Closing Recap

Thursday, September 22, 2022

Equity Market Recap

·     It was another brutal trading session for major averages with every “buy on the dip” met with additional selling pressure (including erasing a late day rally in the final minutes), keeping a cap on the broader US stock market with the S&P 500 falling for the 5^th time in the last 6-days. The U.S. central bank on Wednesday hiked its benchmark overnight interest rate by 75 basis points and projected the policy rate would rise to the 4.25%-4.50% range by the end of 2022, and to a range of 4.50%-4.75% by the end of 2023. The rate hike was widely expected but the more aggressive rate hike outlook for the rest of this year, and no rate hikes in 2023 caught may off guard, raising expectations of a recession and earnings estimates needing to be lowered. The Fed has been playing catch up all year, trying to get inflation down after CPI ticked higher in August after small signs of decelerating in prior months. Fed Chairman Jerome Powell said yesterday that there isn’t a painless way to tame inflation. Government bond yields continued to rise. The yield on the two-year Treasury note reached 4.15% and the 10-year yield hit 3.71%. Short-term yields have been greater than long-term yields since early July, a pattern that has often preceded a recession. Several other central banks raised rates today as well, including the Bank of England, and the Swiss National Bank making it the last European central bank to exit negative rates. Sentiment is overly bearish as Bespoke noted AAII’s Bearish Sentiment reading crossed above 60% this week for only the 5th time in its history since 1987. The last time it happened was March 5th, 2009 (note this is usually a contrarian indicator).

·     Global Central Bank Update (more rate hikes) after the FOMC boosted rates yesterday by 75-bps to 3% to 3.25%, the highest level since before the 2008 financial crisis. Today, Switzerland: 75 bps hike to 0.50%, -Taiwan: 12.5 bps hike to 1.625%, Norway: 50 bps hike to 2.25%, UK: 50 bps hike to 2.25%, Saudi: 75 bps hike to 3.75%, Indonesia: 50 bps hike to 4.25%, Philippines: 50 bps hike to 4.25%, Turkey: 100 bps cut to 12.0%; Brazil Central bank leaves benchmark rate unchanged at 13.75% by a vote of 7-to-2 after 12 consecutive increases; Bank of Japan (BOJ) leaves short-term rate Target unchanged at -0.1%, maintains 10Y JGB yield Target around zero.

Economic Data:

·     Weekly Jobless Claims rose to 213K in latest week vs. est. 218K and prior week revised to 208K from 213K; the 4-week moving avg fell to 216,750 from 222,750 prior; continued claims fell to 1.379M from 1.401M and the US insured unemployment rate unchanged at 1%

·     U.S. Q2 current account balance (-$251.1B) vs consensus (-$260.6B) and vs q1 balance (-$282.5B)

·     August leading indicators down 0.3% vs. last month, consensus 0.0%

Commodities, Currencies & Treasuries

·     Oil prices finish higher as WTI crude gains $0.55 or 0.66% to settle at $83.49 per barrel, helped by the prospect of higher Chinese demand and as heightened geopolitical risks outweighed recession fears after a flurry of central bank interest rate hikes. Brent crude futures settle at $90.46/bbl, up 63 cents, 0.7%.

·     Natural gas ends down 8.9% at 2-month-low $7.089, the lowest closing price since July 19, after a weekly storage report came in even more bearish than analysts were expecting. The EIA says gas-in-storage rose by 103B cubic feet last week, topping forecasts for a 95-bcf rise

·     Gold prices finish little changed, rising $5.40 or 0.3% to settle at $1,681.10 an ounce, rising despite the dollar bounce and pop in Treasury yields. The geopolitical fears with Russia ramping its war with Ukraine by adding troops providing support for the precious metal.

·     The U.S. dollar index (DXY) extends gains, back to fresh 20-year highs at 111.81 slipping and down from two-decade highs vs. the Japanese yen after the Bank of Japan in the forex market to buy yen for the first time since 1998, in attempt to shore up the battered currency. The euro held below 0.99 to the dollar while the British Pound slides further to 1.125 (lowest since mid-1980’s). The aggressive interest rate action and hawkish outlook by the Fed leads the buck higher.

·     Treasury yields jumped early and held their strong gains with the 10-yr holding topping 3.7%, up 19bps today alone and 2-yr above 4.15% up about 16 bps at their best levels. The Gap between 2-year and 10-year US treasury yields widens to 57-bps, steepest inversion since June 2000. The shock from the Fed yesterday impacting currency, bond, and equity markets.

