Closing Recap

Tuesday, August 17, 2021

Equity Market Recap

·     The S&P did not end the day at a record close for the first time since last Monday as the index suffered its largest daily drop in almost a month. The selloff in futures started after yesterday’s close during a CNBC interview with Boston Fed President Eric Rosengren where he laid out his idea to start tapering bond purchases and economic stimulus this fall, and it continued this morning after July retail sales missed consensus estimates. Additionally, HD’s decline after their Q2 comp sales missed estimates last night dragged the Dow to snap the index’s own 5-day winning streak and bring it back to last week’s levels. Furthermore, today’s reset hit high-growth stocks particularly hard as the tech-heavy Nasdaq suffered a 1% decline and the small cap-focused Russell 2000 slid for the 3^rd consecutive day to close at its lowest level since July 19. Additionally, international markets were not spared as Asian stocks retreated for a fourth day as the Hang Seng and Shanghai Composite lost ground after China issues draft rules targeting unfair online competition. The Nikkei Index fell -98 points to 27,424, the Shanghai Index tumbled -70 points (or 2%) to 3,446 and the Hang Seng Index declined -435 points (1.66%) to 25,745. However, today’s pullback is merely a blip on the radar compared to the stock market’s dramatic comeback from the depths of the pandemic. On March 23, 2020, the S&P hit an intraday low of 2,237.40. Yesterday’s intraday high of 4,473.26 was more than double this level as the benchmark index rose 100.22% in 353 trading days. This SPX rally outpaced the rallies from the 1942, 1974 and 2009 generational lows as well as the rallies from the 1987 crash and 1982 lows, according to Bank America Technical Research Strategist saying, “in terms of speed, the SPX rally from the 2020 low is the fastest since the Great Depression." Only 1932 (66 days), 1933 (81 days) and 1935-36 (346 days), saw a faster recovery in levels. https://bit.ly/2XDCIYt

·     Stocks/sector news; HD shares fell after its Q2 comp sales missed estimates last night, dragging the Dow and LOW ahead of its own earnings tonight; fellow Dow component WMT was little changed today even after its Q2 beat and stronger than expected FY22 guide; RBLX shares plunge early after a disappointing earnings report last night that included a Q2 loss despite est. profit and revenue that was 34% below consensus, though shares rally off morning weakness and even go green briefly; SE surges on its quarterly beat and raised FY guidance; SAVE outperformed despite forecasting Q3 revenue well below analysts’ expectations, though other airlines were weak with UAL, DAL, LUV, ALK, JBLU each sliding over 2%; Gaming was another reopen sector underperforming on the day as PENN shares have now lost more than 50% from its 52-week high, LVS traded at 52-week lows more than 42% off its 52-week high, while CZR is more than 25% and DKNG is more than 30% off their 52-week highs; TME plummets to new record lows after its Q2 miss and Macquarie downgrade amidst Chinese stocks falling again on further regulatory crackdowns – BABA 52-week low, BIDU JD PDD underperform.

Economic Data:

·     U.S. July retail sales fell -1.1%, worse than the expected -0.3% drop while June was upwardly revised to +0.7% from +0.6%; July gasoline sales +2.4% vs. June +3.6%, July cars/parts sales -3.9% vs. June -2.2%; July retail sales ex-autos fell -0.4% vs. est. +0.1% and June upped to +1.6%; July retail sales ex-autos/gasoline fell -0.7% vs. June +1.3%.

·     U.S. July industrial production +0.9%, topping the +0.5% estimate, while June revised to +0.2% from prior +0.4%; July capacity use rate 76.1% above est. 75.7% and vs. June 75.4%. July manufacturing output +1.4% vs. est. +0.6%.

·     U.S. June business inventories +0.8%, in-line with estimates and compared to May +0.6% from prior +0.5%; June inventory/sales ratio 1.25 months’ worth vs May 1.26 months; June business sales +1.4% vs. May -0.2%.

·     Housing data weaker as the NAHB Housing market index reported at 75, below July and consensus reading of 80; index for august at lowest since July 2020; Index of current single-family home sales 81 versus 86 in July.

Commodities, Currencies & Treasuries

·     Oil prices extended its losing streak to 4-days with WTI crude falling -$0.70, or 1.04%, to settle at $66.59, on a murkier demand outlook given an extended state of emergency in Tokyo due to a spike in Covid cases and a New Zealand lockdown in response to its first Covid case in over six months. This is oil’s first time falling for 4 consecutive sessions since March. Gold prices slid $2, to settle at $1,787.80/oz as strength in the Dollar added some pressure to precious metals.

·     The U.S. dollar advanced for a second straight session, bolstered by safe-haven demand, as investors fretted about Afghanistan, a slowing Chinese economy, and the rapid spread of the Delta coronavirus variant which forced some lockdowns. The overall tone in financial markets was one of caution, with shares on Wall Street in the red. The euro, the biggest component in the dollar index, fell 0.6% to $1.1709 while the New Zealand dollar tumbled to its lowest in three weeks after the country identified its first COVID-19 case since February, prompting the government to announce new short-term lockdown measures.

