Closing Recap

Friday, October 22, 2021

Equity Market Recap

·     Closing market totals don’t reflect it, but it was another volatile day on Wall Street closing out the week, with several large cap tech stocks hitting fresh all-time highs (TSLA, MSFT, NFLX) before the lights went out on tech late morning as commentary from Fed Chairman Jerome Powell sunk the Nasdaq Composite. The CBOE volatility index (VIX) touched 4-day highs after the roll (before paring gains late day), as he suggested the central bank should begin reducing its asset purchases. The comments took the wind out of the sails for technology specifically, while the S&P 500 managed to hold not far off its closing record highs the day prior. However, the S&P 500 did snap its 7-day winning streak with modest losses to close out the week, while the Dow Jones Industrial Average and Transports each outperformed. A busy week of earnings is now behind us (roughly 20% of the S&P having reported this quarter), but the two busiest weeks of the earnings season coming up in terms of S&P components and pure volume including big cap tech.

·     Fed Chairman Powell comments pressured stocks late morning, taking major averages sharply lower after saying the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet raise interest rates. It’s "very possible" the Fed’s full employment goal could be met next year, Powell said on Friday, if supply-chain constraints ease as expected and the service sector opens more fully, allowing job growth to speed back up. The remarks open the possibility the Fed may need to raise interest rates to prevent inflation from spiraling out of control and, by doing so, cutting short the jobs recovery.

·     Stoc/sector movers: SNAP nosedives up to 25% after quarterly revs miss consensus along with weaker guidance on lower ad demand; FB, TWTR, PINS, GOOG also dragged on the report ahead of their respective earnings next Mon-Tues; INTC was the worst the stock in the S&P, falling over 10% to 2021 lows despite a quarterly beat as it resets its gross margin outlook over the next 2-3 years after ramping its foundry investment, drawing several analyst downgrades; other post-earnings decliners include VFC after it misses on EPS and revenue, HON on its revs miss; WHR traded at 52-week lows early on its sales miss but rebounds into green territory; financials AXP, SIVB, WRB each hit record highs and pace the S&P after their strong reports, STX also among S&P leaders on its beat, while CLF beat lifts other steel names.

·     Something must give one would think, with the Fed on track to begin removal of its asset purchase programs and maybe up the timeline to hike interest rates ahead of stubbornly high inflation (even Powell today noted that “high inflation will likely last well into next year”). While prepping for that, the S&P 500 is at all-time highs, commodity prices are at multi-year highs (oil, gas), Bitcoin touched a record high this week, housing prices soaring, other inflationary components (auto, food) also surging, and quit rates at all-time highs in jobs market.

Economic Data:

·     U.S. business activity increased in October, as data firm IHS Markit said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rebounded to a reading of 57.3 in the first half of this month from 55.0 in September. The pick-up in business activity this month was driven by the services sector, rebounding to a reading of 58.2 from 54.9 MoM. However, in the eurozone, the PMI fell to a six-month low of 54.3 in October from 56.2 in Sept.

·     The U.S. federal budget deficit shrank in September to $62 billion from $125 billion in the year-earlier period and was the smallest budget gap since January 2020.

Commodities

·     Oil prices rise, with WTI crude up $1.26 or 1.53% to settle at $83.76 per barrel, holding near multi-year highs amid ongoing concerns about tight supply and stockpiles fueling bullish sentiment. WTI crude rises for a 9^th straight week as gasoline demand remains high and inventories low, as data showed this week. Brent advanced for its seventh weekly gain. Energy prices in general have been boosted by worries about coal and gas shortages in Asia and Europe, spurring some power generators to switch from gas to fuel oil and diesel.

·     Gold prices rise $14.40, or 0.8% to settle at $1,796.30 an ounce as inflation concerns around rising inflation prompts prices to rise 1.6% on the week. Prices pared gains (gold off highs above $1,815 an ounce) after Federal Reserve Chairman Jerome Powell said that it was "time to taper" the central bank’s $120 billion in monthly asset purchases, with an expected timeframe to conclude around mid’22.

Currencies & Treasuries

·     After touching new all-time highs mid-week at $67,680, Bitcoin prices end the week around $60K, falling the last two days as investors take profits following the launch of the first U.S. bitcoin-focused exchange-traded fund (BITO). The U.S. dollar slipped against a basket of currencies, pulling back from 1-year highs last week (94.65 for the DXY), as investors positions themselves amid rising bets that the Federal Reserve will raise rates sooner than previously expected. Rising inflation fears also impacting currencies and Treasury yields. The Fed said at its September meeting that it will likely begin reducing its monthly bond purchases as soon as November and signaled interest rate increases may follow more quickly than expected. Treasury yields touched highest levels in months, with the 10-yr above 1.7% overnight (highest since May ’21) and the 5-year rising above 1.25% (highest since Feb ’20).

