Closing Recap

Thursday, September 29, 2022

Equity Market Recap

·     When does the pain end? Approaching month and quarter end, the Dow and S&P 500 index fell for the 7^th time in 8-trading days, with yesterday’s rebound all but a memory as Fed commentary and employment data which suggest the Fed is nowhere near a pause in tightening crushed markets again. Stocks tumble despite the U.S. dollar falling a 2^nd day and as Treasury yields remains steady (though elevated). The hits keep on coming for global markets, dealing with surging interest rates, tumbling commodity prices, slowing economic growth, slowing housing market, macro issues in the UK, North Korea, Russia/Ukraine, and impact of a catastrophic Hurricane that crushed parts of Florida and approaches the coast this weekend. US stocks new YTD lows and on track for another dismal month (semis down -13% MTD, Transports -12%, Smallcaps -about -1%, Nasdaq about -10% and S&P -8%) as all averages down 20% or more on the year now. UK Prime Minister Truss broke her silence six days after her controversial fiscal measures roiled markets, calling them "the right plan." German data suggests things aren’t getting any better, posting a September CPI number at a +10.1% YoY – the single worst monthly statistic since the data have been kept. More hawkish central bank talks everyday weigh as they stay focused on inflation and goal to get it to 2% (from 8.3% CPI last month. Fed Fund Futures are pricing in 113bps of tightening by year end while the Fed’s quarterly summary of economic projections showed a median forecast of rates reaching 4.4% by year end (another 125bps).

·     Hurricane Ian made landfalls near Fort Myers on Wednesday afternoon with 145-150 mph winds. Extensive flooding in Orlando and Port Charlotte, 2.5 million residents without power, 12- to 18-foot storm surges near Fort Myers. The National Hurricane Center expects Ian (now a tropical storm) to move northeastward across central Florida and into the Atlantic Ocean before veering westwards and hitting South Carolina by Friday afternoon.

·     Another day, another “hawkish” Fed speaker: St. Louis Fed President Bullard stance today was in line with the message from Cleveland Fed chief Loretta Mester, who said that officials are resolute in their quest to increase rates to a level seen as restrictive. He also said that volatility in financial markets reflected spillovers from recent events in the UK — where the new government’s fiscal measures have seen the pound plummet. Both officials are voters this year on the rate-setting Federal Open Market Committee. The Fed’s Mester said late day as well “recession won’t stop Fed from raising rates.”

·     The Fed has been on a rate hike surge in 2022, with zero signs of slowing according to latest Fed meeting and a handful of speakers daily reiterating their aggressive view. While it may not be seen in CPI yet to them, their impact so far seems noticeable in housing as the typical homebuyer’s monthly mortgage payment has climbed $337 (15%) over the past six weeks to a new high of $2,547 according to a Redfin report. Also, shares of US auto dealers cratered after KMX’s Q2 reported catastrophic results which missed estimates, sparking concern about the whole group. EPS of only 79c, almost half the $1.40 consensus estimate, shocked markets, while net sales of $8.14 billion also missed expectations. The stock lost a quarter of its value and sunk other autos (F, GM, TSLA), retail (AZO, AAP, ORLY) and suppliers (APTV, LEA). Reminder that used car prices were one of the biggest inflation moves over the last year.

Economic Data:

·     Gross Domestic Product (GDP) for Q2 Final (-0.6%), in-line with preliminary reading as Q2 Real Consumer Spending rises +2.0% vs. previous +1.5%. The important inflation data showing no signs of slowing as Q2 Final PCE Price Index +7.3% vs. prelim +7.1%, 2Q Final Core PCE Price Index +4.7% vs. prelim +4.4% and Q2 GDP Price Deflator +9.1% vs. est. +8.9%

·     Weekly Jobless Claims fell to 193K from 209K prior week and below consensus of 215K; the 4-wk avg fell to 207,000 from 215,750 prior week; continued claims fell to 1.347M from 1.376M prior week; the US insured unemployment rate unchanged at 1.0%

Commodities, Currencies & Treasuries

·     Oil prices fall with broader markets as WTI crude slips -$0.92 or 1.12% to settle at $81.23 per barrel while Brent crude futures settle at $88.49/bbl, down 83 cents, 0.93%, ahead of an OPEC+ meeting next week. NYMEX Natural Gas November futures settle at $6.8740/MMBtu.

·     Gold prices finish little changed, down -$1.40 to $1,668.60 an ounce, hold steady as the dollar eased for a second day. Gold prices snap a modest 2-day win streak amid mounting concerns over the U.S. Federal Reserve’s aggressive monetary policy and impending rate hikes. Gold once seen as a hedge against inflation, has tumbled more than $400 this year so far.

