Closing Recap

Thursday, October 20, 2022

Index	Up/Down	%	Last
DJ Industrials	-91.01	0.30%	30,332
S&P 500	-29.58	0.80%	3,665
Nasdaq	-65.66	0.61%	10,614
Russell 2000	-21.32	1.24%	1,704

 

Equity Market Recap

·     New day, same story as US stocks rallied on the open, but failed to hold its gains as another jump in Treasury yields pressured stocks. Every rally continues to be met with more aggressive selling as the S&P dropped 60-points off its best levels and the Nasdaq Composite more than 250-points off its highest point. More “hawkish” Fed speak again at the center of the market midday reversal lower, as Harker said, “sometime next year Fed can stop hikes, take stock of policy impact.” The S&P has not registered a 3-day win streak since early September (4-day 9/7-9/12) as the index remains stuck around the 3,700 level this week. Heading into tomorrow, the S&P has fallen more than 1% for four-consecutive Friday’s (-2.37% on 10/14, -2.8% on 10/7, -1.51% on 9/30, -1.72% 9/23) – will the streak continue ahead of another round of big earnings results? Overnight news from China that officials are considering a relaxation of inbound covid quarantine rules, sparked some risk on flows, especially in travel and leisure, but got wiped out midday. U.S. Treasury 2-year yields were up 5bps at 4.61% and 10-year yields jumped over 9-bps to highs of 4.23%. This morning, UK Prime Minister Liz truss resigned less than 7-weeks after taking over the position amid the turmoil following her initially tax plan. She accepted that she had lost the faith of her party and said she would step down next week. Earnings again are impacting various sectors – but the macro, rates, yields, inflation rule all for now.

·     Housing data showing the impact of surging mortgage rates as homes in September were sold at a seasonally adjusted annual rate of 4.71 million, according to National Association of Realtors’ existing-home sales data. It was the eighth month in a row of M/M declines, with sales falling 1.5% from August’s revised rate of 4.78 million. On a Y/Y basis, sales were down 23.8%. The homebuilding ETF (XHB) move to lowest levels since June as rates extend gains.

·     The U.S. Federal Reserve will materially alter or fully stop shrinking its massive $8.9 trillion balance sheet by mid-2023, more than a year earlier than market expectations, according to UBS. The plans for balance sheet runoff will face several complications through 2023, leading the Fed to sharply slow or fully stop balance sheet reduction sometime around June 2023. "Starting last month, the monthly caps that limit the maximum pace of decline of the Fed’s balance sheet increased," UBS said. "This ratchet higher accelerated the reduction in the size of the Fed’s balance sheet and will shrink reserves in the banking system at significantly faster pace."

·     In an interesting chart provided by CNBC today, ahead of the mid-term elections in a few weeks, they note the most important issues facing voters in the US are: 1) 44% say cost of living, 2) 30% say threats to democracy, 3) 26% say immigration and border security, 4) 25% say crime, 5) 21% say abortion, 6) 17% say climate change, 7) 16% say jobs & unemployment, and 8) 15% say war in Ukraine.

 

Economic Data:

·     Weekly Jobless Claims fell to 214K in latest week vs. est. 230K and prior week revised to 226K from 228K; the 4-week moving average rose to 212,250 from 211,000 prior; continued claims rose to 1.385M from 1.364M prior and US insured unemployment rate rose to 1.0%

·     Existing Home Sales for Sept reported down -1.5% at 4.71M unit rate, in-line with ests and vs. Aug 4.78M; Sept inventory of homes for sale 1.25 mln units, 3.2 months’ worth; the Sept national median home price for existing homes $384,800, +8.4 pct from sept 2021

·     Philadelphia Fed Business Outlook Oct reported at -8.7 vs. est. -5.0 (prior -9.9)

·     Mortgage rates: Note per Charlie Bilello: 2 years ago: 30-yr mortgage rate was 2.81% & average new home price in the US was $395k. Today: 30-yr mortgage rate is 6.94% & average new home price is $522k. Result: $25k increase in down payment (assuming 20% down) & 112% increase in monthly payment (from $1,300 to $2,761)!

 

Commodities

·     Oil prices finish higher but closing just off the lows; WTI crude rises $0.43 or 0.5% to settle at $85.98 per barrel (highs of day $88.17) in response to tighter supplies and on news that China is considering a cut in the duration of quarantine for inbound visitors. Gold prices edge higher, rising $2.60 to settle at $1,636.80 an ounce, but off best levels of the day above $1,650 an ounce

 

Currencies & Treasuries

·     The rout continued in the bond markets, as Treasury yields making fresh multi-year highs by the day now, hitting fresh 14-year peaks for the 10-yr (4.22% high) as U.S. economic data showing persistent labor tightness reinforced investor bets that the Federal Reserve would keep raising interest rates aggressively. Of note the August lows for the 10-year was 2.516% – that was prior to the Jackson Hole Powell/Fed event when markets changed. U.S. 30-year yields soared to a new 11-year peak of 4.18% and the 2-yr Treasury yield hit its highest since August 2007, at 4.614%. Note the 10-yr yield remains on track to rise for a 12th consecutive week – longest since 1980.

