Closing Recap

Thursday, June 23, 2022

Equity Market Recap

·     Stocks were again choppy but ended the day solidly higher as a handful of defensive sectors (Utilities, Staples, REITs, and Healthcare) paced the gains while Energy, Industrials and Materials were among the biggest losers with commodity names/prices falling on recession fears. Financials another sector laggard ahead of the Fed bank stress tests after the close tonight. Treasury yields tumble as the volatility in the bond markets continues to astound, while oil, gold and other commodity prices continue their downtrend. Among some of the big stories today: 1) The U.S. Supreme Court struck down a New York state law by a 6-3 decision that forbids citizens from obtaining a permit to carry a handgun publicly for self-defense unless they can demonstrate a special need for self-defense, arguing that such a provision violates the Constitution’s Second and Fourteenth Amendments. 2) The FDA issued marketing denial orders to tobacco company Juul Labs for all its products that are currently marketed in the U.S. and ordered the company to remove all or risk enforcement action. 3) Commodity prices and stocks tumble as the XME turns flat YTD, wiping out 12-months of gains in just 2-months; FCX hits lowest levels since Feb 2021 and aluminum stocks AA, CENX tumble; fertilizer and chemical names also hit hard MOS, NTR, CF on comments about impact to sales volumes – recession fears weighing heavily on the commodity space. 4) The United States will cancel $6 billion in student loans for defrauded borrowers, the New York Times reported, adding that around 200,000 former students will be affected by the settlement. Note the percentage of investors who are bearish is near the highest levels since the financial crisis more than a decade ago, as per AAII data. Fed speakers today added little to the debate with Chairman Powell’s House testimony largely in line with that from the Senate yesterday and other recent statements.

Economic Data:

·     Weekly Jobless Claims fell to 229,000 in latest week from 231,000 prior week and above estimates of 227,000; the 4-week moving average rose to 223,500 from 219,000 prior; continued claims rose to 1.315 M from 1.310M prior week (est. 1.315M) and the U.S. insured unemployment rate unchanged at 0.9%

·     S&P Manufacturing PMI Flash Actual 52.4 (Forecast 56, Previous 57.0); S&P Services PMI Flash Actual 51.6 (Forecast 53.3, Previous 53.4) and Composite PMI Flash Actual 51.2 (Forecast 52.9, Previous 53.6)

·     The U.S. current-account deficit widened by $66.6 billion, to $291.4 billion, in Q1 of 2022.

·     The 30-year fixed-rate mortgage averaged 5.81% with an average 0.8 point for the week ending Jun. 23, up from last week when it averaged 5.78% and higher than 3.02% a year ago, according to the Freddie Mac Primary Mortgage Survey. 15-year fixed-rate mortgage averaged 4.92% with an average 0.9 point, up from last week when it averaged 4.81% and higher 2.34% Y/Y

Commodities

·     Oil prices resume downward momentum, but recover off lows, as WTI crude slips -$1.92 or 1.81% to settle at $104.27 per barrel (off lows $102.32), fresh 6-week lows. Overall, commodities landscape weak as copper, aluminum, zinc, iron ore all sliding, along with precious metals as global recession fears rise following weaker manufacturing data in Europe

·     U.S. Natural gas prices eased following bearish weekly inventory data as Natural Gas Inventory rose +74 bcf, more than the expected build of 62 bcf. Natural gas prices finish the session 9% lower at $6.239/MMBtu, the lowest closing price in 11-weeks

·     Copper prices have fallen to a 16-month low as fast-rising interest rates and weak economic data fanned fears of a global slowdown that would reduce demand for metals (copper is now down more than 20% from its record high in March).

·     Gold prices slipped a 4^th straight session, erasing earlier gains after Fed Chair Powell in his 2^nd day of monetary policy testimony in D.C. reiterated more aggressive monetary tightening to tame inflation, even as economic risks mount. Gold prices end lower, down -$8.60 or 0.5% to settle at $1,829.80 an ounce

Currencies & Treasuries

·     The volatility in the bond markets this year, just not normal (200 bps move off lows for 10-yr YTD), as the 10-year hits lowest levels in 2-weeks, falling over 11-bps and nearly 50-bps off its highest levels in over a decade last week (3.50%). The 2-yr yield fell over 10-bps to 2.90%. Global sovereign rates tumble amid a flight to safety, especially in Europe as Russia tightens its supply of natural gas to Europe. Bespoke Investment noted just days after its largest 5-day increase in over 5 years, the 10-year yield has now seen its largest 5-day decline since the COVID crash.

