Closing Recap

Monday, January 03, 2022

Equity Market Recap

·     New Year – same result – as stocks “melt” higher throughout, finishing near their best levels of the day. Market action very similar to 2021 with most S&P sectors rallying led by large cap tech (AAPL, TSLA, semiconductors) while defensive sectors (Utes, REITs) and precious metals lagged as investors flocked to riskier assets. Apple (AAPL) finally did it, marking the first company to top the $3 trillion mkt cap when it surpassed $182.86 as its traded to new all-time highs. Surging Treasury yields impacted rate sensitive sectors such as homebuilders, and high dividend paying sectors, as well as high growth software stocks (while provided a boost to bank stocks which outperformed). Overall, it was a good start to the year for U.S. stocks with the S&P 500 coming off its 7^th straight quarter of gains. The Nasdaq snapped its modest 4-day losing streak, after posting a 21% gain for 2021 (has risen 9 of the last 10 years). Tech was buoyed today by strength in semiconductors, momentum buying in AAPL and in TSLA which surged over 12% after reported record quarterly deliveries far exceeded Wall Street estimates. Rising yields, inflation fears bearing no impact on stocks at all while markets await news out of DC this month as Senate Democrats begin toward a path forward on President Joe Biden’s stalled domestic economic agenda, hoping to pass a slimmed-down version before midterm election campaigns begin. Senate Majority Leader Chuck Schumer is vowing to bring a revised version of the $2 trillion tax, climate, and spending package to the floor for a vote as soon as this month.

·     Stock & Sector movers: TSLA surges over 13% to lead the S&P after delivering over 308k vehicles in Q4 vs est. 263k while EV names rise; WFC, C, JPM bank stocks climb with rising yields; CFG gets extra boost as a Wedbush best idea, $C as a Bank of America top quarterly idea; payment stocks another sub-sector within financials seeing a rally after several posted declines in 2021 despite record highs for major indexes; BMO upgraded PYPL today while noting significant upside in GPN and recommending V, MA as core holdings; MTH, LEN, TOL homebuilders, and AMT CCI towers slide as high dividend paying sectors underperform with Treasury yields jumping (10-yr up over 10 bps today above 1.6%); MDB, DDOG, HUBS, FTNT, TEAM, ZS, BILL, high growth software names among top decliners to start the year given the surge in Treasury yields; TSM jumps as Goldman sees growth accelerating this year, WOLF spikes after a Piper upgrade, and IIVI soars on a Raymond James u/g to lead the Philly Semi Index higher to start the year; VIAC, DISCA among S&P leaders to extend their bounces off 52-week lows in mid-December

·     European shares ended at all-time highs as the pan-European STOXX 600 index ended 0.5% higher at a record close of 489.99 points. The benchmark surged 22.4% in 2021, its second-best yearly performance since 2009.

Economic Data:

·     Construction spending for November rose +0.4% below consensus +0.6%

·     IHS Markit December final manufacturing PMI at 57.7 (vs flash 57.8)

Commodities

·     Oil prices rise $0.87 or 1.16% to settle at $76.08 per barrel ahead of the results of the OPEC+ meeting tomorrow, where they are expected to stick to its plans for a February output increase. Current plans would see it raise its February production target by 400,000 barrels per day (bpd) as it has done each month since mid-2021.

·     Gold prices slide -$28.50 or 1.6% to settle near the lows at $1,800.10 an ounce, pulling back from 6-week highs and now moving to lowest close in about 2-weeks as the dollar bounced further along with U.S. stocks and a spike in treasury yields as investors bailed on haven related assets

Currencies & Treasuries

·     Treasury yields surge across the board to start the New Year: U.S. Treasury 2-year yields hit highest since March 2020, last at 0.775%, up about 5 bps; U.S. Treasury 10-year yields rise to six-week peak, last at 1.622%, rising over 12bps; U.S. Treasury 5-year yield touches six-week high, last 1.36%, up over 10bps; U.S. 30-year yield tops 2% for first time since November 24, rising 12bps to 2.01%.

·     The U.S. dollar adding to 2021 gains (DXY rose about 9% last year) as it benefits from more hawkish central bank policy from the Federal Reserve than peers. Fed funds futures traders are pricing in three rate hikes by the Fed by the end of 2022, with the first fully priced for May. Bitcoin had its birthday today, coming into existence on January 3^rd, 2009. Crypto prices ended higher, but off their best levels with Bitcoin around $46,500.

