Closing Recap

Tuesday, October 25, 2022

Equity Market Recap

·     Stocks surge as the market set-up into this week’s big earnings results is…big tech better not disappoint – as major averages have jumped in recent sessions amid high hopes for good results/outlooks from the likes of AAPL, AMZN, META, this week and GOOGL, MSFT, TXN, Visa tonight. With today’s move, the S&P 500 has rallied 1%+ on five of the last eight trading days, moving within a few points of its 50-day moving average resistance level (roughly 3,870 for the SPX), while Smallcaps surged as the Russell 2000 index topped its 50-day MA today. Its not all about tech with reports from KO, GM, SAP, UPS rallying on results this morning, while CCK, CLF, GLW, MMM, XRX tumble on their numbers. We get results from Dow component BA in aerospace tomorrow. Macro picture quiet for the first time in a few weeks, with no Fed speakers on the day (black out period) – but commentary late last week from a few members (Daly specifically) has helped spur hopes for the Fed to ease the aggressiveness of rate hikes after a much anticipated 75-bps hike in a few weeks. The Dow Jones Industrial Average on track for its best month since Nov ’20 and Dow Transports surging, both up more than 10% so far this month.

·     Bank America noted Last week, during which the S&P 500 was +4.7%, clients were net buyers of US equities for the sixth straight week, with inflows into both stocks and ETFs. Buying was led by hedge fund clients; private clients were also buyers (for the fourth straight week). Institutional clients sold equities after buying for two weeks. Charlie Bilello noted: “in prior bear markets, the S&P 500 has bottomed during October more than any other month: in 2011, 2002, 1998, 1990, 1987, 1974, 1966, and 1957. Is this the bottom (Oct 13 low will hold)?”

Economic Data:

·     Case-Shiller August 20-city home price index decelerates to 13.1% year-over-year gain from 16% in prior month; 20-city home price index falls 1.3% in August. Every city in the Case-Shiller 20-city index saw a decline in home prices in August. The last time all 20 cities were down in a single month was in March 2011.

·     Richmond Fed composite manufacturing index -10 in Oct vs 0 in Sept and manufacturing shipments index -3 in Oct vs +14 in Sept

·     U.S. consumer Confidence for Oct reported at 102.5, below estimates of 105.9 and down from prior month of 107.8; expectations down to 78.1 vs. 79.5 prior (rev down from 80.3) while present situation fell to 138.9 vs. 150.2 prior (rev up from 149.6)

Commodities

·     Oil prices edge higher, with WTI crude rising $0.74 or 0.87% to settle at $85.32 per barrel while European natural gas prices fell sharply on Tuesday, thanks to a mix of warm weather and ample inventory and NYMEX natural gas November futures settle at $5.6130/MMBtu. December gold rose $3.90 or 0.2% to settle at $1,658 an ounce, helped by a pullback in the dollar and Treasury yields. Brent Crude futures settle at $93.52/bbl, up 26 cents, 0.28%.

Currencies & Treasuries

·     Treasury yields fell, moreso on the longer end of the yield curve (10-y fell as much as 17-bps to lows 4.05% before paring losses), while the U.S. dollar slips to 2-week lows. Treasury yields fell after dismal data on home prices, consumer confidence and manufacturing fueled market hopes that the Federal Reserve will have to slow its aggressive tightening of monetary policy. The data has fed into market speculation that the Fed is examining how to begin to slow its interest rate hikes. The Treasury auction of $42 billion in two-year notes this afternoon was disappointing.

·     The Euro rose 0.8% after hitting a session high of $0.9976 against the dollar, strongest since Oct. 5 while the British Pound rises to best levels in over a month around the $1.15 level a day after Rishi Sunak took over as prime minister in the UK (3^rd PM in less than two months), saying he would try to fix the mess left by his predecessor, restore trust in British politics. The pound hit an all-time low of $1.0327 on Sept 26^th after Truss budget news was released. Bitcoin tops $20K for first time in 2 weeks, up over 3% in bounce in crypto.

Sector News Breakdown

Consumer

·     Retailers: ADDYY drops partnership with Ye amid outcry over antisemitic remarks; ROST upgraded to Overweight and raise tgt to $110 from $90 at Wells Fargo as continue to gain optimism into the setup in the sub-sector into 2023 and beyond; HIBB upgraded to Buy from Neutral at Bank America and raise tgt to $75 on better product availability & resilient consumer; WEBR jumps after BDT Capital Partners offers to buy co in a $1.8B deal, or $6.25 per share

·     Housing & Building Products: homebuilder PHM misses on top and bottom line for Q3 (EPS $2.69 vs. est. $2.82; Q3 revs $3.94B vs. est. $4.17B); NVR Q3 EPS missed estimates and said Q3 new orders down -15% to 4,421 units but average sales price up 3% to $453,400; paint company SHW Q3 EPS $2.83 ex-items vs. est. $2.56 and revs $6.05B vs. est. $5.79B as reaffirms EPS $8.50-$8.80 vs est. $8.58, and sees revs up low double digit % vs. prior up high-single to low-double % y/y

