Closing Recap

Wednesday, January 18, 2023

Index	Up/Down	%	Last
DJ Industrials	-614.22	1.81%	33,296
S&P 500	-62.22	1.56%	3,928
Nasdaq	-138.10	1.24%	10,957
Russell 2000	-29.92	1.59%	1,854

 

Equity Market Recap

·     US equity markets saw a nice pre-market pop on softer economic data and an immediate hope for a more tempered Fed. In a shift from recent days, though, Fed speakers and earnings fears generated a reversal to red and lows by early afternoon. Fed Gov Bullard indicated a desire to err on the tighter side as insurance and said the Fed should move as rapidly as possible on rate hikes. Fed Gov Mester reiterated that more hikes are needed, and that the policy rate should rise a "little bit" above the 5% to 5.25% range for end 2023. None of this is particularly new, but the market seemed willing to listen today. With today’s pullback the Nasdaq snapped its 7-day win streak while the S&P 500 dropped back below its 200-day MA (3,975).

·     From a data perspective, today was more negative than positive. @edwardnh shared that the NY Fed model has the highest recession probability since 1982, while @DataTrekMB reminded us the S&P500 win rate for Q1 is just 38% following negative years and there’s a wide dispersion of returns. Further, @LizAnnSonders noted the “GDPNow model from @AtlantaFed now has 4Q22 real GDP at +3.5% (q/q ann.), down from +4.1% prior … recent drop mostly attributed to weaker consumption,” while @charliebilello pointed out, “But after adjusting for inflation, the story changes. Real Retail Sales peaked in March 2021 & are down 1.2% over the last year. This was the 4th consecutive month w/ a YoY real decline.” Both offering fodder for those who would prefer to focus on demand destruction over easing inflation.

·     Sector-wise, the equity fade was quite broad. All sector groups were solidly in the red by mid-afternoon, with Consumer Staples (XLP, -2.35%), Utilities (XLU, -2.0%) and Financials (XLF, -1.6%) leading the way lower. Communication (XLC) and Consumer Discretionary (XLY) fared the best, but still retreated by 0.75-0.85%. Breadth heading into the last half hour was about 1.7:1 to the downside and both value and growth slipped, with value -1.3% vs growth -0.8%.

 

Economic Data:

·     Inflation continues to ease as the December Producer Price Index (PPI) for final demand fell (-0.5%) m/m vs. est. for (-0.1%) and Nov +0.2% while on a y/y basis rises +6.2% vs. est. +6.8% and Nov reading of +7.4%. Core PPI data, excluding food and energy showed a rise of +0.1% m/m, in-line with estimates and rose +5.5% y/y vs. est. +5.6% and Nov reading of +6.2%

·     Retail Sales Advance for December fell (-1.1%) m/m vs. est. (-0.8%) and Retail Sales Ex Auto rose +1.1% in Dec vs. est. (-0.4%); Retail Sales Ex Auto and Gas fell (-0.7%) vs. est. unchanged

·     U.S. Dec industrial output fell (-0.7%) vs. est. (-0.1%) and vs. Nov (-0.6%); and Capacity Utilization rate 78.8%, down from Nov 79.4% and consensus 79.6%

·     U.S. January NAHB Housing market index 35 versus 31 in December; index of current single-family home sales 40 versus 36 in December; index of home sales over next six months 37 versus 35 in December and index of prospective buyers 23 versus 20 in December

·     Data showed 35% of households used credit cards or loans in December to cover spending needs in the past week. That’s up from around 32% in November and just 21% in April 2021, when the Census first started collecting the data, per Bloomberg

 

Commodities, Currencies & Treasuries

·     WTI Crude February futures settle at $79.48 a barrel, down 70 cents, 0.87%., while Brent Crude futures settle at $84.98/bbl, down 94 cents, 1.09% ahead of inventory data tonight and tomorrow morning. Natural gas prices continue to sell off, ending today’s session down 7.7% at $3.311/MMBtu, the lowest closing price since June 22, 2021. mild winter weather curbs demand, production remains strong, and LNG exports stumble due to a variety of issues

·     Gold prices erased earlier gains, falling -$2.90 to settle at $1,907 an ounce after hitting earlier highs of $1,929.80 an ounce. The dollar index rebounded off sharp lows, trading flat late day after falling over -0.5% to lowest levels since June after a round of mixed economic data. The yen dropped against major currencies after the Bank of Japan maintained ultra-low interest rates, although it recovered some ground-on expectations for tighter policy in the coming months. The BOJ kept intact its YCC targets, set at -0.1% for short-term interest rates and around 0% for the 10-year yield, by a unanimous vote. It also made no change to its guidance.

·     Treasury yields tumbled, with the 10-yr falling over 15-bps to 4-month lows around 3.38%, while the 2-year hit 4.07%, its lowest since October (inversion remains 70-bps). Yields had fallen earlier on Wednesday after the Bank of Japan maintained ultra-low interest rates, including a bond yield cap it was struggling to defend. Prices extended gains after data showed that U.S. retail sales fell more than expected in December and U.S. producer prices also fell more than expected.

