Closing Recap

Friday, December 02, 2022

Equity Market Recap

·     Uncertainty reigns. Yesterday we saw a lackluster ISM PMI indicating contraction and increasing the likelihood of recession. Today we get bigger-than-expected payroll and wage results creating instant selling pressure pre-market as investors attempted to determine how this data may impact Fed decision-making and the probability of recession in 2023. Equities recovered a bit to spend much of the day still lower but hovering near the S&P 500 200-day moving average (4,050). A reminder from the Fed’s Evans that we may see a higher peak in rates despite the potential for a slowing pace of hikes also kept investors’ sentiment muted. Despite generally lower markets, overall breadth was tilted only slightly negative heading into the final hour of trading. But with the CBOE Volatility index (VIX) tumbling to lows late day (sub-$19), lowest in several months, momentum swung back to the upside in the final hour.

·     Sector moves were paced by Materials (XLB), Industrials (XLI) and Consumer Staples (XLP) as gainers, while Technology (XLK), Energy (XLE) and Financials were the largest laggards. Communications (XLC) and Healthcare (XLV) were flattish. Value and growth both eased on the day, with the Russell 1000 Value giving up about 0.35%, while its Growth counterpart experienced a decline closer to 0.70%.

·     Marketwise, we have yet to find consistency in whether good news is good news or good news is bad news. For the consumer, though, there has been some purely good news. US gasoline prices have dipped to a national average of $3.45 per gallon (about 31% below their mid-June all-time high and to the lowest levels since February). Also, US 30-year mortgage rates have moved lower to 6.49% from 7.08%, marking the largest three-week decline since December 2008.

·     Lots of warnings signs as stocks cut YTD losses in half since October lows, but still no market fears (with VIX holding down under 19 level from 35 in October): 1) the October personal saving rate was the second lowest ever recorded 2.3% (data goes back to 1959) and 2-month average was the lowest ever recorded; 2) Bank America notes shares of AGO at all-time highs, but says the world’s largest bond insurer in world not discounting recession and bond defaults in ’23; 3) Bofa also notes industrials (4%) from all-time highs, big recession in ’23 likely to be as shocking as big inflation in ’22; 4) Last month we saw surging credit card delinquencies and net charge offs (debt expected to not be recovered) showing more people building on debt and are behind.

Economic Data:

·     Jobs stronger on higher wages: Nonfarm payrolls for November rose +263K vs. est. +200K and private payrolls rose +221K vs. est. +190K; manufacturing payrolls +14K vs. est.+20K; the unemployment rate steady at 3.7%, but biggest mover was average hourly earnings grew +0.6% m/m vs. est. +0.3% and on a y/y basis, rose +5.1% vs. est. +4.6%

Commodities, Currencies & Treasuries

·     WTI Crude January futures settle at $79.98 a barrel, down -$1.24, 1.53%; Natural Gas January futures settle at $6.2810/MMBtu, down 7% on delayed Freeport LNG restart, less cold forecasts. Oil gave up early gains after hitting highs of $82.22 as market awaits OPEC+ meeting starting on Sunday. OPEC+ is likely to stick to its current oil output target when it meets on Sunday, two OPEC+ sources said on Friday, although some say a further output cut is not completely off the table given concern about economic growth and demand.

·     Gold prices slipped -$5.60 or -0.31% to settle at $1,809.60 an ounce, rebounding late day following a roll in the dollar off highs and as treasury yields also turned lower. After spiking to 3.63% on the 10-yr following the stronger nonfarm payrolls data and spike in weekly average wages, the 10-year yield “melted” higher around 3.51% late day and the dollar index (DXY) after spiking to highs 105.59 on the data, ended lower by days end around 104.70, continuing its recent meltdown (fell 1% yesterday and over 4% in November on easing rate hike expectations).

Sector News Breakdown

Consumer

·     Retailers: GCO cuts FY23 adjusted EPS view to $5.50-$5.90 from $6.25-$7.00 (est. $6.44) while narrows FY23 revenue view to down 1%-2% from down 3% to flat after top and bottom line beat for Q3 and said inventory rose 66%; SPB announced that it is more committed and confident than ever that it will complete the sale of its Hardware segment to ASSA ABLOY; TLYS Q3 sales fell -13.7% y/y to $177.8M vs. est. $166.1M; Q3 comp store sales fell (-14.9%); KIRK Q3 adj EPS loss more than estimates as net sales fell -8.8% y/y to $131M; ZUMZ slips on Q4 outlook

·     Auto sector: Ford (F) Nov auto sales -7.8% to 146,364 vehicles; truck sales -1.2% y/y and SUV sales -15% y/y and EV sales rose 103% y/y (off small number); in EV charging, CHPT delivered on the low end of its range as component availability limited revenue – Q3 EPS loss (-$0.25) vs. est. loss (-$0.19); Q3 revs rose 92% y/y to $125M vs. est. $132.12M; Q3 gross margin 18%

·     Housing & Building Products: Homebuilders TOL declined as yields on the 10-year US Treasury jumped following economic data that showed nonfarm payrolls increased by 263,000 last month; OC announces approximately 50% dividend increase, authorization for repurchase of up to 10 million additional shares

·     Consumer Staples: in beauty, ULTA Q3 EPS of $5.34 easily topped Street at $4.15 as stronger sales and gross margins fueled the rise while comps increased 14.6% ahead of +9.1% est. and meaningfully lifted FY22 guidance; HAIN downgraded from Outperform to In Line at Evercore/ISI and cut tgt to $24 from $30 following the announcement of the retirement of CEO and given limited visibility into the recapture of lost non-dairy milk contract

