Closing Recap

Wednesday, January 04, 2023

Equity Market Recap

·     U.S. stock markets pivoted, then backed away from its gains before surging late in the wake of the release of the Fed’s minutes from its December monetary policy meeting, which showed members agreeing to slow the pace of future interest rate hikes. Major averages slipped after the Fed minutes revealed concerns about any "misperception" that the central bank was easing back on its hawkish battle to rein in inflation. At the time, Fed Chair Jerome Powell jolted investors by warning that restrictive interest rates could reach higher and last longer than many might have hoped. Major averages jumped in the final minutes amid a strong day of breadth (A/D was in favor of advancers 4:1 margin). Oil prices slid to their lowest settlement in three weeks, pressured by ongoing worries about the outlook for global economic growth, which can lead to lower demand. WTI crude fell over 5% after recording a 4% decline on Tuesday, leading energy stocks lower. For the second day, energy was the big laggard in the S&P 500 (after leading in 2022) while 2022 underperformers (communication, REITs, discretionary) paced the gains.

·     The Minutes from the December 13-14 FOMC policy meeting showed all officials agreed the U.S. central bank should slow the pace of its aggressive interest rate increases, allowing them to continue increasing the cost of credit to control inflation but in a gradual way. Policymakers still focused on controlling the pace of price increases that threatened to run hotter than anticipated, and worried about any "misperception" in financial markets that their commitment to fighting inflation was in any way flagging. But officials also acknowledged they had made "significant progress" over the past year in raising rates enough to bring inflation down. Most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance," the minutes said, indicating officials may be prepared to scale back to 25-bps in Jan.

·     Stock markets ignored overly “hawkish” commentary from Minneapolis Fed President Neel Kashkari earlier who said the Fed should continue hiking interest rates at its next few meetings at a minimum until it is sure that inflation has peaked, setting out his own forecast that the policy rate should initially pause at 5.4%. "In my view … it will be appropriate to continue to raise rates at least at the next few meetings until we are confident inflation has peaked," Kashkari said. Note the Fed’s main policy rate currently sits in a target range of 4.25% to 4.50%.

Economic Data:

·     JOLTS job openings 10.458M in November vs. Oct 10.512M but well above the 10.0M estimate

·     ISM Manufacturing PMI for December 48.4 vs 48.5 est. and 49.0 in November; strong employment trends weigh on markets as employment index 51.4 in December vs 48.4 in November, which overshadowed a drop in orders and prices paid – prices paid index 39.4 in December vs 43.0 in November and new orders index 45.2 in December vs 47.2 in November

·     Bespoke Investment notes the only times the Prices Paid component of the ISM report fell by more (-47.7 points) in a 9-month span was during the financial crisis and in April 1975.

Commodities, Currencies & Treasuries

·     Oil prices fall sharply for a second straight day, with WTI crude down -$4.09 or over 5.2% to $72.84 per barrel, as concerns about weak demand due to the state of the global economy and China’s rising COVID cases weigh on sentiment. OPEC oil output rose in December, a Reuters survey found, despite an agreement by the wider OPEC+ alliance to cut production tgts. OPEC pumped 29.0 million barrels per day (bpd) last month, the survey found, up 120,000 bpd from November. In September, OPEC output had been its highest since 2020. Natural gas prices bounce after hitting 11-month lows, rising to $4.172 mln btus.

·     Gold rises to fresh 6-month highs, boosted by a pullback in the dollar and yields as markets awaited the release of Federal Reserve minutes. Gold prices rose a 4^th straight day up $12.90 to settle at $1,859.00 an ounce after hitting highs of $1,871.30 an ounce. Silver was down 0.9% to $23.78 per ounce, platinum fell 0.8% to $1,075.76, while palladium jumped 4.5% to $1,786.47.

·     The U.S. dollar index was down 0.25%, while benchmark 10-year yields also eased for the day. Treasuries are higher again with the 10-year yield falling to and finding support ~3.677% following a global debt rally before ending around 3.7%. The Canadian dollar hit 4-week highs above 1.348 vs. the US dollar, the euro moved back above 1% and the dollar/yen moved another 1% in a pickup in volatility since the BoJ meeting last week.