 

 

Macro	Up/Down	Last
WTI Crude	-0.70	79.48
Brent	-0.94	84.98
Gold	-2.90	1,907.00
EUR/USD	0.0004	1.0792
JPY/USD	0.62	128.75
10-Year Note	-0.156	3.379%

 

 

Sector News Breakdown

Consumer

Staples & Restaurants:

·     ACI shares active after the Washington Supreme Court said it would allow the grocer to pay a $4 bln dividend ahead of its proposed deal with KR, declining to take up a claim that the payout is uncompetitive

·     OTLY upgraded to Buy from neutral at Mizuho and raised price tgt to $6 from $2.50 and adjust estimates higher as view 1/3/23’s manufacturing agreement as positive, and it enhances visibility into the pivot outlined in November

 

Retailers:

·     BGFV Q4 comps -13.2%, net sales $238.3Mm vs est. $244.7Mm; now sees 4Q EPS $0.07-0.08 vs est. $0.13; total merch inventories +9.6% y/y

·     CHGG downgraded to Hold at Needham saying analysis of FY22 growth trends across Chegg Services subs, ARPU, and Busuu suggests the FY23 consensus estimate of 9.2% y/y Chegg Services rev growth is too high

·     SKX downgraded it to equal weight at Morgan Stanley on valuation, risk of FY23 guidance missing expectations and as the market shifts to early-cycle names

·     GPS upgraded to equal weight at Morgan Stanley and anticipates a 2023 of two halves for US specialty retail and department stores.

·     LEVI downgraded to Neutral from Buy at Bank America with a price Target of $17, down from $19 citing a more cautious North America outlook for the downgrade

·     YETI downgrade Outperform to Market Perform at Cowen as data regarding brand level e-com traffic trends is moderating into FY23 with DTC a key top-line and margin driver

·     PRTY files for bankruptcy to restructure piling debt

 

Leisure, Gaming & Lodging:

·     Keybanc recommends Overweight positions in DIS as raise Theme Park estimates as review of attendance data, historical trends, and assumptions prompt slightly higher estimates, though are still below consensus. They believe Theme Parks represents differentiated assets in Media that provide critical cash flow to fund the Linear to Streaming media transition

·     THO, WGO, CWH shares underperform following CWH CEO comments who was cautious on inventory, negative pricing, and demand as per MKM

·     MTN said season-to-date total skier visits were up 12.5% compared to the prior year season-to-date period; season-to-date total lift ticket revenue, including an allocated portion of season pass revenue for each applicable period, was up 5.3% compared to the prior year season-to-date period; season-to-date ski school revenue was up 35.6% and dining revenue was up 58.0% compared to the prior year season-to-date period.

 

Homebuilders, Building Products, Home Furnishing:

·     US mortgage market index rises 27.9% to 238.7 in week ended Jan 13, according to the Mortgage Bankers Association, the largest increase since March 2020 as the purchase index rises 24.7%, the refinancing index surges 34.2% as the average 30-year mortgage rate falls 19 bps to 6.23%, lowest since Sept 2022

 

Financials

Banks, Brokers, Asset Managers:

·     IBKR 4Q adj EPS $1.30 vs est. $1.17 on adj net revs $958Mm, NII $565Mm vs est. $473Mm; customer accounts +25% y/y; Cleared DARTs decreased 22% to 1.69M

·     PNC Q4 EPS of $3.49 misses the consensus of $3.95 while revs $5.76B top est. $5.71B; reports Q4 tangible book value per share $72.12 and Q4 CET1 ratio 9.1%

·     SCHW Q4 adj EPS $1.07 misses the est. $1.09; Daily Avg Trades were 5.39M vs. est. 5.5M and total client assets fell -13.3% vs. est. -12.5%

·     MBWM downgraded to Market Perform at Raymond James following its release of 4Q results – notes results were solid, but 2023 NIM guidance calls for significant compression beginning in 1Q as deposit costs are set to accelerate with excess liquidity essentially exhausted

·     MS downgraded to Neutral at Citigroup noting shares outperformed Tuesday, up 6% vs. BKX flat, which they attribute largely to negative sentiment heading into the quarter and positive commentary on NII in 1Q23

·     SBNY downgraded to Equal Weight from Overweight at Stephens following the company’s Q4 earnings report

·     PNFP reported Q4 EPS miss amid higher taxes and lower fees; partly offset by higher spread, HWC was in-line for EPS and UCBI a 10c miss on EPS driven by -$0.07 of provision, -$0.03 of expenses, and -$0.01 of taxes, offset by $0.02 of fees

 

Bitcoin, FinTech, Payments:

