Closing Recap

Wednesday, March 24, 2021

Equity Market Recap

·     U.S. stocks finished lower on Wednesday, as industrials, energy and financials recover following yesterday’s steep drop, with shares of DOW, CAT, CVX, HON, TRV leading the Dow, while the tech heavy Nasdaq lagged amid another rebound in Treasury yields, threatening high growth multiple stocks (though tech stayed weak despite yields rolling late day) and the Russell 2000 Smallcap plunged for a second day. Tech enthusiasm at the market open faded, with the rotation back into cyclicals, while Communications Services index dropped amid weakness in media stocks as VIAC announced a stock offering, and DISCA fell in media weakness sympathy after good gains in 2021. Fed Chair Jerome Powell and Treasury Secretary Janet Yellen offered an optimistic view of a recovery from the coronavirus pandemic during their second day of testimony on Capitol Hill. Adding to the positive momentum, data showed U.S. factory activity picked up in early March amid strong growth in new orders. Semiconductors outperform broader tech weakness amid better guidance/capex from Intel, boosting chip equipment stocks. Reopen related sectors (airlines, cruise, lodging, travel) among top gainers early along with a recovery in energy stocks as oil prices jump, mainly due to the traffic jam in the Suez Canal but also as Germany is reversing its decision to impose a hard five-day lockdown over the Easter period to battle higher COVID cases. In vaccine news, the Hang Seng dropped overnight as Hong Kong authorities halted the use of a COVID-19 vaccine developed by Pfizer/BioNTech on Wednesday, citing defective packaging. Economic data mixed to slightly worse after Durable Goods unexpectedly slipped.

·     Sector movers today; INTC hits 52-week highs early in the session after announcing a $20B investment for two new factories to create a new foundry business, lifting shares of ASML, KLAC, LRCX, while shares of AMD, TSM declined on the news; energy stocks FANG, DVN, MRO, APA, PSX rise as WTI crude bounced off 6-week lows after a container ship got stuck in the Suez Canal yesterday, blocking trade; VIAC plunges after pricing its 20M share offering at $85, though shares remain up around +100% YTD; DISCK, DISCA right behind as the worst stocks in the S&P today, but shares have still more than doubled YTD despite move lower this week; GME sinks to below $145 for the first time since March 5 after its EPS, revs miss estimates and its 10-K referenced a possible stock sale; ADBE posts a beat with raised guidance, but shares fall amid another decline in tech stocks; GIS stumbles after its EPS miss as consumer staples underperform.

·     Markets have started to see an unwind, or deflation of some of the biggest winners of late 2020 and early 2021 over the last few weeks including: 1) the electric vehicle space (TSLA, NIO, BLNK), 2) the SPAC industry latest correction; 3) the Reddit/WSB “meme” names (GME, AMC, BBBY, EXPR, KOSS), 4) the latest media surge (VIAC, DISCA, IAC) unwinds today; 5) Bitcoin leveraged names also seeing a roll of late despite Bitcoin prices holding up (GBTC, MARA, RIOT, MSTR).

·     Nothing new on fiscal stimulus as press reports continue to focus on White House plans for $3T in spending on infrastructure and other Democratic priorities and a range of tax increases drug price negotiations to help fund the initiations. Washington Post cited people briefed on internal conversations who said White House officials weighing tax hikes to help fund Biden’s multi-trillion-dollar infrastructure and jobs package. Package expected to be split into two components, one focused on infrastructure and clean energy, funded by tax hikes on businesses.

Economic Data

·     Durable Goods Orders unexpectedly fell (-1.1%) vs. est. for up +0.8% in February, while Durable goods ex: transportation fell (-0.9%) vs. est. up +0.6%, suggesting some cooling in business spending on equipment after recent strong growth. Feb durables ex-defense orders -0.7% vs. Jan +2.3%, nondefense cap orders ex-aircraft -0.8% vs. Jan +0.6%

·     February U.S. PMI Composite Index (final) reported at 59.1 vs. 58.8 consensus and 59.5 prior, while the PMI Service Index at 60, in-line with consensus, 59.8 prior; services sector input prices index at highest in series history going back to October 2009; manufacturing flash input prices index at highest since matching 74.9 in March 2011

