Closing Recap

Tuesday, December 20, 2022

Equity Market Recap

·     U.S. stocks finished little changed, bouncing off overnight lows following an unexpected move by the Bank of Japan, barely snapping a 4-day losing streak. The BOJ unexpectedly widened its cap on 10-year Japanese government bond yields, prompting a global selloff in bond markets and boosted the Japanese yen by over 4% vs. the dollar to best levels in 3-months. Gains today were in energy, industrials, materials, and financials, while defensive sectors staples and utilities lagged. Volumes were light and trading ranges narrower than in recent weeks as investors ease into the Christmas Day holiday weekend. Another day, another awful reading for housing data as November housing starts and building permits decline from the prior month as rising interest rates have really cooled off this industry this year. Next up earnings results in the consumer space with Nike (NKE) and Transports with Fed-Ex (FDX), both a good read on the consumer.

·     The Nasdaq 100 on track for its first losing year since 2008, currently down about -32% YTD. YTD returns since 2000: -37%, 2001: -33%, 2002: -38%, 2003: +50%, 2004: +11%, 2005: +2%, 2006: +7%, 2007: +19%, 2008: -42%, 2009: +55%, 2010: +20%, 2011: +4%, 2012: +18%, 2013: +37%, 2014: +19%, 2015: +10%, 2016: +7%, 2017: +33%, 2018: +.04%, 2019: +39%, 2020: +49%, 2021: +27%, 2022 YTD: -32% as per Charlie Bilello. Tech remains weak, as per Bespoke: Yesterday, Amazon AMZN became the first of the mega-caps to see a $1+ trillion drawdown in market cap. All six of AAPL AMZN GOOGL MSFT META and TSLA are in $750+ billion market cap drawdowns for a combined drop of more than $5 trillion.

Economic Data:

·     More weak housing data as November Housing Starts fell (-0.5%) M/M to 1.427M vs. 1.400M expected and 1.434M prior (revised from 1.425M). Building permits a much wider miss, falling (-11.2%) M/M to 1.342M vs. 1.495M expected and 1.526M prior (unchanged). November single-family starts (-4.1%) to 828,000-unit rate while multifamily +4.9% to 599,000-unit rate. Recall that on Monday, homebuilder confidence fell in December for the 12th straight month.

·     Philadelphia Fed non-manufacturing regional business activity index -17.1 in Dec vs -13.6 in Nov; non-manufacturing firm-level business activity index 3.4 in Dec vs -2.6 in Nov; new orders index -6.1 in dec vs -6.3 in Nov and full-time employment index 3.4 in Dec vs 10.0 in Nov

Commodities

·     Oil prices finish flat, as WTI crude settles at $75.19 per barrel (high $76.75 and low $74.31) ahead of weekly inventory data tonight/tomorrow. Gas prices, now at $3.12/gallon nationally according to AAA, have fallen every day since 11/9 and are now down 16 cents since the start of the year ($3.28), as per Bespoke Investment. Gold prices rise $27.90 or 1.5% to settle at $1,825.40 an ounce, a big beneficiary of the weaker US dollar on the day; Spot silver rose 4.6% to $24.01 per ounce, posting its biggest intraday gain since early November.

Currencies & Treasuries

·     U.S. Treasury yields higher, with the 10-year soaring to the highest this month at 3.711%, before ending slightly below around 3.69%, up about 10-bps. The 2-yr up was up only 2 bps to 4.285% as inversion narrows to around 60-bps after topping above 80-bps just a week ago. The move by the Bank of Japan led to a global sell-off in bonds.

·     The Japanese yen gained as much as 4.4% against the US dollar, hitting below 131 (4-month best) after the Bank of Japan kept its broad policy settings unchanged but decided to let long-term yields move 50-bps either side of its 0% target, wider than the 25-bps previously. The U.S. dollar has declined more than 11% against the yen over past two months—largest such decline since December 2008 noted Bespoke Investment.

