Mid-Morning Look

Tuesday, December 06, 2022

U.S. stocks fall, extending yesterday’s broad-based decline with selling pressure across the board, but seeing bigger drops in Communications, Technology, and Consumer Discretionary. Markets rebounded last week, helped in part by a +3% rally last Wednesday post Fed Chairman Powell comments, but since, economic data has shown strength in the economy with growing jobs, higher manufacturing, and services, while wages spiked – all raising prospect the Fed will hike interest rates higher and for longer, and ultimately cause a deeper recession. Investors are waiting on highly anticipated consumer price inflation data due next week and PPI and UoM inflation expectations data this Friday. Bespoke noted the S&P 500 hasn’t been down on the first 4 trading days of a month since September 2018 (a streak trying to be broken today). The 200-day MA for the S&P may remain resistance after falling below yesterday (4,050). Treasury yields are steady with the 10-year yield ~3.56% but long dated treasury yields declined further, the dollar flat and oil lower. Fed Fund futures are still pricing in a 50bps rate hike at the December meeting, but the peak rate expectation is back above 5% for mid-2023. Not no Fed speakers this week into the FOMC meeting next week.

Economic Data

·     The U.S. trade deficit widened sharply in October as slowing global demand and a strong dollar weighed on exports. The trade deficit increased 5.4% to (-$78.2B) vs. est. (-$80.2B), as exports fell (-0.7%) to $256.6 billion and imports rose +0.6% to $334.8 billion. The Sept deficit was revised to (-$74.13B) from prior (-$73.28B). U.S./China Oct trade deficit $28.87B vs Sept deficit $37.29B

Sector Movers Today

·     Retailers: SIG posts strong Q3 Sales & EPS beat, Q4 looks light to in line and raised FY EPS but mostly low end as it now includes Blue Nile; JILL said it expects FY revs to increase, but sees Q4 sales down as much as 3% from a year ago; in research, Cowen raised tgt on SKX to $48 from $31 saying tone of mgmt meetings lead them to believe that guidance, which implies sales Q4 growth of +6% y/y at the midpoint, could be conservative; BURL added to US 1 list at Bank America; BKE announces a $2.65 per share special cash dividend; BNED cuts FY adjusted ebitda forecast, misses estimates; CONN posts smaller Q3 EPS loss on better revs of $321.2M; GME layoffs

·     Consumer Staples: KR said it received a second request for additional from the Federal Trade Commission as part of the regulatory review process for its merger with ACI; big research call at Deutsche Bank for Consumer Staples as they downgraded shares of KMB, SAM, TAP, CAG, FLO all to sell, downgrade GIS, SPB to Hold and upgraded shares of beauty maker EL to Buy saying they are moving away from their more definitively positive sector bias across Staples—noting that relative sector valuations that were once clearly favorable have returned into extended territory and anticipating more neutral sector performance from here; HLF shares slide after proposed $250 mln notes offering; KDP reiterates 2022 guidance for Net sales and EPS

·     Industrial & Machinery: GE upgraded from Perform to Outperform with $104 tgt at Oppenheimer saying aviation performance reflects strong momentum along industry recovery path, amidst widespread industry supply-chain challenges impacting the commercial business; for heavy duty trucking (CMI, PCAR, ALSN), ACT Research released preliminary November Class 8 net order figures of 33,000 units – recall last month, October Class 8 orders came in at a strong 42.5K units following 53K in September which had marked a big recovery from 21K in August and 11K in July; ETN, TEL, SNA all downgraded to Perform from Outperform at Oppenheimer saying shares have neared their price targets in an environment with limited capacity to argue for multiple expansion or earnings upside; FAST net sales for November increased by 10.2% to $577.8 million while daily sales were also up 10% to $27.5 million.

·     Bank movers: several comments today from US financial services conference: GS CEO David Solomon says clients are taking risk down, job market remains surprisingly tight and competition for talent remains as tough as ever; WFC CEO said growth shrinking in credit cards, debit card about flat; says lower-income consumers have seen more financial stress; SI shares tumble after U.S. senator Warren demands answers from Silvergate Bank about its business dealings with FTX

·     Bank/financials research: Morgan Stanley double upgraded JPM from Underweight to Overweight with $126 tgt as think risks around operating leverage skew to the upside as JPM has already provided guidance on 2023 NII of ~$74B and our 9% expense growth estimate feels conservative, while downgraded trust banks STT to equal weight and BK to underperform; PFSI upgraded to Overweight from Equal Weight at Wells Fargo as believe the backdrop for the mortgage industry has turned more favorable

Stock GAINERS

·     AA+ 3%; along with CENX after Bloomberg sad the US and EU are weighing new tariffs on Chinese steel and aluminum “as part of a bid to fight carbon emissions and global overcapacity”.

·     BWA +3%; said it plans to spin-off its fuel systems and aftermarket segments into a separate, publicly traded company; after the spin-off is complete, BorgWarner would consist of the e-Propulsion & Drivetrain and Air Management segments.

·     EDIT +4%; after saying its experimental cell therapy, EDIT-301, was safe and well-tolerated in the first two patients treated with the blood disorder treatment

·     GTLB +8%; following a 7% Q3 revenue and 5% subscription beat, with rev upside driven by 130%+ NRR and record new business bookings and guided Q4 revs in line, despite widespread software “beat and lowers” this quarter

·     SIG +17%; posts strong Q3 Sales & EPS beat, Q4 looks light to in line and raised FY EPS but mostly low end as it now includes Blue Nile

·     SMMT +60%; announces collaboration and license agreement with Akeso for up to $5B to accelerate global development/commercialization of its bispecific antibody, Ivonescimab

·     TXT +7%; rises after the company announced that its Bell business won a U.S. Army development contract for the Future Long-Range Assault Aircraft (FLRAA) program

·     VVNT +31%; as NRG is acquiring Vivint for $12 per share valued at $5.2B including $2.8B in cash transaction and $2.4B in debt (net of cash); https://bit.ly/3UIR15S

Stock LAGGARDS

·     FSLR -3%; downgraded to Sell from Buy at GLJ Research saying shares are priced for perfection into a (very) imperfect environment

·     GOSS -69%; after analysts question the performance of its experimental hypertension drug seralutinib, that met the primary endpoint in a Phase 2 clinical trial – some noted the therapy didn’t outperform MRK’s sotatercept

·     HLF -18%; after proposed $250 mln notes offering

·     META -5%; as WSJ reported that EU privacy regulators say Facebook, Instagram shouldn’t use their terms of service to require users to accept ads based on their digital activity

·     MRTX -16%; shares fall on what some called underwhelming data as co announced updated adagrasib (KRASG12C inhibitor)/Keytruda combo data in 1L KRASG12C-mutant non-small cell lung cancer at the ESMO-IO meeting

·     RCL -3%; resumed coverage with underweight from Overweight prior at JPM and tgt to $47 from $106 saying Royal could face a $400M funding shortfall by the end of next year

·     SI -5%; shares tumble after U.S. senator Warren demands answers from Silvergate Bank about its business dealings with FTX