Closing Recap

Thursday, December 16, 2021

Equity Market Recap

·     A much different picture on Wall Street Thursday as stocks profit taking in tech and consumer discretionary sunk major averages following a massive surge in equities Wednesday post the FOMC policy meeting, where Fed officials left rates unchanged as expected, will reduce bond purchases by $30 bln a month, and projects three interest rate rises in 2022 and median forecasts show, 3 in 2023, and 2 more in 2024. The news didn’t scare investors yesterday, but clearly a different mood today, especially with other central banks in action today (see below). It initially looked like the upside momentum would continue with futures rising overnight, but that was short lived as high growth tech stocks saw extended selling pressure, led by a 4% decline in semiconductors (SOX) and a drop in software names after ADBE weaker guidance. Financials, energy, materials, staples, utilities, and industrials saw modest gains. Oil rose along with gold as the dollar and Treasury yields tumbled. Despite the S&P 500 coming off all-time highs earlier this morning, the underlying breadth of the broader market has been awful for months. As of yesterday, technician Carter Braxton Worth noted that the Russell 3000 was 3.4% off its 52-week highs…saying that 2,288 stocks or 76% of index was down 10% or more off 52-week highs, while 559 of them (or 18.6% of index) were down 50% or more from 52-week highs (those numbers probably look worse after today). A much more telling picture of the weak underlying market.

·     Stock & Sector Movers: Metals outperform today as FCX was named as a Top Pick for 2022 by BMO and also rises with other Copper stocks SCCO, TECK as prices rise after a major Peruvian mine said they would halt output on Saturday due to transport disruptions; steel names higher as STLD soars on strong guidance to also lift NUE, X; gold miners NEM soar with gold, silver prices; ACN hits ATH and leads the S&P after its beat-and-raise report, ADBE was the index’s weakest stock on disappointing guidance and LEN stumbles on its quarterly miss; JBL hits 21-year high after its earnings; FDX flat into tonight’s report; HOOD stumbles, now more than 50% off its $38 IPO price in July after Bank of America initiated it at Underperform and JPMorgan lowered their price target to a street-low $17; AFRM, MQ, PYPL slid as Reuters reported the CFPB is opening an inquiry into BNPL firms; defensive staples stocks rising with rotation into defensive sectors CAG, MO, K, KHC, SJM, MKC all jumping.

·     The European Central Bank (ECB) cut support for the euro zone economy, but promised some continued support for 2022 while keeping rates steady, confirming its relaxed view on inflation. ECB said expects to conduct net asset purchases under pandemic emergency purchase program (PEPP) at a slower pace than in previous quarter. ECB raises 2021 eurozone economic growth forecast to 5.1% from 5%1; lowers 2022 eurozone economic growth forecast to 4.2% from 4.6%. The Bank of England raised its benchmark interest rate to 0.25% from 0.1% by an 8-1 decision, while Monetary Policy Committee says holding rates steady risked fueling inflation expectations. The BOE said level of global GDP in 2021 Q4 is likely to be broadly in line with the November report projection, while Omicron variant poses downside risks to activity in early 2022.

·     The IPO market is winding up the busiest year for deals since the dot.com boom of 2000 and the best-ever year for proceeds raised at $142.5 billion, according to Renaissance Capital, a provider of institutional research and IPO exchange traded funds. There were 27 deals worth a billion dollars led by electric truck company Rivian Automotive Inc. (RIVN), which raised $12 billion to mark the biggest IPO since that of Alibaba in 20214. Blank check IPOs had another record-breaking year as 604 SPACs raised $143.5 billion and nearly 200 private companies listed via SPAC, and direct listings continued to gain footing with six deals." The average IPO returned negative 10% for the year, while the Renaissance IPO ETF is down 14% YTD – Marketatch.com

Economic Data:

·     Weekly Jobless Claims rose +18K to 206K vs. 200K consensus and 188K prior (revised from 184K); the 4-week moving average fell to 203,750 from 219,750 prior week (previous 218,750); continued Claims fell to 1.845M from 1.999M prior (est. 1.936M); the U.S. insured unemployment rate fell to 1.4% from 1.5%

