Closing Recap

Tuesday, March 07, 2023

Index	Up/Down	%	Last
DJ Industrials	-574.58	1.72%	32,856
S&P 500	-61.98	1.53%	3,986
Nasdaq	-145.40	1.25%	11,530
Russell 2000	-573.23	1.71%	1,879

 

Equity Market Recap

·     U.S. stocks closed lower Tuesday as Federal Reserve Chair Jerome Powell said in his semi-annual monetary policy testimony on Capitol Hill that the central bank would likely lift interest rates more than previously expected to fight inflation and cool down the economy. His comments spurred buying in the dollar, shorter-term Treasury yields and prompted some profit taking in stocks after a 3-day rally as chances of a 50-bps rate hike in two weeks jumped to about 50% according to latest futures outlook (6-weeks ago the odds of 0.5% hike on March 22 were at zero). The pullback in stocks took the S&P 500 index back below its 50-day MA support of roughly 3,995 (recall last week the S&P surged after holding its 200-day MA, which still stands around 3,940). In prepared remarks Tuesday to the Senate Banking Committee, Mr. Powell said robust economic activity to start the year has partly reversed softening inflation trends from previous months. That could prompt officials at the central bank’s meeting this month to consider additional rate increases. Powell will speak again tomorrow at 10:00 AM to the House Financial Services Committee after testifying to the Senate Banking Committee today. Prepared remarks will be the same for both, though new information could come from Q&A. Last month, the Fed raised its benchmark federal-funds rate by a 25-bps to a range 4.5%-4.75%, slowing the pace of rate rises following increases of a 50-bps in December and 75-bps in November.

·     Overnight news overseas was dovish as: 1) the RBA came out and hiked rates 25bps (as expected), but provided dovish language and suggested this could be the final hike of the cycle; 2) CPIs from Taiwan (CPI came in at 2.43% YoY for headline and 2.55% for core), Thailand (inflation cooled to a 13-month low in February, slipping to 3.79% YoY and below expectations of 4.10%) and the Philippines (headline CPI eased to 8.6% YoY in February from 8.7% YoY in January) all fell short of expectations; 3) Japan’s measure of wages (labor cash earnings) eased back to 0.8% YoY in January from a large 4.1% YoY in December; 4) ECB revealed a decline in Eurozone inflation expectations (Expectations for three years ahead dropped to 2.5% in January from 3% in December, while the next 12 months fell from 5.0% to 4.9%).

 

Economic Data:

·     U.S. IBD/TIPP economic optimism index improved 1.8 points to 46.9 in March after rising 1.8 ticks to 45.1 in February. This is the highest level since December 2021. However, the index remains in pessimistic territory (below 50) for a 19th consecutive month.

·     U.S. Jan wholesale inventories unrevised at -0.4% (consensus -0.4%); U.S. Jan wholesale sales +1.0% (consensus +0.1%) vs dec -0.2% (prev unchanged); and U.S. Jan stock/sales ratio 1.34 months’ worth vs dec 1.36 months.

·     The ECB inflation report stated that consumer expectations for Euro-zone inflation receded “significantly.” Expectations for three years ahead dropped to 2.5% in January from 3% in December, while the next 12 months fell from 5.0% to 4.9%.

·     German Factory Orders MoM for January came in better than expected at +1.0% vs the consensus forecast of -0.7%. Capital goods held up well, but a further tightening of financial conditions is worrying some who see danger ahead.

·     Chinese Feb Trade Balance: +$116.88b vs +$81.8b consensus; Chinese Feb Imports: -10.2% y/y vs -5.5% consensus; Chinese Feb Exports: -6.8% y/y vs -9.4% consensus

 

Commodities

·     Oil prices tumble -$2.88 or 3.58%, its largest 1-day decline in 2-months to settle at $77.58 per barrel, and snapping its 5-day win streak. Rising interest rate fears following comments from U.S. Fed Reserve Chair Jerome Powell boosted the U.S. dollar, weighing on commodity prices. Oil prices also fell as top crude importer China issued weak data overnight. U.S. crude production and demand will rise in 2023 the U.S. EIA said in its Short-Term Energy Outlook. The EIA projected that crude production would rise to 12.44 million barrels per day (bpd) in 2023 and 12.63 million bpd in 2024. Gold prices fall -$34.60 or 1.9% to settle at $1,820 an ounce as a 1.1% jump in the dollar weighs on precious metals and other commodity prices. Natural gas prices edge higher, climbing 4.5% to $2.687/MMBtu as the market partially rebounds from yesterday’s sell-off that saw prices drop by nearly 15%.

