Closing Recap

Thursday, November 17, 2022

Equity Market Recap

·     U.S. stocks end lower in another choppy trading session after more Fed speak (at least 4 Fed speakers today), a bounce in the dollar and Treasury yields – but managed a late day bounce to keep losses modest. One of the headlines that appeared to have spooked markets early (took the S&P down as much as -1.25%) was Fed hawk James Bullard saying benchmark interest rate in 5%-7% range may be needed to bring inflation down. Other comments of his were in-line with prior views, but that 7% bogey was seemed to catch markets off guard – for the moment at least. In stocks news NVDA is higher after data center gains offset chip weakness, CSCO posted solid Q3 earnings and a robust near-term outlook, retailers rebound after Macy’s (M), BABA, KSS, BBWI earnings while markets await results from GPS, ROST tonight. Technology and Healthcare the top sector leaders Thursday while Discretionary, Utilities and Materials lagged the most. There really wasn’t much else going on outside a handful of mixed economic reports. In Washington DC, Nancy Pelosi steps down as leader of House Democrats after two decades, U.S. House majority leader Hoyer to step down from democratic leadership; Kevin McCarthy wins Republican nomination to become House speaker after overcoming protest from right flank. Debt-ceiling fights, a tax-cut push and rising impeachment threats among top topics.

·     Warnings signs all over about the slowing economy and the impact the aggressive rate hikes the Fed has implemented hitting everything from housing to mortgage rates; cost cutting by corporations, leading to job cuts, boosting debt by Americans…but they still stay on steady path of overly aggressive rate hikes! Just a few data points: 1) Credit card balances jump 15%, highest annual leap in over 20 years, as Americans fall deeper in debt; 2) Total credit card debt was $930B in Q3, just shy of the record while credit card rates are roughly 19% — an all-time high — up from 16% earlier in the year; 3) US Housing Market Index fell for the 11th consecutive month to its lowest level since April 2020. 37% of builders reported cutting prices in November, with an average price reduction of 6%; 4) massive jumps in net charge-offs and credit card delinquencies from COF, DFS, BAC, Citi last month; 5) US household debt at record $16.5 trillion.

Economic Data:

·     Weekly jobless claims fell to 222K from 226K the prior week (est. 225k) as the 4-week moving average rose to 221K from 219K prior week; continued claims rose to 1.507M in latest week from 1.494M prior and US insured unemployment rate unchanged at 1.0%

·     Housing Starts for Oct fell -4.2% to 1.425M unit rate 9est. 1.41M), vs. Sept -1.3% and single-family starts -6.1% to 855,000-unit rate; multifamily -1.2% to 570,000-unit rate; October Housing permits fell -2.4% to 1.526M vs. Sept +1.4%

·     Philadelphia Fed factory index for Nov reported at -19.4 vs. est. -6.0, the future index at -7.1 vs -14.9 prior, employment index at +7.1 vs +28.5, prices-paid index 35.3 vs 36.3, prices-received at 34.6 vs 30.8 and new orders index at -16.2 vs -15.9

Commodities

·     U.S. oil futures fall with WTI crude settle at $81.64 per barrel, down $3.95, 4.62% to its lowest level since September 30^th, while Brent crude oil futures settle at $89.78/bbl, down $3.08, 3.3% as geopolitical tensions eased slightly and rising numbers of COVID-19 cases in China added to worries over demand. Poland and NATO said a missile that crashed inside NATO member Poland was probably a stray fired by Ukraine’s air defenses and not a Russian strike. China reported rising daily COVID-19 infections and Chinese refiners have asked to reduce Saudi crude volume in December, Reuters has reported. Adding to the pressure, the dollar rose as investors digested mixed U.S. economic data. Gold prices slide -$12.80 or 0.7% to settle at $1,763 an ounce as the dollar bounces along with Treasury yields.

Currencies & Treasuries

·     The U.S. dollar bounced back amid bullish bets for further rate hikes following hawkish Fed commentary (a recipe that pushed the dollar to 20-yr highs in September before pulling back). Sterling falls after U.K. Treasury chief Jeremy Hunt unveiled plans to deliver fiscal consolidation of GBP55 billion in his autumn statement. The euro slipped -0.3% at $1.036 after falling as much as -0.86% earlier (it had briefly touched $1.048 this week, its highest level since July).

·     Treasury yield rose on Thursday, bouncing off six-week lows as the Fed rate hike cycle remains in focus with each passing economic data point. Inflation readings last month showed decelerating prices (though still very high historically), and weak housing data point after the next – but strong retail sales data and strong jobs growth still makes the case for the Fed to stay the course. The benchmark 10-year yield rose 8-bps to 3.77% (hit 3.67% on Wednesday, lowest since Oct. 5) while the 2-yr yield rose to 4.452% above a two-week low of 4.290% last Thursday. The two-year, 10-year part of the curve was at minus 67 basis points, nearing levels last reached in 2000.