Sector News Breakdown

Consumer

·     Retailers: Dow component NKE expected to report earnings tonight – big catalyst for retail space; Credit Suisse initiates & assumes coverage of the sector, while most of the assumptions aren’t changed from previous coverage, assumed coverage of BJ with downgrades to Neutral from Outperform and lowers tgts on HD to $335 from $390, on TGT to $160 from $165 and lowers PT on BJ to $75 from $80; Cowen said they are positive RVLV, and cautious FTCH – as RVLV continues to report strong online traffic trends as traffic holds at 30%+ Y/Y, while FTCH decelerates to -12% from -11%. Beauty (ELF, ULTA) continue to outperform along with accessories (CPRI, TPR), while essentials (TGT, WMT) see Y/Y declines; SCS Q3 adj EPS $0.10 vs. est. $0.18; Q3 revs $826.9M vs. est. $836.4M; sees Q4 revs $740M-$765M vs. est. $790.3M

·     Auto sector: TSLA hits 2-year lows as downside momentum continued (shares drop for the 10^th time in the last 12-trading days); LCID shares rally as completed its previously announced "at-the-market" equity offering program, selling more than 56.2M shares of its common stock for gross proceeds of approximately $600M; RIVN was initiated at Overweight and $30 tgt at Cantor as believe RIVN benefits from a differentiated product offering, a strong backing from Amazon and a proprietary charging network; MGA agreed to pay $1.525 billion in cash for the Veoneer Active Safety business from seller SSW Partners, a New York-based investment partnership; U.S. auto safety regulators said on Tuesday they are investigating if HTZ rented unrepaired recalled vehicles to customers.

·     Housing & Building Products: J.P. Morgan downgrades construction materials OC to underweight from neutral and home appliances maker WHR to neutral from OW while cutting targets as sees macroeconomic headwinds including softening housing market, exposure to European markets and cost inflation to persist for the next 6-9 months – upgraded JELD to Neutral. Another downbeat housing economic data report as Building Permits and Housing Starts for November fell more than expected (homebuilders – TOL, LEN, PHM, MTH, KBH)

·     Consumer Staples: in food, GIS Q2 adj EPS $1.10 vs. est. $1.07; Q2 sales rose 4% to $5.2B y/y vs. est. $5.19B; and raises full-year fiscal 2023 rev outlook to growth of 3% to 5%, from its earlier view of 0% to 3% and boosts its 2023 EPS estimate to 4% to 6% from its earlier view of 2% to 5%, due to better performance and price mix; IFF has agreed to sell its Savory Solutions Group to private equity firm PAI Partners in a transaction that values the business at ~$900M; in research, Morgan Stanley upgraded food companies CAG and SJM while downgraded TWNK saying stable Packaged Food fundamentals and defensive positioning against a softer macro backdrop and volatile market conditions support continued relative outperformance for the group in 2023

Energy, Industrials and Materials

·     Energy stock movers: XOM is avoiding hiring oil tankers that previously carried cargoes from Russia, putting itself in the same camp as Shell with a move that pressures owners to choose whether to serve Moscow’s interests or not, Bloomberg reported; TC Energy Corp (TRP) has submitted its plan to restart the Keystone pipeline to U.S. regulators, Reuters reported this morning citing a source familiar with the matter said on Tuesday, two weeks after the 622,000 barrel-per-day (bpd) pipeline was shut after it spilled 14K barrels of oil in rural Kansas on Dec. 7

·     Industrial & Machinery: MMM said it will exit manufacturing of per- and polyfluoroalkyl substances (PFAS), also known as forever chemicals and cease its use across its products by 2025-end and expects pre-tax charges between $1.3B-$2.3B, including $700M-$1.0B in Q4; FCEL shares tumble to 2-year lows following larger quarterly loss

·     Transports: sector falls ahead of package delivery giant FDX reporting earnings tonight, where they are anticipated to show a roughly 40% earnings decline; truckers, rails, airlines remained weak on the day; in research, ALGT and SAVE were both downgraded to Hold from Buy at Deutsche Bank; J.P Morgan cuts PT for JBHT to $181 from $183 and for CSX to $32 from $33

·     Metals & Materials: STLD to replace ABMD in the S&P 500 at open on 12/22; NUE announced that California steel industries will build a continuous galvanizing line at its mill in Fontana, California; investment is expected to cost approximately $370M; gold miners outperform (NEM) behind the jump in gold as the dollar slides

·     Refiners (VLO, DK, PBF, MPC): Raymond James previewed the sector as they upgraded estimates for 4Q22+, review the current macro setup into 2023, discuss investor sentiment and debates, and outline why they think the risk/reward is still attractive for 2023 noting cracks have continued to fall from historical October levels as crude diffs and diesel cracks have kept refining margins bolstered.