Sector News Breakdown

Consumer

·     Retailers: consumer discretionary names getting hit on the Fed aggressive rate hike outlook, and rising recession fears, with retail names falling hard; SCS slides on mixed qtr and lower guidance as 2Q adj EPS $0.21 vs est. $0.13 on revs $863.3Mm vs est. $882.75Mm; guides 3Q adj EPS $0.17-0.21 vs est. $0.23 with revs $825-850Mm vs est. $856.7Mm; Reuters reported Hedge fund Ancora seeks ouster of KSS CEO, Chairman; COST reports earnings tonight

·     Auto sector: GM said its GM Ventures unit made a strategic investment in Lithion Recycling Inc.’s Series A financing round. The companies did not disclose the dollar amount of the investment; LI said to early launch Li L8, its six-seat, large premium smart SUV, on September 30, 2022; Volvo (VLVLY) downgraded to Market Perform at Bernstein saying it will face significant earnings pressure in 2023 and the equity story is about to run out of steam before it even started; TSLA is recalling almost 1.1 million of its electric vehicles over concerns that a closing window could pinch a passenger before it retracts

·     Housing & Building Products: earnings in homebuilders as both noted steep drops in demand, traffic etc. as rates rise and the macro environment softens 1) KBH Q3 EPS was $2.86, above $2.67 while FQ4 guide components indicate a miss vs consensus across metrics as implied EPS is roughly $3.00 vs $3.66 consensus; LEN Q3 EPS $5.03 vs. est. $4.88; Q3 revs rose 29% y/y to $8.9B vs. est. $9.0B while new orders decreased 12% to 14,366 homes, with a new order value of $6.7 billion, down 11%.

·     Restaurants: DRI reported in-line Q1 EPS of $1.56 as sales rose 6.1% y/y to $2.45B vs. est. $2.47B, guided FY comp sales +4% to +6%, vs. est. +4.44% and still sees FY sales $10.2B-$10.4B vs. est. $10.3B; Q1 comparable sales +4.2% vs. estimate +5.16% as Olive Garden comps +2.3% misses +5.5% est. and LongHorn comps sales +4.2% vs. est. +4.84%

·     Casinos, Gaming, Lodging & Leisure sector: CZR, EXPE, LYV and other leisure, discretionary names again top decliners in S&P on recession fears; in online travel, TCOM posted a strong set of 2Q22 results with a better-than-expected outlook for 3Q22; cruise lines rise early after RCL said demand remains strong, bookings outpacing 2019

Energy, Industrials and Materials

·     Energy stock movers: one of the few bright spots for major averages this morning as oil prices held up initially; in stocks movers, Goldman Sachs said following management meetings, continue to favor XOM’s differentiated upstream projects (Guyana, LNG, Permian), unique business transformation driving the company’s FCF breakeven lower, and improving returns on capital employed; TALO said it has reached agreement to acquire privately held EnVen Energy Corp. for $1.1B cash and stock

·     Industrials, Aerospace, & Defense: China Southern Airlines Co Ltd said its unit has placed an order with Airbus SE (EADSY) for 40 A320neo-family aircraft worth $4.85 billion; GNRC a positive mention in Barron’s this morning saying shares have been falling sharply this year, and that creates an opportunity for investors to pick up a growth stock at a value-stock price; AVAV said the US Army awards $20.6 million switchblade 300 tactical missile systems contract

·     Transports: FDX released earnings (was expected after the close) reporting in-line with last week’s lowered guidance; Barclays lowers price Target on UPS to $180 per share from $200, keeps equal weight (hold) rating, saying FDX "clearly failed" on execution but its warning about business and the global economy suggests that $UPS is also "in for a rough winter"

·     Metals & Materials: AA downgraded to Peer Perform at Wolfe and cut 2022E/23E aluminum forecast on challenges that led to a global surplus rather than deficits. Most importantly China produced +2.6% Jan-Aug y/y but exports rose 31% YTD y/y, amid lockdowns and a faltering property sector

·     Chemicals: FUL reported F3Q22 adjusted EBITDA of $138M, above Street at $136M, revenues of $941M were also ahead of estimate, with 18.4% organic growth, effectively all from price (up 18.7%) with volumes relatively flat (down 0.3%) on cooling demand; it has been a rough two-weeks for chemical names with CC, DOW, EMN, HUN and OLN all cutting their outlooks citing headwinds from a softer European and Asian macro backdrop

Financials

·     Bank movers: HOOD VIRT, SCHW all rise after Bloomberg reported the SEC is poised to let Wall Street keep payment-for-order-flow deals; for regional banks, Wells Fargo noted following the Feds 75bp rate hike, their confidence increases that NII should show the fastest growth in 4+ decades, as favors PNC, RF, and FITB in regionals (and BAC in large cap); DB shares rise early after mixed CFO comments; CS is considering plans to resurrect a “bad bank” to hold risky assets, as it seeks a turnaround from losses and scandals, the Financial Times reported.