Sector News Breakdown

Consumer

·     Retailers; FNKO was upgraded to Overweight at JPMorgan on expected upside to Street 2022 revenue estimates (and the roll to 2023), the margin outlook flipping to positive from negative over the balance of the year, and the toy category’s resilience in recessionary periods, along with FNKO’s even lower price points; in pool stocks, LESL downgraded to Hold at Loop Capital and cut tgt to $16 from $26 and lower POOL tgt on limited mid-term catalysts; NKE has made the decision to leave the Russian marketplace (also note several analysts lower their price tgts ahead of next week earnings results largely driven by soft results in China); SWBI, RGR rise Supreme Court strikes down New York gun restriction law in major win for gun rights advocates

·     Auto sector: Chinese autos get a boost (XPEV, LI, NIO) after Bloomberg reported, citing Chinese state television, that the gov’t may extend tax exemptions on electric-car purchases; LI announced the launch of its new, second-ever vehicle model called L9, a bigger sport utility vehicle than the company’s signature Li ONE model; Wedbush said they continue to see a mixed bag for KMX into F1Q earnings with expectations for strong unit sales offset by weaker profitability, while we do not see a positive catalyst for CVNA near-term; HYZN to collaborate w SLB in decarbonizing oil & gas field operations with high-power fuel cells; SEV initiated with an Overweight rating and a 12-month PT of $7 at Cantor saying SEV is developing a solar-powered, electric car for the mass market, and disruptive solar technology

·     Housing & Building Products; KBH Q2 EPS $2.32 vs. est. $2.02; Q2 revs rose 19% to $1.72B vs. est. $1.65B; narrows FY housing revs $7.3B-$7.5B vs. prior view $7.2B-$7.6B; qtrly homes delivered were essentially even at 3,469; says will remain strategic in our capital allocation decisions to maximize returns in this environment; qtrly ending backlog value up 43% to $6.12B; in building products, William Blair lowers ests on TREX, AZEK, SITE, POOL, LESL, HAYW, and SWIM amid rising rates and declining housing data, consumer spend and business confidence; APOG Q1 EPS $1.00 vs. est. 56c; Q1 revs $357M vs. est. $328.59M; boosts share repurchase by 1M shares; sees year EPS $3.50-$3.90 vs. est. $3.08

·     Consumer Staples: Wells Fargo said they continue to favor the value players like DG, BJ, COST and WMT as they should see share gains and better margin management given their price position, while setup looks most concerning for KR, SFM, and ACI; in tobacco, the FDA officially confirmed today that it will ban the sale of Juul e-cigarettes – MO defended by Goldman Sachs after tumbling yesterday on news of potential prohibition of JUUL products in the U.S., saying was likely overdone; KR raises quarterly dividend by 24%.

·     Restaurants; DRI authorizes new $1B share buyback program after Q4 EPS $2.24 beat by 3c on revs $2.6B (vs. est. $2.54B and comp sales blended for 11.7% vs. est. 8.5% (Olive Garden 6.5%; LongHorn Steakhouse 10.6%; Fine Dining 34.5%; Other Business 18.5%) while guides FY EPS $7.40-$8.00 (est. $8.15) and FY23 revenue $10.2B-$10.4B (est. $10.22B); RRGB announced its CEO is stepping down at the end of the year

Energy

·     E&P and Majors; OXY rises after Warren Buffett’s Berkshire Hathaway disclosed buying 9.6 mln more shares in the oil company; purchases were made over the past week and cost about $529 mln, Berkshire says, which raises its stake to over 16%; Mizuho said they remain buyers of both SWN and CRK on their Haynesville exposure and continue to expect the play to be the primary driver of non-associated US gas growth for the foreseeable future; HES said it expects to add a fourth rig in Bakken shale of North Dakota next month

