Closing Recap

Wednesday, January 25, 2023

Index	Up/Down	%	Last
DJ Industrials	9.75	0.03%	33,743
S&P 500	-0.78	0.02%	4,016
Nasdaq	-20.91	0.18%	11,313
Russell 2000	4.71	0.25%	1,890

 

Equity Market Recap

·     US equities saw another wild session. Lackluster guidance from MSFT last night spooked futures overnight and prompted a very soft open, but averages found help in their 200dma supports and held a generally upward trajectory into the last hour of trading. Even MSFT briefly crossed to green as investors digested the guidance. @bespokeinvest informs us that through yesterday morning, 57% of companies and beaten EPS estimates this season and 54% had beaten sales estimates. While 7% have lowered guidance vs 2% raising, the average stock has gained 0.87% on its earnings reaction day. MSFT is more the norm than the exception, it would appear.

·     Other datapoints floating around today were generally more pessimistic. @KobeissiLetter reminds us we have the highest inflation since 1980, mass layoffs and declining earnings, record credit card debt and the fastest falling housing market since 2011, while 1.84% of auto loans are now severely delinquent (marking highest since February 2009). It is also worth noting that gasoline prices have reversed and are now +11% in the past month. According to @RyanDetrick, though, the January effect holds that when “stocks are up in January, the rest of year is higher 86% of time and up 11.9% on avg. If lower? Only 2.1% and 60%.” So the jury may still be out.

·     From a sector-perspective, with the markets climbing back to near-unchanged into the final hour, performance was mixed. Financials (XLF, +0.57%), Consumer Discretionary (XLY, +0.42%) and Communications (XLC, +0.34%) paced the gainers while Utilities (XLU, -1.38%), Industrials (XLI, -0.59%) and Energy (XLE, -0.34%) led the laggards lower. Breadth was almost even into late afternoon and Value outpaced Growth, with the Russell 1000 Value +0.1% and Russell 1000 growth mirroring at -0.1%.

 

·     Key economic data tomorrow morning with Q4 GDP, Consumer Spending and PCE and Core PCE inflation readings (as well as jobless claims). Then on Friday, another round of inflation data with Consumer Prices (CPI) on tap for January both M/M and Y/Y.

·     CNBC noted this morning out of 96 S&P companies reporting so far, beat rate is 71% vs. average 78% and the size of the beat +0.9% compared to average +9.9%.

·     The US Money Supply has fallen 1.3% over the last 12 months, the first year-over-year decline on record (note: M2 data goes back to 1959), as per Charlie Bilello.

·     The Bank of Canada on Wednesday hiked its benchmark overnight interest rate by 25 basis points to 4.5%, its highest level in 15 years, and said it would likely pause to measure the cumulative effect of previous increases (in-line with expectations).

·     Australian inflation accelerated to the fastest pace in 32 years in the final three months of 2022, exceeding forecasts as the consumer price index advanced 7.8% from a year earlier, exceeding economists’ 7.6% estimate, official data showed.

 

Commodities, Currencies & Treasuries

·     WTI crude March futures gained $0.02, or +0.02% to settle at $80.15/bbl, while Brent lost $0.01, or -0.01% to finish at $86.12/bbl. The WTI settlement marked the fifth consecutive day above $80/bbl despite US crude inventories rising last week to their highest level since June 2021. Analysts had expected a decline. Inventories in the US SPR remained stable, ending a streak of 71 consecutive weekly declines with reserves holding at the lowest levels since 1983. Overall, modest inventory forecasts and expectations for accelerating demand growth in China also continue to support pricing at current levels.

·     February gold settled at $1,942.60/oz, +$7.20 or +.037% to mark the highest close for the active contract since April 21. Today also marks the longest consecutive daily gains streak since August 2, at five days. Year-to-date gold has risen more than 6%, supported by indications of slowing inflation coupled with recession fears and a weakening US dollar. Doubters see the recent move as too much, too fast and hold concern the market is expecting the Fed to ease off more quickly than is likely.

·     Treasury yields were choppy, falling late day off highs after another strong bond auction saw more demand for bonds. U.S. Treasury sold $43B in 5-year notes at high yield 3.53% vs. 3.55% when issued prior with bid-to-cover ratio 2.64 (vs. 246 prior auction), primary dealers take 8.82% of U.S. 5-year notes sale, directs 15.44% and indirect 75.74% (vs. prior 64.5%). The 10-yr yield ended around 3.45%.

