Closing Recap

Monday, November 07, 2022

Equity Market Recap

·     US equities markets were fairly calm today with buying picking up in the early afternoon despite Treasury yields also moving higher. Breadth was positive, but subdued, at a little better than 3:2 by mid-afternoon. With mid-term elections and CPI data yet to come this week, many investors may be in more of a wait-and-see mood. Data-wise, it is interesting to note the US SPR shrank for the 60th consecutive week to the lowest since 1984, with the 33% drop so far this year marking the largest on record (per @charliebilello). Also of note to the energy space, the rolling two-year percent change in the sector is now at similar levels to the tech sector’s peak in the late 1990’s and the homebuilder group peak in the mid-2000’s (per @bespokeinvest). Gives energy bulls something to consider. Sector moves today were paced to the upside by Communications (XLC), Energy (XLE) and Technology (XLK) all in the green by about 1.5-2.0%. The most significant laggards were Consumer Discretionary (XLY) and Utilities (XLU). Utilities faded almost 2%. Real Estate (XLRE) was also an under-performer, waffling around gains and losses but holding close to unchanged in the afternoon. Both Growth and Value gained on the day with Growth the outperformer in a reversal from Friday. The Russell 1000 Growth gained about 1%, while the Value component also climbed more than 0.5% in conjunction with broader-market gains.

·     The focus remains on Tuesday’s midterm elections and Thursday’s inflation data for October, which is expected to show consumer prices increasing at an annual rate of 7.9%, down from 8.2% the month before. Investors are watching for the possibility that Tuesday’s election results could provide a boost to the stock market, especially if Republicans take the majority in the House of Representatives – which some fell could reduce policy uncertainty. Corporate earnings are also due from companies including Lyft, which will report after the market closes Monday, as well as Walt Disney, Occidental Petroleum later this week. Meanwhile overnight, the WSJ reported Chinese leaders are considering steps toward reopening after nearly three years of tough pandemic restrictions but are proceeding slowly and have set no timeline.

·     Coming into the day, sentiment seemed generally bullish for the week with JP Morgan saying the peak in bond yields and very downbeat sentiment may support stocks while notable market beat Mike Wilson of Morgan Stanley said that equities should do well after the midterm elections. Expectations are for the White House and Congress to be divided post-election which will slow down some of the Biden Administration’s agenda.

·     Interesting stat of the day, “there have already been 29 weeks this year where the last trading of the week was 1% move. That’s already a record going back to 1953 with 8 weeks left”, according to Bespoke Investment.

Commodities, Currencies & Treasuries

·     Oil futures fall as WTI crude settles at $91.79 a barrel down 82 cents, 0.89%. Oil prices edged lower on Monday on demand concerns linked to China’s stringent COVID containment policy. China stepped up oil imports last month after the government released more fuel-export quota to help revive the country’s virus-battered economy. Natural gas prices jumped.

·     Gold prices end modestly higher, rising $3.90 or 0.2% to settle at $1,680.50 an ounce, rising a second session, but awaits big inflation data later in the week.

·     In bond markets, the yield on the benchmark 10-year Treasury note edged higher to 4.215%, from 4.157% Friday and the shorter-term two-year yield, which is more sensitive to near-term interest-rate expectations, rose to 4.724%, from 4.652%. The dollar index (DXY) extending its declines down -0.7% after falling 1.7% Friday. Markets await mid-term election and CPI data.

Sector News Breakdown

Consumer

·     Retailers: COST downgraded to Equal Weight at Wells Fargo saying it remains a high-quality name but see several hurdles in the path of this rich multiple stock moving forward; for DECK and ONON, Stifel said High-growth athletic footwear brands HOKA and On Running have each tripled revenue over three years to surpass $1bn run rates. For both brands, we see this just a start; EBAY files prospectus supplement related to a potential three-part note offering

