Closing Recap

Friday, September 16, 2022

Equity Market Recap

·     Stocks stumble on Friday, closing out one of the worst weeks of the year as a profit warning in the transportation sector renew fears about a recession/slowing economy, while investors position themselves ahead of next weeks two-day FOMC policy meeting where another 75-bps rate is widely expected. Dow Transports fell over 5% to 17-month lows following a profit and revenue warning from Fed-Ex (FDX) as the index falls 9% this week and FDX over 20% today. The CBOE Volatility index (VIX), or fear index, hit its highest level in two months of 28.45 before paring gains. The Nasdaq posts its worst weekly return since January, down around 6%. Stocks got a modest bounce off lows after signs of decelerating inflation expectations when the University of Michigan data showed 1-Year Inflation Expectations 4.6% vs. previous 4.8% and U.S. Sep. Michigan 5-Year Inflation Expectations 2.8% vs. est. 2.9% but couldn’t build on the data. Interest rate sensitive sectors saw the biggest moves on the UoM expectations data – utilities, telecom, towers (dividend paying names) and homebuilders on dollar/yields easing. Increased market volume late with "Quad-witching" (simultaneous expiration of index futures, index options, stock futures, and stock options) – options expiration totaling $3+ trillion and 3Q22 rebalance Friday for several major market indexes. In an interesting comment out of Bank America research today: “S&P 500 in 20th bear market past 140 years; average peak to trough decline 37.3%, average duration 289 days; history no guide to future but history says bear market ends Oct 19th, 2022 (35^th anniversary Black Monday); with S&P 500 at 3020 (note Nasdaq already down -29%)”. In Europe, the CAC 40 index ends the week 2.17% lower at 6077.30, falling a 4^th straight day, The FTSE 100 Index is down 114.39 points or 1.56% this week to 7236.6.8 and the German DAX down 346.95 points or 2.65% this week to 12741.26, snaps 2-week winning streak.

Economic Data:

·     University of Michigan Sentiment data, Sept-P consumers sentiment prelim Sept 59.5 vs. consensus 60.0 and vs final aug 58.2; current conditions index prelim sept 58.9 (consensus 60.8) vs final aug 58.6; consumers expectations index prelim sept 59.9 (consensus 59.7) vs final aug 58.0. The Michigan 1-Year Inflation Expectations: 4.6% vs. previous 4.8% and U.S. Sep. Michigan 5-Year Inflation Expectations: 2.8% vs. est. 2.9%, and previous 2.9%.

Commodities

·     Oil prices finished flat on the day, with WTI crude up 1c to $85.11 per barrel, posting its 3^rd consecutive weekly decline amid a resurgent dollar, demand concerns given signs the economy is slowing (FDX warning), and rising interest rate fears ahead of the Fed next week. Brent crude futures settle at $91.35/bbl, up 51 cents, 0.56%. Front month Nymex Natural Gas fell 2.90% this week to settle at $7.7640 (4^th straight weekly decline).

·     Gas pump prices move down to $3.69/gallon (national average), 26% below their all-time high in mid-June and at their lowest levels in over 6 months. The US Strategic Petroleum Reserve (SPR) has moved down to 434 million barrels, its lowest level since 1984 according to data.

·     Gold prices rise $6.20 or 0.4% to settle at $1,683.50 an ounce after falling -1.9% the day prior and settling at its lowest since April 2020. For the week, the most-active contract lost -2.6%. A surge in the dollar and yields have pushed gold lower but bounced today as they eased.

Currencies & Treasuries

·     In bond markets, the yield on the benchmark 10-year Treasury note ticked up above 3.49% from 3.458% Thursday. The two-year Treasury yield, more sensitive to near-term Fed interest-rate expectations, climbed further above 3.901%, after settling at 3.871% on Thursday, the highest since October 2007. The move over the last month has been astounding, with the 10-yr off lows around 2.6% early August to 3.5% today (and off levels of 1.3% y/y). The 2-yr yield is also up about 100-bps over the last month or so and off levels around 0.2% y/y). The yield curve inversion between the 2s and 10s widened to 45 bps. The overall U.S. and global macroeconomic story is getting worse while the dollar is getting stronger.