·     Data showed gross domestic product (GDP) in the U.S. fell at an unrevised 0.6% annualized rate in the second quarter, compared with a 1.6% contraction in the first quarter (so the Fed continues aggressive rate hike into a slowing economy)

·     The dollar eased, falling -0.3% to 112.25 for the DXY, more than 200-bps off its 20-year highs this week as the British Pound jumps back above 1.10 after hitting all-time lows of 1.0327 this week after the UK tax cut debacle. The euro pares losses vs. the dollar approaching 0.98.

·     As per Charlie Bilello: Bears outnumbered Bulls by 43% in last week’s AAII sentiment survey. With data going back to 1987, the only other times we’ve seen sentiment this bearish. 1) October 1990 (-20% bear market that bottomed in Oct 1990 w/ recession in 1990-1991), 2) March 2009 (week of the lows). Pretty wild stuff.

Sector News Breakdown

Consumer

·     Retailers: BBBY posted a -28% drop in sales during the quarter that ended in August, before the struggling retailer unveiled an aggressive turnaround plan; MLKN downgraded by one analyst after mixed Q1 results, but lower guidance as sees 2Q EPS $0.39-0.45 vs est. $0.55 and sales $1.027-1.076B vs est. $1.084B; PTON said DKS will be the first brick-and-mortar retailer to carry Peloton equipment outside its namesake stores; retail getting slammed on slowing consumer spending concerns given weak GDP data.

·     Auto sector: in auto retail, KMX posts a wide Q2 earnings miss of $0.79 below the $1.39 estimate on revs $8.1B vs. est. $8.54B – Total wholesale units decreased 15.1% with gross profit per unit of $881, a decrease of $124 per unit; BWA, APTV weak in auto space; the KMX results weighing on industry, as well as fears of higher aluminum costs for autos/supplies if the London Metal Exchange does announce a ban on Russian metals (earlier reports they are discussing it); TM said vehicle production soared 44.3% in August year-on-year, the first increase since March; TM produced 766,683 vehicles worldwide last month, above its target of around 700K; RIDE said it has started the commercial production of Endurance pickup truck at its Ohio plant

·     Consumer Staples & Restaurants: SBUX raises quarterly dividend 8.2% to 53 cents/share; KHC upgraded to Neutral, but maintaining our $34 PT at UBS saying analysis suggested KHC was benefiting meaningfully from pulling back on promotions, competes in categories with greater trade down risk, and has high risk to consumer trade down; NAPA posted solid F4Q’22 results with a 0.7% topline beat and a 7.3% EBITDA beat vs. consensus while FY’23 guidance ranges bracketed consensus; TAP expands exclusive agreement with Coca-Cola to develop and commercialize Topo Chico Spirited

·     Casinos, Gaming, Lodging & Leisure sector: MTN reports Q4 adjusted EBITDA ($64.2M) at a wider loss than Con ($62.6M) with revenue above. Mountain EBTDA and revenue beat with skier visits +54.2%, but Lodging EBITDA and revenue missed; discretionary sectors flip-flopping between gains and losses daily – but today not a good one for casinos, theme parks, lodging and travel given the ongoing aggressive rate hike nature by central banks and impact on consumer wallets.

Energy, Industrials and Materials

·     Energy stock movers: Oil prices steadied on Thursday, erasing earlier losses, on indications that OPEC+ might cut output, though a stronger dollar and weak economic outlook kept a lid on gains. OPEC+ has begun discussions about making an oil-output cut when it meets next week, a delegate said. Oil traders and executives seeking any tidbit of information on the outlook for China’s Covid Zero policy were left with little clarity at the APPEC conference in Singapore

·     Transports: Citigroup is again lowering 2023 EPS estimates for the rails (CSX, NSC, UNP) heading into 3Q earning season, as we believe the inflationary cost environment is likely to persist next year, with a kicker coming from the union labor deal; in airlines, ALGT lowers Q3 revenue view to up 27.5% vs. 29% vs. 3Q19 and lowers guidance for Q3 ASMs to 14.5% from 16% vs. 3-years ago.

·     Metals & Materials: shares of FCX, AA, CENX and other industrial metals jump initially (then slide with markets) after reports the London Metal Exchange is planning to discuss with its members a ban on Russian metal, sources familiar with the matter said https://bit.ly/3Rhc4L3 . Any move by the LME to block Russian supplies could have significant ramifications for the global metals markets, as the country is a major producer of aluminum, nickel, and copper; WOR slips after lower quarterly profit, plan to separate steel processing business

·     Containerboard: Truist Lowering estimates and price targets for the containerboard stocks – PKG, IP, and WRK – due to higher input costs and lower box volumes but said there is the potential for better box shipments in 4Q (increasing estimates for OI). Notes there is a lot of investor concern on containerboard given slowing demand, partly due to moderating e-commerce trends and retail inventory destocking, and higher input costs such as natural gas.