 

Currencies & Treasuries

·     The U.S. dollar index (DXY) rises to 2-month highs, rising 1% to 105.40 after Fed Chairman Powell comments. Powell said that the U.S. central bank will stay the course until the job is done, adding that the ultimate level of interest rates is likely to be higher than previously anticipated. AUD/USD declined around -2% to 0.6597 after RBA hiked 25bps but said inflation may have peaked and further tightening will depend on incoming data. The euro dropped below $1.06.

·     Treasury yields mixed, rising on the short end of the curve. The 6-month US Treasury yield moved up to 5.27%, its highest level since August 2006 (was at 0.69% last year and 0.07% 2-yrs ago). The 10-yr yield jumped to 3.99% after Powell initial comments but again failed at 4%, while shorter term yields a bigger jump with 2-yr up 11bps to 5% (1^st time since 2007), the 1-yr up 17-bps to 5.22%. U.S. Treasury 2-year/10-year yield curve hits record inversion of -103.50 bps, as per Refinitiv data. U.S. Sells sold $40B in 3-yr notes at high yield 4.635%, with bid-to-cover 2.73 vs. 2.33 prior; primary dealers take 16.84% of U.S. 3-year notes sale, direct 20.67% and indirect 62.49%.

 

 

Macro	Up/Down	Last
WTI Crude	-2.88	77.58
Brent	-2.89	83.29
Gold	-34.60	1,820.00
EUR/USD	-0.0124	1.0552
JPY/USD	1.06	136.98
10-Year Note	0.001	3.984%

 

 

Sector News Breakdown

Consumer

Autos:

·     RIVN shares slip on plans to sell bonds worth $1.3 bln; said initial investors will get an option to buy an additional $200 mln of bonds for settlement 13 days after the bonds are issued.

·     The average monthly payment for a new car has increased to a record $777, nearly doubling from late 2019, according to Kelley Blue Book owner Cox Automotive.

·     In used car data (KMX, CVNA): Wholesale used car auto prices jump 4.3% in Feb. according to the Mannheim Used Car Index. Third straight month where used prices have climbed. Still below the record highs of early ‘22…but the tight supply is pushing up prices again.

·     @KobeissiLetter tweets: Car Market Update: 1. Used car prices up 4.3% in Feb, largest gain since 2009, 2. Average used car loan rates at record 14%, 3. 15% of new car payments above $1000/mo, 4. 25% of new cars selling above $60,000, 5. Most past due car payments since 2009

 

Consumer Staples & Restaurants:

·     In specialty food earnings: CVGW shares slide as 1Q adj EPS loss ($0.08) vs est. $0.24 on revs $226.2Mm vs est. $270.6Mm and sees FY23 prepared segment gross margin in fresh cut division at/near low end of 10-12% range; DOLE said Q4 revs revenue rose to $2.36B from $2.25B y/y and above ests $2.27B as higher prices on everything lifted results; Q4 adj EPS $0.09 vs. est. $0.06; volume of bananas sold fell while the pineapple sales volume rose in core markets.

·     KDP CFO bought another 50k shares on Thurs/Fri (filing showed 50K shares @ $34.39 for total buy of $1.719M), which is in addition to the 20k he bought on Feb 27th.

·     WW shares surge as reported Q4 results, provided guidance for Q1 (both slight misses), and announced plans to acquire Sequence, a subscription telehealth platform offering access to healthcare providers specializing in chronic weight management for $106M.

 

Retailers:

·     Earnings this week for: CASY, SFIX tonight (3/7), VRA, FOSL on 3/8, and BBW, BJ, DLTH, GCO, BIRD, GPS, TLYS, ULTA, ZUMZ on Thursday 3/9.

·     WMT shares reversed early gains, moving lower after saying at broker conference that the co still has some excess inventory in electronics, home goods and apparel categories.

·     Sporting goods retailer DKS posts Q4 EPS and revs above views ($2.93/$3.6B vs. $2.88/$3.45B), n better comp sales (+5.3% vs. 2.5% est.), doubles its dividend to $4.00, guides annual EPS above estimates ($12.90-$13.80 vs. est. $12.03) and forecasts flat to 2% FY comp sales growth.

·     COST upgrade from Neutral to Buy w/ $560 PT at Northcoast.

·     TDUP reported 4Q22 Revenue and EBITDA ($ and margin) better than expected while guidance for 1Q23 and 2023 revs -1%/+9% respectively, above Street expectations of -6%/-4%.

