Closing Recap

Friday, January 28, 2022

Equity Market Recap

·     Rocketship into the close with stocks ending sharply higher! A nice recovery for major averages on Friday, ending at the best levels of the day in a massive buying surge, and eliminating weekly losses for the Nasdaq, the S&P and Dow. The late day rally helped the S&P, Dow and Nasdaq avoid their 4^th straight week of declines but remains on track for big monthly declines as selling pressure had been relentless until today. Coming into the day, Jim Cramer on CNBC said the last 10-days was the worst advance/decline in 20-years – but breadth saw a nice recovery Friday as advancers led decliners. Several Dow components with earnings today including tech behemoth Apple Inc. (AAPL) posting a strong quarterly beat in almost every segment (closes at highs), and Visa (V) which was the Dow top gainer. It wasn’t all roses as Dow component CAT tumbled over 5% on weaker margin guidance and energy giant CVX dropped on a quarterly earnings miss. They wrapped up a big week of earnings in the Dow (MMM, INTC, BA, DOW, IBM, VZ all reported). Inflation data boosts markets early as the employment cost index rose 1% in Q4, lower than 1.2% rise expected, while the core PCE index, the Fed’s favorite gauge, hit its highest annual rate since 1983 at 4.9%, but that was in line with ests. There were a few geopolitical headlines midday that stalled the market rally 1) Reuters reported that Russia’s military buildup near Ukraine has expanded to include supplies of blood, in key indicator of military readiness, U.S. Officials say and 2) within minutes, the Financial Times reported China warns of risk of military conflict with U.S. over Taiwan. Neither carried any market momentum to the downside. A busy (and volatile) week heading into one of the busiest weeks of earnings season.

·     Bank of America shifted its outlook for monetary policy in a decidedly hawkish direction and now sees more rate rises this year. Bofa said the Fed is likely to raise its now near zero short-term interest rate Target seven times over the course of this year, on its way to a stopping point of between 2.75% and 3%. "The Fed has all but admitted that it is behind the curve" when it comes to controlling inflation, and this monetary policy path "should affect the economy with a lag, weighing on 2023 growth." He trimmed his growth outlook for this year to a 3.6% increase, and he now sees inflation, stripped of food and energy costs, rising by 3%, from 2.6%, over 2022

·     Stock & Sector movers: FinTech/payments active with Visa (V) pacing the S&P and Dow on its beat and optimistic cross-border outlook as travel returns that also lifts MA a day after its own beat; AFRM spikes after Visa announces them as their partner for its debit card and DA Davidson upgrades to Buy on improved risk/reward after its brutal sell-off that pushed shares to 8-month lows yesterday; HOOD opens at record lows below $10 for the first time on a wider-than-expected qtrly loss with Q1 guidance below estimates, but shares quickly rebound to outperform on the day; SYF tumbles despite an in-line report; AAPL among the S&P and Dow leaders after its strong quarter; CAT trails the Dow on its forecast of potentially weaker operating margins, CVX also among its worst laggards on its miss; Media space strong after CHTR rallies on its EPS beat and $UBO spikes off yesterday’s 52-week low after being upgraded at Lightshed; DISCA FOX VIAC also among S&P’s top gainers; WDC slide to 52-week after guidance comes in short of consensus, KLAC gaps lower on its weak guidance before paring most of its losses; TEAM soars on its beat with a guide well ahead of expectations, $JNPR jumps on a beat in tech earnings; VFC 52-week lows after lowering its FY revenue guidance, BOOT stumbles despite a positive quarter, $QRTEA plunges on weak prelim Q4 results due to weak demand in retail

Economic Data:

·     University of Michigan surveys of consumers sentiment Jan-F at 67.2 vs. consensus 68.7, below Dec-Final read 70.6; current conditions index final Jan 72.0 from Dec-F 74.2 and expectations index final Jan 64.1 vs. Dec-F 68.3

·     Personal Income for December rose +0.3% below est. +0.5% while Personal Spending fell (-0.6%), in-line with estimates and Real Personal Spending fell (-1.0%) vs. est. (-1.1%)

·     Inflation data mostly in-line as December PCE Price Index rose +0.4% MoM (in-line) and vs. +0.6% prior, while on a YoY basis, PCE Price Index +5.8% (also in-line and up from 5.7% last month); Core PCE Price Index rises +0.5% MoM (in-line) and same as prior month and on a YoY, rises +4.9% vs. 4.8% est. and +4.7% in November

·     The Q4 Employment Cost Index rose +1.0% vs. +1.2% consensus and +1.3% prior as wages and salaries increased 1.1%, while benefit costs increased 0.9% from September 2021

Commodities

·     Oil prices rise for a 6^th straight week after WTI crude gained $0.21 to settle at $86.82 per barrel. For the week, WTI crude gained roughly 2%, while Brent topped the $90 per barrel level, with oil benchmarks hitting fresh 7-year highs. So far, demand has generally rebounded quicker than supply after steep losses in early 2020.

