Closing Recap

Monday, April 03, 2023

Index	Up/Down	%	Last
DJ Industrials	326.77	0.98%	33,600
S&P 500	15.10	0.37%	4,124
Nasdaq	-32.45	0.27%	12,189
Russell 2000	-0.17	0.01%	1,802

 

Equity Market Recap

·     After closing out 1Q with big gains for stocks, Tuesday opened the new month and quarter mixed as technology lagged in the S&P along with REITs (as Nasdaq finished lower), while a spike in oil prices boosted energy stocks, along with Staples and Healthcare posting solid advances. The S&P 500 ignored the fallout from banking woes in Q1, recording a +3.5% gains last month, leaving the index in positive territory for 1Q23 (+7%). Stocks ended a volatile quarter solidly in the green, thanks to a healthy rally among tech companies as the Nasdaq composite climbed nearly 17%. Still to start the month, volumes were light and momentum was generally to the upside with stocks ending the day closer to their highs. A round of weaker economic data (ISM Manufacturing, Construction Spending) adds to market belief that the Fed will soon pause rate hikes and begin cutting despite inflation staying stubbornly high. There was weaker data overseas as China’s Caixin Manufacturing PMI came in at 50, missing the 51.4 estimate, while Japan’s Manufacturing PMI came in at 49.2, the fifth month of contraction. Manufacturing PMIs remain in contraction in the Euro-Area (47.3), France (47.3), Germany (44.7), and the UK (47.9). The broader picture shows a struggling US economy as manufacturing misses, slowing earnings (earnings season gets underway in 2-weeks), debt ceiling concerns, and financial stability fears given the recent bank failures (SIVB, SBNY) but stocks just continue to push higher.

·     U.S. stock markets continue to push higher, with the S&P 500 (SPX) topping the 4,100 level on Friday and held it again this morning despite several market strategists expressing caution. JPMorgan’s Matejka said today in a note “one should be Underweight stocks from here. The main disconnect that the market will need to grapple with revolves around the hopes of a soft landing, without much pain to profits, Labor, or credit, but at the same time the expectation that inflation will come down quickly. Morgan Stanley’s Mike Wilson, who has been bearish for over a year, said, “with major stock indices holding up in the face of deteriorating growth and liquidity, we think the underlying message from broader markets is still defensive. The bigger question for investors is whether large cap tech fits that bill and can it continue to hold the S&P 500 up.”

 

Economic Data:

·     ISM manufacturing activity slumped to the lowest level in nearly three years in March, as PMI falls to 46.3 last month, the lowest reading since May 2020, from 47.7 in February and below ests 47.5. It was the fifth straight month that the PMI remained below the 50 thresholds, which indicates contraction in manufacturing. ISM new orders sub-index fell to 44.3 last month from 47.0 in February; supplier deliveries slipped to 44.8 from 45.2 in February.

·     Feb construction spending fell (-0.1%) vs. consensus for an unchanged reading; Feb private construction spending unchanged, public spending (-0.2%).

·     March PMI Manufacturing Index: 49.2 vs. 49.3 consensus and 47.3 in February.

 

Commodities, Currencies and Treasuries

·     Oil prices jump after OPEC+ announced an unexpected crude oil production cut of about 1.15 million barrels a day starting in May, with WTI crude rising $4.75 to 6.28% to settle at $80.42 per barrel. The group had previously stated that it would hold supply steady. Saudi Arabia will cut output by 500,000 barrels per day. Kuwait, the United Arab Emirates, Iraq, Algeria, and Kuwait are among members that will also cut. Russia said its already-planned March-June cut will now last through 2023. The Financial Times reported that people familiar with Saudi Arabia’s thinking say Riyadh was irritated last week that the Biden administration publicly ruled out new crude purchases to replenish SPR. https://on.ft.com/40WREfk Note oil prices lost about -5.7% in 1Q and was down -1.38% for March overall marking a 5th straight down month, longest streak since 2015 when it fell 7-straight months. Gold prices rise $14.20 to settle above $2k at $2,000.40 an ounce ($2,008 was high) helped by another pullback in the dollar and Treasury yields.

·     The U.S. dollar extends its fall slightly after U.S. manufacturing activity data showed further contraction in March as the ISM fell to 46.3 in March from 47.7 in February, below 50 for a 5^th month signaling a contraction in sector activity. The prices index fell to 49.2 in March from 51.3 in February. The dollar index (DXY) fell below 102 after the survey from 102.260 beforehand.

