Closing Recap

Wednesday, September 22, 2021

Equity Market Recap

·     September FOMC meeting: The Federal Reserve unanimously voted to keep interests rates unchanged at 0-0.25%, but the median view of the fed funds rate at year-end 2022 is now 0.3% from June’s 0.1% forecast as officials are now evenly split on hiking rates in 2022, up from 7 of the 18 members seeing rates rising next year at the June meeting. Additionally, only one member sees rates being held constant through 2023, also rising from June when 5 had seen no hikes over the next 2 years. As for bond purchasing, the Fed is continuing their monthly purchases of at least $40B in mortgage-backed securities and $80B in Treasury securities set last December but says that moderation in the pace of purchases may soon be warranted if progress continues broadly as expected. In his prepared statements, Chairman Powell said that gradual tapering could conclude in the middle of next year. Furthermore, the Fed also negatively revised its economic projections, lowering their 2021 GDP forecast to 5.9% from 7.0%, upping their annual PCE inflation forecast to 4.2% from 3.4% with inflation staying above 2% through 2024, and raising its jobless rate to 4.8% at year-end from 4.5%. All in all, the central bank reiterated their stance that the path of the economy continues to depend on the course of the virus and economic risks remain despite vaccination progress. They also repeated the sentiment that any changes to the interest rate will largely hinge on the labor market returning to maximum employment and elevated inflation is largely reflecting transitory factors.

·     Markets reacted positively to the Fed’s decisions, extending their morning rally with the S&P recapturing the 4,400 level, though it was choppy during Powell’s ensuing press conference as the index briefly reversed back to the pre-FOMC level before bouncing again. Today was the first time the S&P enjoyed its best day in almost 2 months to temporarily placate jumpy investors after the index suffered its largest daily drop since May on Monday and its lowest close in over 2 months yesterday. It also snapped a 4-day losing streak for the S&P and Dow as both will avoid their second 5-day losing streak this month. This move higher was buoyed by Chinese real estate developer Evergrande saying it will make its coupon payment for an onshore bond due tomorrow after fears it would be unable to make any payments earlier this week. Not everything was rosy, however, as FedEx shares fell to their lowest level in a year after an earnings miss with disappointing guidance. Tomorrow morning’s weekly jobless claims will be an important metric with the Fed linking a strong labor market to any changes in interest rates, and economists are expecting 320k initial claims, sandwiching last week’s 332k and the prior week’s 312k claims.

Economic Data:

·     MBA Mortgage Applications Index rose 4.9% in week ended Sept. 17 after rising 0.3% in prior week

·     U.S. Aug Existing Home Sales 5.88M unit rate (consensus 5.89M), vs July 6.00M (prev 5.99M)

·     US EIA Crude Oil Inventories Actual -3.481M (Forecast -2.45M, Previous -6.422M)

Commodities, Currencies & Treasuries

·     Oil prices climbed, with WTI crude rising $1.74, or 2.47%, to settle at $72.23/barrel, supported by a weekly crude draw of 3.481M barrels, larger than the expected draw of 2.45M barrels. Treasury yields initially sank on the FOMC statement, falling below the 1.3% level before modestly bouncing off the lows during Chairman Powell’s press conference that included a more specific tapering timeline. Gold prices were steady, settling before the FOMC policy statement, though the spot price did slide during Powell’s press conference after a brief spike immediately following the FOMC statement.

Sector News Breakdown

Consumer

·     Retailers; SFIX reported a strong Q4 with EPS 19c beating est. (13c) loss on revs $571.2M vs est. $547.9M with 4.2M active clients in the quarter (+18%), guided Q1 revs $560-575M vs est. $588M with FY22 net revs $+15% YoY vs est. +18%, and announced the branding of its direct buy experience as Stitch Fix Freestyle

·     Auto sector; WKHS suspended deliveries of its c-1000 vehicles and recalled the 41 vehicles it had already delivered after saying additional testing and modifications are required to certify the vehicles under federal safety standards; Needham initiated EV charging provider VLTA at Buy with a $15 PT with its diversified revenue streams and focus on locations with high visibility and traffic have created a moat in a highly fragmented and competitive market; SAH acquired dealer group RFJ Auto Partners for an undisclosed sum in a deal that is expected to add $3.2B in annualized revenue with a 30% increase in franchised dealership revenue and push SAH to be one of the top-five largest U.S. dealer groups

·     Housing & Building Products; MBA mortgage applications index rose 4.9% in week ended Sept. 17 after rising 0.3% in prior week; Morgan Stanley downgraded RMAX to EW and lowered their PT to $33.50 from $40

·     Consumer Staples & Restaurants; GIS posted Q1 adj EPS 99c vs est. 89c on revs $4.5B vs est. $4.29B and sees FY22 at the high end of its range for net sales growth (-3%-(-1%), adj EPS (-2%)-0%, and adj. operating profit (-4%)-(-2%); Cowen reiterated JACK as their top SMID-cap pick and #3 overall behind CMG, SBUX after meeting with management