·     Gold dropped -$8.40 or 0.5% to settle at $1,786.60 an ounce (off lows $1,780.60), finishing the week down 2% to fresh 6-week lows (had been at 2-month highs to start the week). A surging dollar this week to 18-month highs amid growing expectations of U.S. interest rate hikes weighed on precious and industrial metals. Gold prices slipped below its 100-day and 200-day moving averages in the last session, after the U.S. Federal Reserve reaffirmed plans to end its pandemic-era bond purchases and signaled an interest rate hike in March.

Currencies & Treasuries

·     The U.S. dollar extended its winning streak to 5-days, posting its biggest weekly advance in roughly 7-months, as the dollar index (DXY) rose over 1.7% topping the 97-level this week for the first time since July 2020. The euro hit 20-month lows around 1.113, while the British Pound fell to 1-month lows. The dollar action came as markets are pricing in a 25-bps hike from the Fed in the March meeting and looking for at least 4 rate hikes this year (futures indicate five hikes possible) as they look to cool rising prices/inflation. The USD-JPY faded from three-week highs of 115.69, with “risk-off” as stocks rebounded. Crypto a nice recover late week with Bitcoin back above $37,500 and Ethereum $2,500.

·     The U.S. Treasury yield curve steepened after flattening for the last three sessions, after in-line inflation data (though elevated) as well as weaker income and spending. A flattening of the curve reflects impending rate hikes that pushes short-term rates higher as the 2-yr yield topped 1.2% this week while the 10-yr stayed under 1.8% this afternoon (off highs above 1.85%). The 2s and 10’s curve hit its narrowest spread since November 2020 yesterday. After data and fed commentary this week, fed funds futures now price in about 120 bps of rate hikes this year.

Sector News Breakdown

Consumer

·     Retailers; Citigroup with several changes in the retail space, as upgraded TPR from Neutral to Buy, and downgrade KR and OXM from Neutral to Sell in North American retailing as reduce tgts across 46 companies to reflect a higher interest rate environment, which has caused a repricing of risk assets and multiple contraction across the market in general; VFC with a mixed quarter while gross margins for the Q3 and its outlook for the year disappointed (sees FY revs +28% vs. prior +30%, and int’l revs +22%-24%, vs. prior +24%-26%; COLM upgraded to Buy from Neutral at Seaport with $120 tgt primarily reflects our more bullish view on the company’s CY22 setup; BOOT Q3 EPS $2.27 vs est. $2.22 on revenue $485.9M vs est. $483.1M; same-store sales +54.2%; RBC Capital resumed/initiated: OLLI downgraded to Sector Perform from Outperform, cut PT to $51 from $76, WSM upgraded to Outperform from Sector Perform, PT lowered to $202 from $219 and initiates at Outperform: ORLY ($755 tgt), TGT ($278 tgt), AAP ($239 tgt), WMT ($160 tgt), CHWY ($77 tgt), PRTS ($15 tgt), and KMX ($140 tgt); QRTEA tumbles as prelim Q4 results experienced lower-than-anticipated demand that negatively impacted sales as retail revenue was down 8%-9% and adjusted OIBDA down 17%-20%

·     Housing & Building Products; it has been a rough week for homebuilders (TOL, KBH, LEN, PHM) with interest rate hikes on the way from the Fed, pushing mortgage rates higher as the MBA mortgage index showed rates hitting highest levels since March 2020 above 3.7%; HD named a new executive; ETD Q2 adj EPS $0.95 vs est. $0.76 on revenue $208.1M vs est. $187.25M; said they are taking selective price increases to counter rising costs; BZH

·     Consumer Staples & Restaurants; CL Q4 adj EPS 79c vs est. 78c on sales $4.4B vs est. $4.42B, sees 2022 organic sales +3-5% below est. +5.36%; CHD Q4 adj EPS 64c vs est. 60c on sales $1.37B vs est. $1.34B, sees FY22 adj EPS $3.14-3.26 vs est. $3.21, net sales +5-8%, and organic sales +3-6%; MDLZ Q4 adj EPS 71c vs est. 72c on revs $7.66B vs est. $7.59B, gross margin 38.7% as it was pressured by supply chain headwinds, sees FY22 in-line with long-term growth of 3+% organic net revenue growth; Barclays lowered their PT on KMB to $127 from $148 as it is facing an unprecedented inflationary cycle broader and longer than any before, necessitating pricing in categories with stiff competition; Loop’s Canada checks show QSR Tim Horton’s Q4 comps below expectations (+8% vs est. +10%, consensus +10.1%) and Q1-to-date comp +4-5% tracking well below consensus as it is being pressured by new restrictions

