Closing Recap

Wednesday, April 27, 2022

Equity Market Recap

·     U.S. stocks finish mixed, well off overnight highs, and remain on track for weekly declines as investors brace for another round of corporate earnings. The Nasdaq is coming off its worst trading day since September 2020 and both the Nasdaq and S&P are on track for a 4^th negative week in a row. Prices rose early Wednesday in choppy trading, clawing back some of their losses after selling off sharply a day earlier as investors digest earnings reports, weigh concerns about inflation, as well as the prospect of rapid policy tightening by the Federal Reserve and the spread of Covid-19 in China. Technical factors have also been cited for the recent market breakdown as we approach January lows for the S&P. On Tuesday, the Nasdaq closed at its lowest level since December 2020, wiping out the gains it notched in 2021, and down 20% from its all-time highs (by definition “bear market territory” while the Smallcap Russell 2000 fell to its lowest level since December 2020. Shares of MSFT and Visa helped the Dow rally (BA results hurt the index), while tech was mixed behind weak results from GOOGL (ahead of FB earnings tonight).

·     The S&P 500 has dropped towards a test of its Q1 lows in the 4,100-4,200 range. Oppenheimer noted this morning that while oversold conditions (daily RSI = 35) offer firepower for a bounce, we think rally attempts are likely to be lackluster until our market bottom checklist gets closer to completion. Whether now or later, we think more is required on the downside to be considered market capitulation, including less than 20% of NYSE stocks above their 200-day average. For the S&P, we think upside is limited to 4,400 (50-day average), and see downside risk to 3,800 (38% retracement of 2020-2022 bull market) over the coming months.

Economic Data:

·     U.S. Advance March goods trade balance -125.32 billion dollars; U.S. Advance March wholesale inventories +2.3%; U.S. Advance March retail inventories excluding autos +2.3%

·     Pending Home Sales Change MoM Actual -1.2% (vs. Forecast -1%, Previous -4.1%) and Pending Homes Index Actual 103.7 (vs. previous 104.9)

Commodities, Currencies & Treasuries

·     Oil prices edge higher, with WTI crude rising $0.32 to $102.02 per barrel and Brent up $0.33 to $105.32 per barrel as ongoing concerns about tight worldwide supply, was underscored by another drawdown in U.S. distillate and gasoline inventories. Gold prices slide -$15.40, or 0.8%, to close at $1,888.70 an ounce. The euro falls to a 5-year low against the dollar below 1.06 on fears Europe weakening further, while the U.S. dollar index rises above 103 to its highest since Jan. 2017. Bond prices rallied initially, sending Treasury yields lower (below 2.72%), but later rebounded back to 2.80% (still down from highs around 3% late last week. Bitcoin extends rally, up over 3% topping $39K earlier.

Sector News Breakdown

Consumer

·     Retailers; MAT has held ‘informal talks" with private equity firms that include Apollo Global Management (APO) and L Catterton about a potential sale, The Wall Street Journal reported, citing people familiar with discussions https://on.wsj.com/3Mzw61a ; SKX raised its full year top-line ($7.2-$7.4B vs. prior $7.0-$7.2B) and EPS guidance ($2.75-$2.95 vs. prior $2.70-$2.90) even with the 2Q outlook coming in below the Street ($0.50-$0.55 vs. Street at $0.72); CRI double downgrade to Underperform at Bank America as see risk to margins from a more normalized promotional environment; HELE, SHOO also among earnings movers

·     Auto sector; GM reported somewhat better-than-expected 1Q22 results on strong used and new car prices, and more surprisingly reiterated its 2022 Ebit guidance, despite considerably higher commodities cost; LCID announced a deal with the Government of Saudi Arabia, pursuant to which the government will purchase up to 100K vehicles over a ten-year period; XPEV said it secured credit line of up to 7.5 bln yuan ($1.15 bln) to support business operations and expansion in China; DRVN comps +15.6%. EBITDA of $119mm vs Street at $103mm; PAG, GPI among auto retailers with earnings released this morning

·     Housing & Building Products; The average contract rate on a 30-year fixed-rate mortgage increased to 5.37% in the week ended April 22 from 5.20% a week earlier, the MBA survey showed; building products active as MAS reports slightly better earnings; OC 1Q adj EPS $2.84 vs est. $2.90 on revs $2.3B vs est. $2.42B, adj EBITDA margin 23%; says sees 2Q net sales, adj EBIT growth for the qtr vs prior year; in builders, TMHC out with results

