Closing Recap

Thursday, September 15, 2022

Equity Market Recap

·     Another early market rally fizzled out, with major averages finishing down over 1% on the day heading into options expiration tomorrow. Treasury yields extend gains, the dollar steadies, and momentum remains to the downside after recently breaking key technical levels ahead of next weeks Fed meeting. The Nasdaq underperformed, falling 1.4% as tech continues its awful 2022 campaign (Nasdaq down over 25% YTD), led by the semiconductor index (-34% YTD). Markets remain fearful the Fed will push the market beyond its limits next week, with a third consecutive 75-bps rate hike baked into markets, and a small possibility of a 100-bps move to try and slow inflation. Treasury yields rose, with the two-year hitting fresh 15-year highs (around 3.9%), after data on retail sales and jobless claims showed a resilient economy that gives the Fed ample room to aggressively hike interest rates next week. US railroads and unions representing more than 100,000 workers reached a tentative deal, the government said, a breakthrough that averted a labor disruption that risked adding supply-chain strains to the world’s largest economy, costing billions – but failed to lift market sentiment.

·     Right now, fear domination broader markets, as several high-profile strategists, investors, hedge fund managers over the last few days have expressed extreme caution about the market, rising interest rates, inflation, and economy as the Fed remains on the path of aggressive rate hikes (75-bps expected next week after back-to-back 75-bps hikes in recent months), including Doubleline’s Gundlach, Bridgewater’s Dalio, Starwood Capital’s Barry Sternlicht, Cathie Wood, and Guggenheim’s Minerd. There have been others in the past but has been highlighted moreso the last few trading sessions into the Fed next week.

Economic Data:

·     August retail sales rose +0.3% m/m vs. -0.1% est. and (-0.4%) in prior month (rev down from 0.0%); but retail sales ex-autos fell (-0.3%) vs. +0.4% prior; sales ex-autos and gasoline rose +0.3% vs. +0.3% prior (rev down from +0.7%)

·     Weekly Jobless Claims fell to 213K from downwardly revised 22K last week and below consensus 226: the 4-week moving average fell to 224K from 232K prior; continued claims rose to 1.403M from downwardly revised 1.401M (est. 1.475M) and US insured unemployment rate unchanged

·     NY Fed’s empire state current business conditions index -1.5 in September vs estimate -13 and vs. -31.3 in August; orders index +3.7 in September vs -29.6 in August; prices paid index +39.6 in September, lowest since December 2020, vs +55.5 in August; employment index at +9.7 in September vs +7.4 in August; six-month business conditions index +8.2 in Sept vs +2.1 in August

·     Aug export prices fell (-1.6%) vs. est. (-1.2%) and vs. July (-3.7%); Aug import prices fell (-1.0%) vs. est. (-1.2%) and vs. July (-1.5%); Aug year-over-year import prices +7.8%, export prices +10.8%; Aug non-petroleum import prices -0.2% m/m and -year +4.3%

·     Industrial output fell (-0.2%) in August vs. est. +0.1% and vs July +0.5% and Capacity utilization rate at 80.0% vs. est. 80.3% and July 80.2%; U.S. Aug industrial output ex cars/parts -0.1%

·     Philly Fed Business Index Actual reported -9.9 vs. forecast 2.25, and previous 6.2

Commodities, Currencies & Treasuries

·     Oil prices slide -$3.38 or 3.82% to settle at $85.10 per barrel and Brent crude futures settle at $90.84/bbl, down $3.26, 3.46%. U.S. natural gas futures dropped -8.67% to $8.342Mln Btu, slipping after a deal that averted a rail strike, after soaring 10% in the prior session on worries such a walkout would boost demand for gas by threatening coal supplies to power plants. Coal fuels about 20% of U.S. power generation. About two-thirds of the nation’s coal-fired power plants receive their coal by rail.