·     Casinos, Gaming, Lodging & Leisure sector; Hyatt (H) commenced a 7M share offering to fund pending acquisition of Apple Leisure Group; XPOF double-upgraded to Strong Buy from Market Perform at Raymond James to reflect its leading position in the attractive boutique fitness market, numerous growth opportunities, and relatively attractive valuation; Truist sees the sell-off in TRIP on the company’s changes to its Plus product and says the stock is trading at about a 40% discount to their SOTP $51 value

Energy

·     Inventory data: the API showed a draw of 6.11M barrels of oil for the week ending September 17; showed a draw of 432K barrels, distillate inventories show a draw of 2.72M barrels and Cushing inventories show a draw of 1.75M barrels

·     E&P and Majors; MKM started CRC at Buy with a $54 target as their 2021 production estimates is at the upper end of the comiapny’s guidance range; SWN and a subsidiary of KMI announced a responsibly sourced natural gas strategic agreement

·     Utilities & Solar; Evercore named SPWR as an Outperform with a $27 PT; Raymond James upgraded BEP to Outperform, though Mizuho remains keeps it at Neutral as they see it as fairly valued despite being a premier global ESG play after the company’s annual investor day

Financials

·     Bank movers; JPM raised its quarterly dividend to $1 from $0.90; LPLA total assets at end of August increased 2.4% from June to about $1.16T; Morgan Stanley initiated JXN at OW with a $37 pt given its clear leadership in the variable annuity market and superior returns to its peers; Wedbush lowered their 2021-25 core estimates on SI and its PT to $160 from $175 due to pushing out their expected Diem launch date to 3Q22 from 4Q21 on regulatory concerns; Piper upgraded PEBO to OW and increased their EPS estimates following the bank’s closed PFBI transaction

·     FinTech, Payments & Consumer Finance; SOFI was initiated with a Buy rating and $25 price target at Jefferies as an industry leader in the rapidly expanding neobank space; TOST at $65.26, 63% above $40 IPO price

·     Bitcoin news; HOOD said crypto wallets are coming to its platform with some users testing it next month followed by a plan for a broad rollout early next year; COIN intends to publicly roll out a proposal for a regulatory framework to federal officials in the coming days in response to last week’s cancellation of its lending program due to the SEC’s threats to sue

·     REITs; SPG upgraded to Buy from Hold with $142 tgt at Argus saying Simon’s fundamentals appear to be improving more rapidly than we anticipated and are also optimistic about Simon’s e-commerce investments; AHH was initiated at Buy with a $15 target at Stifel who likes the company’s diversified asset mix and believes it is attractively priced given its moderate growth and average leverage

Healthcare

·     Pharma movers; DVAX rises early after China’s Clover Biopharmaceuticals said its potential COVID-19 vaccine candidate, SCB-2019, adjuvanted with DVAX’s CpG 1018 vaccine booster, was 67% overall effective against COVID-19 and 79% against the highly infectious Delta variant in a late-stage trial; for PFE and BNTX, a CDC committee is set to meet Wednesday and Thursday to again discuss the science and possible administration plan for their COVID-19 booster shot; cannabis stocks (MJ, MSOS, TLRY, CGC, GTBIF, CURLF) outperformed after the House of Representatives approved a bill to ease banking rules for cannabis companies as part of its Defense Authorization Act; MRK preclinical study reported a 658% increase in STING agonist to tumor when used in combination with private company Vesselon’s drug and showed complete regression of both primary and distant tumors in 44% of enrolled subjects

·     Biotech movers; BIIB slips as STAT news reported the launch of Aduhelm having slower than projected sales has led the company to consider cost-cutting measures including layoffs (notes just over 100 patients infused w/ Aduhelm as of Sept 11th); INCY shares slipped with the company announcing FDA approval of its topical ruxolitinib cream for the treatment of atopic dermatitis with the focus on boxed warnings on serious infections, mortality, malignancy, major adverse cardiovascular events and thrombosis; INO said it has received regulatory authorization in Mexico to conduct a clinical trial of INO-4800, its DNA vaccine candidate for COVID-19; MRNA article ion NY Times noting pressure grows to share covid vaccine technology after Moderna accepted $2.5 billion in taxpayer money to develop its Covid-19 vaccine. But officials in the U.S. and overseas are having trouble persuading the company to license its technology; GILD’s Veklury (Remdesivir) significantly reduced risk of hospitalization in high-risk patients with Covid

·     In research: Goldman Sachs with rating changes as PMVP upgraded to Buy saying presents an attractive risk/reward into upcoming Phase 1 data in the Y220C subtype of p53 solid tumors; FGEN downgraded to Sell saying need for an additional trial/questions on AZN’s role and time to pipeline catalysts likely to drive underperformance; VIR downgraded to Neutral as n/t revenue from Sotrovimab may not be as substantial as previously modeled; HCM downgraded to Neutral saying expanding HCM pipeline reflected in current valuation; FREQ downgraded to Neutral as shares likely range bound as FX-322 opportunity requires further support and clarification and AXLA downgraded to Neutral as story goes quiet as clinical trials are now under way

·     MedTech Equipment; The U.S. government is set to spend $554.4 million to buy rapid COVID-19 tests from ABT in a bid to supply nursing homes and other high-risk populations, Reuters reported citing a senior administration official on Tuesday; OSUR downgrade from Outperform to Market Perform at Raymond James following the stocks >25% rise since news of their government contract began to reach investors.

