Closing Recap

Friday, February 17, 2023

Index	Up/Down	%	Last
DJ Industrials	130.07	0.39%	33,826
S&P 500	-11.18	0.27%	4,079
Nasdaq	-68.56	0.58%	11,787
Russell 2000	4.14	0.21%	1,946

 

Equity Market Recap

·     Stocks closed lower (but at best levels of the day), adding to Thursday losses finish mixed on the week with the S&P lower, but Dow, Nasdaq, and Russell all posting modest weekly gains heading into the 3-day President’s holiday weekend (bond and stock markets closed Monday). Weakness in Energy (biggest loser), Technology, Materials, and REITs, outpaced gains in defensive Staples, Utilities, and Healthcare as market breadth favored decliners. Still, major average finished well off their afternoon lows. The Dow Jones Industrial Average held steady, led by defensive healthcare and staples (AMGN MRK JNJ PG KO) while tech and energy lag (CRM CVX INTC MSFT). After a week of “hotter” than expected inflation readings with both CPI and PPI coming in above views, traders are expecting at least two more rate increases and see the Fed rate peaking at 5.3% by July (and now no rate cuts forecast by end of year). Stocks managed to rebound as Treasury yields fell from earlier 3-month highs (3.93% on 10-yr) and as the VIX finished near the lows of the day. On Thursday, two of the Fed’s most hawkish (and nonvoting) policymakers – Loretta Mester and James Bullard – signaled they may favor returning to bigger, 50bps rate hikes in the future, while European Central Bank Executive Board member Isabel Schnabel also warned that markets may be underestimating inflation, and the risk that the ECB “may have to act more forcefully” against it.

·     Wall Street raising expectations of more rate hikes: 1) Bank America increased its terminal rate forecast on Friday, saying it now expects the Federal Reserve to continue its rate-hiking campaign until its June meeting. However, the firm still predicts that the central bank will begin cutting rates in early 2024. 2) UBS still expect two more rate hikes by 0.25%. After that, we expect the FOMC (Federal Open Market Committee) to turn around and begin to cut interest rates at the September FOMC meeting. 3) Goldman Sachs chief economist Jan Hatzius is now expecting the U.S. Federal Reserve to hike interest rates three more times this year by 25 basis points. The investment bank now expects the funds rate to peak at 5.25-5.5%. Said considering the stronger growth and firmer inflation news, we are adding another 25bp rate hike to our Fed forecast.

·     Stats today: 1) @KobeissiLetter: JUST IN: Total U.S. credit card debt has just hit a record $986 billion. This marks a $61 billion increase in Q4 2022 as well as the largest quarterly increase since 1999. 2) Opco notes Y/Y Earnings-per-share has turned negative for the first time since C19. With 84% of companies reported, S&P 500 Q4 GAAP earnings are down 29% year-over-year, the 3rd straight quarter of negative YoY growth and the largest decline since Q2 2020.

 

Commodities, Currencies & Treasuries

·     U.S. crude oil futures settle at $76.34/bbl, down $2.15, 2.74%, but off the lows of $75.06 per barrel, sliding on concerns more U.S. Fed interest rate hikes could weigh on demand, and signs of ample supply. Prices post third weekly drop in the past four weeks after having rallied last week after Russia said it was cutting its oil production by 500,000 barrels a day. Prices moved lower yesterday after the massive EIA weekly oil stock increase, even though the data was impacted by a one-off data adjustment. Saudi Arabia also pledged that OPEC+ will hold oil supplies steady.

·     Natural gas ends at lowest since late September 2020, falling -4.8% to settle at $2.275 mln MMBtu amid fears of a glut. Gold prices slip -$1.60 to settle at $1,850.20 an ounce, below last Friday’s closing high of $1,874.50 an ounce as rising Treasury yields and dollar, amid a more hawkish rate outlook, weighed on commodity prices.

·     The U.S. 10-Year Treasury yield hit a high of 3.93% this morning (briefly), best level since early-November, but ended near the lows below 3.83%, but still posted its 4^th straight week of gains. The US dollar also early strength but faded late day.

 

 

Macro	Up/Down	Last
WTI Crude	-2.15	76.34
Brent	-2.14	83.00
Gold	-1.60	1,850.20
EUR/USD	0.0028	1.0696
JPY/USD	0.19	134.13
10-Year Note	-0.016	3.827%

 

 

Sector News Breakdown

Consumer

Autos:

·     In auto retail and dealers: KMX shares fall as just one month after markets were stumped by a big jump in real-time (not the lagged CPI variant) used car prices, Cox Automotive reported that its Manheim Used Vehicle Value Index which tracks the auction prices of wholesale used cars, increased again, this time by 4.1% from January in the first 15 days of February. According to Cox, "this was the largest February increase since 2009’s full-month 4.4% gain; AN Q4 adjusted EPS $6.37 tops consensus $5.82 as revs rise to $6.70B vs. est. $6.49B as new Vehicle revenue $3.15 billion, +7.9% y/y; PAG announces additional securities repurchase authority of $250 million.

