Closing Recap

Monday, December 12, 2022

Equity Market Recap

·     Stocks melted higher all day, touching and topping last Friday’s high, but still much uncertainty ahead of a big week ahead for investors with the November CPI data Tuesday, FOMC rate decision and Powell speech Wednesday, the BoE and ECB rate decisions Thursday morning, retail sales, $90B in Treasury note & bond auctions, triple witching with a $3.7T options expiration on Friday. So, despite today’s positive trading action, a lot can change in the next 48-hours. In between the waiting on data and central banks, there was north of $40B in M&A stories today that impacted sectors (see below). Treasury yields rose as did the U.S. dollar while gold slipped. The S&P 500 bounced off its 100-day moving average of 3,930, so maybe today was a technical bounce after the late day swoon Friday that pushed averages to their lows.

·     Consumer Price Index (CPI) tomorrow expected to show prices rose 7.3% in November on an annual basis, easing from the 7.7% rise in the previous month. While the core rate, which excludes food and energy prices, expected to have moderated to 6.1% from 6.3% in October. On a month-over-month basis, headline CPI expected to rise +0.3%, down from the +0.4% reading last month and core M/M expected to rise +0.3%, in line with prior month. Meanwhile this morning, inflation expectations fell across all time horizons in the November survey from the New York Fed. Year-ahead expectations fell to 5.2% from 5.9%, while three- and five-year-ahead expectations fell by 0.1 percentage point to 3% and 2.3%, respectively. The headlines, hitting around 11:00 AM this morning, helped push markets higher into the CPI tomorrow.

·     A handful of Wall Street strategists remain cautious on markets with Morgan Stanley’s Mike Wilson saying they find it challenging to argue for higher valuations at this point, and with our expectation for falling earnings estimates, which leaves little, if any, upside to broader equity markets from here. He thinks the CPI and Fed actions are unlikely to change this picture and sees the S&P 500 plunging to 3000-3300 in the first quarter before recovering. This bear market rally is already running out of steam. Oldman Sachs Kostin’s said base-case scenario for the S&P 500 sees a drop to 3,600 in the first half of the year before an H2 rally to 4,000 by the end of 2023. However, the selloff could extend to 3150 in case of a recession.

Commodities

·     Oil prices rose $2.15 or 3.03% to settle at $73.17 per barrel, bouncing following weeks of declines as a weakening global economy offset supply woes stemming from the closure of a key pipeline supplying the United States and Russian threats of a production cut. Last week, Brent and WTI fell to their lowest since December 2021 as investors worried a possible global recession could hurt oil demand. Brent crude futures settle at $77.99/bbl, up $1.89, 2.48%.

·     Gold prices dropped -$18.40 or 1% to settle at $1,792.30 an ounce, its lowest closing in about a week and snapped its 4-day win streak as investors await the U.S. inflation data and the Federal Reserve’s rate-hike decision later this week. The U.S. central bank is widely expected to raise interest rates by 50-basis points at its final meeting of 2022 scheduled on Dec. 13-14.

Currencies & Treasuries

·     The U.S. dollar edger higher on Monday ahead of tomorrows CPI data and Wednesday’s FOMC meeting results where fed funds futures traders were pricing in a 93% chance of a 50-bps hike. The euro slipped against the dollar to $1.0525 after having risen almost 8% so far in Q4.

·     Treasury yields popped to highs following a weaker 10-year auction as the US Treasury sold $32B in 10-year notes at a yield of 3.625% vs. 3.588%, (3.7bps tail is biggest since at least 2015) with the bid-to-cover at 2.31 vs. 2.23 prior as indirect bidders awarded 59.4% vs. 57.5% prior auction and directs 18.7% vs. 18.8% prior. The 10-yr yield rose to 3.62% after the auction from 3.59% prior and was up more than 10-bps off the lows of day earlier. Still all on CPI Tuesday.