Sector News Breakdown

Consumer

·     Retailers; MAT reported a Q3 EPS/sales beat (EPS $0.84/$1.76B vs. est. $0.72/$1.68B), raises FY21 revenue growth view to up about 15% from 12%-14% and boosts FY21 adj EBITDA view to $900M-$925M from $875M-$900M (HAS, FNKO toy retailers active); VFC posted Q2 EPS and revs that missed estimates ($1.11/$3.19B vs. est. $1.15/$3.49B) and sees FY international rev. +24% to +26%, below prior +25% to +27% citing delays impacting supply chain; URBN upgraded from Neutral to Buy at Citigroup saying despite reducing ests and tgt to reflect more conservative assumptions for F22, they can’t ignore the more favorable risk/reward.

·     Auto sector; auto parts companies GNTX and ALV weaker results, as GNTX Q3 EPS misses by $0.05 on lower revs $399.6M vs. $434M est. and lowers 2H revs view to $770M-$840M from $970M-1.07Bm while ALV also posted a miss on the top and bottom line for Q3 and posted adj profit that was half of last year’s – comes as no surprise given other supplier warns (MGA) as shortages of semiconductor supplies and other components have led to lower production; NSANY cuts its planned production for October and November by 30% as the worldwide semiconductors shortage continues, reports Nikkei Asia.

·     Housing Products & Building Products; WHR slides after revenue of $5.49B in Q3 missed the consensus mark of $5.74B, while EBIT margin fell to 17.7% from 18.9% with inflation only being partially offset by positive price/mix – also guided full-year revenue of $21.99B below the $22.6B prior view and $22.5B consensus and lower EPS as well; BTIG upgraded AMH, INVH in single-family rentals given increasing prices of for-sale homes, lack of for-sale inventory, renter demand for more space, and rent growth that remains well above historic norms.

·     Consumer Staples; BYND lowered its Q3 revenue forecast to about $106M, below prior view of $120M-$140M, citing a drop in demand from grocery stores and lingering effects of the Delta variant of the coronavirus (shares of STKL, LSF, CLXT were active in sympathy); SAM reported stronger than expected sales growth (+14%) in 3Q than the Street was expecting, but temporary costs were significantly higher, driving an EPS loss of -$4.78; Wells Fargo said they think TAP cuts guidance, and think estimates are especially disconnected for Q421; SMPL posted a top and bottom line Q3 beat; ahead of earnings, Bank America raise organic sales estimates for CPB and lower gross margins for FY1Q22E and FY22E as consumptions and costs accelerate and maintain our below consensus EPS estimates.

·     Restaurants; CMG Q3 EPS $7.02 vs. est. $6.32 and Q3 revs rise 21.9% to $2.0B vs. est. $1.94B as qtrly comparable restaurant sales increased 15.1% and saw operating margins rise 400bps; BJRI slides as the restaurant posted an unexpected adj quarterly loss on weaker sales ($282.2Mm vs est. $292.8Mm), while warnings its saw rapid food cost inflation hit 3Q restaurant op margins; Loop said for PZZA its latest Papa John’s U.S. franchisee checks indicate same-store sales growth was better-than-expected in 3Q.

Energy

·     Oil prices outperform, helping boost much of the energy complex as Brent rises for a 7^th straight week; in E&P, SWN shares active after Bloomberg reported the company was in advanced talks to buy Blackstone-backed GeoSouthern Energy for ~$1.7B; the weekly Baker Hughes rig count fell -2 to 443, with oil rigs down -2 to 443.

·     Oil Services & Equipment: SLB the last major service co the report Q3 results as revenues of $5.8B fell short of analysts’ expectations of $5.9B, but up 11% year-over-year; BOOM tumbles initially following a Q3 top/bottom line miss and weaker Q4 rev guidance ($46-50Mm below est. $73.6Mm) – but Roth Capital upgraded shares; FTSI said it will be acquired by ProFrac Holdings, LLC in an all-cash transaction that values FTSI at approximately $407.5M, with holders getting $26.52 per share of FTSI common stock in cash; GLOP upgraded to Buy from Hold and raising tgt to $6.50/unit (from $5/unit) to reflect the ongoing increase in asset values.

·     Utilities & Solar; SO said its Georgia Power adds another three months to the timetable for the Vogtle 3 and 4 nuclear expansion projects; company now projects a Unit 3 in-service date in Q3 2022 and a Unit 4 in-service date in Q2 2023; CMS raises its dividend by 42%; Reuters reported mid-Friday that DUK and Elliott Management are in advanced settlement talks that could lead to the power utility adding two directors backed by the activist investment firm.

