Closing Recap

Wednesday, April 06, 2022

Equity Market Recap

·     Volatile, choppy and trappy maybe the best way to describe today’s market action. After a morning of relentless selling pressure for a second straight session, U.S. stock markets spiked off lows following the Fed March policy meeting minutes at 2:00 PM, quickly paring losses. A quick and violent downturn shortly thereafter put major averages at new intraday lows less than 30-minutes later as investors parsed thru the meeting commentary. The volatility was not done however, as markets resumed strong upward momentum, moving to fresh intraday highs as the S&P 500 reclaimed its 200-day moving average of roughly 4,485, moving above 4,500 after hitting lows around 4,450 at its lowest. Federal Reserve officials strongly considered raising rates by a half-percentage point and neared agreement on a plan to reduce their bond holdings as part of their most aggressive effort in years to curb price pressures, according to the minutes.

·     Some key bullet points: The S&P 500 index dropped below its 200-day MA support after 9-days above; the Dow Jones Industrial Average breaks below 50-day MA support for first time since March 24; Dow Transports fall a 6^th straight day and now down around 20% from last year highs; the 10-year yield hits highest levels since March 2019 (2.66%); large cap tech weakness AMZN, MSFT, TSLA, GOOGL and AAPL weakness dragged the Nasdaq down over 2%

·     Stock & Sector movers: Dow Transports extend losses, falling a 6th day (down 13% during stretch), hitting its lowest levels since late March; CAR tumbles after analyst downgrade; in airlines, ULCC falls after JBLU makes rival bid for SAVE; several utilities hitting 52-week highs again in rotation into defensive assets; homebuilders fall to lowest since Jan 2021 as mortgage rates climb above 5%, highest since 2013; GOOGL SHOP AMZN TSLA ROKU ETSY SNOW large cap tech leads declines on rising rate fears/recession concerns to slow growth; WYNN EXPE MGM NCLH BKNG weakness in travel and leisure related stocks as rising fears of a recession in the U.S., coupled with soaring borrowing costs and fuel hurt sentiment.

FOMC/Economic Data:

·     FOMC Policy Minutes showed: Federal Reserve officials "generally agreed" last month to trim $60 billion per month from the U.S. central bank’s Treasury holdings and $35 billion from its holdings of mortgage-backed securities, with the amounts phased in over a period of three months "or modestly longer," according to minutes of the March 15-16 policy meeting. Participants also "generally agreed" that after the balance sheet runoff was "well underway" it would be appropriate to consider outright sales of MBS. No final decision was made, the minutes said, but officials made "substantial progress" and could "begin the process of reducing the size of the balance sheet as early as after the conclusion" of the May 3-4 policy meeting.

·     No major U.S. economic data today outside of the FOMC Minutes but Chinese Caixin services PMI falls to a 2-year low of 42.0, well below the forecast 49.7 and prior reading of 50.2. The new business sub-index fell in the services sector likely on the back of tightened restriction measures in March according to Caixin

Commodities

·     Oil prices with an about face lower, closing -$5.73 or 5.62% to settle at $96.23 per barrel for its lowest finishing level since March 16^th as investors dumped riskier assets. Prices reversed lower as the International Energy Agency’s Executive Director tweeted that the IEA will release 120 million barrels from its oil reserves. The release includes 60 million from the U.S., as part of that nation’s previously announced overall draw from its Strategic Petroleum Reserve. Prices rose initially as the threat of new sanctions on Russia raised supply concerns, countering fears of weaker demand following a build in U.S. crude stockpiles and Shanghai’s extended lockdown. Gold prices slip -$4.40 to 0.2% to settle at $1,923.10 an ounce.

Currencies & Treasuries

·     The U.S. dollar was slightly higher after sharp gains the previous session following hawkish comments from Federal Reserve’s officials Brainard and Harker earlier today. The buck touched fresh 2-year highs on Tuesday after Fed Governor Lael Brainard said she expected a combination of rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a "more neutral position" later this year. Further tightening would follow as needed, she added. On Tuesday, the index touched its highest since May 2020 at 99.759, down around 99.50 today. The Russian ruble bounced back and is now trading just below its pre-war level. The euro was steady above 109 versus the dollar after falling to its lowest level in a month (1.08735).

·     Treasury yields jumped a 4^th straight day to fresh 3-year highs to start the day before paring gains and finishing off their best levels. Growing expectations for rapid removal of stimulus from the Federal Reserve and a more aggressive interest rate hike cycle boosted the 10-year to highs of 2.66% today before paring gains. The U.S. 2-year yield hit its highest since January 2019 above 2.54%, the 5-year yield its strongest level since December 2018 above 2.75%.

