Closing Recap

Wednesday, August 03, 2022

Equity Market Recap

·     U.S. stocks were on cruise control higher, paced by strength in growth sectors as markets show no fear over geopolitical tensions with China after Pelosi’s trip to Taiwan or mixed earnings and data. So, what has been lifting markets despite the Fed recently raising interest rates by 75-bps last month and expected to raise another 50-bps next month with inflation holding near 40-year highs? First off, 1) a rebound after an awful 1H’22, with strength in momentum/high growth names such as AMZN, AAPL, GOOGL, TSLA; 2) technicals as the S&P has broken out higher after trading above its 50-day MA resistance last month around 3,920 at that time (hasn’t stopped rising since); 3) falling commodity prices as oil hits lowest levels since February and gas pump prices falling 45-straight days (easing inflation fears); 4) mixed economic data – (positive include signs of falling inflation in ISM, confidence numbers, as well as an uptick in services data – while negatives include weaker housing, employment and spending). There are mixed views on whether the US is in a recession or will see one (technically) with data improving, but historical signs such as a yield curve inversion (2s-10s inverted by 30-bps) and two declining quarters of growth (GDP just posted 2^nd straight quarter of negative growth) have occurred.

·     Recall U.S. stocks posted massive gains in July as the S&P rose 9.12% (best month since Nov 2020), the Dow added 6.73%, and the Nasdaq gained 12.35% (best month since April 2020) and is carrying over into early August. The move of course comes after a dismal June where the S&P 500 fell -8.4%, the Dow fell -6.7% and the Nasdaq fell -8.7%, and for the first half of 2022, the S&P 500 fell -20.6%, the Dow fell -15.3% and the Nasdaq fell -29.5%. The next major technical level test for markets is the 4,200 level, which marks the June highs. Note according to Bespoke Investment, over half of all trading days for the Nasdaq over the last three weeks have been gains of at least 1%, as investors chase markets higher.

·     Sector movers: biotech a bright spot for markets after REGN, GILD, MRNA positive reactions to earnings; FinTech another strong sector after results from PYPL, SOFI ahead of SQ tomorrow night; Semiconductor stocks outperform despite AMD sliding on weaker outlook (followed bad INTC results last week), while mega cap the (AAPL, AMZN, GOOG, META) and software (TWLO, U AYX, ESTC) explode higher. Weakness in defensive utility stocks and energy with oil prices tumbling and investors bailing on haven assets in favor of “risk” assets.

·     Fed speakers at it again; more hawkish tone not scaring markets: 1) Fed’s Bullard said: The U.S. Federal Reserve will be steadfast in raising interest rates to bring inflation running at four-decade highs back to the central bank’s 2% target. "We are going to be tough and get that to happen”. "I think we can take robust action and get back to 2%." "We’re going to need to see convincing evidence across the board, headline and other measures of core inflation, all coming down convincingly before we’ll be able to feel like we’re doing enough." 2) Fed’s Daly in another speech today said: “we are not completed with our fight against high inflation; we are committed to get it down closer to our 2% target; said markets are ahead of themselves in expecting rate cuts next year and said the Fed remains united in delivering on both sides of our mandate”; 3) Richmond Fed’s Barkin said the Fed is committed to getting inflation under control, returning it to 2% Target and has made clear ‘we will do what it takes’; he said “Fed may not get help from global events and supply chains but it has tools and credibility to deliver that outcome ‘and we will”; expects inflation to come down but ‘not immediately, not suddenly and not predictably’

Economic Data:

·     ISM report on U.S. Non-manufacturing sector shows PMI 56.7 in July vs 55.3 in June; business activity index 59.9 in July vs 56.1 in June; prices paid index 72.3 in July vs 80.1 in June; new orders index 59.9 in July vs 55.6 in June; employment index 49.1 in July vs 47.4 in June. ISM non-manufacturing prices paid index at lowest since February 2021

·     U.S. June factory orders +2.0% above est. +1.1% and May +1.8%; factory orders ex-defense +1.3% pct vs May +1.7%; factory orders ex-transportation +1.4% vs May +1.8%; June Durables orders revised to +2.0% from +1.9%; inventories/shipments ratio 1.45 months’ worth vs May 1.46

·     S&P Services PMI Final Actual 47.3 (Forecast 47, Previous 47.0); S&P Composite PMI Final Actual 47.7 (Forecast -, Previous 47.5)

Commodities

·     Energy was one of the few weak spots in a day that saw risk assets rise, as WTI crude fell -$3.76 or 3.98% to settle at $90.66 per barrel (lowest since early February), while Brent crude falls -$3.76 or 3.74% to settle at $96.78 per barrel (lowest closing price since Feb. 23). The OPEC+ meeting ended with a small output increase of 100,000 barrels per day. Meanwhile, Libya’s oil production has risen in the past two weeks, but the risk of conflict remains. China’s announcement of military drills around Taiwan prompts detours and delays energy shipments.