·     Gold prices tumbled along with other precious metals, falling -$31.80 or 1.9% to settle at $1,677.30 an ounce, its lowest level since April 2020, hurt by elevated U.S. Treasury yields and a firm dollar, as bets of another hefty rate hike by the U.S. Federal Reserve weigh on prices.

·     U.S. Treasury yields continue to push forward ahead of the FOMC monetary policy meeting next Tuesday and Wednesday, with the 10-yr up around 3.45%, the 2-yr yield up about 9 bps to 3.87% (back near 14-yr highs) and the 30-yr approaching 3.5% again. Treasury 5- to 30-year curve inverts by 19bp, most since 2000 and the 2s and 10s inversion to over 40bps again.

·     The U.S. dollar index (DXY) bounced off earlier losses to end the day little changed around 109.70; China’s yuan traded offshore slipped to 7 per dollar in European hours, reaching as high as 7.0188 yuan in offshore trade, its highest since July 2020, before paring; euro rises vs. the dollar back near parity while the yen slips vs. the dollar. Canadian dollar falls to weakest versus greenback since 2020 (1.3238). Expectations call for the Fed to hike rates by at least 75 basis points next week, with fed fund futures showing 20% chance policymakers will raise rates by 100 bps when they meet on Sept. 20-21.

Sector News Breakdown

Consumer

·     Retailers: DECK was upgraded to Outperform and added to Best Ideas List at Wedbush while raise tgt to $410 from $320 saying amidst an extremely challenging retail environment, DECK was a standout last EPS season as one of the only companies in our coverage to actually raise guidance; at Jefferies, JWN assumed/upgraded from Hold to Buy and up tgt to $24 saying the higher income consumer base is a structural advantage during economic downturns and excess inventory in the industry could benefit Rack merch issues more than expected; KSS was assumed/downgraded from Buy to Hold at Jefferies and cut tgt to $29 PT as would like to see the sales trend and margins stabilize before becoming more constructive; in mattress sector (TPX, SNBR, PRPL, LEG), Piper said the August PSC Mattress Retailer Survey showed a y/y decline of -11% to -12%, in-line with July and slightly better than May/June and says the worst seems to be in the rearview mirror; WSM announced that Julie Whalen (EVP, CFO) and Alex Bellos (President, West Elm) have resigned from the Company effective today

·     Casinos, Gaming, Lodging & Leisure sector; in casinos, WYNN upgraded to Outperform at Credit Suisse as think Wynn is one of the more compelling stories in gaming and see potential upside to the stock amid upside to Vegas trends, think Macau sentiment is near a and says valuation is compelling; in lodging, online travel, BTIG cautious on ABNB as sees risk to ’23 ests; while checks are not pointing to any material divergence from guidance on 3Q room nights, the underlying trend raises some questions on the 2023 outlook; in lodging sector, Berenberg upgraded shares of MAR (tgt to $185 from $165), Hyatt (H) tgt to $105 from $85, and HLT (tgt to $152 from $140) all to Buy from Hold saying the accelerating recovery in lodging has yet to be reflected and expect strong RevPAR increases in 2023 across the sector; cruise lines outperform (CCL, RCL) – overall strength in leisure related sectors (travel, casinos, lodging, cruise); DKNG shares up 7 of the last 8-trading days – built momentum into the start of NCAA Football and NFL betting season; CZR up for the 8th time in last 9-days and PENN up 6 of last 7

Energy

·     Energy stock movers: Rosneft Oil said profits rose in the first half of the year, as rising crude prices helped Russia’s state-backed energy giant as net income rose 13% from a year earlier to 432 billion rubles, or around $7.2 billion; APA boosts quarterly dividend to $0.25 from $0.13 and board approved a further 40M shares of additional share repurchase authorization; in research, EOG upgrade from Neutral to Overweight at JPMorgan and DVN downgraded to Neutral noting EOG’s stock has de-rated relative to its core quality shale peers including DVN. In fact, DVN shares have outpaced EOG by nearly 80% over the past 12- months and 160% over 3-years; Wolfe Research with a handful of changes in the refining sector as CVI and PSX downgraded to Peer Perform from Outperform while upgraded DK and PBF to OP from PP