·     U.S. Treasury yields retreated the ISM report as well, boosting expectations that the Fed will be forced to cut interest rates as the economy slows. The yield on the 2-yr yield fell -6bps to the 4% level while the 10-yr dropped -6bps to 3.42%. Yields had risen earlier after a surprise cut in OPEC+ crude production announced renewed market concerns about high inflation.

 

 

Macro	Up/Down	Last
WTI Crude	4.75	80.42
Brent	5.04	84.93
Gold	14.20	2,000.40
EUR/USD	0.0058	1.0897
JPY/USD	-0.46	132.33
10-Year Note	-0.056	3.434%

 

 

Sector News Breakdown

Consumer

Autos:

·     All about monthly delivery and production numbers in the electric vehicle sector today: TSLA delivered 422,875 vehicles, up 36% y/y, but compared with analyst expectations for 430,008 vehicles, according to Refinitiv data. TSLA said Q1 production was 440,808 units; produced 421,371 Model 3 and Y vehicles in Q1 and delivered 412,180. RIVN Q1 Deliveries total 7,946 vehicles, production of 9,395 vehicles. Both are 7% lower than Q4 2022 levels.

·     In Chinese EV monthly updates: LI said it delivered 20,823 vehicles in March 2023, an increase of 88.7%; Q1 deliveries to 52,584, up 65.8% y/y; cumulative deliveries of Li auto vehicles reached 309,918 as of end of March. NIO delivered 10,378 vehicles in March, +3.94% from 9,985 a year ago but -14.6% from 12,157 in February; delivered 31,041 vehicles in the first quarter, slightly above the lower end of its previous guidance range of 31K-33K; XPEV delivered 7,002 vehicles in March, up 16.51% from 6,010 in February, but down 54.57% from 15,414 y/y.

·     The $1,000 auto loan payment is becoming more common. Some 17% of people who bought new cars in the first three months of the year have an auto loan payment of $1,000 or more, the highest share on record, according to car-shopping website Edmunds. The share was 6.2% in early 2021 and 10% in early 2022. https://on.wsj.com/40THFrh

·     In auto dealership headlines: LAD has officially claimed the top spot as LARGEST dealer group in the U.S., surpassing AN which had been #1 dealer from 1997-2021. @GuyDealership notes Lithia’s 2022 by the numbers: 296 dealerships, 679,518 total units sold and $28,506,585,950 in total revenue.

 

Retail, Consumer Staples & Restaurants:

·     Macy’s (M) was upgraded to Overweight at JPMorgan citing a favorable risk/reward setup noting on valuation, M is trading at 2x our FY24 EBITDA, which stands ~50% below the Department Stores/Mall-based Specialty average (& 5.0x pre-pandemic multiple) with the 30% macro-driven pullback in shares over the past 60 days (vs. SPX -2%) creating an attractive entry point.

 

Leisure, Gaming & Lodging:

·     In casinos: WYNN, LVS, MGM shares rise early after Macau data this weekend showed Macau’s gross gaming revenue (GGR) surged 247% in March, topping estimate of a 205% y/y increase as GGR reached 12.7 billion patacas ($1.6 billion), best month for Macau casinos since January 2020.

·     In travel: AirDNA data suggests a 1Q nights miss for ABNB vs. Street expectations of ~20% y/y growth according to Deutsche Bank. That said, while ADR growth continues to decelerate, the pace of deceleration continues to be less pronounced than feared with AirDNA pointing to 1Q GBV that may still be in-line for Airbnb.

·     In ride hailing: Needham said its Mobility Tracker highlights increasingly aggressive pricing by LYFT throughout 1Q23 with March cheaper than UBER 71% of the time, relative to 44% in Dec. This data, combined with the change in LYFT CEO brings up the question of whether these moves will start a price war or lead to a more benign scenario of LYFT stabilizing/regaining mkt share.

·     In the Golf industry (DKS, GOLF, MODG), Stephens said Golf equipment spending moderated y/y again in February, but remains strong vs. 2019, supported predominantly by pricing growth.

 

Homebuilders, Building Products, Home Furnishing:

·     For homebuilders: CNBC noted unexpectedly strong home sales at the start of this year just reversed a sharp, several-month decline in home prices. Mortgage rates are behind the swing. Home prices nationally rose 0.16% in February, when seasonally adjusted, according to Black Knight. That is the strongest one-month gain since May of last year. Home prices are now 2.6% below their peak last June.