·     Gold prices slip -$13.30 or 0.7% to settle at $1,776.40 an ounce, pressured by a stronger dollar and further rebound in Treasury yields (10-yr back to 2-week highs) as hawkish comments from U.S. Federal Reserve officials lifted both. Worsening ties between Washington and Beijing over U.S. House of Representatives Speaker Nancy Pelosi’s visit to Taiwan had pushed gold to its highest since July 5 on Tuesday, but no follow thru today as she departed without issue.

Currencies & Treasuries

·     More volatility in Treasury markets as the benchmark 10-year hits highs around 2.85% before paring gains to around 2.77%, as markets continue to whip around following mixed economic data, several Fed speakers the last few days after coming out of “black-out period” following the FOMC meeting results a week ago (where they raised rates by 75-bps and is expected to raise by another 50-bps in the September meeting). After hitting more than 20-year highs last month, the dollar saw some profit taking over the last week but has bounced the last 2-days.

Sector News Breakdown

Consumer

·     Retailers: UAA lowers FY adj EPS view to $0.47-$0.53 from prior $0.63-$0.68 (est. $0.61), sees revs +5-7% vs est. $+5.25% and gross margin down 375-425bps; BGFV shares slide in sporting goods after big miss in EPS and comps as Q1 EPS $0.41 vs. est. $0.89; Q2 sales $253.8M vs. est. $294.2M and comp sales -22% y/y; guides Q3 EPS $0.22-$0.32; TUP surges on better quarterly earnings and sales results

·     Auto sector; Ford (F) rises after reported a big jump in July vehicle sales saying total sales rose 36.6% from a year ago to 163,943 vehicles, compared with a 10.5% decline for the industry; DAN slides on miss as 2Q adj EPS $0.08 vs est. $0.25 on sales $2.59B vs est$2.45B; guides FY revs $10-10.2B vs est$10.0B and adj EPS $0.60-0.90 vs est$1.24; TRUE reported a challenging quarter highlighted by worse-than-expected dealer count, units sold and revenue, but adjusted EBITDA was better than we expected on tight expense controls

·     Restaurants: SBUX tops Q3 profit estimates despite a hit to business in China as EPS of 84c beat the 75c estimate on better revs while global comp sales growth of 3% misses ests for 3.76% rise, with China same-store sales falling 44% due to renewed lockdowns; YUM 2Q adj EPS $1.05 vs est. $1.09 on revs $1.64B vs est. $1.64B; system sales +5% ex Russia; KFC comps -1, tb comps +8, PH comps -3, worldwide comps +1; DENN rises after earnings results

·     Leisure, Lodging, Casinos & Gaming: CZR reported 2Q results which included $2.821B of revenue, vs. the Street’s $2.771B while adj. EBITDAR came in ahead of expectations, due to a narrow loss in digital; in online travel ABNB shares declined after reported mixed Q2 results, with Nights & Experiences Booked and GBV both coming in slightly below consensus while revenue and profitability were in line with and well ahead of expectations, respectively (BKNG reports tonight); in RV space, CWH reported stronger-than-anticipated 2Q22 results including adj. EBITDA of $278mm and revenue of $2.17B, both above estimates

Energy

·     Energy stock movers: Energy firms rise as crude prices inched up on Wednesday, as the OPEC+ producer group agreed to only a small output increase of 100,000 barrels per day, according to various news outlets this morning which was one of the smallest hikes in OPEC history.