Financials

·     Bank movers; WAL reported Q3 EPS $2.28 vs est. $2.22 on revs $548.5M vs est. $535.86M with strong growth trends including its highest ever quarterly organic loan growth of $4.8B, avg loan growth +47%, end of period loan growth +64%, and deposits up $3.4B, or 32% annualized; SIVB Q3 EPS $6.24 topped est. $5.04, NII $859M, total revs $1.53B vs est. $1.3B, with deposits, loans, average earnings assets also coming in above estimates; FHB Q3 core EPS 51c vs est. 48c on in-line revs $182.7M, recovery of credit losses $4M vs est. provision $3.48M; RF Q3 EPS 65c vs est. 53c on revs $1.614M vs est. $1.56M, recovery of credit losses $155M vs est. recovery $36.6M; OZK Q3 EPS $1 vs est. $0.97 on total revs $273.9M vs est. $266.36M; FFIN Q3 EPS $0.41 vs est. $0.38, NII $95.78M vs est. $94.89M; PBCT Q3 adj EPS 33c matched consensus, and MTB received approval from CT, NY for the pending merger; FFBC, ASB, SRCE also posted Q3 EPS beats, while BANF EPS missed estimates; BKU was downgraded to Neutral at Piper on lower projected NIM and loan growth and at RBC on loan growth concerns; HBAN raised its quarterly div to 15.5c from 15c; Stephens upgraded AMNB to OW following 3Q results that saw +20% LQA core loan growth, which combined with an improved forward growth outlook helped drive their EPS estimates 6% higher; BSRR announced a new share buyback program of up to 1M shares.

·     Asset Managers/brokers; Evercore upgraded IVZ to in-line as they feel better about the durability of its organic growth and improving profitability with a low valuation on a stock that’s down 17% since June, and downgraded TROW to in-line as they see more opportunity and growth elsewhere, especially within alternative managers, given the company has had a stretch of softer flows and are also wary of target-date competition and lofty equity valuations; JPMorgan raised their estimates on COIN on better trading volume and app download data in October vs Q3 levels that supports the view the company is the go-to destination for crypto trading and lowered their estimates on HOOD as volumes slowed materially in Q3 and they are not seeing a rebound in October in contrast to other peers, particularly within crypto trading and specifically Dogecoin that accounted for a large portion of the company’s Q2 revenues.

·     FinTech & Payments; SQ, AFRM were lower early after Australia’s central bank said BNPL firms will no longer be able to prohibit merchants from passing on surcharges for their services (recall Square agreed to buy Australian BNPL pioneer Afterpay Ltd for $29 bln in August); AXP Q3 results beat estimates with EPS $2.27 coming in above $1.80 and revenue $10.93B vs est. $10.54B driven by higher spending on goods and services by consumers and small businesses, billed volumes above 2019 levels, and provision for credit losses $191M that largely reflected $393M in credit reserve releases; Piper downgraded ALLY to Neutral with a lower $59 target from $68 after their earnings earlier this week and their Fair Square acquisition, which they say decrease the capital base but increase earnings volatility and provide limited potential synergies; Argus upgraded EFX to Buy after its better Q3 earnings and raised FY guidance for EPS, revenue.

·     Insurance; WRB Q3 EPS $1.40 vs est. $0.99 on revs $2.42B vs est. $2.3B, net premiums written +23.7%; MMC double-upgraded to Outperform from Underperform at Raymond James after only trading +2% yesterday despite impressive YoY organic revenue and EPS growth; earnings next week for some big insurers such as HIG

Healthcare

·     Vaccine movers: PFE COVID-19 vaccine showed 90.7% efficacy against the coronavirus in a clinical trial of children 5 to 11 years old, as 16 children in the trial who had received a placebo got COVID-19, compared with 3 who were vaccinated; AZN’s vaccine against COVID-19 was found safe and had no negative effects on fertility, according to a study published Thursday in The Lancet medical journal; MRNA initiated with a Sell and $250 tgt at Deutsche Bank based on $100B base case DCF of which COVID constitutes 1/3 with the pipeline and platform equal parts of the remainder.

·     Pharma movers; OCUL tumbles after announces topline results for phase 2 clinical trial of OTX-CSI for the treatment of dry eye disease did not meet primary endpoint; AGEN slides after withdraws its BLA for its cervical cancer drug Balstilimab, which is expected to reduce R& expenses by over $100M; for ATHA, JMP said CEO overhang now behind us as conclusion of BoD special committee investigation raises no concerns on validity of ATH-1017 development, including independent audit of Phase 1 data.

