Closing Recap

Wednesday, May 19, 2021

Equity Market Recap

·     Stock markets whipsawed late afternoon following the release of the April 27-28 FOMC policy meeting minutes which included comments on “transitory” inflation pressures, showed some members inclined to discuss tapering asset purchases soon, and the strength of the economy. Market moves were quick and volatile as major U.S. stock averages finished down, but well off their morning lows. The Nasdaq Composite recovered more than 225 points off the 13,072 low to the 13,300-level late day (nearly turning positive) led by gains in the semiconductor index (SOX) which jumped as much as 2% nearing the 3,000 level (before paring gains) – but succumbed to late selling pressure. Oil prices end lower as WTI crude drops -$2.13 or 3.25% to settle at $63.36 per barrel not rallying along with broader stock markets and ragging energy stocks lower (among biggest decliners along with Materials). Bonds extended their sell-off following the minutes, as the 10-year Treasury yield jumps 5 bps to 1.69%. Stronger retail earnings this week (TGT, LOW beating earnings today after WMT, HD beats Tuesday) not really helping broader markets. The biggest story of the day was the bloodbath in the crypto markets with Bitcoin dropping below the $30,000 level (before partially recovering), but other crypto assets were pummeled.

Crypto Currency:

·     Massive volatility in the entire cryptocurrency space, with Coinbase noting the overall market was down over 20% in the morning. Major losers include recent winner Dogecoin having its price be cut in half from yesterday’s high and Ethereum losing more than one-third of its value since yesterday (fell below $2,000 before bouncing). Bitcoin, by far the largest coin by market cap, fell over 25% and hit lows around $30,000, the first time under $30k since January and more than 40% off its record high on April 13 (before recovering back above $40K midday). While cryptocurrency’s recent weakness coincides with a general loss of risk appetite that has also weighed on growth stocks, today’s move stems from yesterday’s headlines that Chinese banking authorities warned institutions not to conduct business with digital currencies, recent comments from Elon Musk that Tesla will not accept the currency due to environmental concerns and cryptic tweets that hinted the company may have sold all its Bitcoin, and a JPM note yesterday that institutional investors have reversed course and are now transitioning back to traditional gold. Consequently, RIOT, MARA, MSTR, COIN, GBTC, SQ, OSTK declined.

Commodities

·     Oil prices end lower as WTI crude drops -$2.13 or 3.25% to settle at $63.36 per barrel, slipping to 3-week lows (after touching YTD highs earlier this week) amid a stronger dollar and rising risk aversion as investors worry inflation could lead to tighter monetary policies. Concerns about a US-Iran nuclear deal that could allow Iranian crude back into the global market added to the sell-off. Weekly inventory data was mixed (small bullish points for gasoline and distillates). 

·     Gold prices rose $13.50 or 0.7% to settle at $1,881.50 an ounce, rising to more than four-month highs amid a rotation out of crypto currencies (Bitcoin, Ethereum) and into precious metals as inflation concerns boosted bullion’s safe-haven appeal. Note gold prices have risen by more than $200 (12%), since falling to a nine-month trough in early March, with gains driven by a pullback in the dollar and a rise in inflation expectations.

Currencies & Treasuries

·     The U.S. dollar barely budged off recent YTD lows, getting a bounce off 6-year lows vs. the Canadian dollar as oil prices dropped, but was overall little changed vs. the Japanese yen (below 109) and the euro (above 1.22). Treasury yields saw an afternoon recovery as the yield on the benchmark 10-year rose above 1.68% late afternoon, more than 5 bps off morning lows after minutes from the April FOMC meeting was released (also boosted the dollar). The U.S. sells $27 bln 20-year bonds at high yield 2.286%, awards 65.79% of bids at high with a bid-to-cover ratio 2.24 and indirect bidders awarded 56.74%.