·     The U.S. Treasury sold $21B in 5-year notes at high yield 1.732% vs. 1.722% when issued prior, with a bid-to-cover ratio 2.38 (down from 2.61 prior) as primary dealers take 7.74% of U.S. Indexed 5-year notes sale, direct 17.01% and indirect 75.25% (auction followed a dismal 20-yr auction yesterday).

·     The US dollar bounced back off earlier lows, down as much as -0.6% before finishing flattish just below 113 level. The US dollar/yen moved above the 150 level in non-stop upward momentum for the buck amid aggressive policy tightening vs. loose policy by BoJ. Aggressive rate hike cycle remains the key driver the dollar and Treasury yield strength to tame inflation.

 

 

Macro	Up/Down	Last
WTI Crude	0.43	85.98
Brent	-0.03	92.38
Gold	2.60	1,636.80
EUR/USD	0.0012	0.9783
JPY/USD	0.24	150.13
10-Year Note	0.101	4.23%

 

 

Sector News Breakdown

Consumer

·     Retailers: AMZN is facing a lawsuit in Britain for damages of up to 900 million pounds ($1 billion) over allegations the online marketplace abused its dominant position by favoring its own products, lawyers said; Cleveland Research lowers Wayfair (W) FY23 revenue growth to +2% vs street +5-6%; TSCO Q3 EPS $2.10 vs. est. $2.07; Q3 revs $3.27B in-line with ests; Q3 comparable store sales increased 5.7% and raises year EPS, revs, and comp sales guidance; DKS upgraded to Outperform with a $138 tgt at OpCo and remain OP rated on NKE, LULU, ASO, UA – as look upon fundamental underpinnings of athleisure and sporting good retail as solid, if not strengthening; POOL slides despite EPS/sales beat as narrows year EPS outlook and Inventory levels increased 48% to $1.5 billion compared to September 30, 2021; ADDYY reported results and guided prelim Q3 revs EU6.41B vs. est. EU6.57B (NKE moved on guidance as well)

·     Auto sector: TSLA slides after reported in-line SepQ Rev/EPS of $21.5B/$1.05 (consensus $21.8B/$1.00); with Auto GMs excl. credits at 26.8% (~70bps below consensus 27.5%), as improved ASPs and vehicle deliveries were offset by material/logistics costs and FX impact – installed capacity at >1.9M/year with 1) Berlin/Texas ramping, 2) 4680 cell production ramping 3x q/q, and 3) Tesla Semi deliveries expected to begin in December; GPC rises early on beat and raise quarter in troubled auto space

·     Consumer Staples: in tobacco, PM raised its takeover offer for Swedish Match AB in a deal that values the Swedish tobacco company at 176.4 billion Swedish kronor ($15.72 billion). PM offered SEK106 a share in May, though it has come back with an improved bid of SEK116; MO said that PM has agreed to pay $2.7 billion for the exclusive right to sell IQOS heated tobacco products in the United States; PM also reported quarterly results today

·     Restaurants: WING downgraded to Hold from Buy and tgt cut to $125 from $145 at Truist saying while not purely a valuation call, the impact on our DCF valuation from rising risk-free rates increases the bar for strong SSS and development to create shareholder value

·     Casinos, Gaming: in casinos, LVS reports Q3 adjusted EBITDA $191M beating Con $149.7M, with revenue above consensus on upside in Marina Bay Sands but miss in Macau; MCRI reported record EBITDA in Q3, with a +24% beat; CZR and SL Green announced a partnership to redevelop 1515 Broadway for a NY gaming license in Times Square

·     Lodging & Leisure: Travel stocks got a boost early as Bloomberg reported that China is considering reducing quarantine days from 7+3 to 2+5 as part of a new version of diagnosis and treatment guidelines; in earnings preview, JMP lowers 2023 estimates for online travel names ABNB, BKNG, EXPE by 2%-3% to reflect the increasing likelihood of a recession; for theme parks (DIS, CMCSA), KeyBanc said tracking data showed attendance ended 3q somewhat negative; deceleration, return of seasonality; maintain estimates, but are cautious; US RevPAR was up+27% Y/Y, driven by an 8% increase in occupancy and 17% growth in rates. Globally: RevPAR was +13% in the US this week, followed by -3% in Europe, -16% in APAC ex-China, and -53% in China.

