Closing Recap

Monday, December 05, 2022

Equity Market Recap

·     U.S. stocks tumbled to start the trading week, with major averages bouncing off the lows late, but extending recent declines. The S&P 500 has now fallen 6 of the last 7 days, weak aside from the Wednesday 11/30 ~3% rally (which came after Powell spoke), with big declines in financials and technology. Recent sector winners Energy, Materials, and Industrials saw sharp declines today as all eleven S&P sectors finish lower. With today’s, slide, the S&P 500 dropped back below its 200-day moving averages of roughly 4,050, while the Russell 2000 dropped back below its 200-day moving average of 1,860. Markets are in a quagmire ahead of next week FOMC meeting. Powell doesn’t care about recession forecasts and inflation is still running at 3x target so any data point delaying the onset of recession is risk off. For the calendar this week, tomorrow the RBA will decide whether to leave rates unchanged or hike by another 25bps. On Friday we’ll get two inflation figures w/ the PPI and UMich (inflation expectations). Note the Fed is in a quiet period until next week’s FOMC meeting. WSJ’s Nick Timiraos (the Fed whisperer) said earlier Fed officials have clearly signaled plans to raise rates by 50 basis points at their meeting next week – Elevated wage pressures could muddy the debate over 50 v 25 in February and lead officials to pencil in more hikes next year (those headlines weighed).

·     The S&P 500 is on course for its biggest fourth-quarter gain since 1999 as signs of a cooling in US inflation have led to a pullback in bond yields, but market participants warn the outlook for next year remains uncertain amid the risk to corporate earnings from the specter of a recession. https://gyazo.com/27298e368faf81b3e3be9eba56c7b077

·     The China data continues to be weak but the sentiment in stocks and economy improving as cities in China’s Zhejiang Province, including Hangzhou, Ningbo, Wenzhou, Taizhou, and Shaoxing, relaxed COVID19 rules from Monday, abandoning regular mass Covid tests and no longer requiring negative test results for entering public venues or taking public transportation

·     Markets in Asia were mostly stronger amid optimism over China’s further relaxation of Covid rules. Hong Kong’s Hang Seng finished higher by 4.5% while the mainland Shanghai Composite added 1.8% as authorities eased Covid testing requirements across major cities over the weekend, including the financial hub of Shanghai. Japanese stocks finished mildly stronger with the Nikkei 225 index adding 0.2%.

Economic Data:

·     S&P Global November final composite PMI at 46.4 (vs flash 46.3) and U.S. S&P global November final services PMI at 46.2 (vs flash 46.1)

·     ISM report on U.S. Non-manufacturing sector shows PMI 56.5 in November vs 54.4 in October; business activity index 64.7 in November vs 55.7 in October; prices paid index 70.0 in November vs 70.7 in October; new orders index 56.0 in November vs 56.5 in October; and employment index 51.5 in November vs 49.1 in October

·     Factory Orders for October rose +1% to $556.6B vs. +0.7% consensus and +0.3% prior; factory orders (excluding transportation): +0.8% to $463.8B vs. +0.2% prior; shipments rose +0.7% to $554.8B, up nineteen of the last twenty months and inventories rose +0.5% to $805.3B

Commodities

·     Oil prices drop, with WTI crude -$3.05 or 3.81% to settle at $76.93 per barrel, following U.S. stock markets lower, after U.S. service sector data raised worries that the Federal Reserve could continue its aggressive policy tightening path. Reuters noted WTI’s front-month contract began trading lower than prices in half a year, a market structure called contango, which implies oversupply. Meanwhile over the weekend, OPEC+ responded to surging volatility and growing market uncertainty by keeping oil production unchanged. The outcome of the brief online meeting on Sunday reflects the unpredictability of supply and demand in the coming months. Gold prices slide, down -$28.30 or 1.6% to settle at $1,781.30 an ounce following bounce in dollar and Treasury yields.

Currencies & Treasuries

·     U.S. Treasury yields rose as prices slumped following last week’s stronger-than-forecast non-farm payrolls report (wage portion) as well as a slew of stronger economic data that raises expectations that the Fed will continue to raise interest rates well into 2023 although at a slower pace. The U.S. two-year/10-year yield curve deepened its inversion from last Friday to over 80-bps with the 10-yr topping 3.6% today briefly. The Fed remains in a blackout speaking period until their meeting in 2-weeks.

·     The U.S. dollar rebounded after its recent more than 5% drop the last few weeks, bumping higher today as U.S. services industry activity unexpectedly picked up in November, with employment rebounding. The Institute for Supply Management (ISM) said its non-manufacturing PMI increased to 56.5 last month from 54.4 in October, which was the lowest reading since May 2020. The data helped boost case for Fed to remain aggressive on rate hikes into 2023. The buck jumped over 1.5% against the Japanese yen and dipped below 1.05 vs. the euro.