Energy

·     Energy stock movers; Goldman Sachs raised energy stocks to Overweight from Neutral, citing the positive outlook for crude oil prices, attractive valuations, while downside risks include slowing economy and aversion by some ESG-sensitive institutional investors to owning energy shares; CVX reported Q4 profit that missed estimates on weaker than expected oil and gas production that outweighed gains from recovering prices (Q4 adj EPS $2.56 vs. est. $3.12; Q4 revs $48.1B vs. est. $45.69B) – oil and gas production was 3.12M bpd, down 5% from a year earlier; PSX Q4 adj EPS $2.94 topped est. $1.95 on revenue that doubled YoY to $33.57B vs est. $29B; the Baker Hughes (BKR) rig count rose to 610 from 604, with oil rigs up 4 to 495 and gas rigs up 2 to 115 (rig count rises for an 18^th straight month)

·     Utilities and Alt energy: Raymond James said BE appealing after its YTD selloff of nearly 40% as a way to play green hydrogen which is becoming cost-competitive much faster with nat gas prices surging amidst Ukraine-Russia tensions; Citi cut their PT on ENPH to $205 from $255 but reiterated their Buy rating; Mizuho upped their PT on PCG to $17.50 from $16 after updating their forecast estimates and initiating a 2024 EPS estimate

Financials

·     Bank movers; Goldman Sachs said decelerating economic growth will present a challenge to cyclical in the coming months, as they lowered their sector recommendation in financials from overweight to neutral. Said historically, financials have performed poorly when yield curve flattens, as it is expected now, and ahead of first Fed rate hike. Dick Bove of Odeon downgrades GS and MS based on the Fed’s indication it will shrink its balance sheet

·     In bank/service earnings, HOOD disappointing quarter as posted Q4 loss EPS ($0.49) vs est. ($0.45) on revs $363Mm vs est. $362Mm, transaction-based revs +12% to $264M and revenue from equity trading on platform dropped 35%; CATY core loan growth surprised to the upside in the quarter at 11% annualized, above 2021 guidance of 5%; WAL reported a miss on the core EPS front, but underlying trends were mixed as loan and deposit growth were both very strong, though gain on sale income was down meaningfully by 40% sequentially to $73 million; FICO shares surged after posting quarterly profit beat

·     Finance, FinTech & Payments; AFRM upgraded to buy from neutral at D.A. Davidson saying valuation looks attractive ahead of its Q2 earnings next month, while Visa (V) CEO said last night on earnings call the company will part with Affirm for its debit card; Visa (V) better than expected results across the board as well as an increased FY22 outlook saying more international travel and an increase in e-commerce drove higher transactions and payments volume for the three months ended December 31, 2021, increased 20% over the prior year

Healthcare

·     Pharma movers; MRK said its Covid-19 pill developed with partner Ridgeback Biotherapeutics was effective against the Omicron variant in laboratory tests; INCY and LLY said it is ending the Phase 3 development program for Olumiant in the autoimmune disease lupus based on top-line efficacy results from two pivotal studies; STAT news reported the U.S. ITC is investigating whether two companies stole trade secrets to market a biosimilar of ABBV’s best-selling biologic, Humira. AbbVie has been trying to ward away competition from TEVA and its partner, Alvotech

·     Biotech movers; BIIB announced that it is selling its 49.9% JV equity stake in Samsung Bioepis back to Samsung Biologics for up to $2.3B; GILD was upgraded to Buy at Argus following expanded approvals for Veklury (remdesivir), an antiviral treatment for COVID-19; DNA initiated Buy with $8 tgt saying the recent selloff indicates a better entry point for risk seekers; PRVB said it plans to resubmit the biologics license application (BLA) for teplizumab following a meeting with the FDA; REGN and SNY said they will no longer seek FDA approval for Libtaya as a second-line treatment for cervical cancer.

·     MedTech Equipment; SYK reported Q4 results that topped ests on the top-line but missed slightly on the bottom-line while provided ’22 guidance that is below the Street, accounting for the impact of COVID-19 and rising supply and labor costs.

