Closing Recap

Monday, January 23, 2023

Index	Up/Down	%	Last
DJ Industrials	253.35	0.76%	33,627
S&P 500	47.04	1.18%	4,019
Nasdaq	223.98	2.01%	11,364
Russell 2000	23.43	1.24%	1,890

 

Equity Market Recap

·     The stock market “melt-up” continued Monday, as major averages jumped out of the gate for a second straight day and rallied (little late day profit taking pared gains), taking out key technical levels along the way as market participants showing zero fear (VIX remains below 20) and chase performance higher. The market rally remains based on hopes inflation will continue to show signs of deceleration, leading the Fed to pause rates and pivot to cut rates late year (leading to a bounce in growth sectors). The China “re-open” trade has picked up steam too, boosting industrials and materials. While the Fed has repeatedly suggested they will maintain course of higher rates, before pausing, the bond and stock market continue to trade on a different belief, with Fed Fund futures implying late year rate cuts by the Fed.

·     Over the last week, the S&P 500 (SPX) has climbed (and held) above key technical levels to extend this mkt rally, topping the 50-day (3,932 now) and 200-day MA (3,966 now) levels last week and today the SPY moved above the 400 level after failing twice last week – likely squeezing shorts along the way. Breadth continues to strengthen with NYSE advancers leading by more than 4:1 margin earlier as all 11-S&P sectors were firmly in the green (XLK, XLC, XLF, XLY outperform). The Nasdaq 100 also got it back above its 50-day MA and 100-day MA as well. Earnings tomorrow morning for Dow components Johnson & Johnson (JNJ) in the Pharma sector, 3M (MMM) in Industrials, and Verizon (VZ) in the Telecom sector, and Travelers in Financials. Overall, roughly 90 S&P companies are expected to report this week (or about ~25% of S&P Mkt Cap). So far, 52 S&P 500 companies (including early reporters) comprising 14% of S&P 500 earnings have reported. 4Q EPS slid further, now tracking a 1% miss vs. a historical average of 50bp beat post Week 1, and this is after a 7% cut into the season (as per @MikeZaccardi).

·     It has been a simple plan thus far for investors to kick off January…buy the beaten-up growth sectors from 2022 on hopes the Fed will slow its rate hikes and pivot to cuts by year-end. The communications sector is up 11% YTD (after falling -40% in ’22), Consumer Discretionary +8% YTD after falling -38% in 2022 and Info tech up 6% YTD after falling -29% in 2022. Materials +7% YTD after slipping -14% in ’22 and REITs +6% YTD after falling -28% in 2022. Energy the lone leader last year, surging 59%, up only 3% YTD so far. Defensive utilities, consumer staples and healthcare all currently down YTD. So far the trend continues!

 

Commodities, Treasuries and Currencies

·     Oil prices hit 7-week high, before sliding late to settle slightly lower as WTI crude March futures settle at $81.62 a barrel, down 2 cents, 0.02%. prices have rallied on expectations of rising demand in the wake of China’s reopening, while the US dollar eased and risks to Russian energy supplies came into sharper focus with fresh curbs looming. Brent crude futures settle at $88.19/bbl, up 56 cents, 0.64%.

·     February gold rises a modest $0.40 to settle at $1,928.60 an ounce, holds at highest levels since April with the dollar index (DXY) holding steady around the 102 level (-1.45% YTD) while Treasury yields only a modest rise above 3.5% for the 10-year. No Fed speakers all week with Fed blackout period ahead of next week FOMC. No major economic data either until Thursday with GDP, Jobless Claims and PCE inflation readings.

·     The price of Bitcoin topped $23,000 today, the first move above that level in five months. With prices up by more than 30% in less than two weeks, Bitcoin has emerged from two-year lows that came after the bankruptcy of exchange FTX in November. Ethereum lagged but still up 35% YTD.

·     Euro zone government bond yields rose for a third day after European Central Bank (ECB) officials said over the weekend they expect interest rates to climb considerably higher. ECB governing council member Knot pushed said expects the central bank’s main interest rate to rise 50 basis points (bps) in both February and March and to keep climbing after that. Policymaker Holzmann said he expects at least two interest-rate increases of 50 bps each in the first half of this year.

 

 

Macro	Up/Down	Last
WTI Crude	-0.02	81.62
Brent	0.56	88.19
Gold	0.40	1,928.60
EUR/USD	0.0002	1.0857
JPY/USD	1.09	130.66
10-Year Note	0.035	3.519%

 

 

Sector News Breakdown

Consumer

Leisure, Lodging, Autos:

·     TSLA outperforms, rising to its best levels since Dec 20, topping $140 and up 16% YTD

·     LAD in talks to acquire Ferrari dealer Jardine Motors for about £300M, citing people familiar with the matter, giving the co a substantial foothold in the UK https://bit.ly/3wnTrwT

·     APTV added to Deutsche Bank short-term Catalyst Call Buy List ahead of the company’s 4Q22 earnings day/initiation of 2023 guidance and its Capital Markets Day to follow in February.