·     Meanwhile the news in crypto space surrounding FTX just more amazing by the day. FTX suffered a "complete failure of corporate controls" according to the company’s new chief executive who was appointed as part of the crypto exchange’s bankruptcy process. In a filing to federal bankruptcy court, John J. Ray, who has helped oversee some of the biggest bankruptcies ever, including Enron’s, said despite his 40 years in the business of restructuring companies, he’s never seen anything as bad as FTX. "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented." The filing paints a chaotic picture of the cryptocurrency company’s finances, accounting, and leadership under founder and former CEO Sam Bankman-Fried. It is Mr. Ray’s first detailed description of the state of FTX and Alameda since taking over last Friday. – WSJ https://on.wsj.com/3ECzUO2

Sector News Breakdown

Consumer

·     Retailers: BABA reports September-quarter revenue of 207.18 bln yuan ($28.96B), compared with est. of 208.62 bln yuan; PLCE shares slide after Q3 EPS of $3.33 missed the $3.73 estimate while sales fell -8.8% y/y to $509.1M, which was slightly above ests $500M; BJ Q3 comps beat on better EPS $0.99 vs. est. $0.85 and raise FY by ~20c; more numbers tonight from GPS, ROST

·     Department stores: Macy’s (M) rises as Q3 adj EPS $0.52 tops est. $0.19, and sales fell -3.9% y/y to $5.23B, in-line with ests; Q3 comp sales fell (-3.1%) and raises FY22 adjusted EPS view to $4.07-$4.27 from $4.00-$4.20 (est. $4.10) and backs FY22 revenue view $24.34B-$24.58B; KSS shares slide as Q3 net and adj. income fall 60%, while comparable sales decrease (-6.9%) and withdraws its FY sales and profit forecasts, citing macro uncertainties and the departure of CEO

·     Specialty retail: BBWI shares jump as delivered a very strong 3Q print – beating top-line and doubling their EPS plan ($0.40 vs. $0.10-0.20 guide) on better sales and a ~200bps GM beat which carried into their FY guide (now planning $3.00-3.20 in EPS from $2.70-3.00), implying a reiterated 4Q outlook; HAS said that average a strategic review of its business, the toy maker’s board of directors have OK’d a sale process for part of its eOne TV and film business.

·     Auto sector: GM raises 2022 guidance for adj. automotive free cash flow as sees FY adj auto FCF $10B-$11B from $7.0B-$9.0B; for UBER, LYFT, Needham noted their 17th Mobility Tracker is highlighted by a significant drop in wait times at LYFT, we believe showing continued improvement in supply which would be consistent with company commentary during earnings two weeks ago, and showing the benefit of the driver-side tech enhancements they are making to the platform; AAP rating and tgt cut by several analyst after yesterday’s earnings results; XPEV upgrade to Buy from Neutral at UBS while lower tgt to $13 from $34; auto retailer CRMT tumbles after Q2 earnings of $0.48 comes in well-below consensus of $2.17

·     Restaurants & Consumer Staples: PFGC announces $300 million share repurchase program; for QSR, Oppenheimer noted Patrick Doyle has joined QSR as Exec. Chairman, an enormous win that could create significant shareholder value (note shares jumped the day prior following the announcement); BLMN Director Smith sells 200K shares valued at $4.8M according to form 4 filing last night; COTY Director Goudet buys 100K shares valued at $760K according to form 4 filing last night; DOLE Q3 EPS beat on in-line revs $2.27B with mixed rev and Ebitda guidance

·     Casinos, Gaming, Lodging & Leisure sector: NCLH downgraded to underperform from outperform at Credit Suisse, with the broker seeing downside risk to estimates and preferring the firm’s peers; sharp pullback overall on leisure and more discretionary spending type sectors such as online travel (BKNG, ABNB), gaming (CZR) and cruise lines

Energy, Industrials and Materials

·     E&P and Majors: FANG said it would buy 25,000 acres in the prolific drilling region from a private seller, using 4.18 million of its shares and $850 million (total price tag works out to $1.55B); HES anticipates U.S. oil production will hit around 13 million barrels per day in the next few years and then plateau; overall energy space lagged amid the drop in energy prices and rotation

·     Metals & Materials: in the lithium space, SQM posted Q3 net profit of $1.1B, driven by high prices of lithium used in electric vehicle (EV) batteries and revs surged more than four-fold to $2.95B (vs. est. $2.78B); says average lithium prices rose to record levels of over $56,000/tonne during the quarter; in containerboard (WRK ) Deutsche Bank said Pulp & Paper Week is scheduled to report November pricing for containerboard after market close on Friday, and expect containerboard prices to be cut by at least $20 per ton in November; HMY slides after saying total Q1 gold production falls 4% from Q4 to 11,396 kg,

·     Utilities & Solar: FSLR agrees to supply additional solar modules to Intersect Power, bringing Intersect Power’s total 2022 orders to 7.3 GWDC when combined with an earlier agreement; NOVA strong on the day after provided 2023 guidance during Analyst Day slides – solar names in general outperforms on the day, with big gains for SHLS, SPWR, FSLR, ENPH, SEDG

