Closing Recap

Thursday, January 20, 2022

Equity Market Recap

·     A vicious reversal caught investors by surprise as stocks bled into the close after what started out as a nice market recovery. An early market rally in large mega cap technology, financials, consumer discretionary and energy failed miserably given the sharp roll in U.S. stocks midday with many of the market “leaders” turning “red” in a surprise move. U.S. markets have opened 2022 with sharp declines due to rising interest rate concerns amid hawkish Fed reserve commentary of late. Markets were higher most of the morning, reclaiming some key technical levels for the S&P 500 and Nasdaq before stalling mid-afternoon. Stocks took a leg lower late day on geopolitical concerns after the WSJ reported the U.S. has given approval for three Baltic NATO members to send American-made weapons to Ukraine (raising Russian tensions fears). The headline crossed newswires at a critical time, pulling them back below key technical levels which likely exacerbated the downward movement in stocks. Volatility continues into a big week coming up with the FOMC meeting next Wednesday and as earnings season kicks into full gear.

·     Stock & Sector movers: PTON plunges intraday to hit its lowest levels since March 23, 2020, and below its IPO price of $29 after temporarily halting production due to waning demand and cost controls, sending peer NLS and partner AFRM lower as well; BKR among S&P leaders, AA soars, UNP, KMI rise while airlines AAL, UAL relatively flat among non-financial earnings reports; in financial reports: TRV hits record highs to lead the Dow after its EP and revenue easily beat consensus, while DFS shakes off early weakness to go green despite its miss, and NTRS slides; among regional banks RF, MTB, KEY, FITB fall, SIG opens with a gain of more than 5% after raising its Q4, FY sales forecast on strong prelim holiday sales, but shares roll more than 10% off its open to end well in the red; U.S. listed Chinese stocks rise after China’s central bank cuts key interest rate and the country’s cyberspace regulator denied issuing guidelines requiring major internet companies to seek approval for new investments and fundraising.

Economic Data:

·     Weekly jobless claims rose to 286K in latest week, well above the 22K estimate, while prior week revised to 231K from 230K; the 4-week moving average rose to 231K from 211K, while continued claims rose to 1.635M in latest week from 1.551M prior; the U.S. insured unemployment rate rose to 1.2% from 1.1% prior

·     Philly Fed Survey for January rose to 23.2 vs. +20 consensus, and +15.4 prior month as current shipments index increased 6 points to 20.8; prices paid index increased 6 points to 72.5; and the current prices received index declined 4 points to 46.4.

·     Existing Home Sales for Dec fell -4.6% at 6.18M unit rate below est. 6.44M and Nov 6.48M; Dec inventory of homes for sale 910,000 units, 1.8 months’ worth; U.S. Dec national median home price for existing homes $358,000, +15.8% from Dec 2020

Commodities

·     Oil prices erased earlier gains, as WTI crude slips -$0.06 to settle at $86.90 for expiring February contract, while March oil prices slip -$0.25 to $85.55 per barrel. The EIA reported an unexpected weekly rise in U.S. crude inventories, but concerns over potential disruptions to global crude supplies, including the possibility of a Russian invasion of Ukraine, helped to limit price losses. Gold prices edge lower to pull back off its best level in weeks, down -$0.60 to settle at $1,842.60 an ounce, while precious metals were mixed.

Currencies & Treasuries

·     The U.S. dollar index (DXY) was volatile early but trended higher as investors look to haven currencies, though it was a narrow trading range for U.S. Treasury yields after mixed economic data. All eyes on the FOMC meeting next week and their commentary about futures interest rate hikes (expected in March). The buck fell initially after weekly jobless claims jumped to a three-month high, while existing home sales dropped by 4.6% in December, more than estimates – but as stocks lost steam late day, the dollar jumped. U.S. benchmark 10-year note yields were at 1.83%, off their two-year high of 1.902% reached on Wednesday.