·     Refiners: U.S. oil refiners will try to convince the Biden administration not to ban exports of domestic fuel to combat record-high gasoline prices during tomorrow’s scheduled meeting with Secretary of Energy Jennifer Grandholm, Reuters reported

·     Utilities & Solar; BMO Capital said the results of the 23/24 PJM capacity auction were below investors’ already lower(ed) expectations with a median decline of almost 50% across LDA’s. They see the following estimated annualized impacts (in isolation) to their 2024 estimates assuming a similar outcome in the 24/25 auction: CEG (-6% of EBITDA), PEG (-2% of EPS), VST (-2% of EBITDA), and NRG (-1% of EBITDA) – sees CEG likely the most affected. BMO reiterated Outperforms on CEG and VST and would be adding exposure to both names into any weakness.

Financials

·     Bank movers: financials/banks lag given the sharp decline in Treasury yields today. Also, a reminder that the U.S. Fed will release the results of its annual bank health checks later Thursday (stress tests), where they test banks’ balance sheets against a hypothetical severe economic downturn. The results dictate how much capital banks need to be healthy and how much they can return to shareholders via share buybacks and dividends.

·     Insurance: Wolfe Research upgraded MET to Outperform from Peer Perform as view risk-adjusted free cash flow outlook as most attractive relative to valuation, while downgraded LNC and TRV to Peer Perform from Outperform at Wolfe Research; in mortgage insurance stocks, RBC Capital said they are well-positioned to cope with a downturn, upgrading its rating on MTG to Outperform while downgraded NMIH

Healthcare

·     Pharma movers: FSTX surges after Sino Biopharmaceutical’s unit invoX Pharma will buy the company for $7.12 per share, a 78% premium to yesterday close in a deal valued at $161M; Cantor lowers estimates for AMRN’s U.S. Vascepa sales in 2022 and beyond saying generic competition for Vascepa is greater than we had initially anticipated

·     Biotech movers; SIGA rises after saying it received about $13 mln of procurement orders for oral Tpoxx, its smallpox drug; GILD says treatment with Hepcludex achieves significant response at 48 weeks, meets primary endpoint and achieves significant response in chronic hepatitis delta virus; RDUS being acquired by two investment firms – Gurnet Point and Patient Square – in a deal valued at up to $890M (including debt and a CVR), with holders to receive $10 per share https://bit.ly/3OCtKzC ; QURE rises after trial data for Huntington’s disease therapy; NVAX jumps after its COVID-19 vaccine Nuvaxovid has been recommended by the Committee for Medicinal Products for Human Use (CHMP) for expanded conditional marketing authorization (CMA) in the European Union for people aged 12 through 17.

·     Healthcare Services: pharmacy retailer RAD raised its FY23 revenue outlook to $23.6B-$24B, above est. $22.9B citing increased utilization of higher-cost drugs at its pharmacy benefits business and guides smaller FY loss of (66c-$1.19 vs. est. loss -$1.41); Mizuho positive on CI saying while trends in the PBM industry appear stable y/y, the main incremental data points from checks were the positive feedback on CI’s Express Scripts’ Accredo specialty business

Industrials & Materials

·     Industrial & Machinery; Goldman Sachs lower estimates across multi-industry coverage on slower GDP growth ahead and are now ~3%/3.5% below consensus for 2023/24 as favors HVAC stocks (JCI, CARR) on superior risk/reward as exposure to non-residential end markets is likely underappreciated; idiosyncratic stories (RRX); longer-cycle stores (EMR); likely oversold names (SWK, LII); WAB and AGCO downgraded to equal-weight at Morgan Stanley primarily driven by a reduction in exposure to the consumer complex, Europe, and a potentially peaking commodity backdrop and resumes coverage of CMI at equal-weight while trimming its PTs across industry; AYI downgraded to Market Perform at William Blair given increased uncertainty and lack of confidence in 2023 estimates, though still expect the co to beat street F3Q estimates

