Closing Recap

Monday, February 27, 2023

Equity Market Recap

·     U.S. stocks finished higher, with the S&P 500 holding around its 50-day moving average support (roughly 3,980 on SPX), extending the bounce off its 200-day MA late last week (3,940), but finished off its best levels on the day as investors await the next move by major averages. Stocks kicked off the year with big gains on hopes of a Fed interest rate hike slowdown and potential pivot by year end. However, given a spate of higher inflation readings (CPI, PPI, core PCE) and signs the economy remains strong (jobs and retail sales higher), stocks have slipped recently, paring some of its YTD gains. There were no major Fed speakers today, and earnings season is winding down with only roughly 30 S&P companies reporting this week, keeping markets in check, with the S&P holding around the 4,000 level.

·     After posting its worst weekly return this year, major averages rose as stocks remain resilient in the face of many challenges: The 2-Year US Treasury yield hit 4.78% last week, its highest level since July 2007 (vs. 1.54% a year ago and 0.12% two years ago). The average price of a new home sold in the US is down 16% from its peak last July. Meanwhile the interest rate outlook from the Fed has changed drastically in a month: in 2-weeks, futures are no longer pricing any rate cuts in 2023 while odds of a 50-bps rate hike in March increased to 30%. In 2-weeks, CPI, PPI, and core PCE inflation have all come in above expectations.

·     Morgan Stanley strategist Mike Wilson “tripled” down on his bearish market outlook this morning saying “with the equity market showing signs of exhaustion after the last Fed meeting, the S&P 500 is at critical technical support. Given our view on earnings, March is a high-risk month for the bear market to resume. On the positive side, the US dollar could allow equities to make one more stand. Bear markets are mostly about negative earnings trends”.

Economic Data:

·     Durables orders for January fell -4.5%, more than the consensus -4.0% and well below the Dec reading of up +5.1%; Durables ex-transportation orders +0.7% vs. est. unchanged) and Dec -0.4%; Durables ex-defense orders -5.1% vs Dec +5.6% (prev +6.2%).

·     Pending Home sales index for January rose +8.1% vs. est. +1.0% but down (-24.1%) y/y.

Commodities, Currencies & Treasuries

·     Oil prices fell, on track for a fourth straight negative month after a January report on US durable goods weighed on sentiment, specifically the transportation sector, which accounts for two-thirds of all oil demand. The report showed an overall 4.5% m/m decline in new durable-goods orders, but a 13.3% drop in new transportation equipment orders. WTI crude slipped -$0.64 or 0.84% to settle at $75.68 per barrel. Over the weekend, Russia stopped supplies of oil to Poland via the Druzhba pipeline, a day after Poland delivered its first Leopard tanks to Ukraine.

·     The U.S. dollar slipped from a seven-week high, tracking declines in U.S. Treasury yields, with the dollar index down -0.4% around 104.80. Prices dipped after a higher-than-expected decline in U.S. durable goods of 4.5% last month, reversing a huge December boost from Boeing. Still, the buck has been on an uptrend of late given rising interest rate expectations given hotter inflation readings this month so far. Data showing U.S. pending home sales posting their largest gain in 2-1/2 years failed to lift the dollar. Data on Friday showed U.S. consumer spending rebounded sharply in January, while inflation accelerated.

·     Traders now expect the Fed to raise interest rates to around 5.4% by the September meeting, according to pricing in Fed fund futures. The dollar fell against the Japanese yen, after rising to a more than two-month high of 136.54 earlier. Gold prices rise $7.80 or 0.4% to settle at $1,824.90 an ounce, getting a lift today on dollar decline, its first gain in six trading days. Treasury yields saw modest losses after rising again last week.