·     Consumer Staples/Restaurants; MDLZ delivered strong 1Q organic sales growth and a solid EPS beat relative to expectations, but lowered FY22 EPS guidance; KHC posted Q1 EPS and sales beat but warns of higher inflation impact this year than previously forecast – still raised 2022 organic revs view to mid-single-digit percentage vs. prior for a low-single-digit percentage increase; CMG 1Q22 EPS of $5.70 exceeded consensus as comps accelerated in April and CMG provided ahead of consensus 2Q comp guidance, though the margin outlook was only in-line; BYND shares spiked initially on reports MCD and Beyond Meat say the McPlant burger will become a permanent menu item (rose as much as 20%) – but pared gains after MCD said the headlines from earlier were ‘misconstrued’

·     Casinos, Gaming, Lodging & Leisure sector; BYD fails to hold early gains post EPS beat; HOG posts a drop in Q1 profit as demand for its motorcycles failed to gain momentum due to global supply-chain hurdles and surging inflation/reaffirms initial full-year forecast; in lodging, WH reports Q1 EPS and rev beat while raises guidance for the year; RSI upgraded to Overweight from Equal Weight at Wells Fargo with our updated PT of $10 implying 60%+ upside from current levels

Energy

·     Energy stock movers; big story overnight, Russia’s Gazprom PJSC said it has halted gas flows to Poland and Bulgaria and will keep the supplies turned off until the two countries agree to Moscow’s demand to pay for the fuel in rubles. European gas prices surged more than 20% on the sudden escalation as Russia turns its vast energy resources into a weapon against Ukraine’s European allies.

·     Inventory data: The American Petroleum Institute said weekly crude inventories rose 4.78M barrels, gasoline fell -3.91M barrels and distillates rose 43K barrels; the EIA reported Crude +691K, vs. Exp. +2.0MM, Distillates -1.449MM, Gasoline -1.573MM, Cushing +1.298MM

·     E&P and Majors; HES and XOM announces three new discoveries and increase in resource estimate for Stabroek Block, Offshore Guyana; nat gas producer RRC reported record free cash flow in Q1, paying down $350m of debt while beating earnings estimates; CLR raises its dividend; in services, HAL and SLB both upgraded to Buy at HSBC

·     Utilities & Solar; solar names looking to rebound after better results from ENPH as Q1 adj EPS $0.79 vs. est. $0.66; Q1 revs $441.3M vs. est. $432.28M; and guides Q2 revs $490M-$520M vs. est. $474.5M

Financials

·     Bank movers; CS shares slide following earnings and CFO headlines; BK downgraded to Neutral at JPMorgan because its sensitivity to higher rates including large benefit from lower fee waivers is likely to be partly offset by restructuring of its securities portfolio and shrinkage of deposits due to pressure on capital; NYCB with mixed Q1 results as Q1 net interest income of $332M increased from $322M in Q4 2021, Non-interest expense of $141M in Q1 climbed from $135M in Q4; HOOD said it plans to cut about 9% of full-time employees; has over $6B in cash on balance sheet; Robinhood says it’s scrutinizing headcount growth targets

·     Services & Insurance; NCR slides as reported Q1/22 results sharply below forecasts, especially on disappointing Hardware revenue and cost inflation – cuts year adjusted EPS view to $2.70-$3.20 from $3.25-$3.55 (est. $3.39) and lowers FY22 revenue view to ~$8B from $8B-$8.2B; CB Reported EPS $3.82 vs. est. $3.48 as underwriting results were $0.37 higher-than-expected driven by a better underlying combined ratio and more than expected favorable reserve

·     Consumer Finance; Dow component Visa (V) posted Q2 profit above consensus and a 17% jump in total payment volumes while said it expects revenue to blow past pre-pandemic levels even as challenging macroeconomic conditions persist; COF reported Q1 EPS of $5.62 or $5.27 excluding a one-time gain on card portfolio sales, missing consensus $5.50 driven mostly by higher expenses and marketing, partially offset by better provision and tax (shares were downgraded to Neutral at Piper); ARCC upgraded to OW at JPMorgan as Tuesday’s share price overreaction offers investors an attractive entry point to own a marquis company in the BDC universe with a proven long-term track record

·     REITs; EGP posted a solid 1Q22 FFO beat (+3% vs. consensus) and management raised FY22 FFO guidance 1.8% at the midpoint (+1.1% vs. consensus); ESS 1Q22 core FFO beat and 1.8% increase to 2022 core FFO guidance, at the midpoint ($13.95 vs. consensus $13.92); apartment REITs with results as well as EQR ESS UDR which were generally robust and bode well for peers yet to report, reflecting the favorable operating backdrop for landlords. Mizuho said also expect above-trend results to persist near-term given strong demand / pricing power, historically high occupancies/retention, and double-digit loss-to-leases.