·     Utilities: NEE said it intends to sell $2B of equity units, each of which will be issued in a stated amount of $50.00; PR upgraded from Neutral to Overweight at JPMorgan as expect to deliver an attractive combination of significant cash return paired with differentiated volume growth while trading a turn below peers on 2023 DACF; in solar: FTCI and Primoris announce 500-megawatt tracker supply agreement; ARRY shares slipped after short call from Jehoshaphat Research

Financials

·     Banks & Insurance: sector outperformed broader markets as large cap and regional banks finish higher; CRBG 80M share IPO priced at $21.00, the low end of $21-$24 range with proceeds going to AIG announces brand implemented auto rate increases totaled $777M in August and $2.5B year-to-date, as for Aug alone, rate increases of 14.5% across 8 locations; HIG is a compelling investment opportunity in the insurance sector according to Wells Fargo, especially given its valuation as shares are trading at 7.8x our 2023 EPS estimate, which stands out; PGR August net premiums written $4.08 bln vs $3.89 bln

·     FinTech & Payments; AFRM, PYPL, SQ, and other “Buy Now, Pay Later” names slide after the U.S. Consumer Financial Protection Bureau (CFPB) says planning to regulate “buy-now, pay-later” (BNPL) companies as agency to issue guidance or a rule to align sector standards with those of credit card companies; MQ announces $100m share buyback

·     Consumer Finance: monthly credit card NCO and delinquency data out today, showing rising trends on missed payments from consumers: COF reported charge-offs for August rose to 2.02% vs. 1.54% y/y, while Delinquencies jumped 2.76% vs. 1.79% y/y; SYF monthly net charge-offs for August of 2.63% vs. 2.51% m/m and delinquencies steady at 1.6% m/m; JPM reported charge-offs for August of 1.15% and delinquencies 0.66%; BAC credit card charge-off rate was 1.23% in August vs 1.27% in July and delinquency rate was 0.88% at August end vs 0.85% at July end; Citigroup Inc (C) said credit card charge-offs 1.33 % in August vs 1.19% in July and delinquency rate 0.82% at August end vs 0.79% at July end

·     Bitcoin news: Ethereum completed its long-awaited energy-saving software upgrade known as the ‘merge’, a key step to make the blockchain network faster and cheaper; COIN shares mentioned a negative short all by BearCave

·     REITs: STOR signed a definitive deal where the real estate giants GIC and Blue Owl’s Oak Street have agreed to acquire Store Capital for $14B in all-cash transaction, with shareholders to receive $32.25 per share in cash, representing a 20.4% premium https://bit.ly/3S7Mo46

Healthcare

·     Pharma movers: BMY said its Phase III trial of Opdivo as an adjuvant treatment for patients with completely resected stage IIB/C melanoma met its primary endpoint; ELOX slides after saying combination therapy of its experimental drug ELX-02 to treat cystic fibrosis did not achieve statistically significant results when compared with placebo in a mid-stage study; in European Pharma research, Credit Suisse upgraded GSK to Neutral noting recent underperformance has been driven by Zantac concerns, which are likely to remain an overhang, downgraded AZN to Neutral from Outperform saying valuation is less attractive and NVS downgraded to Underperform from Neutral as enters a period of multiple LOEs and limited pipeline catalysts

·     Biotech movers; AKRO 7.7M share Secondary priced at $26.00; IDYA 7.62M share Spot Secondary priced at $10.50; RYTM 4.8M share Spot Secondary priced at $26.00; THRD 10.9M share IPO priced at $17.00; INCY drug Pemazyre to treat rare cancer cholangiocarcinoma approved in Australia; OMER shares tumbled after narsoplimab showed no benefit in the I-SPY Covid study – study didn’t identify any new safety signals for narsoplimab in setting of critically ill covid-19 patients

