Closing Recap

Thursday, April 06, 2023

Equity Market Recap

·     Well, the thought that “bad news” is actually “bad news” lasted for a whole two days, as U.S. markets went into the three-day holiday weekend (on light volume) much higher, recovering from morning weakness. Stocks had slipped Tuesday and Wednesday after several economic data points (jobs, services, PMI) came in worse-than-expected, reigniting recession fears. However, following a third piece of softer jobs data this morning, into tomorrows’ monthly nonfarm payroll report, investors bought the morning dip as the S&P 500 moved back above the 4,100 level and the Nasdaq climbed roughly 200-points off the morning lows. There was no news, just another “buy the dip” moment. Estimates for tomorrow’s report are for nonfarm jobs to rise 239K, private payrolls +215K, manufacturing jobs +5K, the unemployment rate to steady at 3.6% and average hourly earnings to rise +0.3% m/m. Given the weakness in data this week, markets rallied in anticipation of a “softer” reading, giving the Fed the room in needs to pause any further rate hikes. Financials were strong with investors preparing for the start of bank earnings next Friday (JPM, Citi, WFC) and regional banks the following two weeks. Treasury yields were steady after declining six-consecutive days coming into Thursday, with the 10-yr down at 3.29% and the 2-yr 3.77% as bond and stock trades continue to bet that the Fed will pause at the May meeting, followed by subsequent rate cuts later in 2023. The Reserve Bank of India kept its key policy rate unchanged at 6.5% – marks the third Central bank to pause rates (joins Australia and Canada). Markets are banking the FOMC will follow suit despite the hawkish tilt they continue to push on markets. Federal Reserve Bank of St. Louis President James Bullard said a recent sharp drop in bond yields will ease headwinds for the US economy stemming from recent turmoil in the banking sector. The Russell 2000 is down 0.5% YTD while the S&P 500 is up 6.5% YTD. This divergence is due to a host of factors: US Big Tech outperformance, a larger Financials weighting in small caps, tighter bank lending standards, and differences in US/non-US revenue mix.

Economic Data:

·     Weekly Jobless Claims fell to 228K, above consensus of 198K, but prior week was upwardly revised to 246K from 198K,000; the 4-week moving average fell to 237,750 from 242,000 prior week; continued claims spike to 1.823M vs. est. 1.699M (prior week revised higher to 1.817M from 1.689M); insured unemployment rate unchanged at 1.3%.

·     U.S. Challenger announced job cuts rose 11.9k to 89.7k in March, rebounding from the -25.2k decline to 77.8k in February. Compared to last March, planned job cuts are up 319.4% y/y versus the 410.1% y/y rate in February.

·     China’s Caixin measure of services PMI rose more than expected in March, lifting to 57.8 from 55.0. The employment subcomponent rose to 54.0 its highest since Nov 2020.

Commodities, Currencies & Treasuries

·     Oil prices close higher with WTI crude gaining $0.09 or 0.11% to settle at $80.70 per barrel, posting a third weekly gain as markets weighed further production cuts targeted by OPEC+ and falling U.S. oil inventories against fears about the global economic outlook. Baker Hughes reported that the U.S. rig count is down 4 from last week to 751 with oil rigs down 2 to 590, gas rigs down 2 to 158 and miscellaneous rigs unchanged at 3.

·     Gold prices slipped -$9.20 to settle at $2,026.40 an ounce. The U.S. dollar was flattish all morning, remaining pressured on expectations the Fed will pause and cut rates by mid-2023. Treasury yields no bounce after falling for 6-straight days coming into the day following a massive pullback in Treasury yields as markets bet on no more rate hikes from the Fed, despite Fed members staying cautious on inflation in recent days.

Sector News Breakdown

Consumer Staples & Restaurants:

·     In beverages: STZ reported Q4 EPS $1.98/$1.99B in sales vs. est. $1.82/$2.02B, raises dividend and guides 2024 EPS $11.70-$12.00 vs. est. $11.68 saying beer sales beat internal targets, while the wine and spirits business expanded operating margins. Bernstein noted for U.S. beer category (STZ ), March volumes were very weak as U.S. beer/FMB/cider posted a -2.3% volume decline for the 12-weeks to 25-Mar-23 (-4.9% 4wk YoY) in Nielsen. Positive price-mix of +6.3% (+5.6% for 4wk trailing) led to +3.9% 12wk trailing value growth (+0.5% for 4wk trailing).

