Mid-Morning Look

Friday, June 24, 2022

U.S. stocks in rally mode, closing out a strong week with all 11-sectors in the S&P higher as the S&P trades to its highest levels since June 13^th. Bespoke Investment noted last Thursday, the S&P 500’s 10-day advance/decline line dropped to its lowest level since the COVID Crash. Since then, breadth has been positive every day, the longest streak of positive readings all year. After several weeks of downward stock market pressure on rising inflation, rising interest rate fears, increasing job losses, weaker economic data, food supply shortages, surging Treasury yields, and more investors have been waiting to pounce on any sign of market strength. Today appears to be that day, with stock markets strong overnight, opens higher after holding gains, and then accelerating gains after trading above resistance levels. More than 2% gains across the board for major averages. Economic data was mixed today with UoM confidence reading hitting all-time lows, though inflation expectations reading came down to 3.1% from 3.3% in the preliminary report, while new home sales surprised to the upside (one of the 1st positive data points in housing in months). In news out of Washington, the Supreme Court today overturns the landmark Roe v. Wade ruling that legalized abortion nationwide.

Economic Data

·     University of Michigan Sentiment Jun-Final reported at 50.0 (record low) vs. est. 50.2 and final May 58.4; the current conditions index final June 53.8 vs prelim June 55.4 and final May 63.3; the consumers expectations index final June 47.5 vs prelim June 46.8 and final m=May 55.2

·     New Home Sales for May rose +10.7% M/M to 696KK vs. 588K expected and 629K prior (revised from 591K); Home sales northeast -51.1%, Midwest -18.3%, South +12.8% and West +39.3%; new home supply 7.7 months’ worth at current pace vs April 8.3 months; May median sale price $449,000, +15.0 pct from May 2021 ($390,400)

Sector Movers Today

·     Bank movers; The largest U.S. banks would remain well capitalized in the event of a severe economic shock, the U.S. Federal Reserve said on Thursday in its stress tests. The 34 lenders the Fed oversees with more than $100 billion in assets would suffer a combined $612 billion in losses under a hypothetical severe downturn, but that would still leave them with roughly twice the amount of capital required under its rules. As a result, banks including JPM, BAC, WFC, Citi, MS and GS can use their excess capital to issue dividends and buybacks to shareholders

·     Implications of stress tests: Wedbush said in regional banks, MTB, CFG, HBAN experienced the largest declines in CET1 ratio vs. its 4Q21 CET-1 ratio of 4.1%, 3.0% and 2.5% to an estimated minimum CET-1 requirement for MTB at 9.2%, CFG at 7.9% and HBAN at 7.7%, in our group of regional banks (other banks not covered had more extreme declines, including CS, GS and MS at 7.5%, 5.8% and 4.6%, respectively); Morgan Stanley said Relative to their estimates, the new SCBs suggest that BAC, Citi and JPM will need to keep dividends flat, eliminate buybacks and cut RWAs to generate a CET1 ratio that is above their new required minimum capital ratios

·     Pharma movers; BHC said its chairman Joseph Papa had resigned from the board, effective immediately with john Paulson stepping in; EBS said the FDA accepted for review its application seeking approval of its anthrax vaccine candidate AV7909; CYTK announces date for FDA advisory committee meeting to review new drug application for omecamtiv Mecarbil – FDA has assigned NDA a prescription drug user fee act (PDUFA) Target action date of February 28, 2023; SNY said its coronavirus booster vaccine, developed alongside Britain’s GSK PLC, has produced successful results against the Omicron variant of the coronavirus in an efficacy study

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines active after CCL posted Q2 adjusted net loss of $1.9B, said cash from operations turned positive in Q2, revenue increased by nearly 50% quarter-over-quarter to $2.4B below the $2.77B estimate and occupancy was 69%, an increase from 54% in prior quarter – said booking volumes for all future sailings were nearly double booking volumes during Q1; BALY announced Friday it has started a Dutch auction tender offer to purchase up to $190M of its shares in cash; big rebound day for discretionary stocks with casinos, travel, theme parks, hotels, and the like all sharply higher.

Stock GAINERS

·     BALY +9%; announced Friday it has started a Dutch auction tender offer to purchase up to $190M of its shares in cash

·     BB +2%; Q1 EPS loss (-$0.05) vs. est. loss (-$0.03); Q1 revs $168M below consensus $208M; non-GAAP gross margin was 63% and GAAP gross margin was 62$; IoT revenue rose 19% Y/Y to $51M with gross margin of 84% and ARR of $94M

·     BHC +14%; said its chairman Joseph Papa had resigned from the board, effective immediately with john Paulson stepping in

·     CCL +7%; posted Q2 adjusted net loss of $1.9B, said cash from operations turned positive in Q2, revenue increased by nearly 50% quarter-over-quarter to $2.4B below the $2.77B estimate

·     FDX +8%; Q4/F22 results were largely in line with expectations. F2023 EPS guidance is 5.5% above consensus and implies 9% to 19% y/y growth

·     SGEN +3%; after the WSJ reported MRK is pushing forward with a potential deal for the biotech company citing people familiar with the matter https://on.wsj.com/3nbYmfA

·     ZEN +27%; confirmed a WSJ report overnight, agreeing to be acquired by an investor group led by leading global investment firms Permira and Hellman & Friedman LLC in an all-cash transaction valued at approximately $10.2 billion with shareholders to receive $77.50 per share

Stock LAGGARDS

·     BAC ; Morgan Stanley said relative to their estimates, the new SCBs suggest that BAC, Citi and JPM will need to keep dividends flat, eliminate buybacks and cut RWAs to generate a CET1 ratio that is above their new required minimum capital ratios

·     BAX ; downgraded to equal weight from overweight at Wells Fargo and cut tgt to $71 from $90 as sees potential downside to Q2 and 2022 sales and earnings

·     CAMP -23%; after posting larger than expected Q1 EPS loss (-$0.34) vs. est. loss (-$0.03); Q1 revs fell -19% Y/Y to $64.7M vs. est. $69.4M; said visibility into product shipments remains uncertain due to the global component supply shortages

·     SRPT ; announced the FDA has placed a clinical hold on SRP-505 for treating DMD because of one serious case of hypomagnesemia

·     TREE -8%; guided Q2 revenue lower at $259-$264M down from prior range of $283M-$293M; sees Q2 adj EBITDA in range of $26M-$29M, below prior range of $35M-$40M and said Q2 variable marketing margin is now seen $88M-$92M from prior $100M-$106M

·     UNH -2%; weakness in managed care/healthcare in rotation out of sector