·     Healthcare Services; HUM introduces mid-term adjusted EPS Target of $37 in 2025 and raises full year 2022 adjusted EPS financial guidance to ‘approximately $25′ at investor day; expects to deliver continued earnings growth in 2026 and beyond at or above EPS growth trends reflected in its new mid-term adjusted EPS Target; STAT News reported a Democratic House lawmaker with oversight authority is calling for an investigation into the largest for-profit hospital chain in the country, HCA https://bit.ly/3dhpsRa

Industrials & Materials

·     Industrial & Machinery; DHR announced that it is spinning off its Environmental & Applied Solutions (EAS) segment into a standalone public company and said Q3 core revenue growth is expected to be above the Company’s prior guidance range; FLS downgraded to Neutral at Credit Suisse following the co’s negative Q322 pre-announcement; PWR downgraded to Neutral from Buy at Goldman Sachs with an unchanged price target of $150, representing 6% upside noting since initiation last September, the stock has returned 20%

·     Transports: Major U.S. railroads and unions secured a tentative deal after 20 hours of intense talks brokered by the White House to avert a rail shutdown that could have hit food and fuel supplies across the country and beyond (CSX, UNP, NSC); in airlines, LUV narrowed its Q3 revenue guidance to be between 9%-11% up on the same period in 2019, compared to a previous forecast of 8%-12% higher and said leisure revenue trends remain above 2019 levels and are beating the company’s expectations, but not business travel

·     Metals & Materials; Reuters reported that aluminium consumer Constellium’s current plan is to keep buying from Russia’s Rusal next year as it did in 2022, since it has not been put under sanctions; ARNC shares slip after lower guidance cut on ops setbacks, increased energy costs & EU demand as sees FY adj EBITDA $715M-$765M, below est. $826.6m and guides FY revs $9.2B-$9.5B below prior view of $9.6B-$10.0B; steel producer STLD said Q3 profit hurt by lower flat roll steel earnings; sees Q3 adj EPS $5.33-$5.37 vs. est. $4.97 – said steel fabrication operations are expected to be meaningfully higher than record Q2 results; another steel producer US Steel (X) guides Q3 adj EPS $1.90-$1.95 vs. est. $1.90 and sees Q3 adjusted EBITDA $825M vs. est. $928M

Technology, Media & Telecom

·     Media, Internet: NFLX was upgraded to Outperform from In Line at Evercore/ISI with a price target of $300, up from $245 saying the company’s advertising supported tier and password sharing revenue opportunities constitute catalysts that can drive a "material reacceleration" in revenue growth; DIS CEO Bob Chapek said he’s weighing merging Hulu, which 67% owned by Disney and 33% owned by Comcast (CMCSA), with Disney+, Bloomberg reported; VMEO August revenue up 9%; August average revenue per user up 8%; and reports August subscribers up 1%

·     Software movers: ADBE shares tumble after confirming a prior Bloomberg report, that it will acquire one of its competitors, online design company Figma for about $20B in cash and stock; in video games, EA downgrade from Overweight to Neutral and cut tgt to $130 from $140 at Atlantic saying risks to the Q4 release slate, limited improvement in mobile, and sizeable FX exposure cause them to move to the sidelines; ATVI was upgraded to Overweight at Atlantic with $84 tgt as assumes a 50% probability the $95/share deal completes while valuing the standalone company at $73/share; IRNT slumps after two analyst downgrades (BTIG, Jefferies) after results that included ARR of $26.5M vs consensus $31.9M

·     Hardware, Components & Services; AAPL falls to lowest levels since late July amid weakness in tech space; GLW tgt cut to $37 from $39 and core revenue/EPS estimates reduced by 1-2% at Deutsche Bank saying weaker Display forecasts (particularly in 3Q22) are the primary culprit, as panel maker utilization rates quarter to date have been weaker than previously expected; ARW announces $600 million increase to share repurchase authorization