $138 from $175 at B Riley; group was broadly higher after sharp pullback in recent days on slowing demand concerns for PCs and games

·     Software movers; CRWD upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $285 from $241; KKR is in advanced discussions to acquire cybersecurity firm Barracuda Networks Inc from its private equity owner Thoma Bravo for roughly $4 billion, including debt, Reuters reported

·     Hardware, Components & Services; AAPL is likely to announce an incremental stock buyback of $80b-$90b and raise its dividend by 5-10% when it reports 2Q results later this month, Citigroup said in a note today; HPE downgraded to underweight at Morgan Stanley and lowered its industry view for telecom and networking equipment to cautious from in-line, citing demand data; also downgraded shares of FFIV and NTAP to equal-weight from overweight; CSCO downgraded to sell from neutral at Citigroup citing competition and more difficult year-over-year comparisons for quarters ahead, while upgraded JNPR to Neutral from Sell and raise tgt to $26 from $25 saying that while supply chain constraints are well known, did not foresee two events occurring: the large increase in first responder technology advancements and security with funding needs being met by state and local governments, and the recent war in Ukraine spurring a large increase in defense spending; Citigroup said the continued shortages in the components in the supply chain will help both ARW and AVT beat expectations on higher semiconductor ASPs; QMCO Raised Q4(Mar) midpoint revenue to $93M, up vs prior $92M