Closing Recap

Monday, October 10, 2022

Equity Market Recap

·     Another brutal day for investors, with major averages falling for a 4^th consecutive session led by weakness in technology as the Nasdaq Composite fell to its lowest level since September 2020. Semiconductors were under specific pressure after the US announced fresh curbs on access to US technology (the SOX index fell nearly 5% to lows of 2,250 before paring losses). Today was generally quiet with banks closed along with the bond market in observance of the Columbus Day holiday, with the buyers still sitting on the sidelines. Investors looking to a busy week that includes the release of minutes from the Federal Reserve’s September meeting, a report on inflation in September (PPI on 10/12 and CPI on 10/13), and the start of the third-quarter earnings season (big banks JPM, WFC, MS, Citi all expected to report Friday morning).

·     JPMorgan CEO Jamie Dimon throwing yet more cold water on stock markets, saying in a CNBC interview the “S&P 500 could easily go down another 20% from here” and said, “the Fed will push the U.S. into recession in 6-9 months’ time and that Europe is already in a recession”. Every comment of late has been dire from some of Wall Streets biggest names. Comments from Paul Tudor Jones this morning on CNBC showed: an uncertain macro environment is "best for investing" while consequences of Fed rate hikes are yet unknown. He noted wage hikes give inflation significant push, a very challenging situation for the Fed and said there are significant consequences if inflation is not tamed. He did say short term pain will mean long term gain. A very bleak picture for investors in 2022 as Goldman Sachs noted that the U.S. 60/40 portfolio is down -21%, the 2^nd worst year on record (1974 being the worst) while the S&P 500 is down -24%, on track for its 4^th worst year on record. Treasuries are -17% for its worst year on record.

·     In a very interesting data point by DataTrekMB, the S&P 500 is down 23.6% YTD through Friday’s close, but 9 single days make up that entire decline and more (32 points in total). Most occurred on/around CPI reports or Fed-related events. One was related to Russia-Ukraine, and just 2 were tied to disappointing corporate earnings. Traders may want to be cautious going into Thursday’s CPI report. Investors should moderate their expectations for US equity valuations; history shows these contracts during periods of high volatility.

·     More tough talk from the Fed as Chicago Fed President Charles Evans saying Monday there is a strong consensus at the U.S. Federal Reserve to raise the target policy rate to around 4.5% by March and hold it there while the central bank evaluates the impact on inflation and gives supply chains time to heal. Incoming data would have to "rock" current projections in a fundamental way to upend that plan, which Evans said would put Fed policy, when adjusted for expected inflation, at a level historically associated with prices coming under control.

·     The Bank of England announced new safety net measures including a doubling of the maximum size of its debt buy-backs. After finance minister Kwasi Kwarteng last month triggered a bond market rout with plans for unfunded tax cuts, the BOE said on Sept. 28 that it would temporarily buy up to 5 billion pounds ($5.53 billion) a day of gilts of at least 20 years duration.

Commodities, Currencies & Treasuries

·     WTI crude oil falls -$1.51 or 1.63% to settle at $91.13 per barrel (highs $93.64 and lows $90.76), snapping its 5-day win streak, after surging 16.5% last week. Slowing economic activity in China, the world’s biggest crude importer renewed concerns about a global recession and falling global fuel demand.

·     Gold prices slammed amid the further rebound in the US dollar as Dec prices fell -$34.10, or 2% to settle at $1,675.20 as markets bet further on rising interest rate bets from the Fed. Gold has now fallen for a fourth consecutive session after having hit 3-week highs early last week. Fed fund futures are now pricing in a 92% chance of a 75-basis-point hike at the next Fed meeting.

·     Treasury markets were closed today for Columbus Day Holiday. The U.S. dollar hits three-week high vs yen, as it neared 145.80 (not far from 24-year peak of 145.90), while the British Pound hits more than one-week low vs U.S. Dollar, last down 0.6% $1.1034 before paring losses. The euro dipped about -0.25% to 0.9716 vs. the greenback.