Healthcare

·     MedTech Equipment; EW shares slipped early on guidance as sees 2Q total sales $1.36-1.44B vs est. $1.46B and adj EPS $0.61-0.69 vs est. $0.65; sees FY sales $5.5-6.0B vs est. $5.76B; EXAS posted a nice beat to start 2022, driven by Cologuard screening performance that came in above expectations on enhanced sales force effectiveness; BSX rallies early after results; MDT agreed to buy AFIB left-heart access portfolio for an upfront cash payment of $50m, plus contingent payments tied to milestones and future sales.

Industrials & Materials

·     Aerospace & Defense; Dow component BA posted a larger than expected Q1 loss (-$2.75) vs. est. (-$0.12) and missing estimates for revenues ($14B vs. est. $15.8B), hit with higher costs on commercial and defense aircraft and said it will pause production of its 777X plane through 2023, citing certification delays by U.S. regulators and weak demand, and does not expect deliveries to start until 2025, more than a year later than it previously forecast; GD upbeat earnings lifts shares of the defense maker

·     Transports; JBLU downgraded to Underweight at JPMorgan following earnings disappointment; SKYW downgraded to market perform at Raymond James due to a push out in Block Hour recovery expectations, which is likely to meaningfully reduce our 2023E EPS outlook all else equal; in rails, CNI Q1/22 results were below expectations and FY2022 guidance was lowered; NSC Q1 profit and revenue that rose from a year ago and topped expectations amid strength in the intermodal and coal business segments, while expense growth outpaced revenue growth; Ryder (R) with better Q1 d earnings and sales citing higher used vehicle sales and rentals performance – helped by Ryder’s Supply Chain Solutions acquisitions rose 54%, to $1.09 billion; earnings tonight from CHRW in truckers

·     Metals & Materials; BG posts beat as Q1 adj EPS $4.26 vs. est. $2.79; Q1 revs $15.88B vs. est. 13.28B; raises FY22 adjusted EPS view to at least $11.50 from at least $9.50 (est. $11.04) as it benefited from higher demand for essential crops since the Ukraine crisis; metals bounce back after selling pressure with FCX and steel names to lesser extend bouncing; in chemicals, ECL upgraded to Overweight at JPMorgan; in timber, PCH downgraded to Sector Perform following 1Q22 earnings at RBC Capital

Technology, Media & Telecom

·     Internet, Media & Telecom movers; GOOGL shares declined post earnings after Q1 EPS fell short of expectations ($24.62 vs. est. $25.91), with net income dropping y/y with mostly in-line revs though YouTube growth (of 14.4% to $6.9 billion) due to a pullback in ad spend in Europe following the conflict in Ukraine raised concerns; TMUS Q1 EPS $0.57 vs est. $0.32; Q1 revs $20.12B vs est. $20.11B; FCF of $1.6 billion grew 26% YoY and raising guidance; SPOT posts better quarter results but slides on lower Q2 revenue guidance; FB earnings tonight

·     Semiconductors; TXN shares slide as reported strong results but guided well below Consensus due to COVID restrictions in China (revs guided ~10% below Street); TER posted a Q1 beat on top and bottom line with mid-point of guidance for Q1 above ests; MKSI posted Revenue miss on continuing supply headwinds; SK Hynix with profit miss on a one time charge; QCOM with earnings tonight

·     Software movers; Dow component MSFT posted 3Q beat, in-line 4Q guidance, and strong bookings metrics while Azure $44B run-rate business grew 49% Y/Y in constant currency as MSFT doubled its $100M+ deals; TENB reported strong Q1 results, beating the high-end of guidance by $5.4MM or 3.5%, which was the largest beat the company has delivered in at least 2+ years; CHKP beat estimates with a 2% gain in Q1 profit, boosted by growth in its cloud protection products and consolidated cyber security platform, but shares fall on billings miss

·     Hardware, Components & Services; FFIV shares slide as guides Q3 revs $660M-$680M vs. est. $693.1M and cuts FY revenue growth view to 1.5%-4% from 4.5%-8%; JNPR Q1 EPS missed views and said the global shortage of semiconductors and other parts impacted its supply chain; BHE better results driven by outperformance in semi cap and industrial and upside Q2 guidance and now expects double-digit growth in `22 compared to previous tgt of high-single digits