 

Energy

·     The Financial Times reported, citing people familiar with Saudi Arabia’s thinking, that Riyadh was "irritated" by comment that the US would not refill the SPR this year. In any case, it came on top of stress in the financial sector that had dragged oil prices as low as $64 in March. Energy Secretary Jennifer Granholm last month said it would be difficult for the U.S. to take advantage of low oil prices to replenish the SPR because of maintenance at two of the four sites https://on.mktw.net/3JZxFpA ; OVV said it was acquiring oil E&P assets in the Permian Basin controlled by private equity firm EnCap Investments in an about $4.3 billion cash and stock deal. The assets being bought are in the Midland portion of the Permian Basin in Texas.

·     In solar: Morgan Stanley initiated NOVA at OW, ENPH at EW; Downgraded PLUG to EW and FSLR to UW saying they remain constructive on l-t renewables growth, but near-term risks are elevated for several clean tech stocks.

 

Financials

Banks, Brokers, Asset Managers:

·     Generally quiet on banking headlines after long weekend: IBKR said 2.055 million Daily Average Revenue Transactions (DARTs)1, down 16% y/y and quarter-on-quarter decrease of 3%; ended the year with client assets of $343.1 billion, down 4% y/y and -3 m/m; attention turns to banking earnings in about two weeks, looking into deposits and liquidity. USB was upgraded to Overweight at Stephens. BX shares slumped after the company has again blocked withdrawals from its $70 billion real estate income trust in March.

·     In FinTech: MQ downgrade to Equal Weight at Morgan Stanley and cut tgt to $4.50 from $8 saying the co is working through a multitude of headwinds over the next ~12 months, including SQ contract renewal, non-SQ stagnation, gross profit growth uncertainty, and path to profitability. PYPL and LYV sign multi-year deal to expand simple and secure payments to fans buying tickets worldwide.

 

REITs:

·     In M&A news: EXR will combine with LSI in a $12.4B deal; according to executives, Life Storage stockholders are set to receive 0.8950 of an Extra Space share for each share they own, or $145.82 https://bloom.bg/3ZBa6Jx ; in research, SLG upgraded to Outperform at BMO Capital noting SLG is the third most-shorted US REIT (17.5% of float) as concerns intensify over office demand and bank exposure to commercial real estate – coupled with SLG’s high leverage and declining earnings. However, they believe it is oversold, and upgrade to Outperform.

 

Insurance & Financial Services:

·     In insurance: ALL upgraded to Outperform at William Blair saying shares are primed for good near- and long-term upside as recent indications provide increased conviction that the combined ratio can return to 95% by 2024; this should translate into $15.00 of operating EPS.

·     In payment services: ADP, PAYX both downgraded to Underperform from Neutral at Bank America saying expectations of rising unemployment and lower rates could be a dual headwind for ADP and PAYX; and cyclical dynamics likely to drive top-line deceleration over next 12 months, creating risk for multiples.

 

Healthcare

Biotech & Pharma:

·     APLS shares rose after Bloomberg reported the co is said to attract takeover interest according to Bloomberg; larger drugmakers are eyeing $7.6 billion company: https://bit.ly/40yXNij

·     ASND shares slide after the FDA said it has found deficiencies in the company’s new drug application for TransCon PTH, its candidate for the treatment of hypoparathyroidism.

·     BNTX and DualityBio form global strategic partnership to accelerate development of differentiated antibody-drug conjugate therapeutics for solid tumors.

·     CTLT downgraded to Equal Weight from Overweight with a $70 price target at Barclays saying continues to favor the business long term but moves to the sidelines given the "limited visibility" through 2024 as implied Q4 guidance "seems aggressive."

·     HRTX CEO steps down; appoints Craig Collard as new CEO effective today.

·     PRDS said that pomotrelvir didn’t meet the primary endpoint in its Phase 2 clinical trial for the treatment of mild-to-moderate Covid-19 in test-positive, symptomatic, otherwise healthy, vaccinated adults without risk factors for developing severe disease.

·     YMAB downgraded to Neutral at Guggenheim and remove $12 tgt saying given current progress with the GD2-SADA clinical trial, they remain intrigued by the SADA approach, but grow increasingly cautious given the rate of patient recruitment.

 

Healthcare Services & MedTech movers:

·     CMS released proposed Medicare Hospice provider rate updates for FY2024 at +2.8%, reflecting a +$720 million projected increase in overall payments. This reflects a slight increase from FY2023 proposed Hospice rates of +2.7% but below the final update of +3.8%. Stephens said according to data, this is the highest proposed Medicare Hospice rate update since FY2008 at +3.3% and said covered names with direct Medicare Hospice exposure: ADUS, AMED, AVAH, PNTG, UNH.