·     Transports: FDX earnings after the bell as a good benchmark for the economy; in airlines, UAL to cut about 12% if its daily Newark flights, CNBC reports to address congestion and delays; in research, Raymond James said following the recent pullback, they are upgrading LUV from Outperform to Strong Buy and ULCC from Market Perform to Outperform, with the latter also predicated on our view that JetBlue is going to be successful in its bid for Spirit. Additionally, downgrades ALK from Strong Buy to Outperform due to potential earnings and operational volatility around exiting the A320 fleet by early 2023. Dow Jones reported Daily freight rates from China to the US West Coast are now nearly 3% below year-long contracts agreed between liners and big American importers, showing a continuous fall in demand.

·     Aerospace & Defense: the FAA released business jet flight volumes for the month of May. Industry business jet flights in May were 12% higher than May 2021. Although flights were merely 4.7% lower than the record high set in October 2021, the growth rate was the slowest over the past 12 months; BA announced that it is integrating Aireon’s global ADS-B data and AireonINSIGHTS predictive analytics into its enterprise safety management system (William Blair said this is positive for shares of IRDM; SPIR said it had been awarded a $6 million, 12-month contract extension from NASA.

·     Metals & Materials; CENX tumbles after late yesterday announced it will idle its Hawesville smelter for the next 9-12 months, due to the significant increase in Midwestern U.S. power prices; AA shares also lower as aluminum stocks weak; RIO downgraded to Equal Weight at Morgan Stanley and TECK downgraded to Equal Weight from Overweight; copper prices remain at 16-month lows, weighing on stock – FCX falls for the 4th time in 5-days and below the $30 level since Feb 2021; in wood products, BCC and LPX both downgraded to Neutral at Bank America

·     Chemicals; FUL 2Q adj EPS $1.11 vs est. $1.07 on revs $993Mm vs est. $996.4Mm; sees FY raw material and delivery costs expected to continue to rise, sees more than 20% increase for full year vs 4Q21 exit rate; sees FY adj EBITDA $530-550Mm vs est. $540Mm; MOS said a compressed North American planting season and ongoing rail delays are impacting sales volumes as now expect potash sales volumes of 2.3-2.5M tonnes and phosphates sales volumes of 1.6-1.8M in Q2 (commentary weighed on other fertilizer related names NTR, CF)

Technology, Media & Telecom

·     Internet; NFLX confirms partnership talks for ad-supported service as its co-CEO Sarandos says the company wants a ‘pretty easy entry to the market; in online travel, Morgan Stanley lowers ’23 OTA bookings by 3-6% as latest AlphaWise data show 4 signs of weakening travel demand (EXPE, ABNB, BKNG leveraged to data); EBAY assumed Underweight and street-low PT of $36 at Morgan Stanley as sees eBay continuing to loss mkt share as new entrants enter space/also included on a list by Goldman as a co they feel will have to revise earnings estimates lower

·     Software movers: SNOW upgraded from Neutral to Overweight at JPMorgan with $165 tgt saying at its core, is a massively scalable, highly elastic, cloud-native data warehouse solution that has begun to disrupt the cloud data management space; BNFT downgrade to Neutral, PT to $9 at Piper saying the ongoing mix shift from Subscription to lower quality Platform Revenue introduces fundamental risks to the BNFT model, in their view

·     Hardware, Components & Services; ACN better quarter/tepid guidance as Q3 EPS $2.79 vs est. $2.72; Q3 revs $16.2B vs. est. $15.23B; narrows FY22 EPS view to $10.61-$10.70 from $10.61-$10.81 (est. $10.28) and boosts FY22 revenue growth to 25.5%-26.5% from 24%-26%; for CSCO, a U.S. Appeals court rules in favor of Cisco Systems, throws out more than $2.75 billion patent infringement award to centripetal networks

·     Media & Telecom movers; in the advertising sector, OMC, IPG, PUB and WPP all downgraded at Macquarie saying economic pressures are building, and ad spending follows GDP – they cut estimates unilaterally, with ’22e organic revenue growth now ~1% lower for agencies at +5% on average, and ’23e 1-2% lower at +2.4% on avg