·     Housing starts for Nov rose +11.8% to 1.679M unit rate (above est. 1.568M) and well above Oct -3.1% at 1.502M units; single-family starts +11.3% to 1.173M unit rate and multifamily +12.9% to 506,000-unit rate. Building permits 1.712M unit rate (vs. est. 1.663M)

·     Philadelphia Fed business conditions December 15.4, well below consensus 30.0 and November 39.0; prices paid index December 66.1 vs November 80.0; new orders index 13.7 vs 47.4 prior; employment index 33.9 vs 27.2 prior; six-month business conditions 19.0 vs 28.5 prior; Fed current business conditions index at lowest since December 2020

·     Industrial Production for Nov rises +0.5% vs. est. +0.7%, and below Oct +1.7%; November capacity use rate 76.8%, in-line with estimates and vs Oct 76.5%; Nov manufacturing output +0.7% (vs. consensus +0.7%) and vs Oct +1.4% (previous +1.2%)

·     IHS Markit December flash composite PMI at 56.9 (vs 57.2 in November), while IHS Markit December flash services PMI at 57.5 (vs 58.0 in November). Manufacturing PMI index at lowest since December 2020; manufacturing input prices index at lowest since May

Commodities, Currencies & Treasuries

·     Oil prices rise behind a weaker dollar, as WTI crude gains $1.51 or 2.13% to settle at $72.38 per barrel, while Brent crude gains $1.14 or 1.54% to top $75.02 per barrel. Gold prices jump to its highest level in 3-week, gaining $33.70 or 1.9% to settle at $1,798.20 an ounce, benefitting from a second day of declines in the dollar, and a flight to safety as stocks pullback

·     U.S. Treasury yields extend slump, as the 10-yr yield falls over 3 bps to 1.42% (off earlier highs above 1.47%), while shorter-term yields fell further, as the 2-yr slipped over 6 bps to 0.62%, the 3-yr down 8.7 bps to 0.91% and the 5-yr down over 8 bps at 1.177%. The fact that Fed is speeding up asset tapering and indicating three rate hikes in next 2-years not lifting yields at all.

·     The U.S. dollar fell for a second day, with the dollar index (DXY) dipping -0.5% to around the 96 level (off lows of 95.85) following results of several central bank policy updates out of the UK, England, Switzerland, and Norway. The British pound jumped after the Bank of England (BoE) became the first major central bank to raise interest rates since the beginning of the pandemic, while the euro climbed after the ECB said it would continue to cut its bond purchases. The moves come after the U.S. Federal Reserve said yesterday it will end its bond buying in March.

Sector News Breakdown

Consumer

·     Retailers; Stifel downgraded COLM to Hold with a lower $111 PT from $126 after reducing 4Q21 and FY22 estimates on concern about the sell-through of outerwear and boots due to the unseasonably warm temperatures and cut UAA to Hold with a $24 PT from $30 to reflect lower confidence in potential for revenue and margin upside across FY23, and named LULU, LEVI, ONON, SKX, BIRD, COOK, DLTH as their top 2022 picks in sports/lifestyle; Truist initiated Buy ratings on NKE ($190 PT), RL ($141), ROST ($136), DKS ($161), BURL ($350), TJX ($92), and Hold ratings on PVH ($100), LULU ($435), UAA ($24), and VFC ($79); Bank of America lowered their estimates on OSTK and target to $100 from $110 as they believe Q4 sales and earnings will be lower than expected based on choppy holiday spending, potential pressure from higher online advertising rates and privacy changes from AAPL, and a slowdown in overall online furnishings spending since early November; TGT had its price target cut to $250 at Gordon Haskett