·     Auto sector: IAA to be acquired by RBA in stock, cash transaction valued at $7.3B; combines highly complementary businesses operating in adjacent verticals to unlock accelerated growth https://on.mktw.net/3DGVGP7 ; ADNT downgraded to Sector perform at RBC Capital saying they are below FY23 guidance seeing more downside than upside risk to FY23 guidance, and future improvement, while possible, seems priced in; CVNA shares extend last week earnings decline, and now down -96% YTD – Barron’ s noted this weekend that prices are coming down and that is creating a new problem for auto dealers such as Carvana; TSLA shares dropped below $200 per share on continued downward momentum since Musk takeover of Twitter

·     Consumer Staples: APRN shares fell after Q3 EPS loss (-$0.74) vs. est. loss (-$0.50); Q3 revs $109.7M vs. est. $118.87M; withdraws previous guidance of 2022 revenue growth of 7%-13%; CHD upgraded to Buy from Hold at Argus; PM said that it is moving ahead to complete its $16 billion acquisition of tobacco company Swedish Match AB despite failing to reach the planned level of shareholder support; THS issued Q4 guidance of 22%-24% net sales growth y/y – posts surprise loss and misses, hurt by a strong dollar, rising costs; BYND announced plans to introduce Chicken Nuggets and Popcorn chicken at 5k stores via TGT, WMT, ACI, and Ahold

·     Restaurants: RUTH downgraded from Strong Buy to Market Perform at Raymond James reflecting a more cautious stance on the company’s margin outlook and to a lesser extent, slightly more conservative sales expectations; PZZA downgraded at Northcoast to Neutral concerned that growing macroeconomic headwinds, along with continued inflationary and competitive pressures in the US will limit near-term upside

·     Casinos, Gaming, Lodging & Leisure sector; in gym related stocks, Barron’s said PLNT is a better bet than PTON given it is growing members and has a much larger addressable market, citing a Jefferies analyst; notes Peloton continues to struggle with lower disposable income among consumers, a shift in spending patterns and the move back to in- person gyms; in lodging, CHH EBITDA, and RevPAR FY guide light sends the sector lower.

Energy

·     Energy stock mover: the US Strategic Petroleum Reserve moved down for the 60th consecutive week to its lowest level since 1984. The 33% decline in reserves this year is the largest on record by a wide margin, as per Charlie Bilello

·     E&P and Majors: XOM will take up to a $2 billion loss on the highly leveraged sale of a troubled California offshore oil and gas field that have been idled since a 2015 pipeline spill; in research, SHEL downgraded from Buy to Neutral at Goldman Sachs on the back of the outperformance of its shares YTD relative to the rest of our coverage; BP was upgraded to Equal Weight from Underweight at Wells Fargo and raise tgt to $36 from $31, reflecting increased confidence in its Gas & LCE segment investments paying off into 2024; NOV upgraded to Equal Weight from Underweight at Wells Fargo given upside potential to our price Target, greater visibility on EBITDA/margin/cash flow potential, and a solid demand trajectory, particularly internationally.

·     Coal, Utilities & Solar: BTU shares jump as M&A deal talks with Australia’s Coronado Global Resources Inc ended; DQ said its subsidiaries Xinjiang Daqo and Inner Mongolia Daqo have signed a five-year high-purity polysilicon supply agreement with a ‘leading’ solar manufacturing company in China; also announces a $700 mln share repurchase program; NRG Q3 EPS $0.29 vs. est. $1.43; Q3 revs $8.51M vs. est. $7.89B; NI Q3 EPS $01.0 vs. est. $0.11 while narrows FY22 EPS view to $1.44-$1.46 from $1.42-$1.48 and to sell a minority interest in NIPSCO business following review; in research, Dominion (D) downgrade by several Wall Street analysts (JPM, CSFB, UBS) saying the co’s announced business review would result in large earnings reset and dilution

Healthcare

·     Pharma movers: GSK said phase III trial for Blenrep didn’t meet its primary endpoint; therapy for relapsed or refractory multiple myeloma will continue; VERV late Friday said the FDA placed on hold its clinical trial application for evaluating gene editing treatment VERVE-101 which is being tested as a potential treatment for a subtype of atherosclerotic cardiovascular disease; FOLD Q3 missed on net product sales $81.7M vs consensus $84.2M; OYST shares jump as Viatris agrees to acquire for $11/share in cash https://bit.ly/3FUxvQ2