Commodities

·     Oil prices rebounded of 6-week low settlement ($57.76), with WTI crude rising $3.42 or 5.92% to settle at $61.18 per barrel, while Brent jumped $3.62 or 5.95% to settle at $64.41 per barrel. Egyptian authorities worked to dislodge a giant container ship that remained stuck in the Suez Canal, blocking all traffic on one of the world’s busiest shipping arteries, which helped support oil prices earlier. Late morning, Reuters noted that with oil prices making steady gains earlier this year, OPEC and other producers had hoped to ease output cuts, but industry sources say a fresh wave of lockdowns around the world threatens to tear up those plans. The OPEC+ group of producers, which are holding back millions of barrels of daily supply, surprised the market on March 4 by deciding to hold output broadly steady. Four OPEC+ sources told Reuters they expect a similar decision to the last meeting.

·     Gold rose $8.10 or 0.5% to settle at $1,733.20 an ounce, climbing despite a bounce in both the U.S. dollar (to 4-month highs) and Treasury yields as the precious metal drew support from Federal Reserve Chair Jerome Powell’s repeated calls to keep low-interest rates pinned near zero. Gold prices halted a 2-session decline. Concerns over extended lockdowns across the euro zone and a dispute over the supply of Covid-19 vaccines also helped prop up gold’s safe-haven appeal.

Currencies & Treasuries

·     Bitcoin traded as high as $57,000 before paring gains to trade below $55,000, boosted after Tesla CEO Elon Musk said the company’s electric vehicles can now be bought using bitcoin and the option will be available outside the United States later this year. The dollar index (DXY) touched a 4-month high earlier today (92.60) before paring gains to hold around the 92.50 level, with the euro falling back near the 1.18 level. Treasury yields edged higher most of the morning, with the 10-year holding near best levels late day around 1.64% initially, sliding to 1.61% late.

·     The U.S. Treasury sold $61B in 5-year notes at a yield of 0.85% vs. when issued 0.847%, with the bid-to-cover (demand) at 2.36 and indirect bidders awarded 58.08% of the auction and directs 16.62%. The bid to cover was a modest improvement from last month’s 2.24 but was just below the six-auction average of 2.38. The auction was disappointing after a solid 2-year the day prior, and ahead of tomorrow’s critical 7Y auction.

Sector News Breakdown

Consumer

·     Retailers; GME shares slide after the videogame retailer said it may raise funds through a share sale, while also downgraded at Wedbush to neutral after quarterly results; CENT upgraded to Buy at Truist and tgt to $65 from $45 while up estimates to reflect a conservative accretion estimate of the three acquisitions CENT has announced over the past 100 days; CAL added to Hedgeye best ideas long list; FNKO adding to yesterday gains – Piper noted today new & old articles have surfaced quoting CEO Brian Mariotti’s interview with Yahoo!Finance regarding Funko’s intent to enter the NFT market and soon; HOME reported Q4 EPS of $1.08, well above consensus of $0.69 driven by stronger sales and nearly 400pps of better gross margin, while comp sales of 30.8% topped its preliminary comps of 23-24% announced in January

·     Auto sector; GM said to extend production cuts due to global semiconductor chip shortage – says cuts are included in company’s prior forecast that chip shortage could hit 2021 profits by up to $2 bln, as per Reuters; TSLA active after CEO Elon Musk tweeted that Tesla cars can be bought using bitcoin and the option will be available outside U.S. later this year; KAR positive mention at Truist saying came away from our VNDR with greater confidence in KAR’s combined dealer-to-dealer offering following the complete integration of TradeRev and BacklotCars; CVNA, VRM active after Truist said analysis of data points to an improving pace of unit sales QTD and data also suggests no surprising swings in ASP, with directional trends largely consistent vs expectations; AZO authorizes additional stock repurchase of up to an additional $1.5B; KNDI launches powersports division, expands electric footprint; electric vehicle leveraged plays (AYRO, BLNK, CHPT, FSR, KNDI, NIO) under sharp pressure today in unwind of big 2020 winning trades

