Closing Recap

Wednesday, December 07, 2022

Equity Market Recap

·     US markets still feel heavy, with a tendency to lean lower in the absence of a positive catalyst. We did see a lower-than-expected unit labor cost report this morning put pressure on Treasury yields, but stocks were less impressed and generally moved sideways throughout the day. By late afternoon, indices were down modestly with broad-market breath only slightly tilted to the downside. We will hear from the Fed again next week and the expected move remains heavily weighted toward a +50bps hike, though the implied terminal rate has slipped back to 4.92% in May 2023.

·     Sector moves were weighted slightly to the downside, consistent with the overall market tenor. Gainers included Healthcare (XLV) approx. +65bps, Consumer Staples (XLY) approx. +45bps and both Industrials (XLI) and Real Estate (XLRE) flattish. Consumer Staples (XLY) and Communications (XLC) paced the decliners, fading approx. -50bps, followed by Technology (XLK) and Financials (XLF) each slipping about 34-45bps. Growth trailed value, with the Russell 1000 Growth off approx. 25-30bps by mid-afternoon. Its Russell 1000 Value counterpart managed to fight the broader-market pressure to edge to the positive side of flattish.

·     Other items of interest: Rob Anderson at Ned Davis research noted sector leadership since the October lows have been inconsistent with a bear market bottom. Defensive sectors typically underperform in the 12 months following a bear bottom but have been holding up better thus far. Also of note, from @bespokeinvest, TLT has gained 15%+ month/month for only the third time since it began trading in 2002, while the ten-year yield is 89bps off its year-to-date high.

Commodities

·     WTI crude oil falls -$2.24 or 3.02% to settle at $72.01 per barrel after hitting another new low for the year at $71.75, down 12% from its intraday high on Monday on weak U.S. demand, rising crude output. Brent crude earlier fell close to its lowest in 2022 ($76.91), as hopes of higher Chinese demand offset concern about recession and easing fears that a Western cap on Russian oil prices would curb supply. China announced on Wednesday the most sweeping changes to its anti-COVID regime since the pandemic began, loosening curbs. January heating oil also fell by 4.6% to $2.7805 a gallon and January gasoline settled at $2.0772 a gallon, down nearly 3.4%.

·     Gold prices rose $15.60 or 0.9% to settle at $1,798.00 an ounce, benefitting again from the extended decline in the U.S. dollar and Treasury yields ahead of the FOMC next week.

Currencies & Treasuries

·     Treasury yields slide again as investors look to the safety of bonds amid stock market and economic uncertainty, with the 10-yr falling more than 15 bps of its best levels of the day before ending at 3.41%. Bespoke Investment noted the 10-yr yield down 90 bps from its YTD high and the 3month/10yr Treasury yield curve (-83 bps) has only been more inverted than it is now on 3 other trading days in the last 40 years.

·     The U.S. dollar also under pressure, more than 1,000 bps off its 20-year highs reached late September as the dollar index battles at the 105 level ahead of key inflation data Friday and the Fed meeting next week. The euro has moved above the 1,05 level vs. the buck after tumbling to 0.96 just 2-months ago and the Pound rises.

Economic Data:

·     U.S. Q3 non-farm productivity revised to +0.8% (consensus +0.6%), prev +0.3%; U.S. Q3 non-farm unit labor costs revised to +2.4% (consensus +3.1%), prev +3.5%

Sector News Breakdown

Consumer

·     Retailers: OLLI lowers year comp sales view to -3.3% to -3.8%, from prior -1.5% to -2.5% and lowered its FY EPS guidance view to $1.57-$1.62 from $1.74-$1.79 (est. $1.76) and sales to $1.82B-$1.83B from $1.84B-$1.86B prior after Q3 EPS/sales miss; VRA top and bottom line beat and said full-year sales won’t fall as much as initially feared (sees 6%-7% decline vs. prior 7%-9% decline view and narrowed year EPS view); SWBI Q2 EPS $0.26 misses est. $0.40; Q2 revs $121M vs. est. $145.41M; Q2 gross margins 32.4%; ASO boosted its profit and adjusted earnings outlook for 2022 but warned that comparable sales will decline at least 5% (raised year EPS to $7.50-$7.65 from prior $6.75-$7.50 a share, but comp sales to fall by 5% to 6%)

·     Auto sector: CVNA tumbles as Bloomberg reported that some of its largest creditors, including Apollo and Pimco, signed a cooperation agreement to prevent the creditor fights that have complicated other debt restructurings in recent years (Wedbush also downgraded to Underperform with $1 tgt)