·     In beauty: Piper reiterates ELF as a top idea and are raising tgt to $95 from $90 following impressive results from their Semi-Annual Taking Stock with Teens Survey and an analysis of domestic shelf space opportunity that suggests significant upside potential to current levels.

Retailers:

·     In club retailers: COST said March total comps fell (-1.1%), with U.S. comps down (-1.5%), Canada (-2.4%), other International +2.0%; e-Commerce comp sales fell (-12.7%); overall March comps ex gas/FX +2.6%, U.S. +0.9%, Canada +7.6%, other International +7.6%, and e-Commerce (-11.6%). Shares of WMT, BJ saw early weakness in surprise comp drop.

·     In apparel: LEVI Q1 adj EPS $0.34 vs. est. $0.32 on revs $1.7B vs. est. $1.62B saying they see sequential improvement in inventories as total inventories increased 33% on a dollar basis and 21% on a unit basis over prior year – firm also backs year EPS and revenue outlook; posts gross margin of 55.8% in Q1, co says it is 360 bps below the record level of 59.4% in Q1 2022; BKE reports March comps decline of (-10.1%) and net sales decline of (-9.2%) to $113.4M.

·     In research: Bernstein noted North America and Europe demand robust for Sportswear vs. broader Apparel & Footwear. Sportswear brands and retailers noted a clear benefit from behavioral tailwinds of health and wellness and casualization driving strong Q4 sales, and far more robust current trading into 2023 than seen across broader Apparel and Footwear.

Leisure, Gaming & Lodging:

·     In entertainment: AMC shares rebound and APE shares slide after a U.S. court denied the Co’s request to lift a status quo order, which was necessary to proceed with the conversion of the company’s preferred stock into common shares.

·     In pool/leisure industry: POOL and LESL both upgraded to Buy from Hold at Loop Capital saying their latest Pool survey indicated an FY23 outlook that was better than expected and with Pool shares down 25% since recent highs in early February and LESL down 33%, they think the pullback offers a good buying opportunity.

Energy, Industrials and Materials

·     In energy: SHEL provided a positive 1Q update saying its 1Q adj group operating result forecast is $10.7 billion, 18% higher than its previous estimates, driven by better-than-expected integrated gas and refining results. TELL shares rise on plans to sell land in Louisiana for $1 bln. In Utilities: the WSJ reported Dominion Energy (D) and National Grid (NGG) are exploring selling some of their natural-gas pipeline networks across several states.

·     In chemicals: RPM reported top and bottom line Q3 beat EPS ($0.37 vs est. $0.30) and topline ($1.52B vs. est. $1.47B) but guided 4Q to flat sales vs consensus up 2% and adj EBIT flat to down HSD vs consensus up 4% noting volumes declined but grew in businesses benefitting from increase infrastructure and reshoring spend (SHW moved). In ag chemicals, MOS downgraded to Neutral at JPMorgan and cut tgt to $46 from $60 due to lower expected future projected cash balances due to a likely faster than expected rate of earnings deceleration.

·     In transports; in rails: CNI upgraded to Outperform at RBC Capital and raise tgt to $184 on view that several key drivers to the CN story are turning out to be even better than anticipated – and not fully reflected in shares, in their view. The Baltic Dry Index rises 2.3% to 1,560 in London, up for a Fourth Day as Capesize +4.28% to $16,928, Panamax +2.32% to $15,325, and Supramax 58k tons -0.72% to $12,773. FDX upgraded to Outperform at Raymond James as believe undeniable change is afoot post the company’s recent DRIVE event in NYC that provided better visibility into key transformational changes that are likely set to drive better margins, earnings, and FCF.

