Closing Recap

Wednesday, November 23, 2022

Equity Market Recap

·     Modestly softer economic data gave US equities an early boost, but both the S&P and NASDAQ slipped back to neutral territory by mid-day with little other news to sway early price action in a holiday week. The release of Fed minutes changed that and gave the markets another boost. The minutes stressed the potential for a slower pace of rate hikes and more focus on terminal rates versus the pace of hikes. Markets welcomed no big surprises relative to what we have heard from several Fed speakers over the past week and pushed equities to highs before easing a bit, with breadth holding close to 2:1 to the upside.

·     Sector moves were paced by Consumer Discretionary (XLY) and Communications (XLC) with gains in the 1.25-1.50% range, while Real Estate (XLRE) and Energy (XLE) slipped. Consumer Staples (XLP) and Materials (XLB) also lagged but managed small gains. Value and growth both gained on the day, but the Russell 1000 Growth enjoyed about a +1% move, while its Value counterpart saw a more modest move of about +0.25%.

·     Data-wise, @DataTrekMB pointed out US office occupancy moved higher to 48.1%, suggesting employers may be gaining ground on wage inflation. DataTrek also noted the CBOE VIX and NASDAQ 100 and Russell 2000 “VIX” measures all have been edging closer to their long-run averages, which has been negative for stocks in 2022 and could be signaling the end of the recent rally.

·     More Americans are tapping their 401(k)s for financial emergencies, with the percentage of retirement savers pulling money for hardships spiking 24% in the 12 months through Sept. 30, according to Bloomberg.

Economic Data:

·     University of Michigan surveys of consumers 1-year inflation outlook final November 4.9% vs preliminary 5.1% and final October 5.0%; University of Michigan surveys of consumers 5-year inflation outlook final November 3.0% vs preliminary 3.0% and final October 2.9%

·     University of Michigan Consumer sentiment final Nov 56.8 (consensus 55.0) vs preliminary Nov 54.7 and final oct 59.9; current conditions index final Nov 58.8 vs prelim Nov 57.8 and expectations index final Nov 55.6 vs prelim Nov 52.7

·     New Home Sales for Oct rose 7.5% y/y to 632K annual rate vs. est. 570K; and 588K prior; Oct home sales northeast +45.7%, Midwest -34.2%, south +16.0%, and West -0.8%; Oct new home supply 8.9 months’ worth at current pace vs sept 9.4 months

·     Weekly jobless claims rose to 240K from 223K prior and above ests 225K; the 4-week moving average rose to 226,750 from 221,250 prior week; continued claims rose to 1.551M from 1.503M in the prior week and the US insured unemployment rate rose to 1.1% from 1%

·     Durables Goods Orders for Oct rose +1% vs. est. +0.4% and vs. Sept +0.3%; Oct Durables ex-transportation orders +0.5% vs. consensus unchanged and Sept (-0.9%); Oct Machinery orders +1.5%, electrical equipment +0.4%, defense aircraft/parts +21.7%

·     U.S. S&P global November flash composite PMI at 46.3 (vs 48.2 in October); S&P global November flash services PMI at 46.1 (vs 47.8 in October)

·     US mortgage rates retreated sharply for a second week, hitting a two-month low, falling 23bps to 6.67% for the 30-year fixed rate according to Mortgage Bankers Association data released Wednesday.

Commodities, Currencies

·     December gold settled +$5.70, or +0.32%, to $1,745.60/oz as investors worked to incorporate economic data indicating slower growth. Wednesday’s gain marked a second consecutive up day after a four-day losing streak. Today’s settlement came before Fed minutes were released, but late trading showed extended gains after the latest minutes failed to spook markets.