Sector News Breakdown

Consumer

·     Retailers: TGT downgraded to Equal Weight from Overweight at Wells Fargo as see a complicated and rather uninspiring investment backdrop for their group as we kick off 2023 saying they like staples retailers leveraged to trade down and the low income consumer, with DG, BJ, and WMT at the top of our list; AMZN tgt trimmed at UBS (to $125 from $165) and cut AWS ests to +21% y/y in 4Q, +18.4% y/y in ’23, and +19.3% y/y in ’24, considerably below VisibleAlpha (VA) consensus at 23% / 22% / 22%, respectively; BURL was upgraded to Hold from Sell, price target $200 at Loop Capital; OSTK downgraded to Hold from Buy at Needham; BABA shares rise with Ant’s approved fundraising plan boosting optimism that China’s regulatory clampdown on its internet sector is easing

·     Auto sector: RIVN reported 4Q22 delivery numbers that matched expectations but production numbers that narrowly (~700 vehicles) fell short of expectations – Total deliveries grew to 8,054 units in the quarter, a 22% increase compared to 6,584 units delivered during 3Q22. Total production grew to 10,020 units in Q4, a 36% increase compared to 7,363 units y/y; GM reclaims U.S. Auto sales title, outselling TM in 2022 as sold 2.27M vehicles in U.S. In 2022, compared to 2.11M for Toyota; NSANY reports Q4 U.S. sales down 2% to 191,012 units; STLA is getting into the aircraft-manufacturing business, striking a deal with ACHR to help build an electric flying taxi; TSLA files paperwork to make electric motors for airplanes, boats, and more, Electrek reports

·     Consumer Staples: lags broader market gains; in research, KMB downgraded from Buy to Hold at Jefferies saying it has the greatest degree of trade down risk in HPC, which is already evident in tissue/wipes/diapers; SAM downgrade from Hold to Underperform at Jefferies and cut tgt to $275 from $331 saying the hard seltzer category has yet to "bottom" suggesting risk to Street ests. and deleverage to prolong Co.’s GM % recovery; FIZZ downgraded from Hold to Underperform at Jefferies saying mkt share losses likely to continue given both competitive and trade down risk leading to more prolonged GM % recovery than reflected in consensus ests.; SBUX tgt raised to $112 from $104 at Cowen calling it the best name under coverage to benefit from a China reopening – said top 3 restaurant picks are: YUM, WING, CMG

·     Housing & Building Products: weekly US mortgage market index falls 10.3% to 184.5 in week ended dec 30, according to the MBA; the purchase index falls 12.0% and the refinancing index falls 4.4% as the average 30-year mortgage rate rises 16 bps to 6.58%

Energy

·     Pipelines, E&P, and Majors: energy the biggest drag on the S&P for a second day as oil prices tumble – BKR, APA, VLO among decliners; NOV upgraded to Overweight at Morgan Stanley in oilfield equipment saying 2022 proved even better than expected for Energy Services & Equipment, and the trend remains positive into 2023; SM was downgraded to Neutral at JPMorgan and cut tgt to $46 from $55, trading in-line with peers despite expected oil volume decline; NGL boosted its FY23 adjusted EBITDA guidance from $600M to greater than $630M announced that Brad Cooper will be promoted to Executive Vice President and CFO effective January 13, 2023; PTEN said it sees Q4 2022 net income to exceed $100M, above ests $74.4M and Q4 EBITDA to surpass $230 mln, while analysts expect $207.5M

·     Utilities & Solar: in Renewable Energy and Clean Technology, Raymond James upgraded GTLS from Market Perform to Strong Buy, an opportunistic yet contrarian call in the wake of the controversial Howden acquisition; upgraded MAXN from Market Perform to Outperform, following the stock’s steep drop from the initial euphoria created by the Inflation Reduction Act; upgraded NEP from Underperform to Market Perform, reflecting a stabilizing interest rate environment while downgraded ADSE from Strong Buy to Market Perform, due to a lack of financial visibility, particularly vis-a-vis U.S. sales diversification; and cut XYL from Market Perform to Underperform, due to a prolonged absence of M&A and an overly lofty valuation.