Sector News Breakdown

Consumer

·     Retailers; NKE is Guggenheim’s top pick for 2022 in retail saying the bull thesis remains intact; Wells Fargo said they think there is an opportunity to get more bullish on soft lines looking into 2022, with best way to play the space would be TPR, CPRI, BBWI, SIG, FTCH, TDUP, ASO and UAA, while downgrade ROST to equal weight due to the growing concern over the low-end consumer; ODP sold CompuCom Systems subsidiary to affiliate of private equity firm Variant Equity in deal valued up to $305M and said board authorized $200M increase to existing $450M share repurchase program to $650M

·     Auto sector; big day for electric vehicles (EVs) as monthly figures raise Bull bets; TSLA surges after saying it achieved production of more than 305,000 vehicles and deliveries of over 308,000 vehicles in Q4 vs. 263,422 consensus; in 2021, the company delivered over 936,000 vehicles vs. 499,550 vehicles in 2020; NIO said it delivered 10,489 vehicles in December 2021, 25,034 vehicles in the fourth quarter of 2021, and 91,429 vehicles in 2021 in total; XPEV delivered 16,000 Smart EVs in December 2021. Total deliveries for the fourth quarter 2021 reached 41,751 units, a 222% increase year-over-year, including 21,342 P7 deliveries; LI delivered 14,087 Li ONEs in December 2021, representing a 130.0% YoY increase; took its fourth quarter deliveries to 35,221, up 40.2% QoQ and 143.5% YoY; total deliveries in 2021 increased 177.4% YoY to 90,491

·     Consumer Staples; in the poultry/meat sector (HRL, PPC, SAFM, TSN), several reports (Bloomberg, FT) indicate President Joe Biden will announce plans Monday to combat the market power of the giant conglomerates that dominate meat and poultry processing, ratcheting up a months-long campaign that has blamed anti-competitive practices in the industry for contributing to surging food inflation https://on.ft.com/3eLb7tv ; defensive food stocks declined to start the year with investors looking to beaten up names and higher risk trades

·     Restaurants; Piper with Restaurant call to start the year, upgrading MCD to Overweight with $282 tgt following our incremental confidence in the company’s ability to execute on elevated consumer demand for drive-thru and core hamburger cuisine experiences; the firm downgraded CAKE and QSR to Neutral from OW as they rationalize ratings and valuation across coverage; CMG said it is expanding the vegan chorizo menu option to all locations after a successful test run at 103 locations spread across California, Indiana and Colorado

·     Casinos, Gaming, Lodging & Leisure sector; casinos in focus (WYNN, LVS, MGM, MLCO) after Macau’s December gross gaming revenues (GGR) of 7.96B patacas (~$1.03B), rose 1.8% YoY (-65% versus 2019) from the prior year’s 7.82B patacas/-65.8% comp. The monthly result came in ahead of the -8% Consensus Metrix consensus forecast (-7% to -9% range). December GGR were up 18.0% on a monthly sequential basis; in gun stocks (RGR, SWBI), U.S. unadjusted criminal background checks fell 21% in December from a year ago, according to data from the FBI’s National Instant Criminal Background Check System (NICS). Unadjusted checks decreased to 3.1 million from 3.94 million in December 2020, and gained 14% from 2.72 million in November

Energy

·     E&P and Majors; Mizuho lowered their price targets on EOG, PXD, MRO, MUR, COP, OVV, CLR, CTRA, FANG, SWN, RRC, AR, and CRK though they believe that energy is poised for another year of outperformance relative to the broader market led by E&P with their top E&P picks EOG in oil and EQT in gas, continue to prefer CVX over XOM in integrated oil, and PSX is their top refining pick though MPC offers the best cash return in 2022; Ahead of Q4 prints, Cowen sees SLB, NOV as the most tactically attractive among oilfield services stocks where they continue to like BKR longer-term, sees BP, CVX with attractive setups in integrated oils while RDS, TTE could be more challenging to play with RDS, CVX remaining their top picks; PTEN sold its well service rig and wireline businesses for $43M in cash; HFC preliminary Q4 crude output ~420k is below prior estimates of 450-470k bpd due to severe weather and flooding in British Columbia that caused pipeline shutdowns, unit downtime at its Puget Sound refinery after it completed its acquisition, startup issues at its Navajo refinery, and economic run cuts and bad weather at its Tulsa refinery; Bank of America included OXY as a long in its 10 best quarterly ideas