·     WTI crude oil slid $3.01, or -3.72%, to settle at $77.94/bbl despite US inventories slipping a bit more than forecast and stocks in the US SPR falling to their lowest since March 1984. Slightly softer US economic data, ongoing EU debate over Russia price caps and concerns over China demand combined to push prices lower. Brent crude also struggled, settling -$2.95%, or -3.34%, to $85.41/bbl

Sector News Breakdown

Consumer

·     Retailers: JWN mixed results as Q3 EPS $0.20 tops ests. $0.15 but revs $3.43B miss $3.49B as EBITDA $207M vs consensus $215.4M – Sales from Nordstrom’s banner stores were down 3.4%, compared with a 14.7% increase in Q2r, while Nordstrom Rack sales decreased 1.9% vs a 6.3% increase; GES reported Q3 EPS miss ($0.44 vs. est. $0.55) but better revs of $633.4M as inventories +19.3% y/y, but shares fall on guidance as sees Q4 EPS $1.32 vs. est. $1.48 and FY EPS $2.35 vs prior $2.65 but better revenue growth +2.0% vs prior +1.5%; LVLU downgraded to Market Perform from Outperform, price target $5.50 from $8 at Cowen

·     Auto sector: TSLA upgraded to Neutral from Sell with $176 tgt at Citigroup as believe the YTD pullback has balanced out the NT risk/reward and feel that some of the prior baked-in expectations that they didn’t agree with are out of the stock; Morgan Stanley said they believe OW-rated RIVN could emerge as a short-term beneficiary of any potential commercial disruption/eroding customer loyalty at Tesla; MGA downgraded to Neutral from Buy at Citigroup in auto suppliers w $62 tgt

·     Consumer Staples & Restaurants: JACK removed from Best Ideas list at Wedbush citing its pending incremental visibility around management’s Taco refranchising strategy, and its potential impact on EBITDA and EPS expectations; YUM upgraded to Buy from Hold at Argus with $142 tgt as expect consumers to opt for the company’s relatively inexpensive menu items and look for it to grow at a solid pace

Energy

·     Energy stock movers: inventory data showed U.S. crude stockpiles fell, but gasoline and distillate inventories both rose substantially, alleviating a bit of concern about market tightness, the Energy Information Administration said. Crude inventories fell by 3.7 million barrels in the week to Nov. 18 to 431.7 million barrels. The decline in inventories was tempered by another release of barrels from the U.S. Strategic Petroleum Reserve. Energy stocks lagged as investors rotates out of 2022 winners and into underperforming sectors such as tech.

·     Utilities & Solar: Scotia said DTE, NEE, CMS, WEC, and AEP remain top picks in utilities; among discounted names, we recommend D and BKH and remain bullish on U.S. utilities as believe that near-term headwinds are manageable, the long-term outlook is extremely attractive, and valuations are reasonable relative to the S&P 500, particularly given macro uncertainty; UGI was downgraded to Underperform at Bank America and reduce estimates as propane volumes hold steady to FY22 performance; EVRG downgraded from Neutral to Underperform at Bank America saying it has one of the riskier setups from a regulatory perspective as the company faces rate proceedings in both Missouri and Kansas next year against a backdrop of high inflation and commissions that are increasingly focused on utility revenues

Financials

·     Bank movers: Citigroup (C) shares fell as much as 3% after the Fed, FDIC raise questions about Citigroup’s “ability to produce accurate financial information during stress conditions”; CS shares slide after warning it will lose about $1.6 billion in Q4 after its clients withdrew deposits and funds – said had outflows of some 6% of its $1.5 trillion of assets between Sept. 30 and Nov. 11. that is equivalent to about $88 billion; in alternatives, BX ests and tgt cut at BMO Capital saying they favor APO, CG and KKR; Piper in asset managers, favor ARES as continue to like the alternative asset management group coming out of 3Q22 earnings, despite the challenged economic backdrop while downgrade VCTR

·     Insurance: PRU downgraded to Market Perform at Raymond James on valuation after met with Chairman and CEO Charles Lowrey. PRU targets doubling earnings contribution from higher growth businesses (primarily PGIM and emerging markets) to 30% by year-end 2023.

·     Consumer Finance: Wedbush noted the Biden Administration in conjunction with the Department of Education have extended the moratorium on student loan repayments once again. The moratorium was supposed to end on December 31, 2022, but is now being extended after a federal appeals court issued an injunction temporarily blocking the Administration’s proposed student debt relief program (firm cut SOFI ests based on the extension)

·     REITs: Residential REITs CSR and ESS downgraded at Raymond James Following our meetings with investors and management teams at last week’s REITWorld Conference in San Francisco, as well as digesting the full spectrum of 3Q22 earnings results; in tower REITs (AMT, CCI, SBAC), Raymond James adjusting estimates and raising price tgts for all three following recent commentary on the conference circuit, interest/FX rate movements, and SBAC’s announced $850M 6.6% tower securitization