Financials

·     Bank movers: Wolfe with 2023 outlook in banks, downgrading both GS (to PP from OP) and MS (to Underperform from OP) while upgrading BK to OP from PP (Upside on NII, Buyback) and said 2023 Top Picks: BK upgraded to Buy from Neutral with a $98 price target at Goldman Sachs saying the company’s deposits balances should trough by mid-2023, "unlocking significant earnings power; BK also upgraded at Goldman to Buy citing the combo of an improving fee outlook and underappreciated pre-tax margin improvement opportunity; NTRS was downgraded at Goldman saying tailwinds from higher short-term interest rates peaking

·     Financial Services, Exchanges & Asset Managers: CACC shares tumbled, sued by the U.S. Consumer Financial Protection Bureau and New York AG accusing the subprime auto lender of steering tens of thousands of low-income borrowers into high-interest car loans; CME reported average daily volume for December of 19.2 million and average daily contract volume +7%; TRU upgraded from Equal Weight to Overweight at Morgan Stanley as believe that even in a worsening consumer environment, the stock presents an attractive valuation; FRSH downgraded to Hold from Buy at Canaccord, going to step to the sidelines for now in the context of valuation and still decelerating business metrics; COIN rises after settling with financial regulators for $100M which found that it let customers open accounts without conducting sufficient background checks; other crypto related stocks saw bounces today COIN, MARA, MSTR, SI, RIOT

·     REITs: several analyst changes today: Raymond James downgraded BFS and ROIC in shopping center REITs while saying FRT and KRG are top picks; Mizuho downgraded CUZ saying the Sunbelt should see an uneven recovery post-COVID, driving our then-Neutral stance on CUZ and HIWwhile upgrade VNO to Neutral, remain Underperform on HPP, and keep our Buy on BXP, KRC and PGRE; DLR was downgraded to Underperform at Credit Suisse and cut tgt to $81 from $91 as forecast further ~20% downside from current levels after falling -40% in 2022; Deutsche Bank downgraded BXP from Buy to Hold as office CRE faces a secular headwind as companies right-size their footprint and a cyclical slowdown driven by an expected recession and AVB cut from Buy to Hold as the company’s $2.3B development platform harbors negative leverage risk

Healthcare

·     Pharma movers: PFE downgraded to Neutral from Buy at Bank America based on uncertainty over the magnitude of the revenue decline for Comirnaty/Paxlovid in 2023 and collective impact from launches to offset the ~$17B LOE hole in 2025-2030; MRK upgraded to Buy from Neutral at Bank America based on continuation of strong growth trends seen last year and substantial progress diversifying the Keytruda LOE / concentration risk; VERA tumbles following the post-close release of topline results from the Phase 2b ORIGIN trial (NCT04716231) of atacicept for the treatment of IgA nephropathy – downgraded at Wedbush; GERN announced top-line results from the IMerge Phase 3 clinical trial of imetelstat, with the study meeting its primary and key secondary endpoints; PHAT stumbles after saying the FDA is delaying its decision on the NDA for vonoprazan (p-cab approved as Voquezna in H. Pylori) in erosive esophagitis (EE), originally scheduled for January 11, 2023

·     Biotech movers: DCPH guides Q4 revs ~$36M vs consensus $35M; says QINLOCK showed substantial clinical benefit from Ph 3 INTRIGUE analysis (was upgraded to Buy from Neutral at Guggenheim following the company’s business update and newly announced plans to initiate the Phase III INSIGHT study evaluating Qinlock in 2L GIST; ARAV said it achieved full enrollment in its late-stage clinical trial of a platinum-resistant ovarian cancer treatment

·     Healthcare Services: GEHC announced that its previously announced spin-off from GE is complete, and GE HealthCare will begin trading as an independent company on the Nasdaq exchange under the ticker symbol "GEHC" effective at the market opening on January 4; UNH falling to $500, extending losses after dropping below 200-day MA yesterday

Industrials & Materials

·     Industrial & Machinery: UBS with several changes in the sector as HON downgraded to Sell from Buy on full valuation, anticipated order slowdown & subsequent backlog burn and tgt cut to $193 from $220; EMR downgrade to Neutral at UBS as sum-of-the-parts analysis and pro forma acquisition modeling suggest full valuation – tgt to $100 from $118; HUBB downgraded to Sell with shares at a more than 2 SDEV premium vs the SPX, we see scope for 2023 derating – tgt to $225 from $254; TT upgraded to Buy and raise PT to $200on view its well positioned to bridge the gap to a more accommodative Fed policy / macro backdrop via sustained order momentum and resulting backlog buffer; ENVX plunges after the company’s Executive Chairman gave a special presentation yesterday, with JPMorgan flagging further delays in the production ramp, which the broker said may disappoint investors, while Cowen reiterated Overweight and $25 tgt