Sector News Breakdown

Consumer

·     Auto sector; APTV, LEA upgraded to Buy from underperform, ADNT, VC upgraded to Neutral on production volume recovery; Downgrade CRMT to Underperform from Buy, KMX to Neutral from Buy and CAR downgraded to Underperform from Neutral on valuation – notes that >80% of our coverage is rated Buy or Neutral – Despite the cut to their volume forecasts (more significant in 2022E, but also modest for 2023-2025E), continue to believe that the near-term volume pressure is setting up for a more robust capital goods replacement cycle over the mid/long-term; RIVN said it produced 2,553 vehicles at its manufacturing facility in Normal, Illinois in the first quarter and said it delivered 1,227 vehicles in the quarter; auto supplier tgts cut at Morgan Stanley with APTV to $170 from $200, as sees headwinds from inflation, semiconductor shortages, AXL to $14 from $16, expects hit from volatile production schedules and LEA to $160 from $175, as flags output being hurt by indirect impact of commodity costs due to the Russia/Ukraine conflict; Electrek reported that TSLA now expects Gigafactory Shanghai shutdown to extend to at least Friday – missing out on over 24,000 EVs

·     Housing & Building Products; homebuilders remain in downtrend (LEN, MTH, KBH, DHI, TOL) as surging Treasury yields impacting mortgage rates, as 30-yr fixed rises above 5% for first time since 2013 and impacting industry metrics; the U.S. mortgage market index falls 6.3% in latest week as per the MBA while purchase index falls 3.4% and refi’s plunge nearly 10%

·     Restaurants & Consumer Staples; SMPL 2Q EPS of $0.36 vs Consensus $0.28 and EBITDA of $54M vs $46M, with sales of $297M vs Consensus $275M. North America was +32% and was mostly driven by volume gains and raises FY sales guide to +13-13% vs prior +12-14% and Consensus +13%; PLAY announces acquisition of Main Event for $835 Million; Chris Morris to become CEO of combined entity upon closing; BYND shares dropped as Piper survey showed teens’ interest in plant-based meat is slipping (43% open to trying/consume from 47% in Fall survey)

·     Casinos, Gaming, Lodging & Leisure sector; weakness in travel and leisure related stocks WYNN, EXPE, MGM, NCLH, BKNG as rising fears of a recession in the U.S., coupled with soaring borrowing costs and fuel hurt sentiment; ELYS said will license customized sportsbook platform for Lottomatica for B2C activities, with focus on North American market

Energy

·     Energy stock movers: oil prices were volatile between gains and losses, but majors such as CVX and XOM outperformed rest of energy complex; shares of OXY, HES, EOG, VLO also among leaders; Weekly inventory data showed: the API said weekly crude inventories rose 1.1M barrels, crude inventories at Cushing rose 1.8M barrels, gasoline inventories fell -500K barrels and distillates rose 600K barrels. The EIA said weekly crude stocks up 2.4M barrels in latest week vs forecast of -2.1M bbl draw and inventories of crude in U.S. Strategic petroleum reserve off 3.7Mbarrels to 564.58 mln; gasoline stocks off 2.0M barrels to 236.79M

·     Refiners; VLO tgt raised to $108 from $98 at Piper and increases 1Q estimates as refining cracks continue to surge, and despite anticipated impacts to near-term capture; Utilities generally higher as the defensive sector continues to see several 52-week highs; in renewables, ARRY reported a beat on the top and bottom line for Q4 with mixed guidance as Cowen noted the revenue guidance which was above consensus does not include any delays from the AD/CVD case which SEIA notes could amount to 8GW

Financials

·     Bank movers; no relief for big banks, insurance related stocks despite the 10-year yield hitting its best levels since March 2019 and 2-yr best levels in 3-years as well; analysts providing previews of banks into start of earnings next week, with trading revs expected to be higher but investment banking revs expected to disappoint after a lousy quarter of IPOs; in research, Raymond James downgraded a handful of names BANC, UCBI, PCB; in advisers, AMP downgraded to Underweight from Neutral at Piper saying with ~85% of earnings coming from market sensitive businesses, believe drag from financial market volatility on fee levels will not be more than offset from the lift higher in the Fed funds rates’ benefit to cash sweep fees

·     Insurance; Goldman Sachs said they prefer underwriters where renewal pricing is significantly in excess of loss cost (Focus on: AIG, WRB, CB) over underwriters where inflation could slow margin improvement (TRV, HIG). In Life Insurers, focus on MET as see a combination of fading mortality and Covid hospitalizations giving way to better results for the remainder of 2022.