·     Healthcare Services; another hospital with better results as HCA reported better-than-expected quarterly earnings and raised forecasts for the year (FY21 EPS view to $17.20-$17.80 from $16.30-$17.10 – and ups revs view to $58.7B-$59.3B from $57B) as patient volumes rebounded across most segments, with outpatient surgeries and emergency room visits rising 6.4% and 31.2%, respectively (follows beat and raise from THC yesterday); RAD files for mixed shelf, no amount given; ARAY preliminary Q1 revs $107.4M vs est. $88.5M, raised FY revenue view to $420M-$427M from $410M-$420M, above est. $415.8M; UTRS 6.25M share IPO priced at $12.00

Industrials & Materials

·     Aerospace & Defense; RBC Capital initiated coverage of 11 Aerospace & Defense stocks saying their high conviction picks are BA, KTOS, TDG and VSEC, as they are more confident in the recovery in commercial aerospace (aircraft activity at ~75% pre-COVID levels), although recent Congressional action on the defense budget is encouraging.

·     Industrial & Machinery; HON Q3 results mixed, beating on bottom line but misses on top with sales $8.47B below the est. $8.65B while cutting year sales outlook and narrows the EPS view; LNN upgraded to Buy with a $178 target price as Lindsay reported solid F4Q21 earnings today with a robust demand outlook in domestic and international irrigation markets along with very good, if somewhat delayed, long term growth outlook for the infrastructure business.

·     Transports; among top performers today with Dow Transports rising over 1% led by rails (UNP, CSX) after good earnings this week, and truckers, CAR just off record highs again and package delivery names (FDX, UNP) bouncing of late; LUV downgraded to in-line at Evercore/ISI as see muted valuation upside, longer-lasting rebuild cost pressures and overly optimistic expectations.

·     Chemicals & Materials; LYSCF said Q1 production and sales revenues fell QoQ, citing disruptions from a rise in COVID-19 cases in the area around its Malaysia processing plant; OLN posted a Q3 EPS beat $2.40 vs. est. $2.20 saying a dip in SG&A expenses and higher pricing across all products, partly offset by lower volumes and higher raw material costs.

·     Metals and Mining; gold mining stocks (AEM, NEM, AU, GOLD) moved higher early as gold prices moved back above $1,800 an ounce; CLF a top gainer as Q3 results topped estimates, as revs rose to $6B from $1.65B a year ago and topped ests $5.64B and expects its average sales price next year to be higher than in 2021; FCX downgrade from Buy to Hold at Deutsche Bank post the recent outperformance (stock is up 18% MTD and 48% YTD) saying while the outlook for copper remains solid, the near-term micro data points have worsened.

Technology, Media & Telecom

·     Internet; Social media names pressure, led by declines in SNAP which posted a beat on EPS/revs for Q3 and DAU’s that rose 23% YoY to 306M, but guidance for Q4 DAUs at 316-318M and revs $1.165B-$1.205B below est. $1.36B pressured shares, saying it missed the lower end of guidance due to changes to advertising tracking on Apple’s iOS that did not scale as expected, making it more difficult for ad partners to measure and manage campaigns (shares of FB, ROKU, ETSY, TWTR among names that fell in reaction to SNAP); DWAC shares surged again (jumped 356% on Thursday) as the blank-check acquisition company (SPAC) that plans to publicly list former U.S. President Donald Trump’s new social media company soared again amid upside momentum.

·     Semiconductors; INTC shares fell after the chip maker’s revenue and data-center sales fell just short of estimates amid a big earnings beat but a lower-than-expected earnings and gross margins forecast; INTC delivered mixed Q3 results & Q4 guidance, prompting downgrades from Mizuho, UBS and Morgan Stanley after co announced a significant 100% ramp in foundry investment, resetting gross margins lower over next couple of years WDC talks to merge with Japanese chipmaker and partner Kioxia Holdings Corp have stalled over the last few weeks, Reuters reported overnight; NVDA upgrade from Hold to Buy after checks at Summit Insights; STX outperforms after the disk-drive maker posted better-than-expected profits for Q1 and Non-GAAP gross margin improved to 31%, from 29.6% in Q4 and 26.5% a year ago.

·     Hardware, Software movers; ZM upgraded to Overweight at JPMorgan noting the stock is down over 33% since their downgrade back on December 9, 2020 as investors have factored in the growth slowdown post the pandemic tailwinds. We believe growth will bottom in the fourth quarter but think the market has priced that into price such that the risk/reward looks more attractive; CMBM preannounced top-line revenue expectations will fall short of the prior guided range – as sees Q3 revs about $75M, down from prior view of $88-$92M which primarily reflects greater than anticipated global supply constraints impacting shipments.