·     The U.S. dollar eased off best levels on the UoM inflation portion of data but coming off 24-years highs vs. the Japanese yen, the euro battling to stay above parity vs. the buck and the British Pound fell below the $1.14 level vs. the US dollar today after weak UK retail sales, lowest levels since 1985. The Canadian dollar dropped to 2-year lows vs. the dollar on weaker oil prices and rising rate expectation in the U.S.

Sector News Breakdown

Consumer

·     Retailers: ADDYY downgrade Outperform to Market Perform at Cowen and cut tgt as are increasingly cautious given weakening inbound data vs peers and clear loss of mindshare, a European consumer that faces unprecedented headwinds, a mgmt. team that has lost credibility and the likely end of their 1B+ relationship with Kanye West; BJ said it will accept SNAP EBT cards at all of its clubs and outlets across the U.S. SNAP, or Supplemental Nutrition Assistance Program; Mexican high-end department store chain Liverpool has acquired a 9.9% passive stake in U.S. upscale retailer JWN, saying it had bought 5.9 billion pesos ($293.8 million) worth of stock

·     Auto sector: TSLA offers an 8,000 Yuan ($1,141) discount in China for deliveries between 16-30 Sep if buyers purchase Tesla insurance. This will accelerate end-of-quarter deliveries in China. The event targets all new Chinese-made Tesla Model 3 and Model Y models; Wedbush noted KMX, Auto Finance, and CVNA reported ABS delinquency and loss data for the month of August and found continued modest deterioration in trends, with more pronounced pressure on CAF delinquency rates than loss rates particularly for newer securitizations; UBER shares slide after responding to a cybersecurity breach after a hacker claimed to have gained widespread access to the company’s computer systems

·     Housing & Building Products: falls amid surging mortgage rates (topped 6% this week for the 30-year fixed, highest rate since 2008), while earnings next week from LEN and KBH could impact the sector as well. Bank America previews quarters, saying they forecast Lennar’s net orders to decline -22% YoY and KB Home to decline -32% YoY. Note 2 years ago: 30-year mortgage rate was 2.87% & average new home price in the US was $405k – fast forward to today, the 30-yr mortgage rate is 6.02% & average new home price is $547k. Result is $28k increase in down payment (assuming 20% down) and 96% increase in monthly payment (from $1,343 to $2,628).

Energy

·     Energy stock movers: stocks were generally lower as oil prices fall for a 3^rd straight week; Germany took control of a major Russian-owned oil refinery on Friday, putting a unit of Russian oil firm Rosneft under the trusteeship of the industry regulator as the country tries to shore up energy supplies that have been jeopardized by Russia’s war in Ukraine. Baker Hughes (BKR) weekly rig count rose 4 to 763, with oil rigs up 8 to 599 and gas rigs down 4 to 162.

·     Refiners: CLMT $23 (Prior $20) DK $30 (Prior $28) MPC $129 (Prior $118) PARR $21 (Prior $23) PSX $96 (Prior $104) VLO $127 (Prior $140), price tgt changes at Cowen saying they see the recent underperformance of refining stocks as unwarranted given our view cracks will remain supportive in 2023

·     Utilities & Solar; SHLS upgraded to Outperform at Cowen saying following the passage of the IRA bill, they see SHLS as their preferred beneficiary and see the company’s expansion into EV systems along with its migration to BLA 2.0 serving as tailwinds to drive a tripling of revenue from ’22 to ’25; solar and EV plays have seen strength since the White House IRA bill but took a breather late week with market roll over.

Financials

·     Mortgage & Insurance: According to August data in the RE/MAX National Housing Report, home sellers, on average, accepted offers below their listing prices last month. Across the report’s 51 metro areas, the average Close-to-List Price Ratio in August was 99%, meaning that homes sold for 1% less than the asking price. That’s down from 101% in July and 104% in April. This change helped push August sales 5.3% higher than July, while the Median Sales Price declined 2.4% to $410,000 after peaking at $426,000 three months earlier. At the same time, new listings dropped 12.8% from July and inventory declined 1.8% after four months of double-digit growth. Even so, the number of homes for sale was 20% higher than in August 2021.