·     Auto sector; GOEV upgraded to Buy with $14 tgt at Roth Capital; KXIN announces intention order for 10,000 electric vehicles; TSP said DHL Supply Chain, a subsidiary of Deutsche Post AG, places U.S. order for 100 trucks equipped with TSP self-driving technology; in auto parts, Barclay’s downgraded ADNT to EW (PT $43) while reiterating OW on GM and F (and raising F PT to $23) saying while investors seem largely inclined to buy auto suppliers for a ’22 production rebound, they are cautious about the impact of inflation on the group, while OEMs should continue to enjoy strong pricing with tight inventories; LEA downgrade to Equal weight at Wells Fargo on valuation as see the mid-term production recovery as priced-in; AZO announces additional $1.5B share repurchase program

·     Housing, Home Furnishings, & Building Products; homebuilder LEN with a mixed quarter as 4Q21 EPS of $3.91 missed $4.15 consensus but excluding a $167M pre-tax Mark-to-market negative impact due to declines in public investment values, core EPS would have been $4.36, but guides Q1 delivery guidance is ~2,750 (18%) units below BTIG forecast, and the SG&A/sales guide is ~65 bps below their estimate; Wayfair (W) downgraded to Underperform from Neutral at Bank America with a price target of $175, down from $265 on a continuation of weak near-term data, tough comparisons through 1Q22 and our belief that there is risk from W’s core mass consumer customer shifting spend from furnishings back into other categories such as travel and entertainment in 2022.

Energy

·     Energy stock movers; Saudi Arabia’s October exports rose by 317K bpd from Sept. to 6.833M, its domestic refinery crude throughput rose 121K bpd to 2.611M, crude output rose by 118K bpd to 9.78M, crude stocks rose 264K bbls to 136.8M, and direct crude burn fell 215K bpd to 328K

·     E&P and Majors; Goldman upgraded PBR to Buy and downgraded EC to Neutral; EQNR and Engie (ENGQF) commenced production of low-carbon hydrogen from natural gas in Belgium; ESTE to buy the assets of Warburg Pincus-backed Chisholm Energy Holdings LLC located in the northern Delaware Basin of New Mexico in a $604 mln cash-and-stock deal; the EIA said Natural Gas Inventory: -88 bcf vs. -86 bcf consensus, -59 bcf last week; in refiners: Wells upgraded HEP to OW; WES repurchased 2.5M units from OXY for $50.2M as part of its $250M repurchase program

·     Utilities & Solar; FREY was awarded a 5-year supply agreement for at least 31 GWh of low-carbon battery cells with an undisclosed, leading global publicly listed manufacturer and provider of energy storage systems; STEM acquired solar asset management software company AlsoEnergy in a $695M deal for 75% cash, 25% STEM stock; PLUG partnered with Korean EV maker Edison Motors to develop and mass produce hydrogen-powered electric city buses; BE will provide power through LNG for the first cruise ship operating on solid oxide fuel cell; TD Securities upgraded BEP to Buy with a $41 PT; BMO upgraded HCC to Outperform as their underappreciated earnings/FCF resiliency raises the potential for meaningful capital returns in 2022 and is one of their 3 top picks for 2022 along with ARCH

Financials

·     Bank movers; rebound for banks early; Citigroup updated models mainly to reflect house view on rates including Fed lift-off in June 2022 with our models embedding seven consecutive quarterly hikes, and 2.25% 10yr by year-end 2022. Our top picks on higher rates are Buy-rated CMA, MTB, STT and BK and we are Buy-rated on BAC, TFC and USB; as well as GS; Bank America initiated ARES, CG, BX, IBKR, SCHW, NDAQ, TW initiated at Buy ratings, APO, HOOD, CME, TROW initiated Underperform as initiate on four industries: US Alternative Asset Managers (Positive), US Brokers (Modestly Positive), US Exchanges (Mixed) and US Traditional Asset Managers (Cautious) based on our view of long-term earnings relative to market expectations complemented by valuation; in trust banks, BK upgraded to Overweight at JPMorgan saying all trust banks benefit from higher rates and should all outperform the market, but raise BK relative to peers due to its greater benefit from rate hikes from materially higher money market fee waivers, which will abate with rate hikes; ACBI, SSB upgraded to Outperform, CFB upgraded to strong buy and PB downgraded to market perform at Raymond James