 

Leisure, Gaming & Lodging:

·     In casinos/gambling: DKNG upgraded to Buy from Hold at Argus and setting a price target of $22 saying as additional states legalize online sports betting and consumers allocate more of their income to wagers, they expect DKNGs’ revenue to increase to $3.1 billion in 2023 from $323 million in 2019. Tailwinds include market share gains, greater customer retention, and earnings growth in existing markets.

·     In leisure: towables active after THO Q2 net sales fell -39.4% to $2.35B, below ests $2.41B on weaker EPS ($0.50 vs. $0.96) and margins while cuts 2023 consolidated net sales to $10.5B-$11.5B range (vs. prior $11.5B-$12.5b) and EPS to $5.50-$6.50 from $7.40-$8.70. In travel, TCOM said domestic travel demand has recovered strongly since Covid restrictions were dropped, with hotel and airline bookings exceeding 2019 levels; online travel agency’s revenue and earnings also beat estimates in the fourth quarter. In food delivery, UBER, DASH shares bounced after NYC cuts proposed min delivery worker pay by 2025 to $19.96 (NYC earlier proposed min delivery worker pay by 2025 $23.82).

 

Homebuilders, Building Products, Home Furnishing:

·     For homebuilders and mortgages: @KobeissiLetter notes: “Mortgage payments now reflect 33% of the average U.S. homeowner’s income. This is above the long-term average of 24% and just below the 2006 high of 34%. Total homeowner expenses now reflect a record 46% of the average owner’s income.

 

Energy, Industrials and Materials

·     In energy news: a pullback in oil prices weighed on the energy stock complex, broadly lower; in research, OVV downgraded to Market Perform at BMO Capital and reducing target price to $51 per share noting while FCF yield remains wide vs. peers, the gap has narrowed, and absolute yield and capital returns look less attractive when considering portfolio depth.

·     In transports: UAL +4% among top gainers in the S&P, follows by more than 2% gains for AAL, ALK and DAL airlines broadly outperform other transports; DAL was upgraded to overweight at Evercore/ISI saying recent pilot contract ratification lowers Delta’s cost outlook uncertainty vs. peers. Planned June investor day at its Atlanta headquarters a good opportunity to refine financial targets and segments. NSC said one of its conductors was fatally injured early Tuesday morning at a CLF worksite in Ohio.

·     In aerospace & defense: AVAV reported Q3 results ahead of consensus and modestly raised fiscal 2023 EBITDA and revenue guidance (to $510M-$525M from $505M-$525M) while funded backlog increased to $414M from $293M q/q and does not include the $48M Lithuania order. JOBY downgrade from Hold to Sell at Deutsche Bank and cut tgt to $4 from $6 saying they believe there are important risks being overlooked by the market and Joby’s premium valuation is too lopsided relative to peer Archer.

 

Financials

Banks, Brokers, Asset Managers:

·     In banks: KEY shares after saying it sees 2023 net interest income up 1%-4%, saw up 6%-9%; Sees FY23 noninterest income down 1%-3% and sees FY23 GAAP tax rate 19%-20%.

·     BXP among REITs hitting 52-week lows today.

·     In financial services: VRSK announces $2.5 billion accelerated share repurchase transaction. BKI shares rise after ICE said it would litigate with the U.S. Federal Trade Commission for approval of merger deal, if necessary.

 

Healthcare

Biotech & Pharma:

·     BMRN provided an update on the FDA review of the Biologics License Application (BLA) for its Roctavian gene therapy for adults with severe hemophilia A. Said the company had been actively messaging, that the FDA determined the three-year data of the GENEr8-1 study constitutes a major amendment, triggering a corresponding three-month delay to the PDUFA.

·     CARA shares tumble as Q4 revenue missed estimates ($3.26M vs. $16.3M est.) and reported a wider- than-expected EPS loss of (-0.56), as kidney disease drug Korsuva generated only $1.1M in 4Q22 revenues to CARA ($2.3M net sales; profit/loss share with partner Vifor), below views.

·     CVS among healthcare names hitting 52-week lows today.

·     FSTX shares jump as buyer Sino Biopharma gains CFIUS approval https://bit.ly/3YszdgX .

·     PTGX shares rise after announces positive topline results for phase 2b FRONTIER 1 clinical trial of Oral IL-23 receptor antagonist JNJ-2113 (PN-235) in psoriasis; JNJ-2113 (formerly PN-235) met the study’s primary endpoint, with a statistically significantly higher proportion of adult patients with moderate-to-severe plaque psoriasis achieving PASI-75 in all treatment groups.