·     Housing & Building Products: homebuilder TOL posts strong Q4 EPS $5.63 vs. est. $3.96 and revs +22% y/y to $3.71B vs. est. $3.22B while Q4 net signed contract value was $1.3B, down 56% y/y, contracted homes were 1,186, down -60% y/y, backlog value was $8.9 billion, down -7% y/y; home improvement retailer LOW issues guidance at analyst day; announced a new $15 billion share buyback and affirmed its FY outlook; in home furnishing, LOVE reports Q3 net loss of $8.4M vs net income of $2.8M last year and Q3 sales up 15.5% at $134.8M y/y; weekly MBA mortgage data showed applications index falls 1.9% to 204.2 in latest week, purchase index falls 3.0 pct to 175.5% and refinancing index rises 4.7% to 340.8 while 30-yr falls 8-bps to 6.41%

·     Consumer Staples: food stocks get a boost after CPB boosted its outlook after sales and profit rose at double-digit rates in Q1 as the company kept raising prices to offset rising costs (guides sales for year to 7%-9% from 4%-6% prior); BF shares fall on Q2 EPS miss of $0.49 vs. est. $0.55 and in-line sales while the cost of sales rose 19% – expects fiscal 2023 organic sales growth in the high single-digit range; UNFI posted a mixed quarter as EPS of $1.13 missed the $1.17 est. while net Sales of $7.53B topped the $7.46B estimate on in-line adj EBITDA $207M – reaffirmed year

·     Restaurants: PLAY Q3 EPS of $0.04 topped consensus by 2c and EBITDA outpaced consensus by ~10% owing to stronger comps, but quarter-to-date trends slowed; DRI tgt raised to $155 from $140 at Cowen ahead of earnings on 12/16 and raising 2Q Olive Garden comps to 4% from 2.5% (vs 3.3% consensus) given confidence in upside from Never Ending Pasta Bowl, and are above consensus on 2023 sales & EPS

·     Leisure & Travel: Wolfe Research downgraded BKNG, EXPE, TRIP saying travel demand is likely to moderate amidst macro slowdown in ‘23 and consensus doesn’t appear to reflect the magnitude accurately, and many online travel co’s have ventured into less efficient customer acquisition channels over the last 12-18 months and have seen unit economics erode vs. ’19; ABNB downgraded to Underweight and $80 tgt at Morgan Stanley saying supply deep dive speaks to slowing listings growth, occupancy headwinds, and lower room night demand; in theatres, Wedbush said coming out of a difficult autumn that suffered from temporary release slate holes, and ahead of an improving release slate, they resume our positive overall view of our theater-based names with Outperform on IMAX, CNK, NCMI

·     Casinos & Gaming: in Macau casinos, Citigroup downgraded SJM to Neutral as they are worried about GLP’s ramp-up after the recent departure of some senior executives – but looking ahead into 2023E, they expect new hotel supply and infrastructure improvement to propel Macau’s Mass GGR growth; Macau casinos jumped initially overnight (WYNN, MLCO) on loosening Covid restrictions in China, but weaker economic data a reminder or slowing global growth

Energy

·     Energy stock movers: The American Petroleum Institute said weekly crude oil inventories fell -6.42M barrels, vs. -7.85M barrels the week prior; in E&P and Majors: CRK and CTRA downgraded to Sell at Citigroup and downgraded SWN and EQT to Neutral as see risk that Haynesville production growth is forced to slow as egress falls short and gas inventories trend above normal

·     Utilities & Solar: Dominion (D) downgraded to Equal weight at Wells Fargo with $64 tgt on value and concerns that even if the co manages to outperform our $4.20 ests investors will no longer overlook any over-earnings or lower quality earnings on the non-utility side; NRG downgraded to Sell from Neutral and tgt cut to $30 from $42 at UBS on uncertainties around growth profile and congruent strategy between electric/gas service and home security after acquires VVNT

Financials

·     Bank movers: FITB to buy back about $100M of its common stock; STT raises stock buyback by another $500M to a total of $1.5B; HOOD Nov. Monthly active users 12.5m, -33% y/y from 18.6M and assets under custody $70.2B, -35% y/y with Crypto daily average revenue trades down -40% y/y and equity daily average revenue trades -48% y/y; MTB top decliner early in the S&P after KBW downgraded saying recent guidance suggests lower than expected net interest margin coupled with lower than expected fees

·     Financial Services & Insurance: TW upgraded from Market Perform to Outperform at Raymond James with $74 tgt as believe Tradeweb can achieve solid growth results in a variety of macroeconomic conditions; Axios reported the average driver is expected to pay $1,895 per vehicle for car insurance in 2023, according to a study that analyzed 69M rates across 50 states – up 29.5% from 2020, the first-time average insurance premiums will top $150 monthly.