Sector News Breakdown

Consumer

·     Retailers; SIG raises its forecast for Q4 and FY revenue and same-store sales growth after reporting preliminary holiday sales of $2.4B, up 30.4% from a year earlier – expects same-store sales to rise 22% in holiday quarter vs. prior estimate of 6%-9% growth; AMZN announced the opening of a bricks-and-mortar apparel store in Los Angeles, the first foray by the online retailer into the sale of fashion through physical stores; WMT was downgraded at KeyBanc saying the lack of stimulus tailwinds and continued inflationary pressure may disproportionately impact; BURL downgraded from Hold to Sell at Loop Capital and cutting our PT from $255 to $190 as inflation and reduced stimulus may lead to reductions in consensus estimates; PTON a sharp roll midday after CNBC reported the co is temporarily halting production of its connected fitness products as consumer demand wanes and they look to control costs https://cnb.cx/33SSKAC

·     Auto sector; Ford (F) downgraded to Hold from Buy while raise tgt to $25 from $20 saying it is premature to re rate legacy OEMs for their EV progress since earnings remain mostly driven by cyclical shortages, returns remain within historical norms and the EV transition is largely a zero-sum game initially; in online auto dealers, VRM upgraded to Overweight at Keybanc saying it’s made a number of steps to improve the consumer experience, and downgraded CVNA to Sector weight as think CVNA is attractive long term given its consumer offering, but believe that the space will have a number of national scaled alternatives; LAZR rises following partnership announcement with Mercedes-Benz to accelerate the development of future highly automated driving technologies for Mercedes passenger cars

·     Consumer Staples & Restaurants; BYND rises after MCD’s expands test of beyond meat McPlant burger; IFF shares rise after CNBC reported in the morning that activist Carl Icahn owns a 4% stake in the company; PG added to yesterday gains following strong quarterly results and upbeat guidance; earnings pick up in consumer names next week – MO, KMB

·     Casinos, Gaming, Lodging & Leisure sector; MAR added overs 86k gross rooms and 517 properties in 2021 and expects leisure demand to continue leading a travel recovery this year; CRSR sees prelim FY21 revenue ~$1.9B at high-end of prev. $1.825-1.925B guidance range and above est. $1.88B, sees FY22 revs $1.9-2.1B that sandwiches est. $2B, sets 2026 revenue target of $3.5B; Truist lowered Q1 estimates for them parks FUN, SIX, SEAS to reflect softer visitation trends likely due to Omicron, but keep their FY22 adj EBITDA estimates for each; JPMorgan was incrementally more positive on TNL after management meetings and highlighted its attractive risk-reward following its underperformance last year; Berenberg initiated Buys on GLPI with a $54 PT and VICI with a $35 PT

Energy

·     E&P and Majors; in oil services, BKR Q4 adj EPS of $0.25 misses the $0.27 estimate on slightly better revs of $5.52B vs. est. $5.48B – Orders from its turbomachinery and process services segment were up 62%, to $2.97 billion; KeyBanc raised 2022 WTI oil price forecast by 4% to $78/Bbl and our 2022 Brent forecast by 3% to $81.50/Bbl on expectations for oil demand to hit pre-pandemic levels in 2H22 and a relatively tight oil market at that time

·     Pipelines: KMI posted 4Q21 results above expectations, with adjusted EBITDA at $1.80 billion versus estimate of $1.77 billion, but down from prior quarter as the Permian gas market continues to be robust and management noted the need for another Permian natural gas takeaway solution could be needed in late 2023/early 2024; MMP, SHLX downgraded to EW from OW at Barclays and downgraded HEP to Underweight

·     Utilities & Solar; Guggenheim said New ’22 Best Idea: PCG moved to Best Ideas list, replacing CNP but retaining BUY rating; downgrading to SJI, SR to Neutral, upgrading to Neutral from Sell shares of HE, NWN and downgrading to Sell ED; AQUA upgraded from Perform to Outperform at Oppenheimer as recent trading weakness (-23.8% vs. LTM high, -19.5% YTD vs. XLI -2.2%) appears overdone on a compelling long-term ESG story; JPMorgan trimmed their price targets on all the alt energy names they cover to factor in a valuation re-rating from expected higher interest rates, though long-term investors interested in the decarbonization theme are being offered an attractive entry point and their top picks remain RUN, NOVA, ARRY

Financials

·     Bank movers; another very busy morning of earnings in another mixed quarter thus far; regional bank results holding up better than some of the large caps to this point; earnings results from a bevy of banks including KEY 4Q EPS $0.64 vs est. $0.57, RF Q4 EPS $0.43 vs. est. $0.48, SNV Q4 EPS $1.35 vs. est. $1.08, MTB Q4 EPS $3.50 vs. est. $3.15, FHN Q4 EPS $0.40 vs. est. $0.38; FITB Q4 EPS in-line results at $0.90; SI upgraded at Goldman Sachs to Buy saying shares now trade at the lowest levels of valuation since we initiated coverage, and are approaching valuation metrics of more traditional, lower growth banks

