Closing Recap

Monday, April 25, 2022

Equity Market Recap

·     U.S. stocks finish higher after what looked like a rough start to the week, as major averages bounce following a sharply lower open. Last week’s sell-off was largely driven by hawkish central bank, but today concerns in China related to surging Covid cases was the driving force to stock market declines early (Shanghai Composite fell 5% overnight). Several Beijing districts went into lockdown amid an outbreak raising slowing global growth concerns (pace of global growth and/or global supply chains) and hitting metals, mining, industrials, energy, and other related sectors with China the number one consumer of such products. Meanwhile, financials tumbled again, hurt by recession fears, and sliding Treasury yields. The big news of the day was Elon Musk, after a few weeks of drama, officially bought Twitter (TWTR) in a $44B deal, potentially changing the landscape for social media forever. Stock averages overall were choppy ahead of an extremely busy week of expected earnings, with roughly 160 of the S&P 500 reporting this week, highlighted by the likes of mega-cap tech including AAPL, AMZN, GOOGL, FB, MSFT and INTC all later this week. The Dow on Friday posted its worst one-day percentage change since October 2020, dropping nearly 1,000 points. The S&P 500 and Nasdaq came into the week with 3-week losing streaks and the Dow down 4-straight with rising interest rate fears, inflation, and concern into earnings season weighing heavily on consumer sentiment.

·     Stock & Sector movers: TWTR agreed to be acquired by Elon Musk $54.20 per share in $44B deal and upon completion of transaction, Twitter will become a privately held company; FCX AA VALE CLF NEM metals and mining stock weak on China slowing growth fears; SLB HAL APA MRO energy stocks tumble as the sector enters correction territory, down 11% from its 52-week highs as concern grew that prolonged COVID-19 lockdowns in China would hurt global growth and oil demand; BABA PDD, BIDU TCEHY U.S. listed China stocks fall as the Shanghai index falls over 5% last night on as new measures to limit a Covid outbreak in Beijing reinforce slowdown concerns; BAC AMBC NLY BK BLK among financials hitting 52-week lows today on falling yields;

·     Heading into this week, CNBC noted pessimism has reached extremes (historic lows in AAII survey bulls, equity fund outflows, his proprietary sentiment gauge), while sees commodity, used-car inflation ebbing, views oil/food inflation as largely neutral for the economy in aggregate. Travel, auto demand strong. Earnings look OK, S&P 500 P/E 18.6x but a more reasonable 16x ex the largest 5 stocks.

Commodities, Currencies & Treasury’s

·     Oil slumped as WTI crude fell as much as 6.5% to its lowest in almost two weeks before paring losses, but still extending last week’s decline as concern grew that prolonged COVID-19 lockdowns in Shanghai and potential increases to U.S. interest rates would hurt global growth and oil demand. WTI crude ended the day down -$3.53 or 3.46% to settle at $98.54 per barrel (off earlier lows of $95.28). Meanwhile, EU member states still don’t all agree on the need for a full embargo on Russian energy. Libya’s oil ministry said fields shut down by protesters may reopen within days, potentially allowing the OPEC member to get back to full production.

·     Gold prices slide -$38.30 or 2% to settle at $1,896.00 an ounce, one of many commodity markets tumbling due to slowing global growth concerns out of China as Covid lockdowns intensify. Treasury yields tumbled across the curve with hefty pullbacks in the 2-yr yield by 13 bps to 2.58%, the 5-yr down 13 bps to 2.82% and the 10-yr yield to 2.80% (down 10 bps). Bitcoin hits lowest level in over a month as las as $38,600 before reversing higher. The U.S. dollar index (DXY) adds another +0.5% to 101.75 on aggressive Fed interest rate hike cycle expectations.

Economic Data:

·     China’s central bank said today it would cut the amount of foreign exchange banks must hold as reserves, a move aimed at slowing the depreciation of the yuan, which is at its weakest levels in a year. The PBOC said it would cut the foreign exchange reserve requirement ratio (RRR) by 100 basis points (bps) to 8% beginning May 15

Sector News Breakdown

Consumer

·     Retailers; GPS upgraded to Buy from Neutral at Guggenheim with $22 tgt saying believe at current levels, off ~70% from its highs, the shares offer an attractive entry point and compelling risk reward ratio, with significant asset value and optionality; OSTK was downgraded to neutral at Bank America and tgt cut to $38 from $85, turning more cautious on 2022 revenue trends and projects a decline of 9% vs. the company’s guided growth of high single digit; in golf industry (GOLF, ELY), Truist noted Relative to 2019 levels, YTD retail sales are up a considerable 44%; KSS spiked after the NY Post reported JCPenney owners Simon Property and Brookfield Asset Management have offered to acquired Kohl’s for $68 a share https://bit.ly/3k6leff ; LULU cautiously positive, says that the company may be able to double its revenue by 2026, but it may not be able to preserve its margins in the process