Sector News Breakdown

Consumer

·     Retailers: VFC announces CEO transition and revising its FY23 outlook largely to reflect impact of weaker than anticipated consumer demand across its categories – now expects total revenue growth in 2H’23 to be modestly lower than previously outlined; NKE parted ways with Kyrie Irving one month after the company suspended its relationship with the basketball player according to a Nike spokesperson that told The Athletic

·     Auto sector: TSLA tumbles, plans to cut Dec Model Y output at its Shanghai plant by more than 20% vs. Nov, two sources told Reuters. Reuters later reported, citing tesla China, that media report of December output cut at its Shanghai plant untrue; car rental names CAR, HTZ underperformed in the broader transport sector; GM said it has begun commercial operations in Canada following the opening of its first full-scale electric vehicle manufacturing plant in the country, with Deutsche Post DHL Group slated to be its first Canadian customer

·     Housing & Building Products: LOW holds its analyst meeting in NYC on Wednesday, December 7 as Wedbush noted the company will likely remain bullish on the home improvement outlook and will likely guide 2023 above consensus and guide long-term operating margins ahead of consensus; BLWYF (Bellway Plc) upgraded to Buy, PSMMY (Persimmon) downgraded to Hold and WJPLF (Watkin Jones) downgraded to Hold in UK builders at Jefferies

·     Restaurants: SBUX downgraded to Hold from Buy making a risk/reward and valuation call on the shares, saying "there is not much more to it than that"; DPZ upgraded to Buy from Neutral with $460 tgt at BTIG as believes the company’s margins have bottomed and are set to rebound in 2023 due to higher menu pricing and organic improvements in driver availability; DIN said it is expanding its stable of eatery brands with an agreement to buy fast-casual restaurant chain Fuzzy’s Taco Shop from private-equity firm NRD Capital Management for $80M in cash

·     Casinos, Gaming, Lodging & Leisure sector: casinos extend recent advance, esp. US listed shares of casino operators with presence in Macau after easing of COVID-19 restrictions in China (WYNN, LVS, MGM); MGM upgraded to Buy with $50 tgt (from $40) at Truist saying while the macro presents some uncertainty into 2023 (like 2022), think the event calendar could drive relative outperformance for Strip focused MGM

Energy, Industrials and Materials

·     E&P and Majors: oil prices jump as China Covid restriction ease further, raising hopes for increased demand; in research, JPMorgan upgraded MUR to Overweight and CPE to Neutral, while downgraded LPI to Underweight noting E&P stocks outperformed the broader market by a wide margin in 2022, the second consecutive year of significant outperformance relative to the S&P 500 but see a much trickier set up going into 2023; oil services (OIH) fell with energy

·     Aerospace & Defense: MRCY named high conviction idea post 3Q22 given lagging YTD performance, improving fundamentals, solid defense demand backdrop and activist presence limiting downside; for LMT, Jefferies said continue to forecast flat revenue in ‘23, but raise tgt to $525, highlighting our expectation for stepped up shareholder returns in ’23; Dow component BA continued recent upward momentum, among leaders in the index today

·     Transports: overall underperform with weakness in truckers, freight, car rental and rails while airlines outperform; in airlines, Morgan Stanley upgraded UAL to Overweight, DAL new To Pick, and downgraded ALGT to Equal weight saying after three years of uncertainty when the market was either too cold or too hot, 2023 could be the year when conditions are "just right", potentially delivering earnings well above market expectations; ODFL revenue per day increased 7.3% as compared to November 2021 due to an increase in LTL revenue per hundredweight that was slightly offset by an 8.6% decrease in LTL tons per day

·     Utilities & Solar: DQ downgraded to Neutral from Buy at Goldman Sachs saying due to capacity expansion in the industry, poly prices started to decrease in November 2022, which may weigh on Daqo’s margin and believe the stock is fairly valued; CSIQ signs 256 mw module supply contract for the first two largest solar projects with private PPAs in South Africa as construction started in October 2022, and commercial operation is planned for Q1’24; SEDG tgt raised to $360 from $309 at Cowen saying is well positioned to benefit from secular solar demand driven by policy and higher electricity rates, and shares trade at over a 40% discount to ENPH on 2023 EPS

·     Materials, Industrial, & Machinery: TEX downgraded from Buy to Hold at Deutsche Bank saying is in no way a reflection of a major change in their investment thesis, but noted the stock has outperformed materially, gaining 13% in the past month vs. +8% for Machinery peers; gold miners (AEM, NEM, GOLD) slid with gold prices, as dollar rebounds on bets that strong U.S. economic readings may encourage the Federal Reserve to increase rate hikes