·     Consumer Staples; GIS shares slipped as Q3 adj EPS of 82c missed the 84c est. on slightly better sales of $4.5B noting higher input costs and expenses of logistics weighed on operating earnings and margins, after adjustment (weighed on other food stocks CPB, SJM); EL was upgraded to Overweight from Equal Weight at Wells Fargo and raise target to $340 from $290, above historical but anchored by near-term catalysts driving another step-change in the narrative

·     Restaurants; WEN added to Best ideas, JACK removed at Wedbush as view investor sentiment on WEN as overly negative. At a 5.8% free cash flow yield (17.4x P/FCF per share) on our estimated free cash flow per share of $1.19, we believe investors are discounting an overly pessimistic view; MCD tgt raised to $260 from $240 at Oppenheimer as remains among our top pick saying the US outlook is strengthening and provides and offset for Europe restrictions; WING tgt cut to $150 from $187 at Piper as calculated the 1Q21 weather impact and revised our comps accordingly; YUM announces that it has acquired Tictuk Technologies, a leading Israeli omnichannel ordering and marketing platform company for an undisclosed amount

·     Casinos and Gaming; Hong Kong and Macau temporarily-suspended COVID vaccines manufactured by BNTX and PFE because of a packaging defect. Both governments said Wednesday they received notifications about packaging defects related to caps on vials of the shots from Shanghai Fosun Pharmaceutical Group Co. (watch Macau casinos – WYNN, MLCO); British gambling operator Gamesys (JKPTF) agreed to a possible takeover by BALY for 1,850 pence per share in cash, the companies announced on Wednesday.

·     Leisure and Lodging sector; MTN slides after reduces all pass prices by 20% toward goal of ‘epic for everyone’ as launches new version of epic day pass with more limited resort offering at $67 for a 1-day pass; in theme parks, Stifel says the recent pullback has created compelling entry points and still see plenty of upside to amusement park names, raising ests and tgt prices for SIX, SEAS, FUN as believe visitation/spending patterns across the amusement park sector should continue to accelerate from current levels and show strength over the next six; in RV, towable, WGO Q2 profit and sales topped consensus with sales of towable vehicles grew 55% YoY, to $439.3 million and overall revs up to $839.9M from $626.8M a year ago; PLBY posts a narrower Q4 loss as revenues soared and raised its revenue growth expectations for 2021; cruise lines (CCL, NCLH, RCL) rebounded initially after an industry trade group calls on the CDC to allow for the planning of a phased resumption of cruise operations from U.S. ports by the beginning of July – but later the CDC says order limiting U.S. cruises stays in effect till Nov 1, hit shares.

Energy

·     Oil prices rebounded overnight after a ship ran aground and blocked the Suez Canal in both directions. The 224K-ton Ever Green was stranded after losing the ability to steer amid high winds and a dust storm, causing a gridlock of at least 100 vessels; in inventory data, API said weekly crude +2.93m vs -900k expected; Cushing -2.3m; Gasoline -3.7m; Distillates +246k

·     Energy stock movers; BMO said they see crude oil prices having support in the range of $55-65/bbl in 2021 before moving higher in subsequent years, and macro fundamentals and the recent selloff in oil and gas equities makes their value compelling; Stifel lifted their price target on OAS to $72 from $58 after it simplified its midstream business and said the stock remains one of the most compelling opportunities with its best-in-class balance sheet, superior FCF profile, and management team that is aligned with shareholder returns; OAS was also reinstated at a Buy with an $85 price target at MKM who also upgraded CLR, MTDR to Buy; Roth initiated EGY with a Buy rating and $4 target given its free cash flow, zero debt on its balance sheet, and expected 46% YoY production growth in 2021; Credit Suisse upgraded NEXT to Outperform from Neutral on the company’s Carbon Solution differentiates its offerings and increases the company’s likelihood in commercializing Rio Grande; HPR files Form 8-k with SEC concerning the co’s Chapter 11 bankruptcy plans