Sector News Breakdown

Consumer

·     Retailers: UAA upgrade from Hold to Buy at Stifel and raise tgt to $12 from $9 saying relative inventory management discipline leaves Under Armour with better margin certainty and in a better position to bring newness to market in CY23; RH downgraded to Sell at Goldman Sachs with $215 tgt; WEBR taken private by BDT Capital Partners for $8.05 per share in deal valued at $3.7B – deal has $5.5M termination fee https://on.mktw.net/3iJIv99 ; RL tgt raised to $148 from $132 and named top idea for 2023 at Cowen as top-line momentum accelerated in CY 2022 despite a challenging macro; GPS upgraded to Buy at Goldman Sachs and raise tgt to $18 from $10 as believes has an "idiosyncratic opportunity" to demonstrate sequentially strengthening execution and better margins into 2023; LEVI downgraded to Neutral from Buy at Goldman Sachs

·     Auto sector: RIVN said it has paused its joint venture to build commercial vans with Mercedes-Benz Group in Europe just three months after it was announced; separately, RIVN to be added to the Nasdaq 100 list as of 12/19; the U.S. Energy Department said it had finalized a $2.5 billion low-cost loan to a joint venture of GM and LG Energy Solution to help pay for three new lithium-ion battery cell manufacturing facilities

·     Consumer Staples & Restaurants: LRLCY downgraded to underperform from sector perform at RBC Capital saying cracks are starting to show in L’Oréal’s ‘star’ status; ACI was ordered by a Seattle-area judge to keep its $4 billion special dividend on hold until Dec. 19 while Washington’s attorney general asks the state supreme court to halt the payment during a regulatory review of its pending merger with KR; Kellogg (K) board approved share repurchase authorization of up to $1.5B; CAKE downgraded to Sell from Neutral at Goldman Sachs

·     Casinos, Gaming, Lodging & Leisure sector: BYD downgraded to Market Perform at JMP Securities saying assets have underperformed industry growth post-pandemic, and a lack of catalysts heading into 2023 make the shares fairly valued – recommends to own MGM and FLL for their catalysts; DKNG downgrade from Buy to Neutral at Roth Capital as prefer valuing iGaming stocks off EBITDA, even if not until 2025

Energy, Industrials and Materials

·     Energy stock movers: Natural gas prices jump – the European Union has enough gas for the winter but could face a shortage next year if Russia cuts supplies further, the International Energy Agency (IEA) said. Despite Russia slashing gas deliveries this year, Europe has averted a severe shortage and started the winter with brimming gas storage tanks.

·     E&P and Majors: CTRA, MUR, and PDCE all downgraded at Truist and said would focus on longs to COP, EOG, AR, and PR saying while most E&Ps since 3Q22 earnings have suggested that they have had little to no change to their maintenance capital programs, they think some frac data suggests otherwise; HP boosts 2023 buyback plan to up to 5m shares; Pembina Pipeline Corp. agreed to sell its 50% stake, co-owned with KKR & Co., in Canada’s proposed Key Access Pipeline System; PBF announces $500 million share repurchase program

·     Aerospace & Defense: CAE and CR upgraded to Overweight from EW, TDY upgraded to Equal Weight from UW at Morgan Stanley and downgraded HEI and CW to Equal Weight from OW and MOG.A cut to Underweight from EW saying aircraft scarcity amid strong demand makes Aerospace both a growth and defensive industry in 2023. In our outlook, they identify opportunities after scrubbing valuation. Top Aero stock pick is HWM is a value play

·     Industrial & Machinery: Bank America downgraded TT, JCI, VNT, ROK, upgrade MEG saying investors are already cautious on residential HVAC demand but paying a premium for non-residential exposure. However, cracks are appearing in US non-residential demand, which historically follows residential trends. As a result, they downgrade TT to Underperform and JCI to Neutral. Downgrade ROK to Neutral on a lack of execution visibility and supply chain risk next year. Also downgrade VNT to Neutral on a combination of leverage and declining earnings in 2023. Upgrade MEG to Buy as we forecast accelerating earnings growth in 2023; RRX mentioned positively in Barron’s saying shares could soar over 40%; LEG downgraded to underweight on normalizing margins and market share losses at Piper; Dow Transports outperform, up over 3% as industrials lead, back above its 200-day MA resistance of 14,130

·     Metals & Materials; TROX said expects Q4 EBITDA to come in below guided range – presentation slides in 8K; Shares of gold miners fall, mirroring a dip in the yellow-metal’s prices as investors square positions ahead of U.S. inflation data and a slew of central bank meetings across the world, including the Federal Reserve (NEM, AEM, AUY, GOLD)