Sector News Breakdown

Consumer

·     Retailers; WMT Q2 EPS and sales top views ($1.78/$141.0B vs. est. $1.56/$136.8B) with solid upside guidance for year ($6.20-$6.35 vs. est. $6.02) while sees Wal-Mart-only U.S. stores comparable sales ex-gas +5% to +6% vs. est. +3.22% (after Q2 total U.S. comp sales ex-gas +5.5% vs. +9.90% y/y and est. +3.5% and U.S. comp stores s ex-gas +5.2% vs. +9.30% YoY, est. +3.12%; BURL tgt raised to $395 from $363 at Cowen saying checks and survey data pointed to a robust Q2 environment for off-price which should support estimate revisions; OSTK announces $100 million stock repurchase program; retailers in general little weaker today following the disappointing July retail sales data: U.S. July retail sales fell -1.1%, missing the -0.3% est. drop; CRCT was downgraded at Barclay’s saying it is continuing to see a lower percentage of customers using its machines

·     Auto sector; GM shares slip early after Warren Buffett’s Berkshire Hathaway Inc on Monday in a regulatory filing lowered the stake in GM by 10.4% to 60M; GM said it will replace all battery modules in some Chevrolet Bolt electric vehicles under a recall announced last month; ZEV tumbles after posting a Q2 EPS loss (-$0.79), wider than the est. loss (-$0.14) and said it sees Q3 revs $4M-$6M vs. est. $10.58M and adjusted loss from operations $12M-$13M; FUV top and bottom lines both missed ests and also disappointed expectations with its production guidance; RMO shares fell to its record low after Q2 revs $926k missed est. $2.4M

·     Housing & Building Products; Dow component HD beat Q2 EPS and sales expectations, with revenue climbing 8% to $41.2B, but shares slipped after the company’s comparable-store sales didn’t rise as much as analysts had predicted (Q2 comp sales +4.5% below est. +5.6% and U.S. comp sales in the U.S. +3.4% vs. est. +4.9%); LOW earnings expected tomorrow morning; SWK agreed to acquire the remaining 80% ownership stake in MTD Holdings Inc., a privately held global manufacturer of outdoor power equipment, for $1.6 billion in cash

·     Consumer Staples; defensive food names again one of the few market outperformers given the pullback in growth stocks today, with names like CPB, K, KR, SJM moving higher initially; PM launched IQOS ILUMA, the latest and most innovative addition to their growing portfolio of smoke-free products for adults who would otherwise continue to smoke or use nicotine products

·     Casinos, Gaming, Lodging & Leisure sector; gaming related stocks, both casinos (WYNN, LVS, MGM, CZR) and online plays (PENN, DKNG) sees continued weakness; GAN tumbles Q2 as EPS loss (-$0.07) vs. est. loss (-$0.01); Q2 revs $34.6M vs. est. $34.53M; sequential revenue growth of 24%, driven by strong international results in b2c segment; GENI said it enters a definitive agreement to acquire Spirable, a creative performance platform (terms not disclosed); in lodging sector, Truist upgraded shares of DRH, H, HST, PK, SHO to Hold from Sell noting hotel REITS have severely underperformed since their mid-March highs, down ~10%-25% vs. the RMZ index up ~12% and the S&P 500 up ~13% over the same period.

Energy

·     E&P and Majors; Goldman kept its Buy rating on SU but lowered its target to $25 from $29 and removed it from its Conviction Buy list due to few near-term catalysts, seeing better absolute upside to other Canadian stocks under coverage, and see other stocks as better positioned to capitalize from growth from key mega-trends across their Natural Resources coverage, such as BKR which they added to their Americas Conviction List here after the stock has underperformed almost every member of the XLE year-to-date, some of which could have been driven by GE unwinding some of its ownership that has represented ~9% cumulative volume of shares traded in the past 2 quarters, and BKR’s ~$2B in buybacks removes a meaningful headwind; BHP will sell its oil and gas operations to Woodside Petroleum Ltd. as it plans a shift away from fossil fuels after Chinese city officials took over the management of a troubled private oil refiner amid a tax probe; Paulson & Co’s Q2 transactions included buying APA, RDS, exiting XLEand increasing its positions in OXY, XOM in its 13F filing last night

·     Alt Energy, Utilities & Solar; Wells downgraded LNT to EW on valuation due to trading at one of the highest P/E multiples among regulated utilities, FTS to EW as shares approach their price target (new C$61 PT from C$60) and highlighted ETR as a potential swap after Q2 earnings given it is one of the cheapest utilities and had one of the more compelling Q2 updates; CLNE announced a series of new contract wins worth 74 million gallons, most of which is RNG; PCG shares were sold in Q2 by Third Point and Appaloosa in 13F filings reported last night; OPTT said the U.S. Department of Energy chose it to further the development of a next-generation wave energy converter