·     FinTech & Payments and Consumer Finance; Visa (V) board authorizes new $12B share repurchase program; HRB is suing Block Inc. (SQ), the financial-technology company formerly known as Square Inc., for trademark infringement; Reuters reported late morning the U.S. Consumer financial protection bureau to demand buy-now-pay-later (BNPL) firms provide details about product offerings, use of consumer data (shares of AFRM, MQ active)

Healthcare

·     Pharma/Biotech movers; PFE tops $60 per share as healthcare names outperform; REGN shares slipped after confirming its Covid-19 antibody treatment loses potency against the new Omicron variant. REGN had said it was evaluating how well the drug worked against Omicron in November, warning it expected the drug might not perform as well as with earlier strains; NVAX says application has been submitted with Ministry of Health, Labor and Welfare in Japan seeking approval for its COVID-19 vaccine; LEGN 7.5M share Secondary priced at $40.00; SABS shows data demonstrating that SAB-185, a therapeutic candidate for the treatment of COVID-19 infections, retains neutralization activity against the Omicron variant; QURE tumbles as announces clinical update on first patients in phase I/II clinical trial of AMT-130 gene therapy; said treatment was well tolerated with no significant safety issues; ENDP falls after FDA asks FTC to investigate ‘anticompetitive’ practices

·     Healthcare Services; ANTM added to Goldman conviction list; CI, HUM, WBA, BHG all downgraded at Morgan Stanley saying: Cigna (CI) to Equal-weight on: overexposure to low-growth commercial population, less exposure than others to value-based care, and limited potential for re-rating; HUM cut to Equal-weight as lacks near-term Medicare Advantage catalysts, which given an already premium multiple to other MCOs may limit upside on a relative basis; downgrade WBA to Underweight as now model no EPS growth through FY23and have limited visibility into WBA’s emerging healthcare strategy; BHG to Underweight saying within the "healthcare disruptor" IPO class, we see the most difficult road ahead for BHG considering its elevated operating losses and unsteady performance as the company prioritizes growth

·     MedTech Equipment; ISRG added to Goldman conviction list; MDT downgraded to Equal Weight from Overweight at Wells Fargo citing the recent setbacks and delays to four of MDT’s key pipeline products, namely renal denervation (RDN), the Hugo soft tissue robot, the 780G insulin pump, and Linq 2

Industrials & Materials

·     Aerospace & Defense; Qantas Airways picked Airbus (EADSY) as the preferred supplier to replace its domestic fleet, switching from Boeing (BA in a major win for the European plane maker. The Australian national airline said it had committed to buying 20 Airbus A321XLR planes and 20 A220-300 jets, along with options for 94 aircraft; SPR named top commercial aero pick at Cowen and the best play on 737 recovery with longer term consolidation potential given its margin enhancing supply chain leverage; AL announced the delivery of one new Airbus A350-1000 aircraft on long-term lease to Air Caraibes Atlantique and one new Airbus A350-1000

·     Industrial & Machinery; GNRC was upgraded to Buy from Neutral at Bank America with $475 tgt citing the 30% pullback in shares the last six weeks; BW announced deal with cryptocurrency miner Applied Blockchain to develop new baseload power projects is a nice expansion of the pipeline and creates a new platform in a growth vertical; BLBD slides as Q4 adj EPS 7c missed the est. 19c on sales $192.2M vs est. $242.5M as supply chain disruptions resulted in more than 2,000 bookings being delayed to fiscal 2022

·     Transports; FDX with earnings after the close tonight; airline DAL said expects to be profitable in 2022 on a strong holiday demand, even as travel restrictions have been reimposed due to the Omicron – sees full-year 2022 available seat miles (ASMs) about 90% vs. 2019; full-year 2023 ASMs about 100% vs. 2019; The U.S. Federal Aviation Administration said Thursday it will award $2.89 billion to 3,075 airports under a new $1 trillion infrastructure bill signed into law recently