·     Transports: in rails, RBC Capital said they are modeling for lower volumes at the US Rails in 2023 (CSX, UNP, NSC), in line with their expectation for a recession in H1/23; NSC was downgraded to equal weight at Wells Fargo saying volumes unlikely to outperform peers and could underperform given exposure to intermodal and coal; in freight, FWRD downgraded from Buy to Hold at Jefferies saying they do not see material upside to estimates nor sentiment as it relates to a freight recovery given their weak macro-outlook; CHRW was downgraded to Neutral at Bank America after CEO was removed yesterday and downgraded to Neutral at UBS because analysis points to a sharper decline in revenue and EPS than is reflected in consensus; JBHT and HUBG both downgraded at UBS in intermodal sector; RYAAY raises guidance in airlines

·     Metals & Materials: gold miners enjoying another strong day behind a jump in the precious metal to start 2023 after a flat year in 2022 (NEM, GOLD, AUY, AEM); in Paper and Packaging, Citigroup said its top pick is CCK, downgraded SEE to Neutral and upgraded OI to Buy as see a stock pickers market continuing in 2023, with select names seeing margin expansion as price/cost catches up; CE upgraded to OP from SP at RBC Capital given better than expected M&M integration, double-digit growth anticipated in EM, a Q1/23 trough in AC EBIT, and solid deleveraging – raised tgt to $125 from $98; in the lithium sector, Vertical Research upgraded ALB, LTHM to Buy from Neutral and downgraded APD to Neutral in industrial gases

Technology, Media & Telecom

·     Software movers: CRM announced a restructuring plan that it will incur approximately $1.4B-$2.1B in charges in connection with plan which includes a reduction of current workforce by about 10%, select real estate exits and office space reductions within certain markets; MSFT downgraded to neutral from buy at UBS and lowered its price target to $250 from $300 saying Microsoft’s growth engine, Azure, is entering a steep growth deceleration which may be due to maturation and not just a tough macro environment; SGH rises on earnings as 1Q adj EPS $0.79 vs est. $0.57 on revs $465Mm vs est. $447.7Mm, gross margin 25.4%, adj op Inc $54.8Mm vs est. $43.3Mm; guides 2Q sales $460Mm vs est. $432.2Mm and adj EPS $0.45-0.75 vs est. $0.49; in research, RPD and VEEV downgraded from Overweight to Equal Weight at Barclays as start shifting to more defensive picks in 2023; Bank America upgrades PWSC (defensive) and AMPL (category leadership) to Buy from Neutral; downgrade BIGC (execution risks) and ZI (valuation) to Neutral from Buy; and downgrade ENFN (transition risks), DCT (competition) and LAW (low model visibility) to Underperform from Neutral and revising C23 estimates downward heading into recession – 2022 was a tough year; PRGS announced plans to acquire NoSQL multi-model database vendor MarkLogic for $355 million

·     Telecom, Media, Internet: VMEO announced a reduction of its global full-time headcount by approximately 11%; ETSY upgraded from Hold to Buy at Needham with $150 tgt saying multiple contraction drove most of Etsy’s share underperformance in ’22 – said positive earnings revisions and multiple expansion should drive share upside from here; ROKU unveils its first-ever TVs designed and built by the company; VZ had positive consumer net additions in 4Q, CEO Hans Vestberg said today at a Citigroup conference

·     Semiconductors: chip names outperformed broader technology all day, led by shares of MU, WDC which advanced on reports that China is pausing its investments aimed at building a chip industry to compete with the U.S. as the country’s COVID resurgence strains it economy https://bloom.bg/3WLt9A2

·     Hardware, Components & Services: GLW upgraded to OP from Neutral with $36 tgt at Credit Suisse as expects several headwinds to change to tailwinds during 2023; ANET among top decliners in the S&P, dropping below its 200-day MA support earlier of $117