·     The Federal Reserve launched a review of the potential benefits and risks of issuing a U.S. digital currency, as central banks around the world experiment with the potential new form of money to keep pace with private-sector payments innovations. Unlike private cryptocurrencies like bitcoin, a Fed version would be issued by and backed by the U.S. central bank, a government entity, as are U.S. paper dollar bills and coins. The central bank described Thursday’s long-awaited discussion paper as the first step in a discussion of whether and how a U.S. digital dollar could improve the safe and effective domestic payments system. The paper doesn’t favor any policy outcome, and the Fed said the release of the report isn’t meant to signal any imminent decision.

·     Insurance & Services; TRV Q4 earnings easily top consensus at $5.20 vs. est. $3.80 9and above $4.91 YoY) as net written premiums climb 10%, growing in all three segments from a year ago and Q4 net investment gains were $58M pretax vs. $50M in Q4 2020; ALL reported catastrophe losses for Dec. of $411M comprised of 381 events – said losses for the Marshall Fire estimated at $218M; TASK tumbles as short-seller Spruce Point Capital Management issues "Strong Sell" opinion with 25% – 50% downside risk after conducting a forensic financial and accounting review

·     Consumer Finance, FinTech & Payments; DFS Q4 EPS $3.64 missed est. $3.77 on revs $2.94B below est. $3.03B, total loans ended the quarter at $93.7B (+4% YoY), provision for credit losses of $263M was less than half of prior year period driven by lower net charge-offs and a reserve release; Into earnings, Cowen favors MA due to its accelerating volumes and strong revenue growth, NVEI as its pullback since a 12/8 short report creates a compelling opportunity with their estimates comfortably ahead of consensus, and GPN relative to other acquirers/processors as it is well positioned to deliver low double-digit top line growth, and they also upgraded PSFE to Outperform; AFRM initiated at Hold with a $72 PT by Loop who says it operates one of the more formidable and durable fintech platforms that have emerged in the last few years with room to run given it holds a $5B portfolio and 2021 GMV of $8B in a trillion dollar plus credit market (shares of AFRM, which is used by PTON customers to pay via BNPL financing, tumbled after PTON said it is temporarily halting production of its connected fitness products)

Healthcare

·     Biotech, Pharma movers; MRK announced this am that its EVP and President of Human Health Frank Clyburn would be leaving the firm at the beginning of February to assume a leadership opportunity with another company; VRTX upgraded to Outperform at BMO Capital and up tgt to $274 from $202 ahead of the AbbVie data readout given our increasingly positive outlook and the recent encouraging results for VX-147; NVAX and Australia announced an advance purchase agreement for 51 mln doses of Novavax’s COVID-19 vaccine last January, with an option for an additional 10 mln doses

·     Healthcare Services; EHC said after going through a strategic review and a recent push by an activist to have the company re-engage with third parties for a merger of its unit, EHC announced last night its plan to spin off its home health and hospice business into an independent publicly traded company, rebranded as Enhabit Home Health & Hospice; THC upgraded to strong Buy to Outperform at Raymond James and raise tgt to $120 from $105 after updating model for the acquisition of SurgCenter Development (SCD) completed in December for $1.2B

Industrials & Materials

·     Metals, Industrials, Aerospace & Defense; AA reported better-than-expected 4Q21 results and indicated similar 1Q22 expectations at current prices (albeit including a meaningfully positive change in intersegment eliminations); CMI and Isuzu announce battery electric truck collaboration as prototype to start in 2022 in North America; EH shares jump after announced that AirX Inc., a leading Japanese air mobility digital platform company, has placed a pre-order for 50 units of the EH216 AAV, marking the biggest pre-order EHang has received in Japan; steel stocks pressured late (X, NUE, STLD) after Bloomberg reported Stelco CEO sees North America oversupplied saying The North American steel market is in for some rough months ahead, with excess supplies, rising inventories and shrinking demand,

