Closing Recap

Monday, May 23, 2022

Equity Market Recap

·     After weeks of declines for major U.S. averages, with the S&P 500 and Nasdaq entering the week with 7-week losing streaks and the Dow an 8-week losing streak (longest since 1932), stocks were slow and steadily higher all day long, paced by strong gains in financials, energy, industrials, materials, and utilities. Of note NYSE breadth was in favor of decliners by more than 2-1 margin, but volumes were very light, not a positive sign. Both large cap and regional banks posted the biggest gains in the S&P, led by JPM after it lifted its 2022 outlook for net interest income and affirmed its profitability target during its Investor Day. Tech stocks were mixed ahead of a big week for software related earnings as AAPL posted a big bounce back day rising over 3%, along with gains in GOOGL, TSLA and MSFT (note coming into the week – seven mega cap tech names AAPL, AMZN, FB, GOOGL, MSFT NVDA and TSLA were all down 22% YTD). The standout decliners remain consumer discretionary/leisure related names after last weeks earnings disappointments (and more earnings to come this week). The dollar fell vs. most currencies, with a big drop vs. the euro after ECB President Lagarde said the European Central Bank is likely to start raising interest rates in July and exit sub-zero territory by the end of September. With inflation running at almost four times the ECB’s 2% target, momentum in the central bank’s Governing Council has been building to raise the deposit rate from its current level of -0.5% in July.

Commodities

·     Oil prices end little changed, with WTI crude rising $0.01 to $110.29 per barrel (highs $111.96 and lows $109.15); diesel June futures settle at $3.7688 a gallon; gasoline June futures settle at $3.7977 a gallon and natural gas June futures settle at $8.7440/MMBtus., rising over 8% to biggest one-day gain since February. Gold prices rise $5.70 to settle at $1,847.80 an ounce as weakness in the U.S. dollar and growth concerns in the economy lifted the metal.

·     The White House is weighing an emergency declaration to release diesel from a rarely used stockpile in a bid to address a major supply crunch and blunt rising prices, an administration official said on Monday. The national average price for diesel stood at $5.56 a gallon as of Sunday, shy of the record of $5.58 set last week, according to AAA Up 75% Y/Y).

Currencies & Treasuries

·     U.S. dollar was weak, falling about 1% (DXY) to 102.15, nearly 300-bps off week ago 20-year highs above 105.30 level, extending last week declines (off recent 20-yr highs above 105 level); the euro jumps 1.1% above 1.0675 after ECB President Lagarde outlined a plan to start rate hikes in July and exit sub-zero territory by the end of September; said that the central bank is likely to exit negative rates by the end of 3Q.

·     In crypto, CNBC reported Tether has seen its circulating supply plunge from a record $84 billion on May 11 to around $73 billion as of Monday. Regulators have raised concerns about stablecoins after the collapse of UST, which at one point was the world’s third biggest stablecoin. Bitcoin prices moved back above the $30K level today but slumped late day, falling sharply in the last hour of the trading day.

·     Treasury yields rose across the curve, with the 10-yr yield above 2.85%, up 6.6bps on the day; 30-yr up 5.7bps to 3.05%; 2-yr up around 4 bps to 2.62%. One Fed speaker today with Bostic speaking a few times today, but no market moving economic data to impact prices.

Sector News Breakdown

Consumer

·     Retailers; AAP – handful of retail earnings this week; BIRD a positive mention in Barron’s saying shares may have bottomed given that the company, with a current market capitalization of about $700Mm, has net cash of $240Mm; GME announced it has launched its digital asset wallet to allow gamers and others to store, send, receive and use cryptocurrencies and non-fungible tokens ("NFTs") across decentralized apps without having to leave their web browsers; retail changes at Citigroup, downgraded GPS to Neutral and cut tgt to $8, KSS downgraded to Neutral and cut tgt to $39 from $55; RL downgraded to neutral with lower $98 tgt, UAA cut to Neutral with lower $10 tgt; PLCE downgraded to Sell with lower $36 tgt, AEO cut to Neutral with lower $14 tgt, CRI downgraded to Sell from Buy with lower $68 tgt (from $110), ANF cut to Neutral; for KSS, minority shareholder Macellum Advisors GP LLC, with a 5% stake, is considering legal action against the board for waiting until just after the company’s annual shareholder meeting to disclose a hefty first-quarter earnings miss, reduced full-year guidance and the departure of two executives

·     Consumer Staples & Restaurants: THS upgraded to Buy from Hold, raising our 12-month price target to $50 (from $35) but maintaining our estimates at Truist as believe the macro picture will offset any near-term hiccups and result in multiple expansion for the stock; SBUX says it will completely exit Russia (has about 130 locations in Russia); KR files mixed shelf of indeterminate amount; SJM said late Friday it was recalling nearly 50 types of Jif peanut butter products sold in the U.S. due to potential Salmonella contamination; SAM launches new line of cannabis-infused iced teas dubbed TeaPot