Sector News Breakdown

Consumer

·     Retailers: huge week for earnings in retail with AAP, AZO, ROST, URBN on Tuesday, ANF, DLTR, KSS, LOW, AEO on Wednesday, and BBY, BIG, BURL, M, COST, JWN, VSCO on Thursday. BBY downgrade from Outperform to Market Perform at Telsey as believe Best Buy’s business is likely to experience a further decline related to the challenging macro trends weighing on discretionary consumer demand, given high inflation and rising interest rates—resulting in our lower 2023 forecasts for both sales and profits.

·     In Autos, EV’s: LI reported Q4 net income fell to RMB265.9 million ($37.3 million), or RMB0.25 per ADR from RMB295.5 million, or RMB0.29 y/y while adj EPS of RMB0.98 beat consensus of RMB0.47. FREY Q4 EPS $0.20 vs. est. loss (-$0.22); said it is focused on advancing the following strategic mandates and milestones over the next 12 months: Successfully complete the start of operations at the CQP in 1Q 2023; FSR forecasts 8-12% annual gross margin and potentially positive EBITDA for 2023 and said reservations and orders for its SUV Fisker Ocean continue to increase, totaling about 65,000 from 62,000 as of Oct. 31. LKQ agreed to buy Canada-based automotive Uni-Select Inc. in a deal valued at $2.1B (C$2.8B) https://on.mktw.net/3xVlrIZ.

·     In staples: FRPT Q4 EPS loss ($0.06), in-line with consensus ($0.06) on better revs $165.8M vs consensus $152.2M and EBITDA $18.8M vs consensus $14.4M; NOMD upgraded to Buy from Neutral, at Goldman Sachs after mixed results last week. In tobacco, WSJ reported midday that MO is in advanced talks to buy e-cigarette startup NJOY Holdings Inc. for at least $2.75 billion. https://on.wsj.com/3m1n4SC

Energy

·     Energy movers: in E&P, RRC shares give back much of Friday gains (ahead of earnings tonight) after PXD said this weekend it’s not contemplating a “significant business combination or other acquisition transaction.” Recall Bloomberg reported Friday the co is considering an acquisition of natural gas producer RRC. In pipelines, WMB downgraded to MP from OP at Bernstein saying medium term gas demand expectations have fallen as less LNG has reached FID for the 2025-27 wave than we expected six months ago. At the same time, an increase seems to be taking place in the GOR trajectories of associated basins, particularly the Permian, as gas cuts are growing.

·     In Solar/Alt Energy: JKS announced certain preliminary unaudited financial results for full year 2022; ENPH upgrade from Neutral to Buy at Janney; LICY said the U.S. Energy department to lend Li-cycle holdings Corp $375 million for New York battery recycling plant.

Financials

·     Banks: Trust bank STT upgraded to Overweight at Wells Fargo noting it outperforms in recessions given less credit risk; and if no recession, would increase their EPS ests. above base case of 10%+ in each 2023E and 2024E; GS holding its investor day on Tuesday 2/28.

·     Financial Services: Jefferies initiated PAYO with a buy recommendation, saying the payments firm suffered from a “complexity discount,” and predicting that its ongoing shift toward business-to-business transactions would lead to multiple expansion over time. TREE mixed Q4 results (EPS beat/revs miss) on lower Q1 and FY rev guidance; WTW upgraded to Buy at Goldman saying the co has shown strong progress on turnaround initiatives to date and see a material improvement in fundamentals coinciding with abating tailwinds for more concentrated P&C and commission-oriented brokers. LPRO downgraded to Outperform at Raymond James following disappointing 4Q results that featured significant downside to both revenue/EBITDA relative to the Street (-22%/-55%), and 1Q guidance that will send estimates sharply lower and no FY23 outlook.