·     In medical equipment: HSKA rises after the co entered into a definitive agreement with Mars, which will acquire the provider of advanced veterinary diagnostic and specialty products for $120.00 per share https://on.mktw.net/3ZANUiG . In research, Citigroup posts 1Q23 Preview saying easy comps, better macro for the sector as open a Positive Catalyst Watch on EW and ZBH, a Negative Catalyst Watch on MDT and upgraded SILK to Buy from Neutral, while reiterate Top Picks on DXCM and SYK, but remove it from PEN given the stock’s 25% YTD appreciation. ILMN was ordered by the FTC to divest Grail Inc., saying that “the deal would stifle competition and innovation in the U.S. market for life-saving cancer tests.”

·     In Life Science Tools & Diagnostics Preview at Citigroup: upgrade DGX from Sell to Neutral saying their negative call has mostly played out and heading into 1Q23 earnings season in Life Sciences, Diagnostics, and CROs they see an increased level of investor focus on visibility into 2H23 given most of the guidance within their coverage universe remains back-half weighted and dependent on several variables to hit numbers. Overall, in Tools they prefer to own names with cleaner FY23 setups, citing BRKR and PKI as preferred names for the prints. In Diagnostics and CROs our preferred names are EXAS and ICLR, respectively.

 

Industrials & Materials

Transports

·     In airlines: Raymond James updated estimates and introducing 2025E for U.S. airlines and upgrading ALK to Strong Buy and SKYW to Market Perform. Says 2023 estimates mostly move higher primarily due to a lowered fuel price forecast, albeit still above the forward curve. Given the high level of uncertainty, they continue to reflect a moderation in demand despite no signs so far, albeit slightly pushed out vs. prior view.

·     In railroads: Bank America previews 1q saying CSX, CNI, CP service solid; see miss at NSC; slight at CP. Notes the first quarter was marked by weaker than expected carloads at most rails (flat volumes, down from +2.3% in 4Q22, and below their +3.3% Target), while service issues continued at a few (exacerbated by Norfolk Southern’s derailment in E. Palestine, OH).

 

Materials, Metals & Mining

·     In metals: CLF said it is increasing current spot market base prices for all carbon hot rolled, cold rolled and coated steel products by a minimum of $100 per net ton, effective immediately with all new orders. Cliffs’ minimum base price for hot rolled steel is now $1,300 per net ton. TECK shares jumped after saying it received and unanimously rejected an unsolicited and opportunistic acquisition proposal from GLNCY. https://on.mktw.net/3JZRZam

·     In chemicals: PPG raises Q1 adj EPS view to $1.52-$1.58 above consensus of $1.18 saying sales volume performance was led by aerospace and automotive original equipment manufacturer coatings businesses.

 

Technology

Internet, Media & Telecom

·     In entertainment: Endeavor Group Holdings Inc. (EDR agreed to combine with WWE to form a new, publicly listed company to trade under the symbol TKO, with a combined enterprise value of $21.4 billion. https://on.mktw.net/3K8oNOA . The new publicly listed company to be 51% owned by Endeavor and 49% by Existing WWE holders.

 

Hardware & Software movers:

·     In 3D space: SSYS shares slip early as Stratasys board unanimously rejects Nano Dimension (NNDM) revised unsolicited proposal of $19.55/share.

·     In AI sector: Raymond James said they took a side-by-side look at the latest consumer-facing AI products from MSFT and GOOGL, the AI-enhanced Bing search engine and Google Bard. In all, they found Bing+AI to be a bit more likely to provide useful and correct answers for fact-based and task-based queries, but neither was perfect.

 

Semiconductors:

·     In research: INTC was upgraded to Market Perform from Underperform at Bernstein and upped tgt to $30 from $20 saying while Intel’s situation still looks poor, the Co’s medium-term set-up is finally getting better. At Citigroup, the firm downgraded ENTG, WOLF to Neutral from Buy noting the semi-equipment group is +34% vs SP500 +13% since early 4Q22 and they continue to believe the group bottomed in October last year. That said, we believe the easy money has been made and remain long on top picks AMAT and components (top picks AEIS).

·     WSJ reports Japan will follow the US and the Netherlands in restricting advanced semiconductor equipment exports to China.