·     E&P and Majors; CHK CEO said they plan to exit the Eagle Ford shale as it continues to pivot away from oil to natural gas; OXY posts $3.6B Q2 profit, topping estimates but slipping from Q1 heights of $4.7B, Q2 net earnings swung to a profit of $3.6B, or $3.47/share, from a loss of $97M; PXD reported a modest CFPS beat and as expected, increased ’22 CAPEX; EGY lowers FY22 production guidance by 750 NRI BOPD at the midpoint; CTRA 2Q22 in-line and boost in 2022 capex guide with 80% of FCF total payout; MGY beat and slight 2022 guide increase on higher activity with new quarterly dividend

·     Utilities & Solar; in solar, SEDG stumbles following Q2 miss and margin weakness – Q2 EPS $0.95 vs. est. $1.39; Q2 revs $727.8M vs. est. $725.23M and cash flow generated from operating activities was $77.4M, compared with $163.0M prior quarter and margins impacted; DQ Q2 revs of $1.24B beat the $1.15B estimate as net income $627.8M vs. $232.1M y/y on better margins; in utilities, shares of NI, PPL, EXC among movers on earnings; Wells Fargo weighs in on inflation Reduction Act: saying positive on NEE, CEG and PEG, Clean Energy Tech: see it positive for FSLR, PLUG, RUN and NOVA, Utilities: continue to be relative safe way to play the transition, highlight ETR leverage to hydrogen economy, Autos: tax credits + TSLA, Refiners: see it 1/3 positive 2/3 negative, good for tax credits for renewable fuels (VLO, DINO, CLMT) and carbo capture and underground storage (BKR, FTLS, OXY)

Financials

·     Bitcoin, FinTech & Payments; PYPL rises jumped after EPS and revs topped views, said it expects to record $900 million in savings this year from cost-cutting, and that activist investor Elliott is now one of its largest shareholders (about a $2 bln investment); SOFI came in ahead of its Q2 guidance with adjusted revenue of ~$356mm, ~$21mm ahead of the guide (at the midpoint) as its Lending segment drove the majority of the Q2 beat alongside Financial Services beat; Bitcoin levered names (COIN, MARA, RIOT, SI) rise after the WSJ reported two senators (Stabenow and Boozman) said to propose bill that would put bitcoin, ethereum under CFTC eyes

·     Financial Services; PAYC reported solid 2Q beat and 2022 guidance raise as KeyBanc noted the net raise of $12.5M represents a larger than typical raise, and is fueled by strong new business activity and, to a lesser extent, higher float revenue; HOOD reports smaller-than-expected Q2 loss of$0.32) vs. est. ($0.37) and said it is slashing 23% of its staff and posts a 44% decline in revenue on slumping trading activity

Healthcare

·     Pharma movers: ALNY shares surge after the company said that its Phase 3 study of Patisiran met the primary endpoint of change from baseline in the six-minute walk test at 12 months; MRK provides update on phase 3 KEYNOTE-921 trial evaluating KEYTRUDAPlus Chemotherapy as trial did not meet its dual primary endpoints of OS and radiographic PFS; KNSA announces global license agreement with Genentech for Vixarelimab, to receive $100 mln in upfront and near-term payments and eligible for milestone; HZNP sinks after lowering full-year sales view to high-teens growth from prior view of mid-30’s hurt by slower sales growth of Tepezza drug; MACK slides after its pancreatic diseases treatment, Onivyde, failed to meet the main goal of a late-stage study testing its use as a lung cancer treatment

·     Biotech movers; GILD Q2 beat with strength from its HIV and cell therapy franchises driving a ~$400M (+6.5%) top-line beat and raised guidance, both for Veklury and ex-COVID product sale; MRNA rises after 2q earnings beat, $3B share buyback plan; REGN 2Q adj EPS $9.77 vs est. $8.84 on revs $2.86B vs est. $2.8B; 2Q Dupixent global net sales recorded by Sanofi +40% to $2.09B; sees FY adj R&D $3.1-3.24B vs prior $2.9-3.1B, SG&A $1.74-1.84B vs prior $1.65-1.77B; CHRS said the FDA approved its treatment for age-related muscular degeneration Cimerli, a biosimilar product that can be used interchangeably with Novartis’s Lucentis; INCY downgraded at Guggenheim saying another Jakafi beat in 2Q underscores the strong commercial foundation the product provides for INCY; however, the looming 2027 COM patent expiration, increasing investor uncertainty around the Opzelura launch; SRPT reported above-consensus 2Q product sales of $211M and provided details on the path forward for ‘9001

·     MedTech Equipment; EXAS slipped initially as Cologuard outperforms 2Q22 expectations; 2022 revenue guidance lowered modestly; STE 1Q adj EPS $1.90 vs est. $1.92 on revs $1.2B vs est. $1.22B; guides FY adj EPS $8.40-8.60 vs est. $8.70 with organic growth +10%