·     Metals & Materials; copper stocks active (FCX, SCCO, TECK) active as major Peruvian copper mine to halt output; DNMR tumbled after the company said it intends to offer $175 million in convertible senior notes due 2026 in a private placement; steel producer STLD said it expects adjusted 4Q EPS $5.69-$5.73, above analysts’ forecast of $5.58, which excludes the steelmaker’s continuing costs for the construction of a new steel mill in Texas and other charges; gold miners AEM, NEM, AUY rebound as gold prices jump back near $1,800 an ounce

Technology, Media & Telecom

·     Semiconductors were among the hardest hit tech sectors in rout of high growth tech winners this year as investors rotate into cyclical names (energy, financials); extending losses for semis was a Bloomberg headline Apple (AAPL) building out a new office to bring wireless chips in-house, which hit shares of Apple suppliers SWKS, AVGO, QCOM, STM among them; NVDA and AMD two of 2021 biggest winners saw profit taking after yesterday’s surge

·     Internet; SHOP upgraded to Outperform from in-line with $1,770 tgt at Evercore/ISI based on: 1) the stock is dislocated; 2) this is a high quality fundamentals asset; 3) this is a high quality asset in terms of growth opportunities and option value; & 4) evidence of momentum in the arming of the rebels; Wedbush sees an opportunity in RVLV because they believe the company’s new 5-day holiday promotional period from last year’s 12 days shows strong trends, but said they lowered their estimates on FTCH with a lower $30 PT from $38 and said to avoid the stock even down ~35% over the past month as they’ve accelerated their promotional activity this month

·     Online travel; RBC Capital upgraded BKNG to Outperform and downgraded ABNB to Sector perform saying key focus heading into ’22 is a potentially fairer fight between digital marketplaces and the suppliers from which those digital natives draw their value. They think this is most prevalent in verticals like alternative accommodations, restaurants, home services and car retail in our coverage; SABR signs Nok Air as a new customer

·     Software movers; ADBE shares tumble after a disappointing 2022 outlook guiding revenue of around $17.9B and EPS about $13.70, below estimates of $18.16B and $14.26 as well as weaker Q1 top and bottom line which followed in-line Q4 results; IRNT plunges after disappointing Q3 results and dramatically lowered its full year recurring revenue outlook (Q3 ARR of $27.5MM missed by almost 30% and cut year-end ARR target by 60% to $30MM (+16% y/y) from $75MM (+191% y/y) previously citing delayed large late-stage strategic deals in the U.S. public sector

·     Hardware, Components & Services; ACN beats Q4 PS by $0.15, beats on revenue; raises full year outlook as now expects full-year revenue growth of 19% to 22% in local currency (prior 12-15% Y/Y revenue growth) vs. consensus growth of 13.67%; EPS of $10.32 to $10.60 vs. consensus of $10.13; JBL posts Q1 revenue of $8.57B, topping ests of $8.29B while expects to post Q2 rev of $7.1B-$7.7B vs. est. $7.37B; CDK downgrade to Equal-weight at Morgan Stanley saying despite increasing its leading mkt share in the last couple years, achieving various milestones & taking strategic actions, shares have waxed and waned.

·     Media & Telecom movers; Morgan Stanley upgraded AT to Overweight from Equal Weight with a price target of $28, down from $32, as raised the firm’s Telecom Services industry rating to In-Line from Cautious following a sustained period of underperformance that he sees having brought valuations in the space to historically attractive levels on both an absolute and relative basis; VZ and Google cloud to collaborate to deliver 5g mobile edge computing as ERIC will pilot 5g edge with google distributed cloud edge at its USA 5g smart factory; Bruce Springsteen has sold his recording masters and music publishing to Sony Music Publishing (SONY), in a combined deal worth around $500 million, Billboard reports.