Sector News Breakdown

Consumer

·     Retailers: ADBE said it expects U.S. online holiday sales to hit $209.7 billion, up 2.5% year-over-year — down from 8.6% last year in what would be the slowest growth since 2015; ETSY initiated with Buy and $130 tgt at Goldman Sachs saying the company has shown a great level of resiliency relative to many of its eCommerce peers

·     Auto sector: RIVN said it will recall about 13,000 vehicles it delivered to customers after discovering a minor structural defect, sending shares lower; at UBS, Ford (F) was downgraded to sell from neutral due to weak profit margin while GM was downgraded to neutral from buy and cut tgt to $38 from $56 saying the overall sector outlook for 2023 is deteriorating fast so that demand destruction seems inevitable at a time when supply is improving; the China Passenger Car Association said TSLA delivered 83,155 cars last month, an 8% increase from August that crushed the group’s previous best of just under 79,000 recorded in June; Nissan (NSANY) is said to back Renault EV (RNLSY) split to revamp alliance as Nissan said ready to take up to 15% stake in Renault EV unit; FREY entered into an agreement with Aleees

·     Housing & Building Products: Citigroup trimmed estimates ahead of 3Q earnings season for Building Products (EPS -3% at the median, now -2% below cons) to reflect softening resi demand, continued cost pressure, pockets of unfavorable weather, and sporadic labor & material availability issues. Said VMC is top pick and maintain a preference for Heavy Construction Materials (Buy MLM, EXP, SUM) over more resi exposed names & distributors (OC, CNM) that are potentially seeing earnings decline in ’23

·     Consumer Staples: KHC upgraded to buy at Goldman Sachs and downgrades PG to neutral, adding more food exposure within US consumer staples coverage. Said for KHC, favor its reduced private label exposure, strong pricing actions amidst resilient volumes, and easing cost pressures ahead while cut PG in COVID-driven market share tailwinds, along with headwinds from FX; TPB downgrade from Overweight to Equal Weight at Barclay’s citing low organic sales growth outlook, low EBIT margin compared to peers in the tobacco sector and potential leverage risk; SAM tgt to $296 from $315 at Deutsche Bank as expect SAM to report largely in-line FY3Q2 results while reiterating full-year FY22 guidance – but remain cautious on Truly trends; overall, food names outperform as a risk to safety trade (CPB, CAG, KR, SJM, KHC)

·     Restaurants: Cowen said into 3Q results, are increasingly cautious on SHAK , while feel comfortable owning CMG into the print, and have the most confidence that EPS will serve as a positive catalyst for WING; Benchmark said improving traffic trends over the course of 3Q22 are an encouraging sign and allow them to raise Q3 comp sales on some covered Casual Dining names (said July results for the Index saw SSS of 0.3% (on traffic declines of 7.3%) which then accelerated to SSS of 5.7% in August (on traffic declines of 3.3%); for NDLS, Truist said would be buyers into 3Q22 results given expectation of a comp store sales beat (industry-wide acceleration and marketing/menu innovation), strong margin guidance (sharply lower chicken breast prices) and accelerating development

·     Casinos, Gaming, Lodging & Leisure sector: in casinos, Citigroup cut its estimate of Macau’s gross gaming revenue in October to 5.5 billion patacas from 7 billion patacas, citing disappointing revenue during the first nine days of this month (shares of WYNN, LVS, MLCO, MGM). China’s domestic COVID-19 situation worsened over the National Day Golden Week, during which holiday tourist trips also went down -18.2% from last year as strict anti-virus rules discouraged movement; in leisure, PLNT added to Analyst Current Favorites List at Raymond James to reflect the company’s highly resilient business model and value gym positioning

Energy, Industrials and Materials

·     Energy stock movers: The AAA national average price of a gallon of gas has risen in 19 of the last 20 days. Prices in California are currently 62% above the national average ($6.33 vs $3.92). E&P and Majors: NOG, APA, MRO, MUR, FANG, MTDR, and EQT all Buy rated and among some of the producers Truist said they believe to be best positioned in E&P leading into upcoming earnings saying the surge in 3Q22 gas prices offset some of these oil declines and offered many gas-weighted E&Ps the opportunity in increase payouts.