 

Energy

·     E&P and Majors: NOG announces investment in core midland basin development project as enters into agreement to acquire 36.7% working interest in stacked pay, six-zone development project in core of midland basin for $330 million; in pipelines, KMI shares slide on earnings; XOM agreed to sell its Billings, Montana, refinery, and related pipeline properties to PARR for $310M

·     Utilities: in research, Wells Fargo reiterating cautious stance on water utilities but swapping our view as upgrade AWK but downgrade AWR updating price targets in space given recent divergent performance within the group and ahead of Q3 updates (said reiterate tactical Overweight on WTRG, our Equal Weight on SJW, and Underweight on CWT)

·     Solar sector: RUN downgraded to peer perform from outperform by Wolfe Research saying its rate exposure highest, better ways to play distributed solar; NOVA downgraded to Peer Perform at Wolfe and see a fair value in the range of $18-23 – saying the Resi Solar stocks are hard to own in a rising rate environment, and it keeps getting worse; overall solar names lagged the market.

 

Financials

·     Bank movers: Strategy call at Wells Fargo as downgrade to banking sector to Neutral from Overweight, becoming more selective with sector recommendations, saying Banks do not align with their portfolio barbell of low-vol/high-momentum and GARP. The Bank group’s abnormally positive rewards for Q3 EPS beats, outperformance since reporting season began creates an opportune time to step to the sidelines; another round of earnings results, mostly in the regional bank; misses for FITB, KEY, PACW, TCBI, EGBN and beat by UMPQ and SNV TCBI Q3 EPS $0.74 missed est. $1.01 as net interest income (NII) beat at $239.1M compared to $205.5M for the second quarter of 2022; recorded a $12.0M provision for credit losses for Q3, compared to a $22.0M prior quarter; PACW reported a mixed quarter with the biggest takeaway being deposit growth on an end of period and average basis beat Wedbush forecasts; UMPQ Q3 operating EPS $0.47 vs. est. $0.45

·     Insurance: ALL said it expects a loss of $675M-$725M for Q3, compared with last year’s net income attributable to the company of $538M – estimates were expecting net income to fall to $112 million for the period; RE estimates pre-tax net catastrophe losses of $730M for Q3; RNR announced it estimates that losses from certain 2022 catastrophe events will have a net negative impact of approximately $650M on Q3; RLI reported operating EPS of $0.50, missing consensus of $0.56 primarily driven by lower equity in the earnings of unconsolidated investees

·     Brokers, Bitcoin, FinTech & Payments: FLT downgraded to Neutral at Bank America and reiterate WEX at Buy as expect mostly in-line earnings for both but near-term sentiment for FLT likely capped by a series of idiosyncratic risks (FTC, higher interest rates, Russia exposure); WU said it sees 2023 reported revenue to be down about 8%-10% vs. est. loss of a -2.6% fall and sees 2023 reported and adj. EPS of $1.55-$1.65 while analysts expect $1.80

·     Consumer Finance: ALLY downgraded to equal-weight from overweight at Morgan Stanley following Wednesday’s third-quarter results (also cut at Wells); Citi’s Proprietary Credit Card Data (AXP, COF, DFS) for the week ended 10/15 weekly aggregate purchase volume growth was 4% y/y, down from 6% in the prior week but up from 3% in the prior two weeks and is below 7% growth for the month of September.

 

Healthcare

·     Pharma movers: TALS tumbles after saying a patient died in a late-stage study on cell therapy for kidney transplant recipients – trial was temporarily halted before independent panel allowed resumption after a review; HOOK said it entered into a strategic collaboration and license agreement with RHHBY to develop HB-700 for KRAS-mutated cancers and a second undisclosed novel arenaviral immunotherapy; TAK announces ZED1227/TAK-227 license agreement; PRME 10.3M share IPO priced at $17.00 – midpoint of $16-$18 range; FULC tumbles on mgmt move

·     MedTech Equipment: DHR Q3 beat on EPS and revs (non-GAAP core rev growth +10%); guide Q4 and FY core rev growth in the high single digit % range; DGX Q3 beat on EPS and beat on revs (base biz revs +5.1% y/y while COVID testing revs drop 55% y/y); raise low end of FY guidance range by 20c (midpoint now $9.85 vs prior $9.75) and full rev range (midpoint now $9.79B vs prior $9.63B) on better Covid testing revs

·     Healthcare Services: CVS & SGFY receive second request from DoJ in connection w/ previously announced merger agreement – CVS said in a securities filing the requests extend the window that federal antitrust regulators have to challenge the $8 billion deal announced last month.