·     Auto sector; GM said its electrified-Corvette model will be available next year; NSANY shares fall following a Bloomberg report that top shareholder Renault is considering selling some of the 43% stake it owns in the Japanese automaker; CVNA announces $2.275b senior unsecured notes offering to finance ADESA U.S. Auction acquisition; AN was upgraded to Buy and tgt raised to $140 at Truist in the auto retail sector

·     Housing & Building Products; AZEK and TREX both downgraded to Hold from Buy after decking survey reported a more muted outlook over the next several quarters from a combination of decelerating demand, normalizing channel inventory levels, and a choppier price/cost environment; OC to acquire WearDeck, composite decking and structural lumber manufacturer

·     Consumer Staples; KO reported Q1 EPS beat of $0.64 vs. est. $0.58 as unit case volume +8%, Q1 revs $10.5B vs. est. $9.84B, and adj organic revs rose 18% vs. est. 9.5% (shares hit all-time highs before reversing); Kellogg (K) downgraded to Hold from Buy at Deutsche Bank saying although encouraged by the structural progress it has made thus far they remain cautious (and below-consensus) going into 1Q22 results; in cosmetics, REV announced it has filed to sell up to $25M shares over time through an "at-the-market" offering program.

·     Restaurants; CMG 2022 EPS estimates lowered to $30.00 from $31.50 and trim 2023 EPS estimates on overall expense pressures at Guggenheim (says 2023 EPS is 9% below consensus and cuts tgt to $1,550 from $1,650); for QSR Oppenheimer said see an attractive setup into 1Q22 results and TH investor Day (both on 5/3)

·     Casinos, Gaming, Lodging & Leisure sector; in gaming, Morgan Stanley raises 1Q ests based on state data/checks but lower 2H to reflect Morgan Stanley’s recent GDP forecast cuts but now expect Macau to remain weak for longer and lower valuation multiples to reflect higher rates – said CZR and PENN have the most upside; upgrade Penn to OW, downgrade BYD to EW; Macau based casino names WYNN show concern early given the increased lockdowns in China and potential impact to gaming revs

Energy

·     Energy stock movers; a sharp decline in the energy complex, with no sub sectors safe, as the sector falls on plunging oil prices (Brent dropped below $100 per barrel and WTI down over 6%) following the China economic slowdown concerns on further Covid lockdowns; service stocks (which have earnings behind them) saw the biggest drops (SLB, HAL), along with major oil COP, CVX, XOM, HES tumbling; in research, MRO upgrade from Neutral to Positive w/ $32 PT from $25 at Susquehanna saying the company’s commitment to return most of its free cash flow to investors via share repurchase means MRO is not depleting its inventory on a per-share basis as fast as some of its peers

·     Utilities & Solar; SPWR was downgraded to Sell from Hold at GLJ Research with $6.99 tgt saying the euphoric stage rooftop solar investors were in for the majority of 2021 and the beginning of 2022 is decidedly over; MAXN announced a partnership with software provider OpenSolar to provide its installer network with Maxeon’s SunPower Design

Financials

·     Bank movers; absolutely no relief for financials across the board, with big banks and regionals extending losses post earnings the last few weeks, while insurers, lending and FinTech also still showing no lift on recession fears and slowing growth (offsetting rising yields); the lack of new IPOs in Q1 weighed on some of the countries biggest banks, with no signs of a pick up so far into Q2; in stocks news, MA launches next-generation identity technology with Microsoft to help more consumers shop online safely; in REITs; PSB agreed to be acquired by Blackstone Inc.’s real estate unit in a deal valued at $7.6B, paying $187.50 a share https://on.mktw.net/3vcdgau

Healthcare

·     Pharma movers; RHHBY said a Phase II clinical study evaluating Giredestrant as a treatment for patients with advanced breast cancer did not meet its primary endpoint of progression-free survival; PFE said late Friday it was voluntarily recalling five batches of Accupril blood pressure tablets over elevated levels of potential cancer-causing agent; said the batches were distributed in U.S. and Puerto Rico from December 2019 to April 2022; AZN said its liver cancer treatment tremelimumab was accepted for priority review by U.S. federal health regulators; said the FDA regulatory decision action date is expected in the fourth quarter of 2022; NKTX shares jump after saying two of its experimental cell therapy treatments showed promise in patients with different blood disorders; BDTX to discontinue development of BDTX-189 and reduce workforce to extend its cash runway; GOSS said its Phase 2 clinical trial of GB004 in mild-to-moderate active ulcerative colitis didn’t meet its primary or secondary objectives at week 12.