·     Healthcare Services; the WSJ reported Medicare insurers drew $9.2B in federal payments in one year through controversial billing practices and 20 of those companies benefitted disproportionately, accounting for more than half of the total, citing federal health investigators (shares of UNH, ANTM, CI, HUM active on story)

Industrials & Materials

·     Industrial & Machinery; GE and French power group EDF are in exploratory discussions over a potential transaction related to the nuclear activities of GE Steam Power; ROLL 3M share Spot Secondary priced at $185.00; Baird initiated THRM at OP with a $94 PT; UBS started LICY at Buy, $15 PT for exposure to rapidly expanding need for battery recycling capacity

·     Transports; FDX Q1 adj EPS $4.37 missed the expected $4.91 on revs $22B vs est. $21.9B, adj operating margin 6.8% vs est. 8.5%, and its FY adj EPS forecast was also below consensus as even the top end of their view for $19.75-$21.00 was below est. $21.10, and Raymond James also issued a downgrade to MP from OP along with several analysts lowering their price target following the miss; AAL said that it believes the U.S. Department of Justice’s lawsuit, which alleges the air carrier’s Northeast Alliance arrangement with JBLU violates antitrust laws, is "without merit." American said it will "defend itself vigorously."

·     Metals & Materials; VALE and BHP both downgraded to Neutral from Buy at Bank America; shares of industrial metals (FCX, AA, X) rallied behind a bounce in iron ore prices in China rally on relief that China’s debt-burdened Evergrande would pay interest on a domestic bond, easing fears that the property giant’s troubles might hit the global economy; DNG raised its sales, earnings, and production guidance as it expects gold output to rise above 100,000 gold equivalent ounces for the first time in its history; BMO upgraded TECK to Outperform and raised their PT to C$44 from C$40 after the company’s investor day yesterday

Technology, Media & Telecom

·     Internet; in online travel, Wedbush slightly lowers ests across the board (ABNB, EXPE, BKNG), particularly with respect to 2H21-1H22 as we adjust our expectations of recovery timing on account of the impact of the Delta variant on near-term new bookings and cancellations; Needham initiated POSH at Neutral as they like its blend of social with e-commerce, geographic expansions, and EBITDA profitability, but its gross margins are already above asset-light peers and EV/sales valuation is above peer REAL; FB said AAPL’s ad changes were hurting its business and also revealed it had been inadvertently been under-reporting web conversion by an estimated 15% that led to advertisers believing their ads were not as effective

·     Semiconductors; AMBA upgraded to Overweight from Sector Weight at KeyBanc with a $185 price target as see multiple favorable tailwinds related to the adoption of CV within the security and automotive end markets with a limited competitive landscape with the HiSilicon ban, while we have increasing confidence in front-facing ADAS adoption; Susquehanna downgraded COHR to Neutral and listed KN, MTC, CRUS as their top 2022 M&A targets in the sector

·     Software movers; ADBE reported a good overall quarter, as F3Q revenue and margins were well above consensus. However, net new Digital Media ARR only modestly exceeded the Street, and was below investor expectations; MRIN surges after saying it entered into a revenue share agreement with GOOGL for company to develop its enterprise tech platform and software products effective as of October 1, 2021; WDAY hosted its virtual Financial Analyst Day last night and is aiming to drive subscriber revenue growth above +20% YoY until reaching at least $10B in total revenue with a 25% non-GAAP operating margin; Goldman reinstated MCFE as a Neutral with a $26 target after it completed the sale of its Enterprise business, and paid a special dividend and $1B debt repayment leaves meaningful catalysts behind us

·     Media & Telecom movers; WMG 2.34M share Spot Secondary priced at $44.00; MTCH announces registered direct offering of common stock; CMCSA introduces Xione – a new 4k, Wi-Fi 6 global streaming TV device; VMEO initiated with an Overweight rating and $47 PT at Wells Fargo saying they view the post-2Q pullback (from $45 pre-print on 8/5) as overdone; despite a partial recovery, they believe current valuation still presents an attractive entry point; NFLX purchased the rights to Roald Dahl’s works; Berenberg initiated Buy ratings on RAMP ($64 PT), TTD ($85), MFNI ($37), PUBM ($37)