 

 

Macro	Up/Down	Last
WTI Crude	0.02	80.15
Brent	-0.01	86.12
Gold	7.20	1,942.60
EUR/USD	0.0023	1.0908
JPY/USD	-0.51	129.64
10-Year Note	0.002	3.469%

 

 

Sector News Breakdown

Consumer

Autos:

·     TSLA expected to report earnings after the close tonight. In EV sector, Morgan Stanley said TSLA’s recent price cuts are just the latest sign the EV market may be entering the ‘shake-out’ phase as they reduce exposure across the EV portfolio, while making Tesla our Top Pick (cuts tgt to $220 from $250), lower RIVN tgt to $28 from $55 but stay OW rated, LCID tgt to $5 from $10 and reit UW, downgraded FREY to EW from OW and slash tgt to $13 from $26, downgraded FSR to underweight and tgt halved to $4 from $8 citing need for capital, an unfavorable re-balancing of supply and demand and lastly cut LICY to Underweight from EW and cut tgt to $4 from $7.

·     In auto parts: GNTX PT raise from $29 to $32, VC PT raise from $147 to $160, both remain Buy at Guggenheim noting over the next 12-18 months they continue to prefer secular growth stories (APTV, GNTX, and VC but into guidance we would only be buyers of GNTX.

·     The WSJ reported the Justice Department is investigating GT for its handling of a recalled tire that has been linked to eight deaths and dozens of injuries, according to people with knowledge of the matter. https://on.wsj.com/3XE6EOb

·     Renault (RNLSY) upgraded to Outperform at Bernstein saying the risk-reward balance has improved significantly. An extension of strong European earnings will limit cyclical downside for the stock in ’23.

 

Consumer Staples:

·     In consumer products, Kleenex tissue maker KMB qtrly EPS of $1.54 tops est. $1.51 on slightly higher net sales but forecast FY23 sales and profit below analysts’ estimates (guides FY profit +2%-6% vs. est. for 15% jump) – Q4 sales marginally missed, and sales volumes fell 7%.

·     In tobacco, PM upgraded from Neutral to Buy at Goldman Sachs and up tgt to $120 from $95 based on in-depth nicotine category build, where they size the revenue and profit opportunity for the entire nicotine market through 2030 across the six major categories (cigarettes, cigars, heat-not-burn, e-vapor, smokeless/snus, and oral nicotine pouches).

·     The cost of a dozen eggs in the US has moved from $1.79 to $4.25 over the last year, the largest 12-month % increase on record (+138%), as per Charlie Bilello data (CALM levered to egg prices). U.S. Sen. Jack Reed sent a letter Tuesday asking for the Federal Trade Commission to investigate whether egg prices have been improperly manipulated by producers.

 

Restaurants:

·     BLMN downgraded to Market Perform from Outperform at BMO Capital and lower tgt to $26 from $29, using recent strength in shares, which coincided with accelerating BLMN/industry traffic data, as an opportunity to move to the sidelines.

·     CAKE downgraded from Neutral to Sell at UBS with $30 tgt citing 16% YTD rise in shares, expectation for a more challenged macro this year, and view that risk exists to ’23 margin guidance – expect CAKE comps could decelerate from relatively solid levels through most of ’22.

·     MCD highlighted as a top pick at Oppenheimer alongside QSR and DRI in restaurants as identify a unique path for earnings upside at MCD in ’23E/’24E at a time when the group’s consensus estimates tilt aggressively, in their view.

·     PZZA positive mention at Bank America saying Pizza normalization has passed, a return to growth – expect Papa Johns (PZZA) comps to return to a steady state in the low- to mid-single-digit range

Retailers:

·     AMZN shares pressured after MSFT reported a slight beat for Azure F2Q results, but F3Q guidance implies more deceleration on client optimization – Bank America noted given Azure’s F3Q outlook, they think AWS C1Q revenue expectations could fall to mid-to-high teens y/y.

·     SHOP said it is raising the monthly price of Basic, Shopify, and Advanced by ~33%, while annual subscriptions were more than doubled. Shopify Plus pricing was unchanged at $2,000.

 

Leisure, Gaming & Lodging:

·     In online travel, BKNG downgraded to Neutral at Bank America as favor EXPE for share stabilization in online travel – says Asia recovery & FX positives, but tougher 2Q comps and recession risk; BKNG also downgraded at Gordon Haskett to Hold saying they see limited multiple expansion opportunity over coming months.

·     In hail riding/food delivery, Bank America noted the NY City Council is set to decide on a minimum wage for Delivery workers by Feb. 15, which could sharply increase wages and firm says a new minimum wage would be an overhang on DASH annual guidance for 2023.

·     In education, LRN rises after quarterly results as Q2 revs $458.4M vs. est. $441.3M; guides Q3 revs $445M-$465M vs. est. $436.3M; sees FY23 revs $1.775B-$1.815B vs. est. $1.73B.