·     Bitcoin snapped its 11-day win streak, fading back below $21,000 late morning, while Bitcoin related names saw profit taking after a tremendous run to start the year (MARA, MSTR, COIN)

·     COIN announced it will halt operations in Japan and will conduct a complete review of its business in the country

·     PYPL downgraded to Underperform with $75 tgt at SMBC Nikko as continue to believe that pulling back significantly on investment will erode PYPL’s LT growth prospects

 

Finance, Insurance & Services:

·     RDN said it expects its mortgage insurance subsidiary Radian Guaranty to begin paying recurring ordinary dividends, with 2023 ordinary dividends projected to be between $300 to $400 million

 

Healthcare

Biotech & Pharma:

·     MRNA said its vaccine against the respiratory syncytial virus, or RSV was 83.7% effective in a late-stage trial at preventing at least two symptoms in adults aged 60 and older

·     BLUE announces 20M share offering of common stock

 

Healthcare Services & MedTech movers:

·     SDC sees 4Q prelim revs $86-88Mm vs est. $99.2Mm; FY adj EBITDA ($137)Mm-($135)Mm vs est. ($142.9)Mm; and also guides year revs below consensus; said it expects to introduce an additional $120M-$140M in savings in 2023 excluding transition costs

·     TDOC announced a restructuring plan intended to reduce operating costs

·     NTRA upgraded in Diagnostics & Clinical Labs at Raymond James while downgrade shares of EXAS

·     Citigroup said DXCM, PEN, and SYK remain top picks in MedTech, with a positive catalyst watch on SILK, while downgrade NVRO to Neutral from Buy given the CEO retirement and highlight takeaways from our PEN fieldtrip. Said while we do not think any of the current macro struggles related to staffing, patient volumes, inflation, FX, or supply chain will abate immediately, we remain cautiously optimistic and hope for easing results by 2H23.

 

Industrials & Materials

Transports

·     In airlines, UAL leads airlines higher as 4Q adj EPS $2.46 vs est. $2.10 on revs $12.4B vs est. $12.23B, adj EBIT mgn 11.2%, achieved 9.1% pre-tax mgn ahead of schedule in 4Q; sees Q1 adj EPS $0.50-$1.00 above consensus $0.25 and revs up ~50% y/y vs. est. $11.32B.

·     In truckers, JBHT reported Q4 EPS $1.92 below consensus of $2.46 and revs of $3.65B misses the $3.84B estimate saying revs miss was primarily driven by a -27% decline in volume in Integrated Capacity Solutions and a -1% decline in volume in Intermodal

 

Technology

Hardware & Software movers:

·     Morgan Stanley overall upgrades Hardware to In-Line as the final stage of late cycle underperformance transitions into early cycle – see risk to 1H23 revs/margins & maintain quality bias in OW’s (AAPL Top Pick), but downgrade IBM and upgrade STX

·     IBM downgraded to EW from OW at Morgan Stanley following significant LTM outperformance, as rev growth decelerates and risk of underperformance in a 2H23 early cycle bounce increases

·     STX upgraded to OW and raise tgt to $69 from $54, part of starting to transition away from defensive names, towards more transactional, early cycle beneficiaries,

·     PRGS reported mixed Q and weaker FY 2023 guide which does not include MarkLogic acquisition which will add to cross sell opportunities

·     Keybanc identifies names they believe are key ideas for 2023 by each of their coverage groups and top trends to watch in 2023 for each of our diverse coverage groups. They increase price tgts on JNPR, BOX, BAND, and FIVN and decrease our PT on APPN

·     Citigroup upgraded CHKP to Neutral, names DDOG Negative Catalyst Watch, SPLK a Positive Catalyst Watch – DDOG neg watch based on perceived estimate risk that is likely to impose near-term multiple compression. TEAM are fresh pair trade ideas in systems software. Says muted, decelerating CIO Survey data validates our stance of 2023 as a year of dichotomy in software

·     Citigroup said INTU, WK, and MNDY top picks for CY23 in application software; PEGA is upgraded to Buy/High Risk (+enterprise automation); BL is downgraded to Sell (elevated M&A premium, estimate risk); and new pair trades of WK and PEGA as adjusting estimates and TPs as part of our broader CY23 Back Office Software outlook

·     China’s video games regulator granted publishing licenses to 88 online games, including titles belonging to NTES and TCEHY

·     More layoffs in the software space: Unity (U) is laying off another 200 employees as they continue to trim costs; MSFT could cut headcount by ~5%, or ~11K people; TDOC said it would cut headcount by ~6% while also taking actions to trim other costs

 

Semiconductors:

·     ADI remains top pick in semis at Citigroup while top stocks to own coming out of the downturn are MU, AMD, ON and GFS; raise tgts for MCHP and TXN and open Catalyst Watch for INTC, QCOM, MCHP and ON – says expect Consensus estimates to further decline during earnings season driven by continued downside from the PC, Wireless, Consumer and Auto end markets (combined 70% of semi-TAM).