·     Chemicals: paint coatings company PPG said it sees Q3 adj EPS to be between 5%-7% below the low end of the company’s forecasted range of $1.75-$2.00 prior (est. $1.83), as sales were impacted by further softening demand in Europe and said softer demand conditions are expected to continue into Q4 (shares of RPM ); Chicago wheat futures extend gains after Ukraine attacks this weekend, while ag chemicals (NTR, CF, MOS) advanced on supply fears (Russian retaliatory missile strikes on Kiev and other Ukrainian cities following partial destruction of the bridge to Russian-annexed Crimea over the weekend).

·     Transports: there were reported Cyber-attacks at US airports today; Bank America said this morning, Airline system net sales were -9.8% below ’19 (vs -4.6% last week), partly explained by Hurricane Ian. For 3Q22, system net sales were -7.0% vs 2019 (vs -6.0% in 2Q22) as pricing softened to 4.6% vs 2019 (vs 6.8% in 2Q22). After seeing a step up in large corporate volumes post-LD, corporate trends have softened the past three weeks; in railroads (CSX, NSC, UNP), railroad union rejects tentative labor deal backed by Biden.

Financials

·     Bank movers: big bank earnings kick off earnings season – starting this Friday: with JPM, WFC, C, PNC, USB, and MS; then next week on Monday 10/17: BAC, BK, on Tuesday 10/8: GS, STT, TFC, on Wednesday 10/19: ALLY, CFG, CMA, NTRS and Thursday 10/20: FITB, KEY

·     Financial Services: RBC Capital previews info services saying they continue to prefer defensive stocks, FDS, VRSK, CSGP, and self-help stories, SPGISaid believe CSGP will beat and reiterate guidance with the potential of a modest guidance raise by the magnitude of the 3Q22 beat. Despite the impact of ABF, we expect MSCI to reiterate FY22 FCF guidance given expense levers. Believe SPGI, TRU, EFX, and DNB will guide to the lower end their FY22 guidance range, while MCO and CLVT likely cuts FY22 guidance.

·     Insurance: LNC downgrade from Buy to Hold at Jefferies and initiate a CRBG over LNC relative value idea saying they expect LNC’s capital return will be lower over the next 6-12 months vs. its normal pace, as it rebuilds excess capital; AIG reinstated at Buy at Goldman Sachs as believes the market underappreciates the ROE improvement likely to emerge post its separation from CRBG and as it benefits from shifts it made to its underwriting approach several years ago

·     Bitcoin, FinTech & Payments: PYPL shares fell initially following a plan announced to charge customers $2,500 for misinformation was revealed (co later backtracked saying it was released "in error" and would not go into effect); Barclays revised COIN ests down for Q3 while taking up F23/F24 ests on greater expected interest income – said exchange volumes, app download data, and crypto asset prices continued to soften in the quarter, but rising rates are set to be a material tailwind; EEFT downgraded at KBW saying FX a big headwind with 50%+ exposure to Euro revs and it’s already dragged this year and don’t see that in estimates for 2023 – firm said survey showed with V the two most popular longs and FISV, SQ the two most popular shorts

·     REITs: the sector continues to be hurt by rising interest rates, also effected by a softening economy, and falling home prices (which could slow the recovery in Senior Housing), and rising labor costs (most Healthcare real estate).

Healthcare

·     The Week Ahead – Macro will remain a driver with focus on September inflation numbers (Oct 12th PPI, Oct 14th CPI). On the micro calendar, 1) UNH kicks off managed care EPS on Friday (Oct 14th) and this first outlook tends to bias conservatively. GIR looks for UNH to express comfort that current Street estimates for ~13.5% EPS growth would be captured within its guidance range, 2) WBA’s F’4Q EPS (Oct 13th) — will provide a read-through to CVS’s retail segment, with investor concerns growing after RAD noted in late September that consumers pulled back on discretionary purchases, COVID test/vaccine volumes declined, and some supply chain pressures had emerged. 3) Biotech: CATALINA geographic atrophy data (NGM, APLS, ISEE) will be a focus – Paul Choi assumes a high likelihood of clinical success, which is consistent with consensus expectations