·     Utilities & Solar; EXC downgraded at Mizuho to Neutral based on uncertainty regarding the Build Back Better (BBB) legislative proposal in the US Congress which includes a $15/MWh nuclear PTC that could add more than $700M to the company’s EBIDTA; XEL is a quarterly best idea as a long at Bank of America

Financials

·     Bank movers; Wedbush added CFG to its Best Ideas List given its better position than most peers to generate positive operating leverage in 2022 with its next phase of growth coming from its three recent acquisitions that are expected to be immediately accretive to earnings, and it replaced FITB on its Best Ideas List which remains OW as a large part of its thesis played out with its P/E valuation going from a discount to a well-deserved premium vs regional bank peers; Barclays upgraded PNC, WFC to OW, RF to EW and downgraded USB to EW, HBAN to UW; Citi (C) is among Bank of America’s top 10 quarterly ideas as a Buy

·     Insurance; Bank of America downgraded MMC to Underperform primarily on valuation as insurance broker valuations continue to stretch as security prices rise to all-time highs with this stock trading at 122% of the S&P’s year-ahead P/E multiple vs its recent average of an 8-9% premium and BAML’s valuation of around 20%

·     Consumer Finance & Services; Wedbush upgraded RKT to Neutral after shares ended 2021 within 6% of their prior price target; Stephens downgraded NAVI to EW on valuation after the stock more than doubled in 2021 and SYF to EW as they prefer travel-related credit cards over retailer/goods credit cards

·     FinTech & Payments; BMO upgraded PYPL to Outperform on valuation with a lowered $224 PT from $278 as they believe tax loss selling is done with investors now focused on more normalized 2023 estimates, and they also recommend NVEI, GPN given significant upside to their price targets and Visa (V), MA as core holdings among payment stocks; NU was initiated with OW/Buy ratings at Morgan Stanley ($16 PT), Goldman ($15), Susquehanna ($14), Wolfe ($13), UBS ($12.5), KeyBank ($12) and at Hold by HSBC; Visa (V) is one of Barron’s 10 favorite stocks for 2022

·     Bitcoin news; BITF mined 363 Bitcoin in December to bring its 2021 total to 3,452 Bitcoin; OpCo likes the setup in COIN ahead of its earnings as they see the 30% drop in BTC from 11/8 to year-end driving record trading volume in 4Q21, upside to consensus revenue, attractive valuation with a discount to other high-growth fintech names, massive FCF generated, a very strong balance sheet for possible M&A and diversification, and potential fee rate expansion; A subsidiary of FTFT launched FTFTX, a global cryptocurrency market data platform

·     REITs; REFI was initiated with OW/Buy ratings at JMP ($26 PT), Lake Street ($23), Compass Point ($22), and OpCo; Wolfe named COLD as a new Peer-Perform with a $37 PT; Deutsche upgraded AVB, BXP, REG, SLG to Buy while downgrading ACC, KIM, MPW to Hold

Healthcare

·     Pharma movers; OVID entered into an exclusive license agreement with AZN for a library of early-stage small molecules targeting the KCC2 transporter, including lead candidate, OV350 (under the terms of the agreement, AstraZeneca will receive an upfront payment of $5M in cash and $7.5M in shares of Ovid common stock, and is eligible to receive potential milestones); XERS enters into agreement for $30 million private placement; KNTE files $150M mixed securities shelf

·     Biotech movers; APLT plunges after saying the FDA decided to hold the submission of marketing application for drug candidate AT-007 for treatment of Galactosemia, pending additional discussions with the agency; ITOS will replace MGLN in the S&P SmallCap 600 effective prior to the opening of trading on Wednesday, January 5; ALNY upgraded to Overweight at Piper and raise tgt to $208 from $181 saying they are buyers on recent weakness around BBIO’s ATTRibute-CM miss ahead of Alnylam’s Phase III APOLLO-B data in mid’22

·     Handful of analyst yearly outlooks for Biotech: 1) Piper named 2022 top picks LEGN for cilta-cel approval and launch, KYMR for KT-474 AD & HS data, and XNCR for bispecific antibody data; 2) Raymond James said favorite 5 stocks for 2022 include: RARE for full Ph1/2 Angelman data by mid-2022, CRSP for clinical updates from partnered diabetes program, VCTX210, RLMD for multiple Ph3 readouts throughout 2022 in MDD, MRNS for Ph3 readout in refractory epilepsy in 2H22 and VKTX for Ph2b MRI-PDFF data in Nash in 2H22; 3) Cantor said regarding regulatory approvals, they could provide strong tailwinds in 2022 for AMYT (OW), OMER and HRTX (OW) noting AMYT has its Oleogel-S10 PDUFA date (for Epidermolysis bullosa) on 2/28/2022, with potential EU approval in January 2022; expect to gain some clarity on the work OMER needs to do to resubmit Narsoplimab for HSCT-TMA and says HRTX has the potential to gain approval of HTX-019 for PONV; 4) Raymond James also said recommends select buying in biopharma as top picks on year are ABBV, HZNP, BHVN, JAZZ among others