·     CZR guides prelim Q4 revenue to $2.81B-$2.83B vs. est. $2.78B and announced that it will offer $1.25 billion in senior secured notes.

 

Consumer Staples & Restaurants:

·     PG files for 3-part notes offering.

·     NWL said plans to eliminate about 13% of its office positions as part of a restructuring that could cost up to $130 million.

·     INGR downgraded to Equal Weight at Barclay’s saying core of investment thesis remains intact but post the recent stock price rally they see limited upside potential.

 

Retailers:

·     Several analyst rating calls as LEVI downgraded to Neutral from Overweight at JPMorgan; SKX upgraded to Outperform from Market Perform at Cowen and raise tgt to $65 from $48 based on checks it is gaining preference in their survey for casual/lifestyle footwear; TPR downgraded to Equal Weight from Overweight at Barclays; investors continue to pile into beaten up 2022 losers such as discretionary on rising hopes of no recession/rebound in 2023.

 

Homebuilders, Building Products, Home Furnishing:

·     In Home furniture movers: Wayfair (W) was double upgraded by two analysts, raised from Underperform to Buy at Bank America (tgt to $65 from $30) and raised to Overweight from Neutral at JPMorgan (tgt to $63 from $35) and upgraded at a third firm as Wedbush raises to Outperform with $38 tgt as are now more confident it will achieve breakeven or better EBTIDA this year (first time since 2020) on a significant improvement in revenue trends

 

Energy

·     In oil services, BKR reported Q4 adj EPS $0.38, missing consensus by 2c and revenues of $5.9B above last year $5.49B figure, but below consensus $6.06B; Orders increased by 20%, to a quarterly record of $8.01 billion.

·     In natural gas stocks, Benchmark downgrade RRC and SWN to Hold as debt reduction is the top priority while maintain BUYs on AR as adjusting 4Q and 2023 estimates on revised natural gas prices. 4Q is marked-to-market at $6.27 HH from our prior estimate of $7.00.

·     MUSA upgraded to OW at Wells Fargo saying they see underappreciated support for stronger-for-longer fuel margins and are taking a more constructive view.

 

Utilities & Solar:

·     AQUA agreed to be acquired by XYL in an all-stock deal valued at $7.5 billion, where AQUA holders will receive 0.480 Xylem shares for each Evoqua share owned, valuing the shares at $52.89 https://on.mktw.net/3wncLKF

·     In research, Guggenheim with several changes as they upgraded FE to Buy and moved to Best Idea list in utilities, while removing PCG from Best Idea list but retaining Buy rating as material valuation upside remains. Firm also downgraded AEE, CNP, OGE to neutral, upgraded OGS to Neutral from Sell and downgraded ALE, LNT, NWE to Sell as no longer recommend any SMID utilities outside of BUY-rated POR, any Gas Utilities outside of NI.

 

Financials

Banks, Brokers, Asset Managers:

·     Regional banks broadly outperform (KRE) as FITB moves back above 200-day MA of $35.20; ZION highs +3.25% approaching its 200-day MA of $53.45; USB +1.65%; PNC also outperforms.

·     In Asset Manager preview, Credit Suisse said they retain cautious view on U.S. Traditional Asset Managers, even as they raise ’23-24 adjusted EPS estimates for 4Q22 (F1Q23)/early 2023 above trend NAV. AMG remains lone Outperform (OP) as remain Underperform-rated on TROW, IVZ, and JHG.

·     In alternative manager preview at KBW, the firm recommends investors overweight ARES and underweight OWL, and on the traditional asset manager side, they recommend investors overweight AMG and underweight APAM. Despite tactical recommendations, they reiterate Market Perform ratings on both OWL and APAM

 

Bitcoin, FinTech, Payments:

·     Big banks including WFC, JPM, and BAC are teaming up to launch a digital wallet that will be linked with customers’ debit and credit cards, the WSJ reported, competing with PYPL and Apple Pay (AAPL) https://on.wsj.com/3R14Wne

·     Mizuho noted ABS securitization trends for December are largely encouraging for AFRM saying they see overall delinquencies (DQs) for AFRM’s primary non-0% APR trust (2021-B A) declining by almost 20bps vs. the prior month – an acceleration of the promising trend seen in November.

·     SYF Q4 EPS $1.26 vs. est. $1.12; provisions for credit losses were $1.2B vs $561M last year; Net interest income in Q4 jumped 7% to $4.1 bln, driven by higher interest rates and fees on loans; net income, however, reduced in Q4 to $577M vs. $813M y/y.

 

Healthcare

Biotech & Pharma:

·     JNJ expected to report earnings this week in big Pharma.

·     Cantor said their “biggest winner" picks into the 4Q22 print are (BMY, VRTX) and biggest loser ahead of 4Q (BMRN) as believe Bristol will come out with solid 2023 guidance.

·     CPRX said it has received a notice from TEVA saying it had submitted an Abbreviated New Drug Application (ANDA) seeking authorization from the FDA to manufacture, use or sell a generic version of Firdapse in the US.