·     Biotech movers; AXSM falls saying was informed by the FDA CMC issues identified during the review NDA for AXS-07 product candidate for the acute treatment of migraine are unresolved and based upon the time remaining in the NDA review cycle, expects to receive a CRL with respect to this NDA; in research, at Morgan Stanley, ALNY downgraded to EW from OW and cut tgt to $178 from $210 and BMRN upgraded to OW from EW and raise tgt to $113 from $96; ELYM tumbles as Phase 2a clinical trial of ETX-810 in diabetic peripheral neuropathic pain (DPNP) did not achieve the primary endpoint

·     MedTech Equipment; in research, Wells Fargo downgraded TMO to Underweight, cut DHR to Equal Weight, while upgraded MTD to Overweight and WAT raised to Equal Weight in medical devices ahead of earnings – says are turning incrementally negative on some key growth drivers of our space over the past few years—Biopharma, MDx, and China—suggesting investors seek refuge in less favored stocks; BLFS was upgraded to Outperform at Oppenheimer based on view that stock is currently oversold, trading at a forward P/S of 2.7x our FY23E revenue estimate of $194M

·     Healthcare Services; UNH has entered an agreement to sell CHNG claims editing business to private equity firm TPG Capital for $2.2 billion after the healthcare company completes its acquisition of Change; CRL downgrade from Buy to Hold w/ $280 PT from $370 at Jefferies saying tracking of funding and cash balances highlights a leading edge of small biotech’s growing short enough on funds to begin curtailing spending; also downgraded SYNH to Hold

Industrials & Materials

·     Industrial & Machinery; DE downgraded to Neutral from Buy at Bank America and cut tgt to $450 from $475 saying a lot of the good news has been priced into the stock and on dealer caution due to fertilizer shortages; OTIS posted mixed Q3 results as EPS beat while revs of $3.41B was just short of the $3.45B estimate new orders were up 8.8% in the first quarter

·     Metals & Materials; NEM and GOLD both downgraded to Market Perform from Outperform at Bernstein saying the stock’s leverage to the gold price is at levels that can’t be sustained; precious metals tumbled with gold down over 2% weighing on miners; shares of metal miners tumble as fears grow in top consumer China that Beijing is on the verge of a Shanghai-style lockdown after another surge in Covid cases; shares of AA, CNEX, FCX, VALE in metals, ALB, LTHM in lithium, and MOS in fertilizers all tumble.

Technology, Media & Telecom

·     Semiconductors; AMD upgraded to Strong Buy from Outperform at Raymond James with $160 price target as favor those semi companies with strong secular drivers, more muted cyclical exposure and attractive valuations, for which AMD appears well positioned; MRVL was upgraded to Outperform at Raymond James; NVDA cautious mention in Barron’s this weekend while Bank America noted NVDA is down -34% YTD vs SOX -24% on fundamental concerns: slowing demand from PC gamers/crypto-miners and macro concerns but says the risk reward remains attractive; SIMO said to be considering a potential sale amid takeover interest in the company and is working with advisers as it holds talks with possible bidders https://bit.ly/36Hgd9I

·     Software movers; ATVI (which is still in process of being acquired by MSFT) reported Q1 miss of EPS and sales ($0.64/$1.77B vs. est. $0.70/$1.8B); SNOW was initiated at Outperform and $250 tgt at Wolfe Research lifting shares saying they are getting very excited about the potential for meaningful revenue outperformance

·     Internet, Media & Telecom movers; TWTR agreed to be acquired by Elon Musk $54.20 per share in $44B deal and upon completion of transaction, Twitter will become a privately held company – there are no financing conditions to closing of transaction and Musk secured $25.5 bln of fully committed debt and margin loan financing; weakness in several U.S. listed China stocks (BABA, PDD, BIDU, TCEHY) as the Shanghai falls over 5% last night on as new measures to limit a Covid outbreak in Beijing reinforce slowdown concerns/Shanghai Composite sinks to lowest since June 2020; in research, GDDY upgraded from Neutral to Overweight at Piper, raise PT from $94 to $110 saying its least risk to numbers with 9% Street growth in CY22E with highest FC while downgraded WIX to Underweight and cut tgt to $78 from $105; VZ downgraded to Neutral from Buy at Goldman Sachs on valuation following big subscriber loss; NFLX falls to 4-year lows down 65% YTD after plunging last week on subscriber losses