·     Biotech movers: BNTX reports Q3 profit of 1.78B euros, compared with 3.21B euros a year earlier and quarterly revenue of 3.46B euros vs estimates of 2.06B euros on lower sales of the COVID-19 vaccine and raises lower end of FY22 forecast; ICPT announces additional positive data in fibrosis due to NASH from new analysis of phase 3 REGENERATE study at AASLD the liver meeting; AXSM reported mostly in-line quarterly results for Q3; BLUE cash and cash equivalents $186M, raised $46M via ATM in Q3, received two PRV’s in Q3 – exploring options to monetize both PRVs and said Q4 cash burn projected to $75M-$80M

·     Healthcare Services: a unit of WBA is nearing a deal to combine with a big owner of medical practices and urgent-care centers in a transaction worth roughly $9 billion including debt, according to people familiar with the matter https://on.wsj.com/3E7GxYn ; Jefferies assumed coverage of LFST, DNTL, and EYE and maintain Buy ratings on all three saying they are bullish on behavioral health and believe LFST’s strategy is defensive and differentiated as it has more dependence on insurance pay when most counselors only take patient pay

Industrials & Materials

·     Industrials, Aerospace & Defense: ERJ said it has delivered a total 33 jets in the third quarter, up from 30 in the year-ago period, and reaffirmed its full-year forecast even with supply chain constraints hitting the industry recently; FLR upgraded to Buy from Neutral at DA Davidson after Q3 results as EPS missed but backlog improved and expects this to continue; early strength in Dow component BA topping its 200-day moving average of $160

·     Transports: Dow Transports pocket of strength, rising above its 100-day MA earlier of 13,515 with truckers/logistics leading; RYAAY traffic +11% & fares +15% vs pre-Covid in Sept quarter and lifts full year traffic forecast to +13% vs 2019 with strong forward bookings even for airline entirely in supposedly recession-ridden Europe

·     Metals & Materials: in containerboard names (IP, PKG, WRK), Wells Fargo noted a slowing economy, transition to spending on services, and incoming capacity continue to pressure domestic containerboard market. With the backdrop of slowing domestic demand and a wave of incoming capacity (~2.0 million tons of incremental supply projected to come online over the next 6-9 months), they believe domestic pricing remains at risk.

Technology, Media & Telecom

·     Media, Internet: META is planning to begin large-scale layoffs this week, according to people familiar with the matter; Meta reported more than 87,000 employees at the end of September, the WSJ reported this weekend; DWAC shares jumped early after Donald Trump mentions possibly running for 2024 election; suggested this weekend at a rally in Pennsylvania that an announcement for another run was imminent

·     Software movers: PLTR posted a 22% rise in its quarterly revenue (slowest since went public in 2020) to $478M vs. est. $470M while EPS missed by a penny and forecast a better-than-expected Q4 revenue due to renewal and expansion of U.S. government contracts and a growing commercial business; SE upgraded to Overweight at JPM citing urgency to achieve self-sufficiency and be cash flow positive supports positive earnings revisions; OKTA upgraded from Neutral to Buy at Guggenheim with $65 tgt noting faces challengers, but finds current valuation levels too compelling to ignore; WDAY upgraded from Sell to Neutral at Guggenheim given the recent market turmoil that has sent shares down below current price Target; CERT jumps after Arsenal Capital Partners Increases Investment Certara with $449M Stock Purchase

·     Hardware, Components & Services: AAPL said over the weekend that it expects lower shipments of the iPhone 14 Pro and Pro Max models after a production cut at a Foxconn plant in China’s Zhengzhou; Foxconn said that it is revising down its outlook for Q4 due to the pandemic affecting some of its operations in Zhengzhou, China; said its visibility for the quarter was originally "cautiously optimistic."

·     Telecom movers: TDS downgraded from Strong Buy to Market Perform at Raymond James without a price target saying despite the significant value that remains underappreciated at USM, which is ~80% owned by Telephone and Data and makes up ~80% of its revenues, does not see a near-term path to unlocking that value