Financials

·     Bitcoin news: FTXs new CEO, John Ray, has criticized the oversight of the bankrupt crypto exchange, a court filing showed on Thursday. "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here," Ray said. Ray also criticized his predecessor and FTX co-founder Sam Bankman-Fried for making "erratic and misleading public statements". SI provided a mid-quarter update that included deposit trends that were worse than expected. Average quarter-to-date digital asset customer deposits, excluding FTX and all related entities, totaled ~ $9.8 billion as of November 15, which compares to $12.0B in Q3

·     Asset Managers, Investment, Bank movers: price tgts of BAC raised to $52 tgt from $47, JPM $174 tgt from $154, and USB $71 tgt from $54 at Oppenheimer saying the 3Q22 results for banks saw benefits from rising rates and strong loan growth driving strong revenue growth, but growing concerns about normalizing credit costs’ LPLA downgraded to Neutral at UBS saying their Investor Day presentation suggests a shifting focus towards a growth channel that offers a lower ROA (~15 bps vs. 25-30 bps for advisory services), requires investment in capabilities, and a lumpier NNA profile than its traditional market (which appears to be slowing).

·     Insurance: ALL said during month of October, Allstate brand implemented auto rate increases of 14.0% across 15 locations; Allstate’s estimated catastrophe losses were below $150 mln reporting threshold for October 2022; PFG downgraded at both Evercore and Morgan Stanley citing its high valuation.

·     FinTech & Payments: for Buy Now Pay later (BNPL) stocks (AFRM, UPST), UBS said its Survey (> Access Dataset) results showed stable to softening demand for BNPL products and mixed trends on credit. Over the past 12 months, 33% of consumers indicated they used BNPL products (unchanged YoY vs. last year’s survey), while over the next 12 months, just 28% of non-BNPL users expect to use BNPL (down from 31% YoY last year).

Healthcare

·     Biotech & Pharma movers: ARDX shares jump after its kidney disease therapy won the backing of a majority of a panel of FDA advisers, voting in favor of tenapanor’s risk/benefit profile; EDIT shares slipped after pauses enrollment for early-to-mid-stage drug trial for Leber congenital amaurosis 10, a genetic eye disorder; said looking for a collaboration partner to advance this program

·     MedTech Equipment: in Life Science Tools & Diagnostics, Citigroup downgraded IQV to Neutral and DGX to Sell saying as 3Q22 earnings ended, they reflect on the key themes and takeaways from the quarter – 3Q22 represented another quarter with several systemic and idiosyncratic factors affecting company results coupled with significant volatility.

Technology, Media & Telecom

·     Media, Internet: Advertising stocks in focus after the WSJ reported FTX’s unraveling in the crypto sector is the latest blow to softening ad market – bankrupt exchange and crypto peers had spent heavily on advertising since (MGNI, TTD, PUBM, GOOGL, META) https://on.wsj.com/3hPoLk9 ; FWONA announces plan to split off Atlanta Braves and create new liberty live tracking stock

·     Semiconductors: group has been in recovery mode most of November (up 14% MTD) after a hiccup yesterday sent the group lower on weaker rev guide and capex comments from MU; gets a rebound today as NVDA issues qtrly results and guidance that weren’t great, but “better-than-feared” according to some analysts

·     Software movers: Software firm PTC said it will buy cloud-based provider of software ServiceMax for $1.46 billion in cash as it looks to expand its portfolio of product lifecycle management offerings; ATVI’s game development and publishing unit said it would be suspending most Blizzard game services in mainland China, as its current licensing agreements with NTES ends in January; for SPLK, Bank America said channel feedback suggests steady/resilient Q3 activity, driven by resilient security and IT use cases. Believe 17-20% ARR growth is sustainable through a recession, with reacceleration to low 20s exiting recession achievable; GLBE slides on larger Q3 loss and lower guidance – sees FY revs $404.7M-$410.7M from prior $406M-$416M; for WDAY, Bank America said channel suggest a slight uptick in Q3 activity vs. Q2; see potential upside to Q3 cRPO growth of 20% y/y (vs. base of 19% y/y).

·     Hardware, Components & Services: CSCO reported Q1 results, beating consensus by $321 million on the top line and 2c on the bottom line, driven by above-expected product shipments tied to orders received last fiscal year SAIC downgraded from Buy to Hold at Jefferies based on lower growth vs peers, contract loss headwinds, weaker FCF growth and traded at a premium to history; ROKU announced 200 job cuts

·     Telecom movers: in cable and telecom (CMCSA, T, CHTR, VZ), UBS said 3Q provided further evidence of fixed wireless taking share from cable while telco DSL declines worsened – they estimate the industry added 860K broadband subscribers, up from last year’s 835K and well above 610K in 3Q19. Cable adds slowed but were slightly better than expected (+63K vs. +585K last year) while fixed wireless net adds reached 930K+, up from 825K in 2Q and 220K in 3Q21; Cell tower REITs AMT, CCI, SBAC mentioned positively in Barron’s saying their stocks are selling at steep discounts right now