·     Services & Consumer Finance: NCR shares slide after ended a process to sell itself and decided to split into two companies. NCR’s board approved a plan to separate NCR into two independent, publicly traded companies – one focused on digital commerce, the other on ATMs (the news likely throws cold water on the recent takeover rumors); for EFX, Stifel said mortgage rate lock tracker, which uses rate lock data from Black Knight, suggests that the decline in inquiries in 3Q22 is likely 10% higher than the 46%+ management was expecting on its 2Q22 earnings call

Healthcare

·     Pharma movers; PFE and BNTX receive positive CHMP opinion for conversion of COMIRNATY® conditional marketing authorization; ADTX announces pricing of a public offering of 3.33 mln shares of its common stock at $6 per share and associated warrants; HRTX announces U.S. FDA approval of Aponvie (HTX-019) for the prevention of postoperative nausea and vomiting

·     Biotech movers: NVAX said that Israel has granted an import and use permit for the company’s COVID vaccine for use in people aged 12 and older; GILD said the European Medicines Agency’s Committee for Medicinal Products for Human Use recommended expanded approval of its Yescarta cell therapy for certain B-cell lymphoma patients.

Industrials & Materials

·     Industrials, Aerospace & Defense; BA and RTX shares slip after headlines that China plans to slap sanctions on the CEOs of Boeing Defense and Raytheon over their involvement in Washington’s latest arms sales to Taiwan – Reuters; GE CFO said last night at conference: supply chain continues to be tough and continues to impair our ability to deliver to our customers; expect Q3 free cash flow to be in line with q2 or slightly better; see some pressure on the cash flow

·     Transports: sector crushed after FDX guides Q1 adj EPS $3.44, below consensus of $5.10 and sees revs $23.2B vs. est. $23.54B; said Q1 operating income at $1.23B below est. $1.74B and withdraws year guidance as results were adversely impacted by global volume softness that accelerated in final weeks of quarter (UPS slides in sympathy); in airlines, JBLU said it continues to expect Q3 cost per available seat mile (CASM) to increase 15%-17% and now expects an average all-in price/gallon of fuel of $3.86 for Q3, up from previous estimate of $3.68

·     Metals & Materials; AA upgraded at Morgan Stanley to Overweight from Equal Weight along with several other peers (TECK, NEXA, WDH to Overweight and SCCO to EW), noting that value begins to show within Americas metals and mining shares, but cautioning that uncertainty remains; Glencore (GLNCY) is looking to add lithium to the suite of metals it trades, as the raw material is in hot demand due to the rapidly growing production of electric vehicles (EVs), two sources with knowledge of the matter said, Reuters reported

·     Materials & Paper sector: IP and PKG both downgraded to Underperform from Hold at Jefferies, cutting estimates to reflect the "massive inventory glut" in containerboard and said channel checks indicate orders are decelerating sharply and broad-based downtime is being taken, even by the smaller players; in the lithium sector (ALB, LTHM, LAC), Bloomberg noted Lithium prices soar to new record on surging demand to make batteries for EVs. Lithium carbonate prices in China reached 500,500 yuan a ton; SQM sees a "very tight market" for lithium in the years ahead

·     Chemicals: HUN marks the third chemicals company to lower guidance over the last week (DOW, EMN the other ones), as cuts Q3 adjusted EBITDA view to $260M-$280M from $310M-$355M saying they are feeling the same pressures as others in the industry, impacted by persistent and extraordinary cost of energy in Europe, together with lower-than-expected demand across segments in our portfolio, primarily within Polyurethanes and Performance Products

Technology, Media & Telecom

·     Media, Internet; Elon Musk accused Twitter Inc (TWTR) of fraud by concealing serious flaws in the social media company’s data security, which he said should allow him to end his $44 billion deal for the company, according to a Thursday court filing; RBLX shares extended losses from yesterday after the company issued August metrics showing estimated bookings rose 5% to 7% from a year earlier and estimated average bookings per daily active user were down 14% to 16%.

·     Semiconductors, Hardware & Software movers; APPN said a state judge in Virginia has entered a final judgment awarding Appian Corp. more than $2 billion in damages from Pegasystems Inc. in a legal dispute over trade secrets; AAOI agreed to sell its manufacturing facilities in China to Yuhan Optoelectronic for $150 million; ARW and AVT both downgraded to Underweight at Wells Fargo as believe strong semi / component demand, coupled with shortages and price increases have resulted in distributors over-earning relative to prior cycles; TXN raises dividend 8% to $1.24 from $1.15 and announces $15B share buyback program