·     Casinos & Gaming: in gaming (WYNN, MGM, CZR), Wells Fargo said the estimate current U.S. Gaming valuations are implying a 5-10%+ Y/Y decline in 2023 revenues and a 10-20% EBITDA decline vs. in the early 2000s, peak-to-trough regional operator, revenue and EBITDA declined ~15/30% (exacerbated by slowing consumer and new supply), while LV Strip operator revenue/EBITDA declined 9% and 16%, respectively; in online gaming (DKNG), Bank America said April digital GGR for reported states was $700M, -8% M/M, a smaller than normal seasonal decline as April ended on a Saturday

·     Leisure sector: in leisure, KeyBanc noted in golf industry (GOLF, ELY) that hard-good retail dollars for April were -5.5% y/y vs. a record month in 2021, or +37.1% vs. 2019, a slight reacceleration from March’s +33.6% vs. 2019 and ~in line with historical seasonality (this month was +29% seq. vs. historical April seasonality of +32% seq.). This said, balls saw a noticeable step-down vs. 2019 levels (+23.0% vs. March’s +38.77%); in cruise lines, Bank America cuts tgt on CCL, RCL and NCLH saying CCL’s debt offering highlights refinance needs of RCL/NCLH

·     Auto sector; AXL is exploring a potential sale, Bloomberg reports late Friday citing people from the process. https://bloom.bg/3lAQyn6 (note AXL this weekend said “we feel it is important to clarify that we are not engaged in a process to sell company”); DIDI said it would proceed with delisting of ADS from NYSE; XPEV falls following larger loss Y/Y and guided Q2 deliveries between 31,000 and 34,000 vehicles, down from 34,561 units in theQ1; NIO down in sympathy

Energy, Industrials, and materials

·     Energy stock movers: AR, EQT, SWN, CHK, RRC – nat gas levered energy names outperform broader oil names with nat gas rising over 4% to around $8.50 mln btus; energy stocks in general outperformed as energy remains the top sector mover in 2022; West Texas Intermediate prices topped $111 a barrel early before slipping, while gasoline and diesel prices have rallied to records ahead of the start of the US driving season, which begins in about a week.

·     Aerospace & Defense; AXON downgraded to EW from OW at Morgan Stanley with $120 tgt saying heading into Accelerate conference, they expect focus on new software categories and new end markets. We remain highly encouraged on the longer term, and on Axon’s differentiation, but event will likely be a limited catalyst; MNTS positive mention by Deutsche Bank saying with the stock down 64% over the past 6 months (vs. Nasdaq -28%), believe the bar for a successful demonstration is low and most institutional investors have given up on the story

·     Industrials, Materials & Machinery; a very strong day for the likes of industrials DE, CAT, PWR, PCAR as well as metals such as steels (NUE, SLD, X) on rising hopes of a China lockdown subsiding and a rebound in general for U.S. stocks with the S&P riding a 7-week losing streak; PH signed an agreement to divest its Aircraft Wheel and Brake Division, located in Ohio, in the US to KAMN

·     Transports: a solid rebound for the sector after tumbling last week on weaker rails (post analyst downgraded CSX, UNP, NSC) and truckers (surging gasoline prices and slower consumer spending); SAIA upgraded to Buy and raise tgt to $240 from $213 at UBS as believe SAIA has an attractive algorithm for multi-year EPS growth based on expansion of its terminal network, focus on service performance, and consistent pricing which supports margin expansion

·     Metals & Materials; DOW and LYB both downgraded to Neutral from Overweight at Piper saying checks in the chemical supply and product chains indicate that parts of the industry, especially olefins and polyolefins, may have entered a period of price and volume weakness which will likely impact margins over the next six months; OROCF initiated with an Outperform rating at Cowen and an AUD 18 price Target as remain highly constructive on the lithium market given our view of 31% undersupply on average through 2030 and a global move to diversify the supply chain; steels and other metals among top gainers along with industrials (DE, CAT, PCAR)

·     Utilities & Solar; strength across the board in defensive utilities to start the week – ED, SRE, NI, AWK, AES, EXCOn Friday, Staff and intervenor testimony was filed for the CECONY 2022 electric and gas rate cases. And as we expected, Staff’s recommendation was significantly lower than ED’s request. Specifically, Staff proposed increases of $299.5M for electric and $165.4M for gas, compared to ED’s request of $1.037B and $402.2M, respectively. ED was upgraded to Neutral at Guggenheim as believe the removal of the valuation discount no longer justifies a Sell rating, and the stance is now in line with their broader outlook for the sectors on potential earnings re-rating, near-term catalysts, and alignment with energy transition policy in NY state; DTE upgrade from Neutral to Outperform at Credit Suisse following a positive update from management at this year’s AGA conference and see the opportunity for portfolio rotation to fund upside CAPEX.