·     MedTech Equipment; NTRA and LH slip as NYT investigation finds that up to 90% of positive results for prenatal genetic tests are incorrect, depending on the genes. https://nyti.ms/3zlWczh; JPMorgan says own these medical device stocks into next week’s conference BSX, INSP, ABT, EW, PEN, ATRC, DXCM

·     Healthcare Services; WBA is said to have received a takeover offer from private equity firm Bain Capital for its Boots drugstore chain in the U.K. https://bit.ly/3FS5oOz ; NSP extended its partnership with UNH to provide medical and dental coverage; COO upgraded to Buy with $485 tgt at Guggenheim saying while expects headwinds from rising COVID admissions on elective procedure volumes, hospital staffing issues, supply chain constraints, thinks increased uncertainty could drive investors to low hospital exposed co’s with strong pricing power like COO

Industrials & Materials

·     Industrials & Transports; BA among early leaders in the Dow and S&P as investors look for aerospace rebound; in airlines, UAL upgraded to Buy at MKM Partners while LUV and SAVE downgraded to Neutral and JBLU downgraded to Sell while update ests and tgt prices saying they expect airlines to lower capacity in 2022, although it expects them to benefit from better pricing power despite cost headwinds due to the COVID-19 pandemic; in trucking, CHRW upgraded from Sector Weight to Overweight with $135 tgt at KeyBanc saying 4Q21 marked the first time in eight quarters contract rates (+9% y/y) increased faster than spot rates (+5% y/y); Susquehanna with tgt changes in rail space as UNP PT raise from $270 to $300, maintains Positive, NSC PT raise from $335 to $352, maintains Positive and CSX PT raise from $40 to $45; CNHI declined as spanning truck, bus, powertrain and specialty vehicle businesses, Iveco (IVG.MI) completed its spin-off from CNH Industrial on Jan.1

Technology, Media & Telecom

·     Semiconductors; ASML said there has been a fire at a factory it owns in Berlin, Germany, and that it is too early to assess the impact on its operations; Goldman Sachs said TSM will grow at faster pace this year than in 2021 underpinned by price hikes, the ongoing industry upgrade cycle in HPC/5G, and strong demand for cryptocurrency; Piper upgraded WOLF to Overweight from Neutral and upped tgt to $160 from $125 calling it a clear leader in EV semi space, likes ON in EV market as well, likes QCOM due to its participation in the 5G penetration in Android and its position across areas like automotive and IoT; says AVGO should also benefit from the enterprise recovery and continued strength in cloud/hyperscale and up tgt for PI to $100 as a secular grower given its position as a leader in RFID; IIVI upgraded to Outperform at Raymond James based on view regarding its largest product group delivering stronger than expected results

·     Software movers; in video games (ATVI, EA, TTWO), Wedbush noted that according to NPD, November 2021 U.S. console/handheld hardware and software sales data were roughly $536 million, down 1% y-o-y, and below their estimate of $612 million; Cowen was cautious on the industry citing declining Twitch viewership for Call of Duty; SE was upgraded to Buy at Bank America as find risk-reward more favorable. From its peak, Sea is down c. 40% and at current levels is trading at 2023E P/S of 5.9X

·     Media & Telecom movers; AT and VZ CEOs Sunday rebuffed a request from federal transportation officials to voluntarily delay the launch of new 5G wireless services, extending a showdown that could lead to potentially disruptive U.S. flight restrictions as soon as this week. They did however agree to put additional restrictions that closely mirror the C-Band radio exclusion zones used in France, giving U.S. authorities more time to study more powerful signals’ effect on air traffic; SEAT upgraded from Neutral to Buy at Citigroup saying while the Omicron variant has injected some volatility into equities exposed to live events – including Vivid Seats – they view the pullback as unwarranted; in cable, Wolfe Research downgraded shares of ATUS and CHTR given their pureplay exposure to cable; some of the bigger media laggards in 2021 such as VIAC, DISCA, were among the top S&P gainers today