Financials

·     Bank movers: WFC shares slipped early after the Consumer Financial Protection Bureau ordered the bank to pay more than $2 billion in redress to consumers and a $1.7 billion civil penalty for legal violations across several of its largest product lines; banks and insurance names were among the top gainers in the S&P 500 today following the pike in Treasury yields; SI is reviewing transactions between Sam Bankman-Fried’s crypto exchange FTX and his investment firm Alameda Research, the bank told three U.S. senators – WSJ reported

·     Services, FinTech & Payments: for GPN, Truist said they stay bullish as cut tgt to $120 from $135 noting has underperformed (-31% YTD/SPX -20%) amidst macro and competitive concerns but argue it has an attractive tech-enabled Merchant footprint (60%+ of rev); DLO rises after announcing new $100M share buyback plan; FDS shares dropped following earnings results

Healthcare

·     Pharma movers: VRNA shares jump as achieved positive results in the Phase 3 ENHANCE-1 trial evaluating nebulized ensifentrine for the maintenance treatment of chronic obstructive pulmonary disease; ALT announces positive topline results from 24-week (12-week extension) trial of pemvidutide in subjects with non-alcoholic fatty liver disease; MGTA shares cut in half after stops dosing patients at cohort 4 dosing level in drug MGTA-117’s early-to-mid-stage trial after dose-limiting toxicities (DLTs) were observed in the second and third dosed participants

·     Biotech movers: GILD and RCUS shares drop after reported mid-stage data that showed their combo cancer therapy helped shrink or destroy tumors in 41% of patients, which analysts say missed investor expectations; BEAM upgraded to Outperform and $66 tgt at BMO Capital saying despite always been positive on its base editing technology, remained on the sidelines due to lack of near-term stock-moving catalysts from Beam’s pipeline – but see good risk/reward now

·     Cannabis sector: Congress did not include the SAFE Act on cannabis banking in the omnibus, which means it will not become law in the lame duck. Cantor said that is a disappointment to them as expected Senate Majority Leader Chuck Schumer to use his influence to get SAFE enacted. Cantor said while disappointed, this will likely accelerate a much-needed industry rationalization, benefiting the largest incumbents (Outperform-rated GTBIF, CURLF, TCNNF)

·     MedTech Equipment: Canaccord issued its 2023 Med-Tech outlook: weathering the macro storm in a defensive sector with improving fundamentals – and said have three focus names SWAV, TMDX and NVRO (which was upgraded to Buy) as believe that each of these companies can outperform peers in 2023 – firm downgraded MMSI to Hold given current valuation; CTLT to buy U.S. commercial rights for FYCOMPA from Eisai for $160M

·     Healthcare Services: Wells Fargo updates tracking of inpatient hospital utilization to reflect data through 12/9, capturing ~11 weeks (~85%) of Q4 saying current data week (12/10-12/16) screens mixed as analysis suggests inpatient days decreased 2.4% w/w at the national level and 2.8% / 4.4% w/w for THC (before potential restatements). However, we see HCA’s inpatient days up 1.3% w/w. UHS data quality appears to be impacted by recurring reporting issue; WMT reaches opioid settlement agreements with all 50 states

Technology, Media & Telecom

·     Media, Internet: NFLX new ad-supported plan was the least popular tier of its service in November, the first month in which the streaming giant offered it, according to subscription analytics firm Antenna. The plan accounted for 9% of new Netflix sign-ups in the U.S. during the month https://on.wsj.com/3BOOAIb ; GOP lawmakers press Biden officials for answers on TikTok Security concerns, the WSJ reported (SNAP, META); JPMorgan several changes in Internet space, upgrading MAX, EVER and downgrading ZD, YELP, SFIXfor DIS, Wells Fargo said they think Bob Iger is returning to DIS to make big changes. Spinning ESPN/ABC is the best path forward and they see it as a reasonably probable late-’23 event. Splitting would leave remaining DIS as an attractive pureplay IP company.

·     Semiconductors: MKSI upgraded to Overweight and $100 tgt at KeyBanc after attending MKSI’s recent analyst day, saying they better appreciate the strong competitive position ATC brings, and expect a resumption of the LT secular trends toward increasing semi demand, a higher reliance on advanced packaging techniques; SMIC to replace STLD in S&P 400 at open on 12/22; European antitrust regulators have opened an in-depth investigation into U.S. chipmaker AVGO’s proposed $61 billion bid for cloud computing company VMW, the European Commission said

·     Hardware, Components & Services: JPMorgan said for tech communication sector 2023 outlook they see downside risks from macro which leads them to choose resilience; as recommend JNPR, APH, KEYS, ANET, CDW, FN – said for sector could see a scenario of 2H23 growth appearing to be robust helped by macro recovery and easier comps; hence, we are choosing to take a shorter-term 6-month view on stock recommendations. The firm upgraded FN and CIEN to Overweight from Neutral and downgraded NTAP to Neutral from OW; separately at JPM, they again lower revenue and earnings forecast for FY23 for AAPL