·     Financial Services: RBC Capital previews 3Q22 earnings for SPGI saying given the incrementally more hawkish Federal Reserve, where the updated dot plot puts 50%+ of the committee north of 4.5%, we see continued pain in new issuance; FDS Q4 EPS of $3.13 missed the $3.20 estimate though revs topped views, and guided FY23 $14.50-$14.90, with the mid-point missing the $14.76 estimate but revs above views

·     Bitcoin, FinTech & Payments: SQ downgraded to Neutral from Buy at Mizuho and slash tgt to $57 from $125 as believe user fatigue, plateauing inflows, loss of the best-of-breed POS status, and BNPL mis-execution are blocking SQ’s growth; the WSJ reported COIN tested group to speculate on crypto as the company completed a $100 million transaction before ending the effort. It says that it hasn’t engaged in proprietary trading

·     Consumer Finance: Credit Suisse said AFRM securitization data came out, noting 30-day delinquency trends are promising: DQ for 2021-B A declined in August, marking the first decline in several months. 2021-A A 30-day DQ remained flat (pro-forma for amortization of the securitization), which is another positive. 60 & 90-day delinquencies continued to rise; MQ was initiated at Neutral and $8 tgt at Wedbush reflecting a combination of large client concentration (SQ accounts for 69% and 54% of net revenues and gross profits in Q2/CY22), exposure to the controversial BNPL sector (Affirm, Klarna), tough 2HCY22 comps; AFRM and AMZN introduce pay-over-time option to customers in Canada

Healthcare

·     Pharma movers: large cap pharma stand out to upside in bad tape with LLY, MRK, JNJ, BMY, ABBV higher; LLY upgraded to Buy from Neutral at UBS with a price target of $363, up from $335 as now views Eli Lilly as the most attractive name in large cap pharma, with the greatest potential upside to estimates; TLRY said its FL Group S.R.L. unit in Italy has received approval from the Italian ministry of health to import and distribute Tilray’s medical cannabis oral solution THC25; DBVT disclosed that the FDA has placed a partial clinical hold on its Phase 3 VITESSE clinical study of Viaskin Peanut; MRK announces favorable U.S. District Court ruling in Sitagliptin Phosphate patent lawsuit vs VTRS

·     Biotech movers: NVAX downgraded to Underweight from Neutral at JPMorgan and slash tgt to $27 from $132 in accordance with an updated model and revised longer-term outlook for Nuvaxovid demand and related revenue, as well as development prospects of the pipeline; CLXT announced that its Board of Directors is evaluating potential strategic alternatives to maximize shareholder value; BTTX announced the submission to FDA of a de novo request for BT-001 for the treatment of type 2 diabetes, setting the stage for a 2023 approval and commercialization.

·     MedTech Equipment & Healthcare Services: LUNA signed a $14.2 million deal to supply photonic subsystems to ISRGCowen notes Friday’s scheduled Nebraska award will likely drive outsized CNC stock movement as it may be perceived to confirm or rebut procurement fears and notes the recent CA loss will likely constitute a larger 2024 EPS headwind than we previously estimated; lower our PT from $108 to $101; CANO shares jumped after the WSJ reported HUM, other potential buyers circle Cano Health https://on.wsj.com/3UxtZQw

Technology, Media & Telecom

·     Semiconductors: for MU Digitimes reported DRAM sales tumbled 36% in June and another 21% in July, after posting their highest monthly level in more than two years in May, according to IC Insights; there were 343,000 new smartphones sold in Taiwan in August 2022, the lowest monthly level so far in 2022 with decreases of 17.5% on sequentially and 9.5% on year, according to retail channel sources, reported Digitimes; Bank America lowered INTC estimates and POs to reflect further consumer demand deterioration and inventory adjustments; 52-week lows for AMD, NVDA

·     Software movers; CRM sets FY26 revenue target of $50 bln at Dreamforce investor day on Wednesday; aims 17% compound annual growth rate; Ubisoft (UBSFY) downgraded from Buy to Hold, at Stifel to reflect a combination of factors, including what they view as overly ambitious FY2023 guidance, execution risk around the company’s slate over the intermediate/longer-term, and reduced expectations for a takeout scenario; in video games overall, Stifel said see 2022 as a down year for the global industry, including a -6% decline in the U.S.; UPWK reaffirming Q3 2022 guidance previously announced on July 27, 2022 after announces CFO transition plan