·     In auto suppliers: AXL shares slide on unexpected quarterly loss and in-line revs; VC was downgraded to Neutral at Guggenheim ahead of investor day (3/7), primarily because of what they view as a relatively full valuation and the potential for optically weaker 1H23 results that we expect to leave shares range bound.

 

Consumer Staples & Restaurants:

·     In restaurants: TRXH posts a top- and bottom-line Q4 miss (4Q EPS $0.89 vs est. $1.03 on revs $1.01B vs est. $1.02B) and said Q4 restaurant margin decreases 1.32% to 14.5%, pressured by commodity, wage and other inflation; BJRI mixed as EPS and sales beat but comps below views (Q4 EPS $0.17/$344.3M vs. est. $0.06/$343.7M) and comps +6.6% vs consensus +7.7%; CHUY Q4 EPS $0.27 /$104.1M tops consensus $0.20/$102.9M with comps +3.4% vs consensus +3.0% and guides FY EPS $1.60-$1.65 vs consensus $1.46 and 6-7 new restaurants.

·     In food: Piper said they remain bearish on BYND as retail sales declines continue to accelerate, and steady sales from its recently launched jerky are masking a greater acceleration in declines for the rest of its portfolio

·     Citi initiates coverage on the U.S. Beverage and Household Products & Personal Care industry with Buy ratings on EL, PG and STZ as favor high-quality names that have fallen on temporary concerns with gross margin expansion opportunities as commodity prices decline and real pricing power. Also, like CL, KO, and MSNT with sell ratings on KMB, BFB.

Leisure, Gaming & Lodging:

·     In ride hailing: DASH shares a sharp reversal off overnight gains, falling nearly 10% at one point despite posting a beat and raise 4Q22, whereby GOV and EBITDA came in 2% and 8% above consensus, respectively, while the Delivery platform lost more than half a billion dollars in the fourth quarter, as impairment charge and layoffs weigh on bottom line.

·     In gaming: DKNG Q4 EPS loss (-$0.53) vs. est. loss (-$0.59) and revs better rising 81% y/y at $855.13M vs. est. $800.23M; said monthly unique payers, or MUPs, increased to 2.6M and average revenue per MUP was $109, up 42% y/y; raised its fiscal year 2023 revenue guidance to a range of $2.85B-$3.05B, which equates to 27%-36% growth vs. est. $2.95B.

 

Homebuilders, Building Products, Home Furnishing:

·     In homebuilders: RBC Capital calls out the Swift 80 bps move higher in mortgage rates over the past two weeks, retracing a significant portion of the ~130 bps decline from November-February, noting builders have remained resilient (down just 4% from recent highs), creating notable downside skew in our view if rates stay at current/higher levels (underperform on DHI, LEN). TOL expected to report earnings next week.

 

Energy

·     Energy stocks the biggest drag on the S&P 500 (DVN, HES, APA, FANG), with oil prices falling over 4% pressured by concerns of more U.S. Federal Reserve interest rate hikes that could weigh on demand, and signs of ample supply after bigger inventory builds reported this week. Saudi Arabia also pledge that OPEC+ will hold oil supplies steady. WMB said it has executed agreements with CVX to support natural gas development in the prolific Haynesville Basin as well as the deepwater Gulf of Mexico. Defensive Utility stocks outperformed (AEE, FE, SRE), the leaders in the S&P 500 index following the “risk-off” move for growth stocks the last 2-days. Baker Hughes said weekly US oil rig count down 2 to 607 – US gas rig count up 1 to 151.

 

Financials

REITs:

·     In security facilities (GEO, CXW), Wedbush notes based on information from the official Supreme Court website, it appears that the pending case related to Title 42 has been removed from the February 2023 argument calendar, a positive for GEO and CXW. This news comes a little over a week after the Biden Admin urged the Supreme Court to dismiss a challenge related to the ending of Title 42, citing that their plans to end the health emergency related to the pandemic on May 11th would make the case moot. Digital REIT DLR slides after earnings results.

 

Healthcare

Biotech & Pharma:

·     APLS gets FDA approval of Syfovree for the treatment of geographic atrophy; shares of rival drug maker ISEE, which has its PDUFA in August, rallied in sympathy.

·     MRNA shares slide after announced that a study into a flu vaccine candidate failed to reach one of its goals; said that the candidate accomplished superiority in two goals and non-inferiority in another but did not reach the non-inferiority standard on the other goal of the study.

·     REGN tgt raised to $860 at Wells Fargo saying their deep dive indicates higher probability of upcoming COPD trial (1H’23) working and risk/reward is $25-55/share up & $45/share down, but success seems more likely.

·     VTRS downgraded to MP from OP at BMO Capital and cut tgt to $14 from $16 saying they are progressing well with strategic initiatives to create additional value, but stock could be rangebound pending execution on next phase of evolution.