·     REGN said FDA accepted for review Dupixent as treatment of Chronic Spontaneous Urticaria.

 

Technology

Internet, Media & Telecom

·     Strength in social media names again (SNAP, META) ahead of New bipartisan Senate TikTok bill that will be unveiled. A highly anticipated bipartisan Senate bill to give the President the authority to respond to threats posed by TikTok and companies like it will be unveiled Tuesday afternoon by Senate Intelligence Committee Chairman Mark Warner – CNBC. META rises early after reports that the co is planning another round of layoffs as soon as this week, Bloomberg reported; comes on top of the 13% workforce reduction from November.

·     $LSPD downgrade from Outperform to Market Perform w/ $17 PT (from $23) @ Moffett – We are downgrading Lightspeed to Market Perform with a 12-month price Target of $17 (down from $23). We are increasingly concerned that challenging competitive dynamics in the U.S. will preclude Lightspeed from reaccelerating GTV growth even when macro pressures recede. We are lowering our near-to-medium term gross profit forecast by ~10%, and now expect Lightspeed’s EV/NTM GP multiple to remain stable (at ~4x) over the next 12 months.

·     Tower stocks AMT, CCI, SBAC all down around 3% or more, pressured by rising rates, as all falling to lowest levels since October.

·     SQSP shares jump after reported Q4 results and issued revenue outlooks for Q1 and 2023 that both topped analyst expectations (guides Q1 revs $232M-$234M vs. est. $227.3M and FY23 revs $955M-$970M vs. est. $949.4M).

 

Hardware, Service movers:

·     BB guides prelim 2023 revs of $656M vs. est. $674.7M and sees prelim Q4 revs $151M vs. est. $168.5M; said macro challenges were a key factor for BlackBerry’s Cybersecurity business unit, with elongated sales cycles in government causing some large deals to slip into later quarters.

·     DXC after the close last night announced that it was approached by a financial sponsor regarding a potential acquisition of the company, engaged in preliminary discussions, but no formal proposal was received by the company and DXC has terminated the discussions.

·     HPE files prospectus supplement related to a potential two-part note offering.

·     NTNX shares fell after delaying 10-q filing amid an investigation into its use of third- party evaluation software, but guided Q2 prelim revs $486.5M vs. est. $465M; and raises fiscal year 2023 revenue and ACV billings guidance to $1.8B-$1.81B and $905M-$915M.

 

Software movers:

·     CRM announces Einstein GPT, the world’s first generative AI for CRM.

·     DOMO announced a series of changes to the executive team, including founder Josh James stepping back into the role as CEO and reported overall better-than-expected Q4 results, including total revenue of $80M, up 14% y/y (est. $77M) EPS and op margin, but billings of $104M, down 3% y/y (vs. est. $107M).

·     GWRE reported F2Q constant currency ARR ahead of consensus estimates ($707M up 14% y/y vs. $699M) and investor expectations (<$5M beat) revs up 14% y/y to $232.6M vs. est. $223.2M) though sub revs of $86.0M, up 37% y/y, was a deceleration from 38% growth last quarter.

·     SE shares rise after posted a surprise quarterly profit of $422.8 million, on revenue of $3.5 billion.

·     TEAM discloses rebalancing of resources, including elimination of ~5% of current workforce.

 

Semiconductors:

·     AMD and NVDA notable strength early in the session before falling late.

·     ON said it signed long-term supply agreement with German car maker’s electric drivetrains.

·     Bank America noted, citing the SIA data: January semis sales finished -20.1% YoY, the seventh consecutive month of negative semis growth, as the macro environment continues to depress demand. Core-semis (ex-memory) sales were down -10.6% YoY, showing negative YoY growth in core-semis for the third consecutive month (worst since 2019). Key takeaways from January data on a 1-month basis: 1) Semis/core-semis fell -13.6%/-7.1% MoM, finishing 499bpsbelow/200bps above seasonal, as total semis sales revert from positive growth MoM in December of last year, 2) MoM core-semi underperformance was driven by MPUs, the weakest core segment falling 16.3% MoM, although positive MCU/Std Cells, PLDs growth (+2.2%/+3.1% MoM) helped moderate the decline, 3) Memory sales remained negative, declining -41.4% MoM, with DRAM -42.5% MoM and NAND -44.3% MoM