Sector News Breakdown

Consumer

·     Retailers; TGT with solid Q1 beat as EPS $3.69 topped the est. $2.25 as sales grew 23.4% to $24.2B vs. est. $21.81B, with comp sales up 22.9% and digital comp sales up 50% (follows a strong report from WMT the day prior – but broader market weakness hurts); DKS tgt raised to $102 from $93 at Cowen and raise ests ahead of earnings next week as see meaningful upside to topline + guidance; PRPL files for resale of up to 8.41 mln shares of class a common stock by the selling stockholders; TJX slides post better earnings as EPS 44c/$10.09B above ests 31c/$8.62B on comp store sales 16% while says Q2 comparable store sales trends remain similar to Q1

·     Auto sector; TSLA falls with broader market sell-off as reports showed Tesla inc.’s growth in China slowed precipitously last month, as 11,949 China-built Tesla’ were registered in the country in April, according to data from state-backed China automotive information net (down sharply from a record 34,714 registrations in March); KMX was downgraded to Neutral from Outperform at Wedbush noting since their upgrade report on May 12, 2020, shares increased +58% vs. a +41% increase in the S&P 500; LAD announces $1B offering of Class A common stock.

·     Housing & Building Products; LOW the latest home improvement company to report better earnings and sales following an uptick in demand with Q1 EPS $3.21 vs. est. $2.62 and Q1 sales $24.4B vs. est. $23.86B while posted a 25.9% jump in Q1 comp store sales vs. est. 19.2% (strong data but not as much as HD 30% reported yesterday); EXP Q4 EPS $1.56 vs. est. $1.23; Q1 revs $343M vs. est. $333.6M; decided not to pursue proposed separation of eagle materials; average net cement sales price for quarter increased 2% to $112.77 per ton; lumber down for a 7th straight day (down 27% during that stretch off record highs) – still up 45% YTD; TCS shares slipped despite earnings, revenue beat & positive outlook.

·     Consumer Staples & Restaurants; another rotation into defensive related sectors (food, tobacco, consumer products) early as investors bail on high growth, high multiple stocks – but as major averages recover, defensive names sold off; TSN upgrade from Hold to Buy with $92 tgt at Argus as see strong prospects for Tyson as demand for protein continues to grow and the company invests in new products, e-commerce upgrades, and capacity expansion; TAP increasing Canadian hard seltzer production by 300%, part of $100M investment in its Canadian hard seltzer portfolio

Energy

·     Oil prices fell for a second day on Wednesday on renewed demand concerns as coronavirus cases in Asia rise and on fears rising inflation might lead the U.S. Federal Reserve to raise interest rates, which could limit economic growth. – A wave of strong oil buying by processors in China and Japan has lifted spot premiums in Asia’s physical market, adding to signs of rising global demand. Europe’s battered oil refineries are finally looking at some relief amid improving margins

·     Inventory data: The API shows a surprise build of 620K barrels of oil for the week ended May 14; gasoline inventories a draw of 2.84M barrels, distillate inventories show a draw of 2.58M barrels and Cushing inventories show a build of 53K barrels; this morning, the EIA said weekly crude oil inventories rose +1.3M barrels vs. +1.6M consensus, Gasoline stockpiles fell -2.0M vs. -0.9M consensus and Distillates fell -2.3M vs. -0.4M consensus

·     E&P and Majors; Wells upgraded AR to OW due to its improved leverage and positive NGL outlook, downgraded ESTE on valuation, kept DVN, PXD, PDCE as their top picks, and continue to like MRO, FANG, BCEI for oil exposure and CHK, CNX, EQT in gassy E&Ps as last quarter’s earnings showcased the sector’s value investment case as companies delivered FCF that almost doubled their estimates and used the cash to repair balance sheets and pay down debt

Financials

·     Bitcoin: The entire cryptocurrency space was hammered, with Coinbase noting the overall market was down over 20% in the morning. Major losers include recent winner Dogecoin having its price be cut in half from yesterday’s high and Ethereum losing more than one-third of its value since yesterday. Bitcoin, by far the largest coin by market cap, fell over 25% and hit around $30,000, the first time under $30K since late January and more than 40% off its record high on April 13. While cryptocurrency’s recent weakness coincides with a general loss of risk appetite that has also weighed on growth stocks, today’s move stems from yesterday’s headlines that Chinese banking authorities warned institutions not to conduct business with digital currencies, recent comments from Elon Musk that Tesla will not accept the currency due to environmental concerns and cryptic tweets that hinted the company may have sold all its Bitcoin, and a JPM note yesterday that institutional investors have reversed course and are now transitioning back to traditional gold. Consequently, RIOT, MARA, MSTR, COIN, SI, SQ pulled back.