·     Transports; airlines with earnings as AAL 4Q adj EPS ($1.42) ex items vs est. ($1.48) on in-line revs $9.4B, qtrly load factor 80.2 vs 64.1%, RASM 13.72 cents vs 9.6, sees 1Q capacity down 8-10% with revs down about 20-22% vs 1Q19, and expects to return to profitability this year; UAL Q4 adj EPS ($1.60) was a narrower loss than est. ($2.11) on revs $8.2B vs est. $7.96B, sees Q1 capacity down 16-18% and revenue down 20-25% vs 1Q19, said Omicron’s impact on bookings has bottomed out and expects to be profitable again in Q2; UPS upgraded to Neutral at Exane; Bank of America upgraded CHRW to Buy with a $125 target from $108 as a value opportunity in an expected volatile year for transports; in rails, UNP 4Q EPS $2.66 vs est. $2.61 on revs $5.7B vs est. $5.6B; says although uncertainty remains around covid variants and supply chain disruptions, see a positive demand environment in 2022; HTLD Q4 EPS 26c matched consensus expectations on revs $148.3M slightly below est. $152.8M

·     The Baltic Exchange’s dry bulk sea freight index fell for a tenth straight session hitting the lowest level in about a year, on waning demand across all vessel segments. The overall index, fell 96 points, or 6.1%, to 1,474, its lowest since February 2021 as Capesize fell 15.9% to 1,031 and slipped 71 points, or 3.4%, to its lowest since April at 2,024 (shares of tankers move on data)

·     Paper & Containerboard sector: BLL downgraded from Overweight to Equal weight and trim tgt to $100 from $110 at Morgan Stanley as see greater risk of multiple contraction at Ball given its premium valuation to peers, offsetting continued strong earnings growth, while upgraded SEE from Equal weight to Overweight w/ $79 PT up from $61 as believe has been executing well in an inflationary environment and is best positioned to outperform as resin prices moderate; in paper, Bank America downgraded IP and WRK to Neutral while keep PKG at Buy in the containerboard sector after the stocks have lifted a bit in 2022 (up 5-10% relative) on a cyclical/value rotation saying early responses from their latest Survey show further deceleration

·     Chemicals; HUN named catalyst Buy at Deutsche Bank saying with the company engaged in a proxy contest with activist shareholder Starboard Value ahead of the upcoming March 25 annual meeting they believe Huntsman will pull out all stops in delivering Q4 earnings and providing strong Q1 and ’22 earnings guidance; Keybanc said they are tactically more cautious on ethylene/PE producers DOW and LYB, following a strong rally in shares over the last 30 days despite U.S. PE prices falling $0.20/lb since cycle highs; FUL reported F4Q21 adjusted EBITDA of $134M, above Street at $130M on and revs of $897M were in line at 15% organic growth that included over $100M of realized pricing initiatives ASH downgraded to Equal Weight from Overweight at Wells Fargo and tgt cut to $110 from $120 to reflect another earnings reduction for FY21 and FY22 , which reflects 13.5x our lowered 2022 EBITDA estimate

Technology, Media & Telecom

·     Internet; big tech in focus (AAPL, FB, GOOGL, AMZN) after the Senate Judiciary Committee advanced a bipartisan antitrust bill forbidding tech platforms from favoring their own products; NFLX earnings after the close tonight (shares down about 14% YTD into results); U.S. listed Chinese stocks such as BABA, BIDU, DIDI, PDD, NTES jumped after China’s central bank cuts key interest rate and as their cyberspace regulator denied issuing a document with new guidelines requiring the country’s major internet cos to seek approval for new investments and fundraising; in online travel, Truist tweaks ests lower saying they believe travel demand slowed in Dec (particularly non-US), with headwinds continuing into Jan, based on analysis of broad array of data points – see a greater hit to BKNG, TRIP, TRVG (given geo exposure) less for EXPE; ETSY upgraded at Keybanc as First Look Data has pointed to stable to improving q/q trends

·     Semiconductors; AMD, NXPI downgraded to neutral at Piper citing concerns about a growth slowdown; generally a nice rebound for semiconductors after selling pressure the last two trading sessions, with a few names moving back above key technical levels (AMAT held 100-day MA $144.25, though AMD dropped below its 100-day around $128)

·     Media & Telecom movers; DIS will be closely watch tonight following NFLX earnings, with investors looking for key subscriber numbers; LUMN awarded an 11-year task order valued at $1.2B from the U.S. Department of Agriculture (USDA); ORAN and VOD both downgraded to Hold from Buy at Argus