 

Industrials & Materials

·     Transports: mixed results in trucking as KNX Q3 earnings missed at $1.27 vs. est. $1.33 (rev in-line) and cut its adjusted year ESP to $5.17-$5.22 from prior $5.30-$5.45 (est. $5.40); LSTR Q3 results were in-line while FY annual revenue expected to be more than $7.5B and EPS more than $11.75 (ests $7.48B and $11.72); in airlines, ALK Q3 profit beats and said Q3 was the highest revenue-generating quarter in its history, but shares fell; AAL top/bottom line beat as well saying qtrly revenue was achieved while flying 9.6% less capacity than same period in 2019; in rails, UNP increased earnings and raised its top line by 18% in Q3 on higher fuel-surcharge revenue, volume and prices (Q3 EPS $3.19/$6.6B vs. est. $3.06/$6.41B) – but said sees waning cargo demand

·     Metals & Mining: aluminum sector mixed results as AA posts unexpected Q3 EPS loss (-$0.33) vs. est. $0.19 as Q3 sales fell -8.3% y/y to $2.85B vs. est. $2.97B & cut alumina shipments forecast for the full year to 13.1M-13.3M metric tons, from prior view of 13.6M-13.8M tons; KALU results same in above last year for profit; in copper, FCX mostly in-line Q3 EPS and revs while cuts capital expenditure view to $3.6B from prior $4.5B and sees higher sold sales volume outlook

·     Steel producers: STLD with top and bottom line Q4 beat and posted record steel fabrication operating income, and record steel shipments; NUE Q3 profit dropped to $1.69B from $2.13B a year ago and came in below estimates while sales rose to $10.5B (topped views) – said bottom line was hurt by earnings declines in its steel mills segment – shares reversed higher

·     Chemicals: WDFC Q4 earnings and revenues fell short of Wall Street consensus estimates (Q4 EPS $1.08 vs. est. $1.22; Q4 revs $130.2M vs. est. $131.1M); PPG posted in-line Q4 results with previously lowered guidance and still guided Q4 EPS $1.05-$1.20 vs. est. $1.25 and sales volumes down a mid-single-digit percentage; DOW reported Q3 top and bottom-line beat, though profit fell -56% in Q3 while issued cautious commentary

·     Materials: in lithium space (ALB, LTHM, LAC, SQM), Cowen said Persistent lithium pricing strength should catalyze another round of beat-and-raise quarterly reports for lithium names as we also update our 2023-2025 pricing to reflect prolonged duration of high pricing that is underscored by relatively resistant EV demand and the inability of lithium supply to keep pace. Pricing upside should continue to drive investor interest

 

Technology, Media & Telecom

·     Semiconductors: after getting a revenue warning last week from AMAT, semi equipment stocks get back-to-back days of better earnings, revs, and guidance, as LRCX posted beat and raise last night a day after ASML posted good results (did warn it expects ‘23 semi equipment capital sending to fall more than 20% across the industry); ASML upgraded to Buy from Hold at Deutsche Bank on a much healthier entry point into a defensive semicap

·     Software movers: DDOG held its Dash conference and investor meeting, prompting an upgrade to Buy at Canaccord as came away from the well-attended event more positive on DDOG’s near-term consumption momentum and longer-term revenue runway supported by continued platform innovation; ORCL upgraded to Neutral at Piper saying the margin and increasing debt burden concerns they had have largely played out with operating margin sliding below 40% to an eight-year low; COUP downgraded to Underweight at Piper saying they see elevating risk factors that erode confidence in a sustainable growth recovery including; TLS said the TSA has granted the company the authority to operate its TSA Precheck System. Telos can now provide initial trial enrollment services to a limited population of applicants first

·     Hardware, Components & Services: IBM shares rallied as reported better than expected Q3/CY22 results, with revenue outperformance offsetting weaker than expected margin expectations; SMCI rises after guiding prelim Q2 adjusted EPS $3.05 to $3.20, above estimate $2.16 and sees prelim sales $1.78B-$1.82 vs. est. $1.57B citing customer design wins

·     Media & Telecom movers: AT soars as Q3 adjusted EPS $0.68 vs. est. $0.60; Q3 revs $30.0B vs. est. $29.84B; adjusted EBITDA $10.7B, mobility revenue $20.3B; wireless postpaid net adds +964,000 (vs. est. +913,399); adj EBITDA $10.7B (est. $10.39B); sees FY Adj EPS at least $2.50, from prior $2.42-$2.46; ERIC quarterly royalty revenue fell 1.1 billion Swedish crowns ($98.24 million); gross margins fall to 41.4% from 44%; NOK patent revenue was down by 62 million euros ($60.67 million), mainly due to a dispute with Oppo and Vivo; gross margin fell to 40.1% from 40.7%; for TWTR, Oct 28 deal expected to close – Firms furiously seek to raise equity for TWTR deal per CNBC’s David Faber this morning