·     Consumer Staples: Dow component and beverage giant KO Q3 adj EPS $0.60 vs. est. $0.64 and revs $11.1B tops consensus $10.52B; Q3 global unit case volume grew 4%- expects to deliver organic revenue growth of 14% to 15% in FY22 and to deliver comparable currency neutral eps growth of 15% to 16% in FY22; ADM reported a 96% rise in its third-quarter profit, bolstered by high demand and tight global grain supplies; IPAR FY net sales forecast meets estimates; KMB Q3 adj EPS of $1.40 missed ests of $1.44 with revs $5.1B slightly beating ests and sees FY adj eps low end of $5.60-$6.00 and still sees FY net sales +2% To +4%

·     Casinos, Gaming, Lodging & Leisure sector: in autos, GM reported a higher quarterly profit, and reaffirmed its full-year outlook, but net margin slipped to 7.9%, from 9.0% a year earlier; PLNT upgraded from Neutral to Overweight at Piper citing several drivers that suggest 2023 estimates look too low; in leisure, PII Q3 beat driven by higher volumes, strong pricing and mix supported by modest seq improvement in supply chain. Revenue outlook revised higher while EPS reiterated; HOG files recall of 199,419 US vehicles

Energy, Industrials and Materials

·     E&P and Majors: in oil services, HAL posted a rise in Q3 profit, wrapping up an upbeat earnings season from the world’s top oilfield services providers on strong demand fueled by higher oil prices (better SLB results last week); in E&P sector, RRC Reported Q3 adj EPS/EBITDA of $1.37/$586mm compared to consensus of $1.37/$593mm and full-year capex guidance is unchanged.

·     Aerospace & Defense: AJRD rises after the U.S. rocket maker whose $4.4 billion sale to LMT was blocked by antitrust regulators in February, is soliciting offers from potential suitors, including private equity firms, according to people – Reuters reported https://bit.ly/3gGfUkf ; RTX Q3 revs $17.0B misses est. $17.21B and EPS better at $1.21 vs. est. $1.14); sees FY adj EPS $4.70-$4.80, from prior $4.60-$4.80 and FY sales $67B-$67.3B, down from $67.75B-$68.75B; HUBB Q3 sales rise and earnings top expectations amid higher demand for its products; KBR, LDOS, BAH favored names in defense/Comm’l services at Stifel as all three are somewhat less reliant on new sources of funding which is where the primary headwinds have been

·     Industrial & Machinery: GE said Q3 adj profit was down -19% as misses estimates and lowers its FY outlook to $2.40 to $2.80 vs. prior expectation of $2.80 to $3.50, primarily driven by warranty costs and reserves at its renewable unit; MMM Q3 results topped bottom line estimates but cut its full year guidance for the second time in two quarters (down to $10.10-$10.35 from prior $10.30-$10.80, which was below April range of $10.75-$11.25)

·     Transports: UPS posts adj Q3 profit of $2.99 vs. est. $2.71 as revs in its biggest and e-commerce-dependent domestic unit up 9.8% from a year earlier and reaffirms its FY revenue forecast of about $102 billion and adjusted operating margin of around 13.7%; in airlines, JBLU reported quarterly results as sees 4q CASM ex-fuel up 8.5% to 10.5% vs 4q 2019; UBER and WBA announce a new partnership in conjunction w/ the WH to enable free prescription delivery of oral Covid-19 treatment Paxlovid

·     Metals & Materials: CLF shares slide after Q3 EPS of $0.29 misses to $0.55 estimate and adj Ebitda fell -77% y/y to $452M, below the Bloomberg est. $668M and revs drop nearly 6% y/y to $5.65B vs. est. $5.78B; Swedish steelmaker SSAB said it will cut capacity in Europe in Q4 by bringing forward maintenance work, seeing uncertainties over demand and a risk of low activity towards the end of the year

·     Containers & Packaging: group pressured after CCK miss and lower guide as Q3 adj EPS $1.46 vs. est. $1.77; Q3 revs $3.26B vs. est. $3.3B; cuts FY22 adjusted EPS view to $6.60-$6.70 from $8.00-$8.20 (est. $7.67); sees Q4 adjusted EPS $1.00-$1.10 vs. consensus $1.77 citing lower than expected beverage can demand; GPK beat w/ FY EBITDA outlook raised in packaging; PKG reported 3Q adj. EPS of $2.83, slightly above guidance of $2.80 and its adj. EBITDA of $477M was modestly below consensus of $485M on lower than expected Packaging segment sales