Financials

·     Bank movers: JEF strong 3Q results amid a challenging operating environment as reported 3Q22 EPS of $0.78 vs. consensus’ $0.65E on better revs; BGCP said Q3 revenue is now expected to be below midpoint of range of its previously stated outlook and Q3 pre-tax adjusted earnings is expected to be around midpoint of its previously stated outlook

·     Insurance: Ian weakens to tropical storm after making landfall in Florida as a category 4 hurricane. Hurricane Ian was forecast to move across central Florida and emerge over the Atlantic today. More than 2 million homes and businesses in the state are without power, according to PowerOutage.us. The storm is expected to cause more than $67 billion in damages and losses, making it one of the costliest ever in the US.

·     FinTech & Payments: Wedbush said they believe recent under-performance in the payments sector, which seems to be factoring a scenario of massive revenue/earnings revision is unwarranted, especially given recent volume/trend updates from most companies in the group, including the networks (V, MA), the "deal stocks" (FIS, FISV, GPN), monetization "plays" (PYPL), and PAYX (earnings)

·     Consumer Finance: SUNL withdrew 2022 guidance after impairment charges on advances to an installer and higher interest rates. This comes after the company missed Q2 expectations after a failed lender merger led to the cancellation of $85m in direct channel funded loans

·     Bitcoin news: Wells Fargo initiates COIN at Underweight, RIOT at equal weight saying the rise of crypto over the past decade-plus has been significant, and has taken numerous forms/names, including HODLING, Payments, DeFi, blockchains, stablecoins, NFTs, or TradFi. Currently, there are over 20,000 kinds of cryptocurrency

Healthcare

·     Pharma movers: defensive large cap Pharma remains a haven in turbulent market thus far, with LLY, MRK, BMY recent winners as well; AXLA with positive interim results from its ongoing global Phase 2b study to evaluate the safety, tolerability, and efficacy of AXA1125 for the treatment of nonalcoholic steatohepatitis, or Nash.

·     Biotech movers: AXSM said following a Type A meeting with the FDA it intends to resubmit its NDA for AXS-07 for the acute treatment of migraine in Q3’23; SIGA announces new contract awarded by DoD for the procurement of up to $10.7M of Oral TPOXX; SWTX announced that the first patient has been dosed in a Phase 2 trial evaluating nirogacestat; ILMN announced new faster, cheaper gene-readers Thursday, twice as fast as its current products, and 60% cheaper, which will pressure rivals to DNA for research and medical testing (will drop the cost of sequencing a genome to $200-$240 from $500-$600 today)

·     Healthcare Services: RAD shares slide after 2Q revs were marginally ahead at $5.9B (vs. $5.8B cons) though EBITDA of $78.5M was light (vs. $110M est.), with weaker gross margins from a decline in COVID vax and testing and higher costs and lowered its adj EBITDA outlook now expecting $450M-$490M from $460M-$500M prior

Technology, Media & Telecom

·     Semiconductors: more pain in chips as semiconductor index now down -12.7% this month and over -38% YTD on supply glut fears, slowing economy; Susquehanna said weaker channel checks compel them to lower PC ODM Notebook builds and PC shipment ests for 2022 (now -20% YOY and -17% YOY, respectively). Aftermarket GPU list prices fall another -14% QoQ as prices fall well below MSRP and inventories bloat. AMD laptop and desktop CPU share hits new highs, even ahead of 7000 series ramp – cutting estimates and price targets for AMD (to 95 from 115), INTC (to 23 from 33) and NVDA (to 180 from 190)

·     Hardware & Software movers: just lots and lots of pain in the technology space on rising inflation/yield concerns; CGNT downgraded to Hold from buy at Stifel after reported Q2 results that lagged our expectations as they continue to face similar macro and operational issues; AAPL downgraded at Bank of America to neutral from buy amid worries about slowing consumer, while Rosenblatt upgrades to buy from neutral

·     Internet, Media & Telecom movers: CHTR upgraded from Underperform to Peer Perform at Wolfe on valuation saying today’s cable multiples, particularly equity FCF yields, are generous; for likes of CMCSA, T, DIS, CHTR, Pay TV Household Penetration at Lowest Point Since 1993; Linear TV’s Downfall May Be Hastening https://bit.ly/3RohiVp ; WIX was upgraded to Outperform with $110 tgt at Oppenheimer as believe Wix has the potential to operate more efficiently to drive meaningful shareholder value