·     Pharma movers: MRK rises after saying the Phase III study of its sotatercept drug candidate met the key goals as an add-on to stable background therapy for pulmonary arterial hypertension; TEVA falls after the European Commission said they suspect TEVA of being involved in practices aimed at delaying competition to multiple sclerosis product Copaxone; in research, Guggenheim upgraded MRK to Buy as STELLAR Approaches and street catches up on Januvia and Pipeline while downgraded BMY to Neutral as think the path to reaping the rewards will be longer and more challenging than what is currently reflected in consensus

·     Biotech movers: THRD positive mention by Jefferies as initiates with Buy and $30 tgt as believes its drug, THB001, for curing skin and respiratory complaints shows promise as per pre-clinical and clinical data; notes its side effects are mild and reversible; ILMN slips despite positive Barron’s mention this weekend

·     MedTech Equipment: AXNX was downgraded from Buy to Hold at Needham saying responses they received in urologist survey makes them concerned that AXNX may have difficulty driving upside to the consensus 2023 revenue estimate; ATEC raised guidance as sees prelim Q3 revs to grow to $89M-$90M, above est. $81.4M; SUPN said the FDA declined to approve SPN-830, its experimental apomorphine infusion device for continuous treatment of motor fluctuations in Parkinson’s disease as issues complete response letter (CRL) requiring additional information; BIO shares jumped midday after the WSJ reported BIO is in talks to combine with fellow life-sciences company QGEN in a deal that would be worth more than $10B https://on.wsj.com/3MiQapQ

Technology, Media & Telecom

·     Media, Internet: Evercore ISI lowered its FY23 revenue estimates for MTCH (tgt to $65 from $75) and BMBL (tgt to $34 from $38), citing forex risks and softer macro environment while adds that BMBL has less FX risk than MTCH (JPM also cut estimates on both names citing forex challenges); MSGS positive mention in Barron’s saying the owner of the New York Knicks and New York Rangers, is trading at a big discount to its teams; Morgan Stanley lowered tgt price for Internet space into earnings: said are buyers of GOOGL on weakness, 3 keys for META earnings, why remain cautious SNAP and 4 things we look to learn from PINS – GOOGL ($135 from $145), META ($205 from $225), CRTO ($35 from $32), YELP ($35 from $33)

·     Semiconductors: sector has been bludgeoned this year, with Philly semi-index (SOX) down -40% YTD, led behind chip glut, slowing demand, macro pressures – as several high-profile chip names have lowered guidance in recent weeks into earnings season (AMD, NVDA, INTC). Chip equipment stocks pressured after the Biden administration published a sweeping set of export controls, including a measure to cut China off from certain semiconductor chips made anywhere in the world with U.S. equipment. The rules build on restrictions sent in letters this year to top toolmakers KLAC, AMAT, LRCX, effectively requiring them to halt shipments of equipment to wholly Chinese-owned factories producing advanced logic chips

·     Software movers: FTNT upgraded to Overweight at Morgan Stanley in Internet Security as think the market materially underestimates FTNT’s secular growth and share gains in an expanding TAM across security + networking; TOST upgraded to Buy at Mizuho as proprietary survey of 55 TOST restaurants uncovers the positive impact on sales and profits from cross-selling payroll and adjacent SaaS products; TENB downgraded to Neutral at BTIG following recent checks on the security space saying fieldwork leads them to believe that growth in TENB’s core vulnerability management Target market is slowing at a faster-than-expected pace; FIVN announces leadership transition as Mike Burkland to return as CEO as Rowan Trollope has resigned

·     Hardware, Components & Services: Global PC shipments fell 15% to 74.3 mln units in Q3 as demand cooled, according to a report by research firm IDC. In Q3, HPQ Inc saw 27.8% decline in shipments, the steepest fall q/q vs 40.2% rise in AAPL PC shipments. Consumer demand has remained muted, though promotional activity has helped soften the fall IDC said. Indian IT names active (INFY, WIT) after Q2 profit of India’s top IT exporter Tata Consultancy Services rises 8.4% to 104.31B Indian rupees (vs. Reuters est. 102.44B rupees) on the back of strong deal wins