Healthcare

·     Pharma movers: BMRN said the FDA does not plan to hold a meeting of outside experts for co’s gene therapy application, which could mean a shorter review period; remains on track to host scheduled manufacturing inspections by the health regulator in the coming weeks

·     Biotech movers: for ARGX, Wells Fargo reiterates Outperform after diligence ahead of the 1Q23 readout for subcu Vyvgart’s ADHERE Ph2/3 trial in CIDP where they believe there is a reasonably high probability (POS: 65%) the study will be successful; QURE announced that its partner, global biotechnology leader CSL (CSLLY), has received approval from the U.S. FDA for HEMGENIX, a one-time gene therapy for the treatment of adults 18 years of age and older living with hemophilia B; MGNX upgraded to buy from neutral at Guggenheim citing a stronger balance sheet and near-term clinical data catalysts

·     MedTech Equipment: MDT was downgraded to Neutral from Buy at Citigroup saying it was one of those quarters when investors question the ability of Medtronic to deliver MSD revenue growth over time (MDT was also downgraded at Oppenheimer); ZBH was upgraded to Equal Weight from Underweight at Wells Fargo driven by consistent execution in 2022, Hips and Knees growing in line with the ortho market this year and strong Q4 ortho trends

Industrials & Materials

·     Transports, Industrial & Machinery: machinery giant DE reported top and bottom line beat as Q4 EPS $7.44 above est. $7.09 as sales rose 37% y/y to $15.54B vs. est. $13.38B with all business segments beating expectations and sees FY23 production and precision agriculture sales to be up 15% to 20% from a year ago, while the consensus of $24.96 billion implies 13.4% growth; regarding the rail strike, Cowen increases probability of a rail strike to 30%; we believe TL stocks are the largest potential beneficiaries KNX, WERN, SNDR, DSKE, TFII, CVLG

·     Metals & Materials: US steel scrap prices may be at a floor following 8 months of declines. Relative pricing supports a floor with US scrap ~$50-100/t cheaper than billets for Turkish processors and ~$150/t cheaper than imported pig iron said Citigroup; in research, VALE upgraded from Hold to Buy at Deutsche Bank and instate Vale as our top pick from the iron ore majors after the 30% pull back from the YTD high; in copper, SCCO downgraded from Hold to Sell at Deutsche Bank as shares have outperformed over the last one month (up 23% vs peers up 14%) driven by a rally in copper prices and the relatively in-line Q3/22; GLNCY was upgraded to Outperform at Bernstein saying thermal coal prices are driven by natural gas prices and believes Glencore is best positioned under coverage to take advantage of this; Alamos Gold (AGI) upgraded at Scotia as believe will continue its peer-leading share price performance.

Technology, Media & Telecom

·     Telecom, Media, Internet: GOOGL and SNAP estimates lowered at JMP Securities Following 3Q22 advertising earnings reports that were impacted by a weakening consumer, tighter corporate budgets, and FX, as lower our 2022 U.S. and global advertising growth estimates by 190bps and 340bps to +9.1% Y/Y and +6.7% Y/Y, respectively; WMG upgraded to Neutral at Bank America and raise tgt to $33 from $23 reflecting approx. 16x our CY23 OIBDA est. (vs 12.5x prev)

·     Software movers: ADSK barely missed consensus revenue (by $1M) and matched consensus EPS expectations, while narrowing its full-year revenue guidance range (and lowering the midpoint) and lowering its full-year billings guidance (both in constant-currency terms) – blaming its reduced billings and FCF guidance primarily on a greater shift in demand from multi-year to annual contracts than expected; VMW missed consensus forecasts Tuesday night, as markets await the closing of Broadcom’s acquisition, likely due to a challenging macro.

·     Hardware, Components & Services: HPQ forecast a lower-than-expected profit for Q1 and said it anticipated softness in both consumer and commercial demand, but also said it expected to cut up to 6,000 jobs by the end of fiscal 2025 as sales of PC and laptops are sliding; Workers at the world’s biggest iPhone assembly plant in China at Foxconn clashed with scores of police officers after protests erupted at the factory, which has been under COVID-19 lockdowns in recent weeks