Homebuilders, Building Products, Home Furnishing:

·     U.S. 30-year mortgage rates fell to a 4-month low of 6.20% last week from a prior low of 6.23%, leaving the rate nearly a full-point below the 21-year high of 7.16% in October, according to the MBA. The purchase index rose 3.4% after a huge bounce from an 8-year low at the start of January, and the refinancing index jumps 14.6%.

·     Homebuilder DHI was downgraded to Neutral from Outperform at Wedbush and cut tgt to $96 from $104 saying the price cuts needed to maintain sales volume for F2Q23 and potentially F3Q23 may prove steeper than we previously expected (follows earnings).

 

Energy

·     GLOP rises after GasLog Ltd. made an unsolicited non-binding proposal to acquire remaining shares not owned with overall value of $7.70/unit in cash, consisting in part of a special distribution of $2.33/unit in cash. https://bit.ly/3Jb0G2V

·     NEE mixed Q4 as rev rise 22% to $6.16B but below consensus of $6.55B, while EPS of $0.51 beat

·     In solar, ENPH downgraded to neutral from overweight at Piper as demand for residential solar loans dipped more than the broker expected (shares fall to lowest levels since July). Barclays downgraded SPWR to underweight and RUN to EW from OW saying with US residential solar demand expected to slow in 2023, they are adjusting ratings to reflect our expectations for SPWR and RUN and how they will fare in the changing environment. Reiterate OW for NOVA.

 

Financials

Banks, Brokers, Asset Managers:

·     BLK authorizes share buyback of up to 7M shares and raises dividend by 2.5%

·     NDAQ Q4 EPS of $0.64 just misses consensus as operating expenses rose ~3% to $557 million from a year earlier; revs of $906M misses $909.5M estimate.

·     USB 4Q adj EPS $1.20 vs est. $1.17 on NII $4.3B vs est. $4.2B; net charge-offs $578Mm

·     In research, ZION downgraded from Neutral to Underweight at JPMorgan and trim tgt to $46 saying underlying their bearish sector call is that they see the regional banks as being at risk of seeing negative EPS revisions in coming quarters.

 

Finance, Bitcoin, FinTech, Payments:

·     SQ downgraded to market perform from outperform at Oppenheimer, saying the firm looks less defensively positioned than other payments names w/tgt changes on GPN to $119/$85/$6/$237 from $133/$99/$7/$210 respectively saying biggest difference vs. consensus 2023/2024 is spending slowdown persists until ~1Q24 where consensus largely reaccelerating.

·     COF slumps as earnings slightly missed expectations as 4Q22 EPS was $3.03 including a $105M benefit vs. consensus’ $3.87 on large reserve build/NCO ramp.

 

Healthcare

Biotech & Pharma:

·     MRK said it was discontinuing a late-stage trial of its immunotherapy Keytruda in some prostate cancer patients after interim data showed it was unlikely to meet the study’s main goals.

·     ILMN was downgraded to Hold from Buy at Argus saying despite the falling margins and worsening outlook, Illumina shares remain at a lofty valuation.

·     PLRX priced upsized underwritten public offering of 8.3M shares at $30.00 per share.

·     CDTX receives 14-1 favorable vote from FDA Antimicrobial Drugs Advisory Committee for limited use of co’s drug rezafungin.

 

Healthcare Services & MedTech movers:

·     In managed care, ELV 4Q22 adj. EPS of $5.23 topped consensus of $5.19and introduced formal 2023 guidance of >$32.60, which compares to consensus $32.69; 4Q MLR beat consensus by ~80bp despite company commentary intra-quarter about potential pressure from flu in 4Q

·     EHTH shares jumped after guides Q4 revs $190M-$200M vs. est. $176.5M; sees year revs $395M-$405M vs. consensus $385.6M.

·     ISRG missed on top and bottom line as 4Q adj EPS $1.23 vs est. $1.25 on revs rose 7% y/y to $1.66B vs est. $1.67B; co said in 2H’22 saw COVID-19 resurgences impact Da Vinci Procedure volumes in China. Gross margins compressed to 68.2% from 70.1% y/y (versus consensus’s 69.0%) and operating margins to 32.0% from 37.9% y/y (versus 34.1%).