·     Real Estate Services: JPMorgan initiates two US online real estate firms, ZG at overweight and RDFN and BMRK to merge in deal expected to create company with equity capital base of $2.8B https://on.mktw.net/3KCkpcx; OPEN downgraded from Outperform to Perform at Oppenheimer and removing price Target on slower 3P ramp than previously disclosed, while the lower-margin 2Q22 cohort continues to handicap margins. BKI shares slumped late day after Politico reported The FTC is expected to challenge Intercontinental Exchange’s (ICE) $13 billion takeover of mortgage data company Black Knight https://bit.ly/3IxSoQx

Healthcare

Pharma & Biotech: SGEN shares jumped after the WSJ reported PFE is in discussions to acquire the biotech firm in a deal that could be worth more than $30B; notes the talks are still at an early stage https://on.mktw.net/3IUJr5m ; CLDX issued updated data from a phase 1b trial of barzolvolimab in patients with moderate to severe chronic spontaneous urticaria, an allergic skin condition, showed "meaningful symptom improvement" based on the urticaria activity score. In research, SGMO upgraded to Outperform at Wedbush and raised tgt to $16 from $4 saying Phase 1/2 STAAR Data Shines at WORLDSymposium. AXSM S4 sales of $24.3M top $21.7M estimate. RETA shares stumbled ahead of FDA decision whether to approve a neurological disease drug from the company – news that Bill Dunn, who directs the FDA’s Office of Neuroscience, will retire from the agency immediately, weighed on prices, STAT news reported.

·     In Healthcare Services & MedTech: LUNG upgraded to overweight tgt $15 at Wells Fargo as believe Q4 results represent a turning point, also encouraged by the increase in utilization at existing accounts and the growth in new accounts. LHDX is seeking a strategic or financial partner to aid resumption of manufacturing for its Covid-19 & Flu test, which received emergency authorization from the U.S. FDA on Friday.

Industrials & Materials

·     In Transports: railroad UNP rises after saying Sunday it plans to name a new CEO this year after major shareholder Soroban Capital partners publicly urged the railroad company’s board to oust Lance Fritz from the job. In airlines, ULCC upgraded to Outperform at Raymond James reflecting an attractive risk-reward and increased conviction from their fare analysis and industry commentary.

·     In chemicals: WLK downgraded to Sector Perform at RBC Capital and lower ests given the 4Q miss and continued weak demand, particularly in housing/construction; at Wells Fargo, company reshuffling signature picks, adding ALB , and removing DOW and OLN, saying for CE, believe the earnings power of CE w M&M should still approach $4b in EBITDA and could see a firm inflection point in EPS headed into Q2.

·     In metals: CLF announced that it is increasing current spot market base prices for all carbon hot rolled, cold rolled and coated steel products by a minimum of $100 per net ton, effective immediately with all new orders.

·     Lithium-exposed stocks listed in the US (LAC, LTHM, ALB) were active as China’s top production hub — responsible for around a 10th of the world’s supply — faces sweeping closures amid a government probe of environmental infringements. overnight per Bloomberg.

Technology, Media & Telecom

·     In Telecom, Media, & Broadcasting: TGNA shares tumble after the FCC said late Friday it would hold a hearing on hedge fund Standard General’s $5.4B bid for the co, noting the "proposed transaction could artificially raise prices for consumers and result in job losses"; DISH tgt cut to $15 from $20 at RBC saying they are incrementally more cautious as the opportunity with wireless across both enterprise and retail postpaid seems to perennially get pushed out and less clear. WBD is suing PARA saying its competitor aired new episodes of the popular animated comedy series "South Park" after Warner paid for exclusive rights. FYBR upgraded to Strong Buy from Outperform at Raymond James following impressive 4Q results and continued execution on its post-bankruptcy plan to future-proof itself for a modern customer base.

·     Software & Hardware: SMSI shares tumble after saying received written notice of contract termination from a U.S.-based Tier 1 carrier customer for the Company’s family safety solution on Feb 21st, effective June 30, 2023. In earnings results from WDAY and ZM later tonight and then SNOW and CRM later this week. Ahead of DELL and HPQ results this week, UBS says its survey of 1500 PC owners in the US and China shows improving consumer sentiment. The analysts say the average replacement cycle for PCs has contracted to 3 years from 3.1 years, with the shortening mainly coming from the US, at 2.9 years from 3.1 years.