·     Healthcare Services: drug distributor ABC beats profit and revenue expectations, raises full-year outlook; CVS raises FY adj EPS to $8.40-$8.60 from $8.20-$8.40 (est. $8.35); Q2 EPS $2.40, vs. consensus $2.1; Q2 revs $80.6B vs. est. $76.37B; CRL shares slide after cutting its year forecast earlier to 9.0%-11.0% rev growth from prior range of 13.5%-15.5%

Industrials & Materials

·     Aerospace & Defense; aero parts supplier SPR slips initially after posting a wider-than-expected Q2 loss of (-$1.21) vs. est. loss (-$0.25) and revs of $1.26B missed the $1.28B estimate with a Q2 op loss of $104.7M vs. a loss of $97.7M a year earlier

·     Transports, Industrial & Machinery; GNRC Q2 net sales jumps by 40% to $1.29B topping the $1.27B estimate and EPS of $2.99 beat the $2.64 estimate and maintains its FY 2022 net sales growth outlook of about 36% to 40%; CAT downgraded at Bernstein after earnings miss yesterday; TEX reported 2Q EPS results of $1.07 vs. consensus of $0.86 and revenue of $1,077M was in line with consensus of $1,078M; AAWW rises after a Bloomberg report overnight that an investor group led by Apollo has agreed to acquire airfreight company for about $102.50 a share

·     Material movers: CLW reported 2Q adj. EBITDA of $63M, at the high end of guidance of $54M-$64M and above consensus/us at $61M; price/cost was more favorable than consensus expected and guidance was also above views (upgraded at RBC Capital to Outperform after results); SEE upgraded to Outperform at RBC as well as believe that at current levels, the stock is attractive and offers ~25% potential upside given modest FY23 assumptions; OI Q2 beat in line with pre-announcement and FY eps guidance raised as expected, though implied 4q guidance below consensus; delays to capital/MAGMA plans; in lithium space, LTHM raises sales and profit forecast for the year due to rising prices of the metal that is used in making electric-vehicle battery after a Q2 beat (other lithium movers ALB, SQM, LAC)

Technology, Media & Telecom

·     Telecom, Media, Internet; big rebound in Internet large caps with AMZN, GOOGL, META, SHOP all posting big advances early and carrying markets; MTCH Q2 revenue and operating income was relatively in-line with expectations but the guidance fell well short of Street estimates and, importantly, new CEO announced several sweeping changes at Tinder; DISH Q2 EPS $0.82 vs. est. $0.64; Q2 revs $4.21B vs. est. $4.25B; Q2 net Pay-TV subscribers decreased about 257,000, compared to a net decrease of approximately 67,000 in the year-ago quarter

·     Semiconductors; AMD shares slumped after guiding Q3 sales to approx $6.5-6.9B vs est. $6.8B still sees year revs $26.0-26.6B vs est. $26.18B after Q2 top and bottom line beat – AMD revised its outlook on the PC market for this year to drop by the mid-teens percent from previous projections of a high single digit percent drop; SMTC to acquire SWIR for $31 per share in all-cash transaction in a transaction representing a total enterprise value of approximately $1.2B; CRUS posted stronger than expected F1Q results, reflecting healthy iPhone 13 demand trends, and guided F2Q largely in line with expectations; MCHP posted solid results and higher guidance

·     Software movers; AYX shares jump after Q2 revenue was $180.6M, an increase of 50%, compared to revenue of $120.1M in the year-ago quarter with ARR growth of 33% y/y; RNG reported 2Q22 results that beat top and bottom line expectations with total revenue of $487mn and non-GAAP EPS of $0.45 per share; EA EPS beat, Net bookings were $1,299B vs. consensus of $1,258 million, falling -2.7% y/y driven by a softening mobile gaming

·     Hardware, Components & Services; PING to be acquired by Thoma Bravo for $28.50 per share in cash, in deal valued at $2.8B; CGNX stumbles after in-line results but wide Q3 rev miss, guides 3Q revs $160-180Mm vs est. $290Mm as analysts see this as a long-time clearing event and would be buying weakness (upgraded at Bernstein and Cowen also positive); KN reported 2Q22 revenue below consensus and guided for a sequential decline versus typical strong seasonality; INFN shares fell after $275M conv debt deal announced last night