Financials

·     Bank movers: European bank earnings showed HSBC report higher-then-expected provisions for loan losses and restructuring costs; UBS reported profits that exceeded expectations, bolstered by $17.1 billion of new fee generation by wealth clients; ZION 3Q22 results were less than expected due to a larger LLP and higher expenses, which offset better NII versus the consensus; insurance names lagged behind results from BRO, WRB and ahead of CB results tonight following ALL’s disappointing comments last week when guided Q3 loss of $675M-$725M

·     FinTech & Payments: UPST initiated Underperform and $17 tgt at Mizuho saying interest rates and high inflation are associated w/ rising delinquencies, which can limit funding (however shares surged with the broader market rally); PYPL shares jump after AMZN said it will add venom as payment option ahead of the holiday season

·     Consumer Finance: Credit card debt in the U.S. hits all-time high of $930 billion, per the Federal Reserve; DFS slides after Q3 EPS $3.54 misses the est. $3.77 – NII of $2.84B beat ests but was offset by higher COF, Provision and OPEX, driving the street EPS miss; XM reported better-than expected 3Q headline results particularly with strong income statement metrics against subdued investor expectations; SYF beat on NII, RSA (mainly Gap portfolio), and expenses, partially offset by higher reserve build – 2022 guidance better, biggest benefit being lower RSA (profit share expense) at 5.10% vs prior 5.25%, as well as lower loan losses said MSCO

·     REITs: ARE posts 3Q22 beat and narrowed 2022 guidance leaving midpoint unchanged – reported its third highest SS NOI growth rate in the company’s history; SUI beat and bumped 2022 earnings guidance and 2023 preliminary rate growth was largely in line with their guidance

Healthcare

·     Biotech, Pharma movers: cannabis names jumped after CGC said it will no longer wait until federal legalization to buy three U.S. cannabis companies amid opportunities to benefit from strong growth in state-by-state cannabis sales – announced a plan to consolidate its U.S. cannabis assets into a new holding company called Canopy USA; BIIB reports Q3 revs above expectations for seventh straight quarter, while profit beats estimate, and raises 2022 non-GAAP profit forecast for second time – now sees EPS of $16.50-$17.15 vs $15.25-$16.75 earlier

·     Healthcare Services: CVS shares fell after CNC awarded PBM contract to CI’s express scripts for 2024; MEDP shares jump after Q2 came in well above consensus expectations and raised its top and bottom-line full year 2022 guidance, while also guided 2023 revenue and EBITDA that are significantly above our estimates that were near Street; in managed care, CNC raises lower end of its adjusted annual earnings forecast by 5 cents to $5.65 per share, while keeping the upper end at $5.75 but reports marginal increase in its medical costs ratio to 88.3% from 88.1% a year earlier; RBC Capital a sector preview for Healthcare IT, as think fundamentals are stable, improving, or not- as-bad-as-perceived for RCM, SRCL, AGL, CTLT, EVH and HQY and firm urges n-t caution around TDOC and GDRX and downgrade HCAT to Sector Perform

Technology, Media & Telecom

·     Media, Internet: GOOGL with earnings tonight – all eyes on ad spending comments following SNAP lower guide/comments last week that sunk social media and internet names; WBD said it expects up to $2.5B charge on its decision to scrap several series and films deemed unworthy of the investment; WBD said its House of the Dragon episodes are averaging 29M viewers in the US, tracking closely behind ~32.8M for season 7 of Game of Thrones

·     Semiconductors: TXN earnings tonight after the close; MBLY IPO expected to price tonight – trade tomorrow – recall the WSJ reported yesterday, Mobileye, which was originally expected to land a valuation of more than $50 billion, is now looking at one of roughly $16 billion or more if it prices the shares at $20, the top of its range https://on.wsj.com/3NjCoE1 ; MCHP advanced amid some activist investor speculation following a 13-F filing https://bit.ly/3Fgiwzt

·     Software movers: Dow component MSFT to report earnings tonight; SAP said it remains on track to meet full-year guidance after its cloud business drove faster than expected quarterly revenue growth, +38% to 3.29 billion euros ($3.25 billion) as total revs also topped views

·     Hardware, Components & Services: CDNS posted better-than-expected 3Q FY22 results (and mostly in-line 4Q22 guide); GLW Q3 results in-line for core EPS but guides Q4 core EPS $0.41-$0.47 below est. $0.55 and guides revs below estimates as well; LOGI shares rally after the co reported op. margin upside and reaffirmed guidance; ANET downgraded to Neutral at Credit Suisse and cut its PT to a street-low $110 from $185 as sees risk Arista will struggle to meet buy-side rev growth expectations in ’23; ADTN issued an upside preannouncement for Q3/Sept; XRX shares tumble as Q3 adj EPS $0.19 misses the $0.40 estimate and revs $1.75B misses $1.77B est. and trims 2022 rev forecast to $7B-$7.1B vs. market estimates of $7.1B