·     In aerospace & defense: Wells Fargo previews the quarter, saying they prefer BA, TDG, CACI as think A&D could hold up better than broader industrials into Q1 results, given less exposure to recession concerns. EADSY CEO signed agreements to open a new assembly line in China, doubling its capacity in the world’s second-largest aviation market, while formalizing earlier orders for passenger jets. AL said aircraft investments in quarter totaled about $1.4 bln; as of March 31, Co’s fleet had 437 owned aircraft, 86 managed aircraft. HEI named favorite aftermarket stocks for exposure to aerospace recovery at RBC Capital, though continue to remain cautious on the planned production rate increases for Boeing, and risks around the long-term outlook for demand in China remains a focus.

Financials

Banks, Brokers, Asset Managers:

·     Earnings season right around the corner, and the big banks get things started late next week, followed by regional banks the next two weeks as investors will closely watch deposits and liquidity of big banks. Few analysts weigh in today:

·     Raymond James with several bank rating changes: in large caps, WFC upgraded from Outperform to Strong Buy as see several incremental positive catalysts for the bank going forward. COLB upgraded from Outperform to Strong Buy. Lastly, RNST, TFIN, TRMK downgraded from Outperform to Market Perform while upgrading CMA from Outperform to Strong Buy in Southeast/Southwest banks saying they tend to favor banks with: 1) proven low-cost core deposit franchises with lower L/D ratios and uninsured deposit balances, 2) higher proportions of cash balances/excess liquidity, 3) proven historical credit quality with solid LLR ratios, 4) strong capital bases including AOCI impacts, 5) footprints with strong economic backdrops.

·     KBW Inc also with handful of rating changes in banking sector: FITB, COLB, and BPOP upgraded to Outperform (from Market Perform), and HBAN to Market Perform (from Underperform), while downgrading AUB to Market Perform (from Outperform) and PNC to Underperform. Says more broadly, they remain market weight U.S. banks with 27% fewer Outperform-rated stocks year over year. Recommend investors take an overweight position in WAL, FCNCA, CADE, MCB, and TBBK, and a pair trade of overweight USB and underweight PNC.

Bitcoin, FinTech, Payments:

·     In payment processors 1Q preview, Bank America said among FIS, they believe GPN has the best risk/reward ahead of 1Q earnings as see material upside potential for multiple. Expect solid execution at FISV to persist, with very little direct exposure to regional bank crisis. MA SpendingPulse data showed U.S. Retail sales excluding automotive were up +4.7% year-over-year (yoy) in March. MQ initiated with Buy rating at Deutsche Bank saying the card issuing and processing platform holds the keys to embedded finance, one of the hottest trends in fintech.

Technology

Internet, Media & Telecom

·     In Internet: PINS mentioned positively in Barron’s, saying the stock is now a buy; BABA announced launch of its own ChatGPT-style tools, which could be unveiled at an upcoming conference on 4/11; GOOGL shares have bounced of late after the company recently claimed its supercomputers that it uses to train its AI models are faster and greener than comparable systems from NVDA; RBC capital said Internet qtrly SMB ad checks point to at least an in-line Q1 & some likely upside starting out Q2.

·     In media: FOXA downgraded to Hold from Buy saying they believe that a recent adverse ruling for Fox in the Dominion Voting Systems case raises downside risk for FOXA shares. In telecom: Oppenheimer adjusts VZ model to reflect lighter equipment trends, as upgrades are low for VZ and the entire industry. VZ is slowly turning around its Consumer Business to stabilize market share, which will likely take another one-to-two years, but likely + signs this quarter. For TMUS the company adjusting model to account for low upgrade volumes that will likely drag Equipment revenues below our overly aggressive estimates.

Semi’s, Hardware & Software movers:

·     In optical: LITE lowered its Q3 revenue outlook to $380M-$384M from $430M-$460M and below consensus of $444.15M saying it experienced order cancellations "due to customer Inventory management” which represented more than 10% of their 2Q revenue (which analysts noted was CIEN), sending shares of the telco equip/optical space lower (INFN, MTSI, COHR). CIEN later this morning pared losses after reaffirming Q2 and Full year guidance.

·     In Storage: Wedbush upgraded PSTG to outperform and downgraded SMCI to underperform citing the fundamental prospects of both firm’s vs expectations and valuations on an absolute basis with the two companies having significantly different business models.

·     In semiconductors: SK Hynix double upgraded to Buy at Bank America on cyclical bottom, turnaround, upturn through 2023/24/25; $5bn+ funding well executed YTD (no credit crunch).