Mid-Morning Look

Thursday, July 07, 2022

U.S. stocks strong out of the gate, led by strength in technology, metals and mining, and energy, and extending the market winning streak to 4-days in the early going. China stimulus headlines boosted sentiment overnight after Bloomberg reported China was considering allowing local governments to sell $220 billion of special bonds in the second half of the year, brought forward from next year’s quota. That news, coupled with Samsung posting better Y/Y quarterly results (but shy of estimates), helped boost the technology sector, specifically semiconductors. Metals and mining names have been pummeled along with energy stocks the last few weeks on rising recession fears, but all seeing a recovery this morning on China and a bounce in crude oil back above $100 per barrel. Treasury yields remain slightly higher (though 2–10-year yield back to inverted by 6 bps – recessionary signal), while the U.S. dollar takes a small breather after ramping to recent 20-year highs. In political news, UK PM Boris Johnson resigned this morning. All eyes on earnings season kick-off next week with the banks and monthly jobs report tomorrow morning.

Economic Data

·     Challenger Gray job cuts spiked 58.8% y/y in June vs. -15.8% in prior month; largest jump since December 2020 … auto sector announced most cuts at 10,198 (+155% y/y)

·     Mortgage rates recorded their largest decline this year as investors raise their bets that the economy is headed for a downturn. The average rate on a 30-year fixed-rate mortgage fell to 5.30%, mortgage-finance giant Freddie Mac said Thursday. That is down from 5.70% last week but far above 3.22% at the beginning of the year.

·     Weekly Jobless Claims rose to 235,000 from 231,000 last week and vs. est. 230,000; the 4-week moving average rose to 232,500 from 231,750 prior week; continued claims rose to 1.375M from 1.324M prior week; the U.S. insured unemployment rate rose to 1.0% from 0.9%

·     The U.S. Trade Deficit for May (-$85.55B) vs. est. (-$84.7B); Exports up 1.2% to $255.9B and Imports up 0.6% to $341.4B (seasonally adjusted); May capital goods imports $71.46 bln vs April imports $71.71 bln; U.S.-China may trade deficit $31.54 bln vs April deficit $30.57 bln

Sector Movers Today

·     Transports; in airlines, Argus downgraded UAL to Hold from Buy and lowers EPS estimates to reflect flight cancellations, pilot shortages and higher fuel prices; Bank America cut tgts and estimates in space as well ahead of earnings: DAL ($40 from $50), AAL ($8 from $9), UAL ($39 from $47), ALK ($60 from $72), HA ($14 from $16) and ALGT ($140 from $170); in railcars, Wells Fargo said they believe rail supply concerns around improved rail service and recession likely overdone – WAB continues to be top idea; further, heading into Q2, we would be OW the names with the greater leasing exposure, notably GATX, TRN, and GBX in order of preference

·     Metals & Materials; nice rebound in materials and metals names after recent downturn on recession fears; shares of copper, aluminum, iron ore, etc. getting a boost after upbeat China stimulus headlines overnight as FCX, AA, CLF, others bounce; in research, FCX downgraded to Peer Perform at Wolfe Research on lower Copper prices and limited growth, now assuming buybacks slip 50% from H1 levels in H2E and, also cut SCCO to Underperform; in coatings space ahead of earnings, RBC Capital lowers FY22/23 EPS/EBITDA estimates by ~2-4% for our covered coating names AXTA , resulting in price Target cuts of ~10%

·     Industrial & Machinery; several analyst previews ahead of earnings season as Cowen lowers tgts on CAT $225 from $255, CMI to $267 from $281, DE to $342 from $396, PCAR to $92 from $100 saying in the near term ahead of earnings, favor GATX and CAT; we’re cautious on GBX and RAIL; and neutral on DE, WAB, CMI, PCAR, and TRN downgrade from Overweight to Neutral at JPMorgan as see potential for continued tailwinds as an independent entity; DE upgraded was upgraded to Buy from Neutral at Citigroup while downgraded OSK to Neutral

·     Consumer Staples: RBC Capital with earnings preview for space, saying they expect solid results across the CPG space in Q2 with top ideas into prints KO and cautious on CLX as topline and margin trends see the benefit from higher sequential pricing realized in the quarter vs. Q1 results, with still limited elasticity impacts on volumes. SAM downgraded to SP from OP at RBC as well and lowers tgt to $331 from $488 given expected depletions miss and guidance cut); USNA slides as guides prelim Q2 EPS $1.05 below consensus $1.26 and sees Q2 revs roughly $265M below consensus $272.77M and prior year figure of $337M; sees year EPS $3.85-$4.45 vs. est. $5.27 and sales $1.015B-$1.065B vs. est. $1.13B; BG upgraded to Overweight at JPMorgan as think near-term positive catalysts could come from 2Q22 earnings; Kellogg (K) downgrade to Neutral from buy at UBS on concern the company is going to experience a significant amount of inflation over the NTM and will likely have difficulty passing through as much price going forward; NAPA 5M share Spot Secondary priced at $19.50

Stock GAINERS

·     AMD +4%; a big boost for beaten up semiconductor chip names after mixed quarterly results from Samsung (better-than-feared) though still cautious comments about demand – still seeing big bounce in NVDA and others

·     APA +5%; energy another sector seeing a rebound in commodity space as oil prices recover; shares of MRO higher

·     ANVS +8%; after saying the FDA has allowed it to proceed with the late-stage study of its experimental therapy, buntanetap, in early Parkinson’s patients

·     BBBY +18%; after Form-4 filing showed Interim CEO Sue Grove discloses purchase of 50k shares

·     GME +7%; announced that its Board of Directors has approved and declared a four-for-one split of the company’s Class A common stock

·     SGEN +2%; as WSJ reports MRK is aiming to finalize a deal for SGEN this month that would be one of the year’s largest at ~$40B or more, WSJ reported last night saying the companies are discussing a price for Seagen above $200 a share https://on.wsj.com/3P4qAF4

Stock LAGGARDS

·     CTMX -28%; after saying while the phase II study of its praluzatamab ravtansine drug candidate met its primary endpoint of objective response rate, a separate study arm didn’t pass the protocol-defined futility boundary in triple-negative breast cancer.

·     DMAC -34%; as announced that U.S. FDA has placed a clinical hold on company’s phase 2/3 remedy2 trial

·     HELE -8%; Q1 adj EPS $2.41 beats est. $2.00 on better revs $508.1M vs est. $474.2M but guides year lower to $9.85-10.35 vs. prior guidance $12.73-13.03 and revs $2.15B-2.20B vs prior guidance $2.38B-2.42B (est. $2.37B)

·     ICPT -9%; announced topline results form a new interim analysis of its Phase 3 REGNERATE trial of obeticholic acid (OCA) in patients with liver fibrosis due to nonalcoholic steatohepatitis (NASH)

·     SAM -2%; downgraded to SP from OP at RBC and lowers tgt to $331 from $488 given expected depletions miss and guidance cut

·     USNA -14%; as guides prelim Q2 EPS $1.05 below consensus $1.26 and sees Q2 revs roughly $265M below consensus $272.77M and prior year figure of $337M; sees year EPS $3.85-$4.45 vs. est. $5.27 and sales $1.015B-$1.065B vs. est. $1.13B