Financials

·     Bank movers: financials among worst S&P sectors on the day (SIVB, ZION, SBNY, PNC); Morgan Stanley with focus on Midcap Banks as expect rising funding costs will increasingly drive the group in 1H23 and favor names with resilient funding profiles, which provide more support to revenue growth as liquidity conditions tighten further – Overweight rated on MTB, WBS, CFG, CFR, HBAN and Underweight rated on FRC, SIVB, SI; Piper Resuming coverage of 13 of Our Mid-Atlantic / Southeast Banks with OW on ABCB ; resumed at Neutral: CARE and resumed FCBC underweight; CS attracts Saudi Crown Prince WSJ reports saying could invest $500M https://on.wsj.com/3FtkGLM ; in REITs; SLG cuts annual dividend by 12.9% to $3.25 per share, affirms FY22 FFO and guides FY23 FFO $5.30-$5.60, below est. $6.12

Healthcare

·     Pharma movers: PFE and BNTX submit application to U.S. FDA for emergency use authorization of Omicron ba.4/ba.5-adapted bivalent COVID-19 vaccine in children under 5 years; VERV received a clinical hold letter from FDA that outlined information required to resolve clinical hold on verve-101; GSK downgraded to Underperform at Bank America saying the co remains their least preferred of the majors and our Underperform as see little to rerate the shares near-term and expect Zantac litigation to remain an overhang into 23E; HZNP slips early after JNJ’s Janssen confirmed today that it does not intend to make an offer for Horizon this weekend

·     Biotech movers AXSM files mixed securities shelf; UTHR initiated a Sell rating and $230 tgt at Goldman Sachs as see potentially fewer catalysts that can drive performance of the business at levels that they believe would be necessary to propel further outperformance of the stock; NKTX announces updated clinical data on anti-CD19 allogeneic CAR-NK cell therapy NKX019 for patients with relapsed or refractory non-Hodgkin lymphoma

·     Cannabis stocks extend recent gains: Barron’s noted Majority leader Chuck Schumer (D, NY) is said to plan to pass two distinct cannabis bills before this month’s holiday break. One bill would allow federally regulated banks to service marijuana businesses that are licensed in states where they operate. The other would provide federal grants for state and local programs helping expunge the records of individuals convicted of marijuana possession. The bills would appeal to separate ends of the political spectrum. Schumer reportedly plans to attach them to other legislation that the Senate must pass. The House will go along, having already passed the banking reforms under the name of The SAFE Banking Act. And President Biden will be on board, after calling for cannabis reforms in October.

Technology, Media & Telecom

·     Media, Internet: PINS US & International user trends look positive QTD said Piper as US November MAUs ticked down slightly versus October partially driven by seasonality (i.e., Halloween), but y/y growth rates are roughly the same at ~5%; for SNAP, Piper said look at Snap CPM data suggests Oct was weaker (-16% m/m), but may have improved in Nov (+29% m/m); ETSY tgt raised to $145 from $110 at Bank America amid strong 4Q data points but shares appear to reflect potential upside

·     Semiconductors: AVGO earnings on tap mid-week; ALGM being added to the 400 while SMTC being demoted to the 600; for the semiconductor space, Needham noted this morning 54% of the companies guided below the Street for 4Q22 sales, vs. 46% last quarter; not much news in group but semis little roll vs. broader tech (software bigger declines)

·     Software movers: CRWD was upgraded to Buy with $181 tgt at Daiwa following strong 3Q’23 operating results mixed with poor management outlook; ATVI rises early after Bloomberg News reported that MSFT is ready to fight for its $69 billion acquisition of the video gaming company if the US Federal Trade Commission files a lawsuit seeking to block the deal; RXT shares dropped early after reports of security incident that took out email services for some customers; CRM tumbles after second major mgmt departure in a week, shares fall over 7% while broader high growth software names slide (SNOW, CRWD, MDB, NOW)

·     Hardware, Components & Services: AAPL has accelerated plans to shift some of its production outside China, the WSJ reported https://on.wsj.com/3P3u8Zr ; Also for AAPL, 9to5 Mac said Apple’s AR/VR headset may be facing another round of delays, although it’s still expected sometime in 2023; Foxconn said November revenue totaled 551.1 billion new Taiwan dollars ($14.7 billion), down more than 29% versus October and over 11% lower compared to Nov. 2021; NTAP downgraded to Hold at Loop Capital as macro has moved its presence into storage, both on premise and in the Cloud (Hyperscalers)

·     Telecom movers: CMCSA upgraded upgrade from Underweight to Equal Weight at Wells Fargo and raise tgt to $38 from $30 saying some of the theses have played out with Cable derating as competition for subscribers has advanced from FWA and fiber; VOD CO Nick Read will step down on Dec. 31, the UK-based telecom company said; VZ said CEO of Verizon Consumer Group Manon Brouillette steps down and CEO Hans Vestberg to lead the unit alongside existing responsibilities