·     IDYA initiates phase 2 trial of darovasertib in neoadjuvant/adjuvant uveal melanoma; provides guidance for clinical update in metastatic uveal melanoma.

·     PLRX shares surge as reported positive interim data from a Phase 2a study of its lead product candidate in the chronic lung disease idiopathic pulmonary fibrosis; said the highest dose group of bexotegrast met its primary and secondary endpoints.

·     RGNX announced that the Phase I/II AFFINITY DUCHENNE trial of RGX-202 for the treatment of Duchenne muscular dystrophy (Duchenne) is now active and recruiting patients.

·     TCRX said the FDA cleared three investigational new drug applications for the treatment of solid tumors, for T-Plex, TSC-204-A0201 and TSC-204-C0702.

 

Industrials & Materials

Aerospace & Defense

·     BA was awarded option year six of an estimated $72.7 million US Air Force contract for engineering support services, according to a Friday notice posted on the US DoD.

·     RBC Capital with commercial aerospace (HEI, RTX, TDG) MRO survey – says total 4Q22 MRO sales were up 19%, with parts purchasing up 15%. The strength was led by Europe and the engine market. Inventory levels remain low, with pricing up 7.4% (down ~200 bps from 3Q22). See the most potential 4Q22 upside with BA commercial services, HEI, RTX and TDG.

 

Industrials & Materials

·     EMR which last week unveiled a $53 bid, nearly $7B offer for NATI said today its seeing engagement between the management teams and advisers for both companies.

·     RBA said it will increase the cash payout for IAA to $12.80 per share from $10 as part of the deal to buy the U.S.-based company, the WSJ reported. https://on.mktw.net/3QXw8DE

·     In containerboard (IP ), benchmark U.S. containerboard price fell another $10/ton, such that it’s now fallen $50/ton (~5.5%) in the last three months following a $220/ton (~30%) increase during the pandemic as per Fastmarkets RISI’s PPI data, noted Keybanc.

·     Steel stocks X, NUE, slip after the Brazilian ministry said the US revoked duties on Brazil carbon steel plates.

 

Technology

Internet, Media & Telecom

·     SPOT said it is laying off 6% of its staff as a part of a broader organizational restructuring and cost-cutting measures.

·     WMG downgraded to Equal Weight from Overweight at Barclay’s with an unchanged price target of $35 saying its financial performance has been too volatile to justify a premium stock valuation.

·     In Towers, Keybanc downgraded AMT and CCI to Sector Weight from Overweight as see a tough 4Q22 setup with outperformance in U.S. and International leasing unlikely. Further, AFFO/share growth for AMT/CCI is flat, and valuation multiples are not screening inexpensive.

 

Hardware & Software movers:

·     CRM rises after the WSJ reported this weekend that Elliott Management “has made a multi-billion investment in Salesforce,” following Starboard Value having taken a “significant” investment in Salesforce late last year https://on.wsj.com/3wkMZGK

·     CFLT upgraded to Buy at Deutsche Bank and downgraded CHKP, CRWD, MTTR, S & WDAY to Hold from Buy; said NOW is top large ca pick in software, top value/GARP is ORCL, and top security pick is OKTA as they expect another volatile year for software in 2023 as fundamentals remain uncertain over the near-term.

·     PTC upgraded to Overweight at Keybanc saying despite being one of the relatively better-performing software stocks in 2022, they raise rating on view that the Company could be one of the best FCF growth stories over the next three years.

·     SUMO shares spiked late afternoon after a report in Theinformation Private equity firms including Thoma Bravo, Vista Equity Partners and Francisco Partners have approached the company expressing interest in a possible acquisition https://bit.ly/3wldJam

 

Semiconductors:

·     Big gains in semis as the Philly semi-index (SOX) rises as much as 4% above 2,900, pacing the gains in the Nasdaq on positive analyst commentary.

·     Ahead of earnings season, Barclay’s upgraded AMD, QCOM, STX, and SWKS to OW from EW, while downgraded shares of VECO to EW and cut both AMAT, KLAC to Underweight saying they are more positive on semiconductor companies with data center, PC, and handset exposure, but remains negative on semiconductor capital equipment stocks – Raises WFE (wafer front end) spending estimate to $78 bln (from $69 bln) in CY23, but sees it at $65 bln in 2024

·     Truist upgrading semis & AI sector view to positive from cautious and adjusting models & price tgts as see most upside potential from our Buy-rated growth stocks TSLA, NVDA, MPWR, and ON. Firms expects >100% upside over 2 years.

·     IDCC commences a modified "Dutch Auction" tender offer to repurchase up to $200 million of its common stock; shares outperformed.

·     WDC shares rise early after Bloomberg published an update over the weekend indicating Kioxia and WDC talks have advanced further since its initial report that WDC and Kioxia were in talks to merge. The deal’s potential structure now would include a dual listing of a WDC managed spinout of WDC’s flash business combined with Kioxia.