 

Healthcare Services & MedTech movers:

·     In MedTech: SWAV reported 4Q22 revenues of $144M (+71% y/y) vs. consensus’ $143M estimate following pre-release projection of $143-144M and U.S. revs was $118M (+70% y/y, $82.1M C2), OUS revs $25.7M (+76% y/y) vs. OPCO $121M/$22.3M ests. NVRO shares fall after larger Q4 EPS loss and weaker Q1 rev guide ($94M-$96M vs. est. $97.51M).

·     In services: HCSG upgraded to Outperform at RBC and raise tgt to $17 as believe that the suspension of HCSG’s dividend signals an important strategic turning point for the story and should serve as one of the final clearing events for the stock. GEHC initiated at Buy and $90 tgt at Mizuho citing positive feedback from proprietary radiology survey, positive checks from hospital surveys and an aging EU imaging installed base that supports a multi-year upgrade cycle.

 

Industrials & Materials

Transports

·     Baltic index falls for seventh straight week. The overall index, which factors in rates for Capesize, Panamax and Supramax shipping vessels, was up 8 points, or about 1.5%, at 538 – but down 10.6% for the week. Capesize fell 4 points, or about 1.5%, to 271 — its lowest since early June 2020 (down 44% for the week). Panamax index down 6.1% for the week, marking its seventh straight weekly fall. – Reuters (DSX, EGLE, GNK, SB, SBLK)

 

Materials, Industrials, Aerospace & Defense

·     In farm & machinery: DE raised its FY23 net income forecast to a range of $8.75B-$9.25B from $8B-$8.5B prior (and consensus of $8.32b) after Q4 beat as sustained high crop prices keep farmers spending, resulting in a record windfall for the top maker of agricultural machinery.

·     In industrials: GNRC downgraded to Equal Weight from Overweight at Wells Fargo due to strong performance YTD and what looks like aggressive 2023 guidance and believe GNRC could fall short of achieving the steep ramp implied in H2’23 guidance.

·     In defense: AXON downgraded to Outperform from Strong Buy at Raymond James after shares have more than doubled (up 130%) from their May 2022 lows and notes inevitability of mean reversion vs. other software stocks, decelerating growth off a larger base and less room for multiple expansion leave them searching for a near term positive catalyst.

·     In chemicals: lithium producers ALB, LAC, LTHM, others fall after Reuters reported China’s CATL, the world’s largest battery maker, has offered discounts to some Chinese automakers it supplies, reflecting a downturn in the price of lithium and a bid to win more orders, three people with knowledge of the offers said; AXTA upgraded to Outperform from Sector Perform and raises our price Target to $36 from $30 at RBC saying they see ~20%+ upside potential.

 

Technology

Internet, Media & Telecom

·     In media: ROKU double upgraded at Bank America from Underperform to Buy and raise tgt to $85 noting the co is performing better than the broader advertising market which remains weak and see benefit from new partnerships with media networks and DSPs. AMCX shares surge after Q4 results top views on op income and revs.

 

Hardware & Software movers:

·     Software: HUBS delivered a strong Q4 revenue beat as most metrics beat consensus estimates with CC billings growth of 29% y/y exceeding views and FY23 guide was above most estimates for all metrics but FCF. DBX reported mostly better-than-expected 4Q22 results, with non-GAAP EPS of $0.40 (consensus $0.39), on revenue of $598.8M, up 6% y/y (up 9% y/y in CC) (consensus $594.4M), down from 7% growth last quarter; ARR of $2.514B (consensus $2.460B), up 11% y/y.

·     Hardware & Components: CGNX shares fall after lower guide for FY revs ($180M-$200M vs. est. $226M) which followed a Q4 rev miss; said forecasts represent a decline both YoY and sequentially due to lower rev from a few large e-commerce customers and broader economic softness. For NTAP, Bank America said survey of VARs indicates an overall weak environment, with respondents cautious on storage demand and see some downside risk to NTAP PCS ests based on weaker hyperscale trajectory. For PC makers (DELL, HPQ, LNVGY), Digitimes noted the global top-5 notebook brands, not including Apple, saw their combined shipments plunge 29% on month and nearly halve from a year ago in January due to a slow channel inventory digestion.

·     IT Services & Consulting: EPAM downgraded to Market Perform at Cowen and cut tgt to $370 saying execution remains top tier, but multiple growth & margin pressure points make an upside case harder to foresee.

 

Semiconductors:

·     The Philly semi-index (SOX) underperforms broader Nasdaq, down around 2%, dropping back below 3K as profit takin ensues after big run to start the year (SOX +20% YTD).

·     In semi equipment: AMAT reported a slight beat with JanQ Rev/EPS of $6.74B/$2.03, and guided AprQ to $6.40B/ $1.84 (ahead of consensus $6.32B/$1.79) and better than peers, with strong trailing-edge demand with ICAPS, offset by weaker memory and leading-edge foundry/logic.

·     MX reported 4Q22 revenue/non-GAAP EPS of $61.0M/-$0.36 vs consensus estimates of $59.7M/-$0.26 and 4Q22 gross margin was 26.4% due to unfavorable mix from lower display revenue, as well as lower utilization rate.