·     Bitcoin, FinTech & Payments; crypto assets were sharply lower with broader stock market pullback as Bitcoin drops to $44K, down over 3% while Ethereum declined over 5% to $3,250; shares of other crypto assets slumped in sympathy

·     Consumer Finance; the WSJ reported banks are debating a plan to bring Zelle to the checkout at big retailers. The money-transfer service boomed during the pandemic, when people avoided ATMs and replaced cash and checks with digital money transfers. At the center of the debate is whether it is in the banks’ best interest to promote a payment option that competes with card networks Visa (V) and MA upgrade from Neutral to Overweight at Piper ahead of 1Q22 earnings season saying it is experiencing strong credit performance with 30D+ DQs barely retreating to pre-pandemic levels and the company has indicated loan growth is accelerating, which ultimately should support NIM. These positive trends clearly aren’t priced into the stock; MKTX shares tumbled a second day after monthly metrics as emerging markets momentum overshadowed by weaker fee capture and credit spread compression

Healthcare

·     Pharma movers; general strength in pharma, led by PFE (BMO positive), ABBV, and biotech AMGN, REGN; LLY named a top pick at Morgan Stanley, says it has best product outlook in pharma as assumed with an OW rating and tgt to $364 from $265; said LLY has the most robust new product cycle (and hence growth) outlook in Pharma as over the next 2 years the company could launch five new drugs; JAZZ was downgraded to Neutral at Goldman Sachs post recent outperformance as we feel most of the upside is now captured in its present valuation

·     In cannabis, TLRY reported a swing to profit in Q3, benefiting from a rise in revenue rising to $151.9M from $123.9M a year ago, benefiting from wellness revenue, which contributed $14.7M; said cannabis revenue rose to $55M from $41.7M

·     Biotech movers: BTAI said the FDA approved its lead drug, IGALMI, for treatment of mild, moderate, or severe agitation associated with schizophrenia or bipolar disorder in adults; vaccine names lagged early MRNA, NVAX, BNTX after the FDA said that currently available COVID-19 vaccines are not well matched against the BA.2 sub-variant of Omicron, although booster doses help protect against severe outcomes

·     Healthcare Services, MedTech Equipment; SYK shares decline following a “short” call from SprucePoint Capital saying debt-fueled acquisition roll-up is hitting a wall and no longer producing an attractive ROIC https://www.sprucepointcap.com/stryker-corp/ ; CANO was downgraded to underweight at Piper saying it has underperformed the group, looks cheap relative to OSH and CMAX and is the object of an ongoing activist campaign…but still cannot recommend the stock at current levels

Industrials & Materials

·     Aerospace, Industrial & Machinery; in multi-industry, Goldman Sachs said they are lowering EPS ahead of C1Q EPS, favor self-help (JCI, RRX) and long cycle (EMR, GE); the firm sees the most downside risk to C2Q EPS for FLS and 2H EPS for ROK given increased geo-political risk and cost curves rising since companies last reported earnings; BA announced it has awarded a contract to the three biggest U.S. cloud-computing companies AMZN, MSFT and GOOGL

·     Transports; in airlines, JBLU made an offer to acquire SAVE for roughly $3.6 billion, or $33 per share, throwing a wrench into Spirit’s plan to merge with ULCCFrontier announced plans in February to buy Spirit for $2.9 billion in cash and stock; overall transport index tumbles a 6^th straight day, falling over 550 points at worst point

·     Metals & Materials; RPM Q3 EPS of $0.38 tops the $0.30 estimate as sales of $1.43B narrowly top consensus but warns of hit to operations in Q4 due to supply chain disruptions and raw material shortages; LNDC 3Q adj EPS ($0.08) vs est. ($0.01) on revs $53.1Mm vs est. $48.4Mm; reiterates FY 22 guide; SCHN reports in-line Q2 results in steel space; VALE agreed to sell assets in its Midwestern System group of mining operations and will receive about $150 million; VNTR said U.S. court granted judgment in favor of venator for $75 mln and rejected TROX’s counterclaim for damages

Technology, Media & Telecom

·     Semiconductors; the Philly semi index (SOX) dropped nearly 3% at worst below 3,200 as QCOM breaks March lows, and weakness across board; NVDA mentioned cautiously at Cleveland Research saying demand is more mixed and softer for gaming PCs. As a result, they see less upside potential in the near term; INTC said it has suspended all business operations in Russia following its earlier decision to suspend all shipments to customers in Russia and Belarus

·     Hardware, Software, Component movers; TUFN will be acquired by Turn/River Capital in an all-cash transaction that values Tufin at ~$570M, with holders to get $13 per share, a 44% premium https://bit.ly/3KdYVj5 ; SGH reported F2Q results that came in above consensus estimates, and at/above the high-end of prior guidance ranges while Q3 outlook was more inline

·     Internet, Media & Telecom movers; GOGO will replace FLOW in the S&P SmallCap 600 effective prior to the opening of trading on Friday, April 8; DWAC shares slide a 9^th straight day, falling recently on competition fears as Elon muck joining TWTR board