Industrials & Materials

·     Aerospace & Defense; BAH posted a Q4 EPS beat by $0.04, but revs of $2.03B missed the $2.13B estimate and lowered its FY rev outlook to 5.7%-7.2% from prior view up 7%-10%; HXL was upgraded to neutral at UBS as shares have now traded down to $49 from their recent highs in the low 60s and when taken with the 2022 guidance announcement, risks appear more balanced; GD upgraded from Underperform to Peer Perform at Wolfe Research saying the stock was getting close to old TP and co provided guidance at Aerospace well above our expectations

·     Transports, Industrial & Machinery; CAT a drag on the Dow after saying its Q1 operating margins could take a hit from higher production and labor costs, overshadowing a Q4 beat (EPS $2.69 vs. est. $2.27; Q4 revenue rose 23% to $13.8B vs. est. $13.15B); the weaker results carried over to other industrial/multi-industry names with MMM, DOV, ITW, IR falling; airlines DAL, AAL, UAL and others were lower ahead of expected disruptions this weekend in the Northeast

·     Metals & Materials; U.S. Steel (X) posted quarterly sales above expectations as it earned $1.1 billion, or $3.75 a share, in the quarter, compared with $49 million, or 22 cents a share, in the year-ago period; RS upgrade from Underperform to Peer perform at Wolfe after the recent pullback made valuation look less steep. Steady non-ferrous pricing and working capital release can offset expected slipping carbon steel prices; WY advances after in-line earnings; TECK reported that realized Q4 steelmaking coal sales were 5.1 million tons, slightly below the low end of the company’s revised guidance of 5.2 million to 5.7 million tons; copper prices slide today, on track for biggest fall since October (weighs on FCX)-getting hit as the dollar touched its strongest levels since June 2020

Technology, Media & Telecom

·     Hardware & Components: AAPL delivered stronger-than-expected Dec. Q results and Mar. Q guidance, setting an all-time total revenue record of $123.9B (+11% Y/Y), driven by better mix and strong growth across all products and services except for iPads, which was hampered by more pronounced supply constraints; JNPR reported strong Q4 results with higher revenue and EPS. FY22 revenue guidance was revised to 7-9%, vs. prior expectation of MSD growth

·     Semiconductors; Philly semi index down over 19% in January alone, dragging the Nasdaq lower after surging over 40% in 2021; after a strong quarterly result from STX the day prior, sending shares higher, WDC reported in-line DecQ rev/EPS at $4.8B/$2.30 with GM at 33.6%, but guided MarQ to $4.55B/$1.65 (below consensus $4.7B/$1.96) with component sourcing and cost headwinds, supply constraints, and lower NAND ASP; TER downgraded by at least two firms following disappointing earnings forecast at the chip-testing company the day prior (shared fell -20%); AMD broke below its 200-day moving average day prior as semi chip sector extends recent decline, with the Philly semi index (SOX) down about 20% in January alone)

·     Software movers; TEAM reported very strong F2Q results, led by a fourth consecutive quarter of accelerating subscription revenue/sequential acceleration in Cloud and Data Center revenue drove a big 2Q revenue beat and guidance increase; Mizuho lowered their price targets across SaaS to reflect recent valuation multiple compression and remains cautious on 2022 guidance overall but favors CDAY, TWLO, AVLR; Stifel lowers their PT on PCOR to $85 from $120 given multiple compression across the group but maintains it as Buy on the opportunity for 20%+ top-line given it is levered to a number of industry and company-specific drivers; Wells’ Best Ideas for the Q4 earnings cycle are FTNT and TENB; SE removed from Goldman’s Conviction List as the market shift toward lower risk assets with positive free cash flow

·     Media & Telecom movers; cable names edge higher after CHTR Q4 results; in tower stocks, CCI upgraded to Outperform from Market Perform at Raymond James with $184 tgt as believe the path to stronger tower growth is evident for the next several years, and pullbacks in the broader market and tower stocks (CCI down 18% YTD vs. S&P 500 down 9%) have created an attractive buying opportunity; FUBO upgraded to Hold at Lightshed from Sell after valuation has collapsed (though notes when initiated on FUBO on December 23, 2020, said "it may be the most compelling short we have ever identified in our career as analysts."

·     Digital advertising, Truist downgraded NLSN to Hold, $22 PT from $25 on balanced uncertainty in 2022 and mixed view of numbers vs consensus, for CRTO they maintain Buy, $50 PT unchanged. Best relative in Scoring Table on revision trend, valuation, buybacks, catalysts/M&A; MGNI Maintain Buy, $23 PT (from $30) calling it the 2nd best relative in Scoring Table with positive setup into 2H22 on political, any improvement supply chain and maintain hold on SCOR