·     WBA is weighing a sale of its pharmacy automation business, which could fetch up to $2 billion, according to people familiar with the matter – Bloomberg. https://bloom.bg/3DgnvhQ

 

Industrials & Materials

Transports

·     In rails, CNI top and bottom-line beat as Q4 EPS C$2.10 tops est. C$2.08; $CNI Q4 revs C$4.5B vs. est. C$4.48B driven by stronger than expected intermodal performance (12% above our estimate) and strong volume growth in the bulk segment. NSC Q4 EPS $3.42 vs. est. $3.44; Q4 revs rose 13% y/y to $3.2B vs. est. $3.2B; CP shares slid amid DOJ call for railroad regulator to block Kansas City deal.

 

Aerospace & Defense

·     Dow component BA missed on the top/bottom line for Q4 as EPS loss of (-$1.75), which compares to consensus view of $0.26 profit, due in part to higher production/re-work costs on planes in inventory before delivery; operating cash flow $3.46B and adj FCF $3.13B above ests.; posted stronger commercial airplane revs $9.2B but Defense revs $6.18B weaker.

·     In defense, GD 4Q EPS $3.62 tops consensus $3.54 on revs $10.85B vs est. $10.69B; backlog $91.1B rising 4% y/y with operating margin 11.3% and FCF $175M (below est. $409.5M); sees FY23 EPS $12.60-$12.65 vs. consensus $13.90.

·     TXT Q4 results topped consensus and said it expects 2023 revenue of about $14B, compared to analysts’ estimates of $13.70B and profit outlook also above consensus.

·     Benchmark noted the two large jet engine OEM’s, RTX and GE have both reported strong aerospace related 4Q22 results yesterday and overall, OEM and aftermarket demand were positive and indicate accelerating demand for aerospace materials group (CRS, ATI, HWM, CSTM, KALUand ARNC). RTX noted aerospace supply chain issues starting to ease while also noting there is nothing in supply chain today that would prevent RTX from hitting Airbus or Boeing expected delivery rates.

 

Materials, Metals & Mining

·     Jacobs (J) approves $1B share buyback authorization, raises dividend by 13%

·     MOS CEO said does not currently see the right market conditions to restart its idled Canadian potash mine, with high inventories in the United States and Brazil and cold weather slowing trains from Canada.

·     Copper producer FCX Q4 profit fell y/y but adj EPS of $0.52 beat the $0.47 estimate as revs drop to $5.76B from $6.16B y/y (est. $5.45B) – said average realized price for copper in the quarter was $3.77 a pound, down from $4.42 a pound in the same period a year ago.

·     Oppenheimer notes the American Institute of Architects’ Architecture Billings Index (ABI) was 47.5 in December vs. 46.6 in November. The December result represents a third consecutive month below 50 (says relevant to non-resi construction-related stocks URI ).

 

Technology

Internet, Media & Telecom

·     AT Q4 EPS of $0.61 beats ests by 4c while posts a loss from continuing operations of $23.1 billion, or $3.20/shr, due to a $25 bln impairment charge: Q4 postpaid subs 656K tops views.

·     NWSA announced that the company’s Board of Directors received a letter from K. Rupert Murdoch withdrawing the proposal to explore a potential combination with FOXA. Loop Capital upgraded both NWSA/FOXA on the news.

·     SHOP said it is raising the monthly price of Basic, Shopify, and Advanced by ~33%, while annual subscriptions were more than doubled. Shopify Plus pricing was unchanged at $2,000.

·     DIS, WBD, NFLX, PARA and other streamers participated in the late day rally.

 

Hardware & Software movers:

·     MSFT reported mixed Q2 results as EPS of $2.32 beat by 3c while revs grew 2% y/y to $52.7B vs. est. $52.9B while Q2 azure and other cloud services revs +31%, in-line with consensus, but guided Q3 revs $50.5B-$51.5B vs. est. $52.4B and CFO said “we are seeing customers exercise caution,” which resulted in “moderating consumption growth in Azure and lower-than-expected growth in new business” in December.

·     FFIV posts better to in-line Q1 results but guidance misses citing heightened budget scrutiny, deal delays, and spending caution resulting in weaker-than-expected software demand.

·     Earnings tonight from IBM, NOW.

 

Semiconductors:

·     ASML topped Q4 earnings and said its order backlog had grown to a record 40 billion euros ($43.62 billion) at the end of the year; reported fourth-quarter net profit of 1.82 billion euros, up from 1.77 billion a year earlier, on revenue of 6.43 billion euros.

·     TXN reports slight quarterly beat and modest guidance miss better than feared – Stifel notes all end mkts still correcting, except for Automotive (up mid-single digits q/q as Ind. down ~10% q/q, PE down ~mid-teens, Comms. Eqpt. & Enterprise Sys. down ~20% q/q. GMs Light, w/ 1Q23E.

·     Earnings tonight from LRCX, TER in semi equipment sector and WOLF in chips.