·     FinTech & Payments: STNE and PAGS both downgraded to Equal weight at Morgan Stanley saying as interest rates will likely remain higher for longer, will have a negative impact on TPV growth and funding costs, and pressuring earnings and profitability. Valuations look fair given balanced risk-reward and limited visibility on policy & interest rates path; MA board of directors announces quarterly dividend and $9 billion share repurchase program

·     REITs: PMT the second REIT to cut its dividend this week, cutting quarterly dividend by 14.9% to $0.40 from $0.47 (follows lower div cut from SLG Monday); WELL shares declined after short seller Hindenburg Research publishes new report on company

Healthcare

·     Pharma movers: NBIX suffered another pipeline disappointment, announcing that the Phase 2 STEAMBOAT study of NBI-827104 in pediatric patients with epileptic encephalopathy with continuous spike-and-wave during sleep (EE-CSWS) missed the primary endpoint; REPL said it signed a deal to work with Roche Holding AG to advance Replimune RP2/3 program in colorectal cancer and hepatocellular carcinoma.

·     Biotech movers: RXDX surges after reports positive mid-stage data testing antibody PRA023 in ulcerative colitis and Crohn’s disease treatment trials as both studies showed strong efficacy and favorable safety results; AXSM announced that treatment with AUVELITY resulted in rapid, substantial, and durable improvements in cognitive and physical functioning in the EVOLVE open-label trial in major depressive disorder.

·     MedTech Equipment; CDMO beat top line and raised full-year revenue guidance though bookings were short of expectations at $26M relative to KeyBanc $44M estimate, but says somewhat countered by CDMO’s Process Development (PD) growth of 74% to $7M

·     Healthcare Services: HQY Q3 beat and FY23 guidance raised; FY24 revs guided $950-970M vs consensus $948Mand raised EBITDA guidance for FY23 and issued FY24 guidance (ahead of their typical schedule) that was well above estimates

Industrials & Materials

·     Defense & Industrial & Machinery: in waste sector, RSG downgraded to Market Perform at BMO Capital noting shares have significantly outperformed the market year to date (flat vs. S&P 500: -16%) reflecting robust industry conditions, solid execution; BWXT said it starts production of TRISO nuclear fuel that will power the first microreactor built and operated in the United States.

·     Transports: in airlines, LUV reinstated its dividend saying its Q4 outlook remains strong, and have a solid plan for 2023 as it trimmed its fourth-quarter fuel cost forecast by about 5 cents per gallon and said it was expecting "strong leisure revenue trends" to continue into the first quarter; overall Dow Transport sector underperform, falling near its 100-day MA level 13,750

·     Metals & Materials: MOS said it is temporarily cutting production at its Colonsay potash mine in Saskatchewan as farmer demand wanes, sending prices down; precious metals got a boost as the dollar resumed its recent slide, lifting shares of miners GOLD, NEM, PAAS

Technology, Media & Telecom

·     Media, Internet; SHOP was upgraded at CIBC, but downgraded at Wolfe Research, along with CHWY ahead of earnings; SFIX posted slightly lower than expected revenue results but better than expected adjusted EBITDA results, reflecting ongoing cost-savings efforts; PINS announced a cooperation agreement with Elliott, and appointed Marc Steinberg (a senior portfolio manager at Elliott) to Pinterest’s board; SKIL outperformed consensus revenue and adj. EBITDA ($139M / $28M vs. $136M / $26M estimates) but missed on bookings ($133M vs. $136M estimate); MSGE provides update on potential spin-off transaction; now exploring a potential spin-off of its traditional live entertainment business

·     Semiconductors: for MU Wells Fargo lowers tgt to $70 from $75 saying weakening fundamentals leave them to now model non-GAAP EPS losses thru F2023; down-cycle bottom shifting to mid/2H2023 vs. prior 1H2023 expectation; for STX UBS said the current Q is tracking as expected in terms of revenue, though STX has been more aggressive in bringing down utilization to clear inventory off the B/S and this could pressure GM and EPS versus the original guidance

·     Software movers: MDB a standout to the upside after as EPS of $0.23 and revs $333.6M tops est. $0.17/$304.9M), up 47% y/y, a deceleration from 53% last quarter, with strong Atlas revenue growth of 61%), but down from 73% growth last quarter; GWRE posted better Q1 results with total revenue of $195.3M, up 18% y/y (consensus $191.7M); non-GAAP EPS of ($0.12) (consensus ($0.39)); subscription revenue of $79.0M, up 38% y/y, a deceleration from 50% growth last quarter; ARR of $673M, up 13% y/y; ZUO cutting headcount by 11% as macro dynamics have forced the co to align expenses to near-term growth profile and improve near-term profitability

·     In cyber security, SentinelOne (S) reported Q3 ARR of $487.4m (+106% y/y vs +122% last qtr) was ~2% below Street on operating margin of -43% (vs -69% a year ago) but better than guide with implied Q4 ARR guidance of ~$546m (+87% y/y vs +106% in F3Q23) was ~5% below Street

·     Hardware, Components & Services: for AAPL, Morgan Stanley cut Dec Q iPhone units by another 3M (to 75.5M) to account for a slower Zhengzhou production ramp, bringing Dec Q rev down 3% to $120B. Remain constructive on iPhone demand durability given solid lead time data, but for now, conservatively assume no additional units are pushed into the March Q.