Financials

·     Asset Managers: BEN reported preliminary month-end assets under management (AUM) of $1,410.6 billion at November 30, 2022, compared to $1,318.4 billion at October 31, 2022; TROW reported preliminary month-end assets under management of $1.34 trillion as of November 30, 2022. Client transfers from mutual funds to other portfolios, including trusts and separate accounts, were $0.7 billion in November 2022 and $1.4 billion for the quarter-to-date period ended November 30, 2022; LAZ reported assets under management of $221.03 billion vs. $267.4 billion, down -17% y/y as total equity assets under management $173.58 billion, -19% y/y

·     FinTech & Consumer Finance: COF added to the JPM Analyst Focus List as a top Value opportunity; at Mizuho TOST, FISV, FIS, and HOOD named top picks in Fintech and are cautious on UPST, COIN, and SQ

Healthcare

·     Pharma movers: APVO shares jump after saying a combo of its experimental therapy with azacitidine and venetoclax produced a clinical benefit in 16-patients with acute myeloid leukemia who haven’t been treated previously with venetoclax in an early-stage clinical trial; MRK begins tender offer to acquire IMGO for $36 per share; HARP reports positive interim data in early-stage blood cancer trial; ARDS said the Cystic Fibrosis Foundation invested $4.85 million to support the company’s ongoing development of AR-501; Tough ASH morning for the allogeneic cell therapy space for several names with ACET, AFMD, FATE, ALLO and CRBU all falling early

·     Biotech movers: HZNP +14%; to be acquired by AMGN for $116.50 a share in cash as total value of the deal is valued at about $27.8 billion https://on.mktw.net/3FMrJiZ ; ACET tumbles after reports data from ongoing ADI-001 phase 1 trial in patients with relapsed or refractory aggressive B-cell Non-Hodgkin’s Lymphoma; GRCL said its experimental therapy to treat multiple myeloma, a type of blood cancer, showed promise in an early-stage study; INAB announces new data at ash showing 100 percent of cohort 1 patients maintained durable complete response in ongoing phase 1 trial of inb-100’; NOTV said it is delaying the release of 4Q and fiscal 2022 results as the company assesses the impact of a government probe into a supplier

·     MedTech Equipment: two analyst research calls in space as Citigroup upgraded PKI and QDEL to Buy from Hold and said FY23 setups and numbers appropriately set for the year with more compelling current valuations such as AVTR (top pick), BIO, and PKI (upgrade to Buy) and in Diagnostics and CROs, name QDEL (upgrade to Buy) and ICLR our respective top picks for FY23. Wells Fargo downgraded NVRO to Equal weight as 2023 ests appear high, and see headwinds, downgraded SWAV to Equal weight, significant growth runway priced in and cut RXST to equal weight on economic sensitivity – are cautiously optimistic, top picks are BSX, DXCM and GMED

Technology, Media & Telecom

·     Semiconductors: QCOM downgraded to Underweight at Wells Fargo as think shares will trade at a discount to peers because investors will assign lower multiples to chip co’s serving the no-growth mobile handset market; Deutsche Bank said "incrementally more cautious" on memory market, as believes the current downturn will last longer and be more severe than we previously forecasted, as downgraded both MU and KLAC to Hold from Buy while upgraded LRCX to Buy with $520 tgt saying while still see some risks to memory WFE in the near term, expectations are already low enough and should not have a significant impact on LRCX’s share price; GFS added to the Nasdaq 100 index as of 12/19; China on Monday launched a suit at the World Trade Organization over against the United States over its chip export control measures, the sate-backed Global Times said in a tweet on Tuesday, citing China’s commerce ministry.

·     Software movers: COUP acquired by Thoma Bravo, a leading software investment firm in an all-cash transaction with an enterprise value of $8.0 billion, with Coupa shareholders to receive $81.00 per share in cash https://on.mktw.net/3iJI12P ; MSFT said it will buy a 4% stake in the London Stock Exchange valued at £1.5 billion ($1.8 billion); MNDY upgraded from Neutral to Overweight at JPMorgan and up tgt to $140 PT saying it core differentiation is that the underlying product infrastructure is agnostic to the data structure; ORCL set to report earnings tonight after the close and ADBE to report later this week on Thursday 12/15

·     Hardware, Components & Services: BOX upgraded to overweight at JPMorgan saying customer due diligence highlights Box’s differentiated focus on rich and complex features for corporate IT departments, spanning security, compliance, workflow, and auditing; ACN downgraded to underweight at Piper anticipating that a weaker tech spending environment in 2023 will weigh on the consultant.