·     Bank movers; big bank shares fell initially (but rallied late as Treasury yields moved to highs) as investors digest minutes from the Federal Reserve’s most recent meeting (JPM, WFC, MS, C); in research, WFC downgraded from Buy to Neutral with $47 tgt at UBS noting shares have risen 59% year-to-date (YTD) and 123% since the end of Oct. 2020 (BKX is up 37% and 74%, respectively, over these periods). Hence, the shares no longer trade at material PE discounts to other banks they cover.

Healthcare

·     Pharma movers; IOVA shares fall following news that BLA filing for lifileucel in advanced and metastatic relapsed/refractory melanoma will be delayed until 1H22 (previously guided 2021); RETA said it would file for a pre-marketing application meeting with the FDA and withdraw a request for a Type-C meeting to discuss its treatment omaveloxolone for Friedreich’s ataxia; VERU enrolled the first patient in its Phase 3 trial of sabizabulin, a novel, proprietary, oral cytoskeleton disruptor with anti-inflammatory and anti-viral properties, to combat COVID-19

·     Biotech movers; MYOV falls after saying the U.S. FDA on May 18 placed partial clinical hold on co’s late-stage study of its combination tablet as a contraceptive; BTAI said the FDA accepted filing of NDA for bxcl501 for the acute treatment of agitation associated with schizophrenia and bipolar disorders I and II

Industrials & Materials

·     Aerospace & Defense; AXON was upgraded from Market Perform to Strong Buy and initiating a $150 target price at Raymond James following a 39% pullback and view that the current valuation understates the improving ARR, adjacent market growth, mix shift and clear-cut intensification of secular tailwinds; BA rises on Reuters report midday that it has resumed 737 Max deliveries following fix of electrical grounding issue

·     Transports, Industrial & Machinery; KRNT yesterday hosted a virtual investor event at which management matched the Street’s projection of greater than 50% revenue growth in 2021, expressed confidence that the company could meet its $500M run-rate goal exiting 2023 sooner than expected, and introduced a new long-term target of $1B in revenues in 2026; FDX tgt raised to Street high $372 at Bank America saying overall positive view on margins for both the ground and express businesses is seen leading to FDX earnings beats; airlines slide after LUV raised its estimate for fuel costs Q2 to $1.90-$2.00 per gallon, from $1.85-$1.95 per gallon

Technology, Media & Telecom

·     Internet; JD posted a Q1 rev advance of 39% to $31.57B, topping ests amid an expanded product line-up that helped lure in more users; TCOM posts Q1 narrower EPS loss to 0.34 yuan from 3.73 yuan a year earlier on better revs 4.1B yuan vs. est. 2.98B citing a strong rebound in Chinese travel demand; VIPS slips after earnings mixed while guides Q2 revs 28.9 bln-30.1 bln yuan below Street est. of 30.57 bln yuan; Squarespace (SQSP) began trading today through a 40M share direct listing rather than a traditional IPO, as the NYSE has set a reference price of $50 per share (shares traded as low as $43 late day – below reference price)

·     Semiconductors; ADI posts both Q2 revenue and adj profits above consensus expectations, helped by record revenue in the industrial and automotive markets while guides Q3 revs $1.7B plus/minus $70M topping the $1.65B estimate; Citigroup upgraded OLED to buy saying post pandemic, they expect UDC’s material sales to normalize on higher OLED utilization rates in 2022, while firm downgrade SLAB to neutral saying it has less M&A appeal post divestiture and the splitting of the company into 2 pieces shows that management and the board is less likely to sell IoT piece (also maintain MRVL #1 pick, move NVDA up to #2 from prior #4 on enterprise demand recovery and move LRCX down to #4 from prior #2; AMD announces $4B share repurchase

·     Software movers; TTWO reported a Q4:F21 top and bottom-line blow-out driven by outperformance from RCS across the company s portfolio; CRM upgraded from Equal weight to Overweight with $270 tgt at Morgan Stanley saying its well positioned for ramping digital transformation demand and more constructive margin commentary from management tilts the risk/reward significantly more favorably; XM upgraded to Buy and raise tgt to $45 at Bank America saying the company is executing well and the valuation has improved after a recent 20% pullback

·     Components & Services; CSCO expected to report earnings tonight; CGNX upgrade from Outperform to Strong Buy with $120 pt at Raymond James given view supply chain disruptions, rising labor costs and restocking depleted inventory will accelerate longer term automation plans globally; XONE tgt cut to $31 from $46 at Canaccord as reported weak 1Q21 earnings that missed on the top and bottom line as a result of ongoing travel restrictions