Financials

·     Bank & Insurance movers: JPM center stage today holding its investor day, with shares surging after raising its outlook for net interest income (NII) growth to $56B in 2022 (from view of couple billion more than $53B prior) and reaffirming return on tangible equity target of 17%. For 2023, the bank expects its investment spending growth rate "will moderate", but for 2022, expense forecast was kept unchanged at $77 billion – the commentary from JPM helped boost beaten bank stocks with massive gains in shares of GS, MS, Citi; ENV shares slipped on reports its sale process may be on life support, according to a recent report, reported by Bloomberg

·     Bitcoin, FinTech & Payments; for AFRM, Mizuho said early 2Q data for April shows promise, as 30+ day delinquencies for major non-0% APR trusts are trending mostly lower, while additionally, analyzing AFRM’s 10-Q shows that for the first time in many quarters, total delinquent loans as a % of the amortized cost basis are trending lower; Cryptocurrency-linked stocks rise in US premarket trading as Bitcoin rebounds to climb above $30,000 after closing below that level over the weekend

·     REITs; CUBE upgraded to strong buy at Raymond Jams and now top picks in REITs as reiterate our Overweight sector recommendation and believe the declining new supply impact – that has likely declined further given the recent shiD in macroeconomic and capital market conditions – creates a scenario where fundamentals can surpass expectations for the next several years; Stifel said they remain Buy rated on all the self-storage names (CUBE ) and see the quarter as a continuation of the strong operating environment

Healthcare

·     Pharma movers: IMGN after the FDA accepted its Biologics License Application for mirvetuximab soravtansine monotherapy to treat ovarian cancer with a priority review designation; OCUL said that the FDA lifted the clinical hold on the company’s Phase 2/3 clinical trial, OCU-002, for Covaxin; INVA said to acquire all outstanding shares of ETTX it does not already own for $2.20 per share in cash, which represents a 50% premium to Entasis’ closing price of $1.47 per share

·     Biotech movers: Antiviral and vaccine stocks rise early amid spreading cases of the monkeypox virus (SIGA, EBS, CMRX, INO among active names the last few days); CNCE reports positive topline results for first CTP-543 phase 3 clinical trial in Alopecia Areata; SGEN announces positive topline results of pivotal phase 2 clinical trial of TUKYSA® (tucatinib) in combination with Trastuzumab in HER2-Positive Metastatic Colorectal Cancer

·     Healthcare Services & MedTech Equipment; CDNA shares fell after CFO, Ankur Dhingra resigned effective May 25th to pursue another career opportunity; NOTV shares fell after disclosed late Friday that the DOJ, together with federal and state law enforcement agents, executed a search and seizure warrant at Inotiv’s Cumberland, Virginia facility on May 18th

Technology, Media & Telecom

·     Software movers: VMW surges after reports this weekend AVGO is in talks to acquire the cloud service provider, citing people familiar with the matter. Negotiations between Broadcom and VMware are ongoing, and a deal is not imminent, the sources said https://bit.ly/3wLcPU7; ADSK downgraded to Hold at Deutsche Bank and lowering tgt based on conversations with platinum partners which indicate mixed 1Q results and downside to FY23 estimates from changing demand, potentially lower adoption of multi-year contracts, FX, and Russia; SKLZ downgrade from Buy to Neutral at Citigroup saying if the status quo persists, the firm may face liquidity issues in 2024 while assign relatively high likelihood (80%) of improved marketing efficiencies; big week for earnings with SNOW, SPLK, ZM, WDAY among those expected to report

·     Hardware, Components & Services; HPQ downgrade from Buy to Neutral at Citigroup noting shares have outperformed their peers (-10% YTD vs Nasdaq at -30% YTD) but says challenging PC shipment growth and higher freight costs are likely to limit operating income growth and EPS upside here in FY22; GLW downgraded to Neutral from Buy and tgt to $36 from $47 at Citi on lower PC and tablet demand, lower visibility in demand recovery for premium and large size TVs; MSI upgraded to OW from EW at Morgan Stanley saying analysis shows the $300 Bull case valuation on MSI on a 2-year view is achievable; Stifel said they are expecting cautious near-term guides from hardware OEMs reporting April-Q results including covered names HPE, PSTG and NTAP as believe supply conditions have clearly worsened in the last month or so.

·     Internet, Media & Telecom movers; AT CEO said today “not seeing softening of consumer demand yet”; CABO authorizes additional repurchases of up to $450 million; the WSJ reported that Conan O’Brien sells his podcast company to SIRI in $150M Deal; TTWO completed its acquisition on Zynga today; AMZN dropped below the $2,100 level, its lowest since April 202o amid weakness in retail/consumer discretionary on slowing spending fears by consumers