Financials

·     Bank movers & Investment Co’s; shares of major U.S. banks slipped initially as Treasury yields tumbled, but after mixed economic data and a rebound in yields, banks too recovered; KKR said it had agreed to sell a 14.5M sq ft industrial property portfolio for about $2.2B to Oxford Properties Group. In the SPAC world, Bill Ackman’s SPAC Pershing Square Tontine Holdings (PSTH) gets sued – PSTH responded saying it never held investment securities that would require it to be registered under Investment Company Act of 1940

·     Bitcoin, FinTech & Payments; JPMorgan made a few changes in the payments sector, saying FIS, FISV, GPN remain top picks, while they downgraded ADP and LSPD to Underweight – said they tilt in favor of legacy processors given underperformance as FIS (Big 3) are our top picks, trading at double-digit discounts to the S&P 500 (vs. historical premiums), with growth expected to revert to pre-pandemic levels in the coming quarters. In contrast, ADP trade at healthy premiums to the market and well above payment processing peers on a relative historic basis despite similar growth

Healthcare

·     Vaccine news: The Biden administration is planning to announce that most Americans who have received the coronavirus vaccine will need booster shots eight months after being fully vaccinated as the delta variant sparks a surge in Covid-19 cases – Washington Post (shares of MRNA, BNTX, PFE, NVAX saw rebounds after recent profit taking)

·     Biotech & Pharma movers; LLY announced executive leadership changes and the creation of neuroscience and immunology business units; Berkshire Hathaway reduced its stakes in large cap Pharma names MRK by 48.8% to 9.2M shares, ABBV by 10.2% to 20.5M shares and BMY by 15.3% to 26.3M shares and exited shares in BIIB according to 13F filings

Industrials & Materials

·     Transports; in airlines, SAVE said it expects total operating revenues in the range of $885M – $955M vs. $1.05B consensus and adjusted operating expenses between $1,030M and $1,040M; expects a negative revenue impact of ~50M from 2,826 flight cancellations between July 30 and August 9, due to airport staffing shortages and adverse weather – recall last week, LUV said it may not be profitable in Q3, and now sees Q3 revs to be down 15% to 20% vs. 2019. President Joe Biden’s administration plans to extend requirements for travelers to wear masks on airplanes, trains, and buses and at airports and train stations through Jan. 18 to address ongoing COVID-19 risks, three sources told Reuters.

·     Metals & Materials; CF was upgraded to Buy from Hold at Berenberg and raised tgt to $60 from $54 noting last Friday, the ITC voted that CF cannot afford to have competitors playing by different rules, and firm thinks this paves the way for severe anti-dumping measures for urea ammonium nitrate which could be meaningful for CF as UAN is one of its highest margin products; Stifel raised fertilizer price deck and company estimates for NTR, CF, MOS saying elevated prices have put a significant dent in affordability; however, weather disruptions in several key grain regions have helped to validate our expectation for better price support

Technology, Media & Telecom

·     Internet; BABA, BIDU, JD, NTES slide again with massive pressure on U.S. listed Chinese stocks following another regulatory crackdown after China published detailed rules to tackle unfair competition and companies’ handling of critical data; the draft regulations ban unfair competition and restrict the use of user data; SE better Q2 results as revs of $2.3B beats the consensus est. of $1.94B and raises its forecast for both digital entertainment and e-commerce bookings for the financial year 2021 – said Q2 digital entertainment bookings rose 64.8% to $1.2B

·     Software movers: RBLX Q2 bookings rose just 35% to $665.5M down from a 161% surge in bookings during Q1 and below general analyst expectations of $683.3M – also posted Q2 EPS loss (-$0.25) vs. est. $0.24 and qtrly average daily active users (DAUs) were 43.2M. up +29%; UPST announced proposed private offering of $575M convertible senior notes

·     Hardware, Components & Services; few changes in the IT & BPO Service sector as JPMorgan downgraded DXC to Underweight, and downgraded RXT to Neutral, while upgraded PRFT to Overweight saying the cuts were on the notion that the war for talent creates a relative disadvantage for turnarounds versus cleaner growth stories; APP was upgraded to equal-weight at Morgan Stanley noting 2Q results showcased a significant acceleration in the ad network’s (i.e. AppLovin Software’s) growth rate, which they believe could be sustained from here;

·     Media & Telecom movers; MSGS positive comments at Morgan Stanley, upping its tgt to $230 from $220 saying they estimate that the Knicks value alone translates into $181 a share for MSGS, 17% above the current share price. Said differently, MSGS shares offer the Knicks at a 15% discount to private market value and the Rangers for free; FN reported another quarter of record revenue as Q4 Non-GAAP EPS $1.31 vs. est. $1.22; Q4 revs $509.6M vs. est. $487.5M; sees Q1 revs $510M-$530M vs. est. $491.5M