·     Oil refiners; shares of PBF, MPC, PSX higher after the Environmental Protection Agency said it is finalizing a proposal to extend the deadlines for refiners to prove their compliance with U.S. biofuel blending laws for 2019 and 2020. Under a final rule released Tuesday, refiners now have until Jan. 31, 2022, to submit compliance documentation for the 2020 year, while small refiners have until Nov. 30, 2021, to submit documentation for 2019. In research, Wells upgrades CLMT to OW and doubled its price target to $8 from $4 on the company’s proposed transition to renewable diesel which would shift the company into high-growth and high0margin renewables; Credit Suisse sees the recent weakness in refiners extending to the first week of April, though they also see margin upside in the second half of the year as vaccines are administered and restrictions are lifted, and they raised their price targets on PSX (to $90 from $85), VLO ($85 from $76), HFC ($45 from $42), PARR ($19 from $18), and PBF ($7.25 from $6)

Financials

·     Bank movers; Bank of America issued a double-upgrade on BK to Buy from Underperform on the stock’s attractive valuation and improved revenue and earnings outlook, upgraded CME to Buy from Neutral on its expected revenue improvement and attractive yield, and downgraded VINP to Underperform from Neutral; KBW upgraded BANC, PMBC to Outperform; Seaport initiated Buy ratings on OCFC ($28 pt) and SNV ($53 pt); RILY sees Q1 adj EBITDA $105-115M, which is almost a 50% YoY increase at the low end ($70.9M in 1Q20) and commenced a $125M offering of senior notes due 2026

·     Insurance; Morgan Stanley upgraded RE to OW with a $316 pt; Citi said that while they see potential near-term regulatory concerns impacting shares of WLTW and AONthey continue to like AON long-term and that their DCF valuation shows a present value of $300/share and suggests $400 in 2024; Barclays lifted their price target on HIG to $73 from $55 to reflect the increased market sentiment of CB completing its takeout, seeing a possible offer of up to $80/share, and also on Overweight-rated TRV to $165 from $155, saying investors have an attractive entry point after its 9% pullback from March 18’s high on speculation that it will make a bid for HIG, though Barclays says it is unlikely it will aggressively outbid others

·     Payments and FinTech; OpCo said investors should be buying V (Visa) as cyclical tailwinds and the return of travel outweigh the risk to shares on the DOJ’s investigation into the company’s debit card competitive practices; Bank of America reiterated their Buy rating on PYPL and $323 target after their management meeting showcased their plans to bring more features to Venmo after launching its Business Profiles for small business last month, including a credit card and crypto functionality, and eventually add high-yield savings accounts, budgeting tools, and stock trading to the app; Citi initiated coverage on RPAY at Buy with a $29 target as they like its position in underpenetrated end markets and solid execution and client gains

·     REITs; BTIG said RealPage data and commentary from Apartment REITs show rents in coastal markets have bottomed (including Boston, NYC, San Fran) and are rebounding in the South, and they downgraded CSR to Neutral as they forecasting a SSNOI decline vs growth for non-Coastal peers in 2021 given pressure from a slower return to office in Minneapolis; Deutsche downgraded AVB, EQR to Sell

Healthcare

·     Pharma movers; Hong Kong authorities halted the use of a COVID-19 vaccine developed by PFE and partner BNTX on Wednesday, citing defective packaging, in a move that triggered scenes of confusion in inoculation centers across the city; India govt official says no risk of blood clotting-related complication with AZN vaccine, as per Reuters; MYOV and PFE said Phase III LIBERTY Trial withdrawal study met its primary endpoint with 78.4% of women who continued on relugolix combination therapy achieving the sustained responder rate through Week 76 compared with 15.1% of women who discontinued treatment and initiated placebo at Week 52; BHC downgrade from Neutral to Underperform at Bank America

·     Biotech movers; APTO surges following 4Q results and mgmt’s update on luxeptinib’s Phase 1 trials in AML and CLL/NHL – price tgt raised to $9 from $8 at Oppenheimer; KLDO rises after saying its oral drug cut recovery time as well as hospitalizations and emergency room visits in patients with mild to moderate COVID-19, in an early trial; ATNM initiates patient enrollment in Iomab-ACT trial prior to CD19 CAR t-cell therapy; ADTX said to initiate first-in-human clinical trials with its therapeutics programs in psoriasis by year-end; BCLI announces positive topline data in phase 2 study evaluating Nurown as a treatment for progressive MS as it was shown to be safe/well tolerated/achieved the primary safety endpoint