·     Restaurants: CAKE downgraded to Neutral at Wedbush and cut tgt to $35 from $37 saying a December acceleration necessary for Q4 SSS growth to hurdle consensus, but even if one occurs, it will not be a good indicator of underlying fundamentals; CBRL Q1 adj EPS $0.99 vs. est. $1.22; Q1 revs rose 7% y/y to $839.5M vs. est. $835.72M; Q1 comparable store restaurant sales increased 7.1% vs. est. 7%, while comparable store retail sales increased 4.3%

Energy, Industrials and Materials

·     Refiners: Cowen noted the EPA released a proposed Renewable Volume Obligations (RVO) ruling for 2023-25, with the ’23-’24 proposals likely sticky due to implementation timeline. Proposal puts forth a 0.2B gal increase in RINs for ’23, bearish for RIN prices given capacity coming online next year capable of producing 2B RINs, and thus RINs could fall $0.50 to $1.20. Negative for biofuel names and refiners excluding potentially PBF. Falling RIN prices are negative for biofuel names under coverage, with DAR most exposed

·     Utilities & Solar: SHLS 26M share Secondary (upsized from 20M) priced at $22.25; JKS and CSIQ active after U.S. trade officials said they had determined that solar energy imports produced in four Southeast Asian countries were circumventing duties on goods made in China. The decision follows an 8-month investigation requested by a U.S. solar panel maker, Auxin Solar.

Financials

·     Bank movers & Asset managers, Alt Investments: CS rebounds after Chairman Lehmann said during an interview with Bloomberg Television that the bank’s liquidity was improving and the large outflows of client assets have "basically stopped”; BX downgraded to equal weight at Barclay’s following BREIT’s notice indicating the monthly / quarterly redemption limits had been triggered; RJF increases quarterly dividend by 23.5% to $0.42 from $0.34; CM downgraded to Sector Perform at RBC Capital following 4Q22 earnings saying core EPS fell short of our expectations this quarter, in every segment except for its Canadian Commercial Banking and Wealth business

·     Real Estate Services/REITs: OPEN CEO Eric Wu stepped down to become president of its marketplace business to be replaced as CEO by Carrie Wheeler; ZG initiated Buy and $50 tgt at UBS as see the current period of maximum uncertainty as a good entry point for Buy-rated Zillow shares for longer-term investors; UDR upgraded to Overweight take a balanced view, given risk of macro shock & Morgan Stanley strategist view of S&P trough in 1Q23 and AVB downgraded to Equal Weight at Morgan Stanley as take a balanced view, given risk of macro shock & Morgan Stanley strategist view of S&P trough in 1Q23 – says Apartments trade at a rare discount to REITs

·     Financial Services: In info services, Barclays downgraded four names to EW (from OW) – TRU and BKI in Information Services; and ECL and BFAM in Business Services as they continue to believe the risk to high quality growth nature of our entire universe is to the upside – especially if there is a continued rotation out of Mega Tech / Tech into Industrial

Healthcare

·     Pharma movers: GSK said Jemperli (dostarlimab) RUBY phase III trial met its primary endpoint in a planned interim analysis in patients with primary advanced or recurrent endometrial cancer; BEAM said the U.S. FDA has lifted the clinical hold and cleared its experimental therapy being developed to treat patients with a type of blood cancer for study; in Alzheimer space, AVXL shares jump after saying its therapy for mild cognitive impairment due to Alzheimer’s disease met the primary endpoints in a Phase 2b/3 clinical trial; RIGL said the FDA approved Rezlidhia for certain leukemia patients

Technology, Media & Telecom

·     Media, Internet: for SNAP, Guggenheim said November global Snap Ads Manager shows a modest m/m increase in audience reach while Apptopia third-party app download data suggests cooling momentum; for DIS, Florida lawmakers are working on plans to reverse a move that would strip Disney of its right to operate a private government around its theme parks, according to the Financial Times

·     Semiconductors: MRVL shares slip as Q3 results just miss consensus estimates and guides Q4 revs $1.4B, below the $1.6B estimate on lower EPS view saying inventory reduction is impacting near-term earnings and outlook; AMBA FQ3 in line with FQ4 sales/implied pf-EPS guide ($83mn/$0.14) below consensus ($86mn/$0.22) amid supply/demand setbacks; COHR initiate Buy and $48 tgt at Stifel saying the combo of II-VI Inc. and Coherent Corp, has established itself as one of the largest suppliers of photonics components and compound semiconductor materials

·     Software movers: IOT delivered a strong beat and raise with upside to both ARR and revenue as well as profitability, sending shares higher; PATH topped its preannounced results slightly and raised its 4Q ARR guidance, despite decelerating trends – ARR grew 38% Y/Y in constant currency (36% nominally) to $1,110M, beating PATH’s preannounce; on downside, ZS delivered a quarter with slight revenue/billings deceleration at 54%/37% (42% normalized billings growth) though billings showed less upside than historically; VEEV reported in-line results (with mixed 4Q guidance), and said will re-platform CRM on Vault and off Salesforce; in research, ASAN downgraded at Piper, CRM downgraded to Hold at Wolfe; PD posted beat-and-raise for both the top- and bottom-lines; revenue grew 31% YoY, NRR held roughly steady at 123%

·     Work management software: peers SMAR and ASAN reported starkly different F3Q results; SMAR reported a solid F3Q beat and better F4Q guidance, while ASAN posted mixed results and lower F4Q guidance; SMAR reported F3Q23 billings and revenue well above guidance and consensus estimates and raised FY23 billings guidance; ASAN non-GAAP EPS of ($0.26) (consensus ($0.32)); a negative 37% operating margin (versus -46% last quarter) on revenue of $141M (consensus $139M), up 41% year over year, down from 51% last quarter and 57% in F1Q; and with RPO growth of 43%, down from 53% last quarter and 72% in F4Q