·     Healthcare services and providers; LH said while they continue to see strong momentum across operations, its board believes value is not being appropriately reflected in the Company’s current stock price and is undertaking a review of the Company’s structure and capital allocation strategy; ACCD pre-announcement and F4Q:21 revenue beat were ahead of consensus for both revenue and adjusted EBITDA; TWST said its in-vitro diagnostic test that can detect SARS-CoV-2 RNA received emergency authorization in the U.S. Twist’s test can identify the presence of the virus from a patient sample

Industrials & Materials

·     Metals & Materials; Morgan Stanley said they remain constructive on mining equities but are rotating to equities more directly exposed to emissions cuts in China as upgrade AA to overweight (tgt to $43 from $20.50) on better prospects for aluminum & downgrade FCX (tgt raised to $38 from $28), GMBXF to equal-weight to take profits on copper names; MP 6M share Secondary priced at $35.00; WOR Q3 profit rose as it booked gains in steel processing, though total sales fell to $759.1M (from $764), driven by lower sales in the oil-and-gas-equipment business within the pressure-cylinders segment (also raises dividend and announces buyback); CMP entered into a definitive agreement to sell its South America specialty plant nutrition business to ICL Brasil, for total potential gross cash proceeds of approximately $418M

Technology, Media & Telecom

·     Internet; BIDU, BABA, JD, TCEHY slide – Chinese Internet/e-commerce names under pressure today following news overnight that the govt has issued new rules that define for the 1st time the "necessary" personal information that mobile apps can obtain from their users; ZKIN rises after saying it has formed a new wholly-owned subsidiary, xSigma entertainment limited, with the intent of acquiring online gaming assets; LIZI announces in-car audio collaboration with new energy vehicle company Enovate Motors; ACVA 16.55M share IPO priced at $25.00

·     Semiconductors; sector dominated by news out in INTC last night after saying it would top its Q1 guidance issued earlier this year for sales and earnings saying sales are likely to reach $76.6B this year, down from a record $77.9B in 2020, but above the $72.7B estimate and issues upbeat cap-ex guidance of $19B-$20B and provided a 7nm product update, and outlined Intel’s goal of becoming a significant player in global foundry capacity (shares of AMD, TSM fell on news)

·     Semi equipment companies; LRCX, AMAT, KLAC rose following Intel’s announced $20B manufacturing expansion in Arizona in its push to become a global foundry player; ASML among top gainers in semi after INTC comments on EUV lithography last night in company update; Cowen noted INTC’s commentary was very bullish for semicaps as their capex moved up 37% above our $15B estimate. Further, Gelsinger highlighted EUV being extremely important and that INTC is partnering with ASML and has ‘fully embraced’ EUV and increased adoption by 100%.

·     Software movers; ADBE quarterly beat as net new Digital Media ARR of $435M surpassed consensus by $23M, driven by strength in both Creative Cloud (20% y/y ARR growth vs. 19% last quarter); sees Q2 revenue roughly $3.72B vs. est. $3.7B; ZS upgraded to Buy from Hold at Truist and up tgt to $225 from $175 as walked away extremely positive from conference at the company’s short, medium-term as well as its long-term durable growth profile; NET upgraded to Buy and tgt raised to $110 at Truist saying conversations with customers indicate broad-based strength in NET’s business, with newer solutions like Teams now starting to drive new customer growth in addition to increased upsell opportunity; DOCN 16.5M share IPO priced at $47.00

·     Media & Telecom movers; VIAC 20M share Secondary priced at $85.00; KKR teams up with music company BMG to acquire recorded music, music publishing, and other music rights; SIRI says Disney hits launching on SiriusXM on March 25^th – first ever music channel; OUT tgt raised to $27 from $20 at Oppenheimer as expects a full recovery in its billboard business by Q4 as top regional markets recover; INFY upgraded to Outperform at Bernstein saying the ability to sign billion-dollar deals led by a multi-year cloud cycle is core to their thesis; DLPN and HOFV shares surge after the companies signed a partnership to offer non-fungible tokens (NFTs); WWE shares surged to 52-week highs, topping the $61 level earlier