Closing Recap

Tuesday, January 25, 2022

Equity Market Recap

·     So much for quiet markets ahead of the Fed meeting Wednesday as major U.S. averages deal with more volatility, posting hefty early losses like Monday (Nasdaq down as much as 3%, the S&P down as much as -2.5% at lows and the Dow down as much as 818 points at lows) before another early afternoon rally turned markets well off the lows (S&P and Dow each turned “green” late day). Two macro factors remain the key market drivers (despite earnings season heating up with Dow components AXP, VZ, JNJ, MMM earnings today and MSFT due after the close), as all eyes on the Fed meeting tomorrow and geopolitical news as the U.S. is putting as many as 8,500 troops on heightened alert for deployment to bolster NATO forces in Eastern Europe if needed as Russian troops amass on Ukraine’s borders. Things looked bleak this morning as today marked a 4th straight day with an $NYSE $TICK of -1,800 or worse, but markets found solid footing, again rising into the afternoon. Investors at this point are hoping the “hawkishness” the Fed has exhibited to start 2022, with many members calling for at least 4-interest rate hikes this year, will be tempered somewhat in Powell FOMC policy commentary. Expectations are for them to say March is likely the start of the rate cycle increase – but perhaps after the latest stock market “tantrum” Powell will ease on the commentary amid the recent volatility and economic uncertainty – watch for comments that the Fed may be data dependent for future moves. 

·     Stock & Sector movers: NVDA stumbles after Bloomberg reports it is preparing to abandon its purchase of Arm from Softbank amidst general weakness among semi stocks – most components in the Philly Semi Index (SOX) sliding; AXP soars after its strong quarter with record card spending levels, ZION also among S&P leaders in financials after its report; IBM jumps after its beat, JNJ climbs despite its quarterly sales miss as its guidance range for EPS, revs were completely ahead of consensus, MMM hits 52-week lows after its report before recovering losses, GE, XRX sink on their weak quarterly sales; Energy outperforms as crude oil prices rise on Ukraine-Russia tensions; SLB, CVX, OXY, HAL, APA among S&P leaders; defense names active – RTX green despite a weak open on a mixed quarter, LMT gains after its beat, but AJRD plummets to 52-week lows after the FTC sues to block its acquisition by LMT; MSFT, FFIV, TXN slip ahead of their earnings reports tonight amidst another rotation out of tech.

Economic Data:

·     January Consumer Confidence index 113.8 tops consensus 111.8 and compared to December revised 115.2 (previous 115.8); the present situation index 148.2 in Jan vs Dec revised 144.8 and the expectations index 90.8 in Jan vs Dec revised 95.4

·     In Housing, CaseShiller November 20-metro area home prices +18.3% from year ago vs revised +18.5% in October; November home prices in 20 metro areas +1.2% seasonally adj vs revised +1.0% in October

·     Richmond Fed Composite manufacturing index +8 in Jan vs +16 in Dec; shipments index +14 in Jan vs +12 in Dec and revenues index +4 in Jan vs +12 in dec

Commodities, Currencies & Treasuries

·     Oil prices were firmly higher, with WTI crude rising $2.29 or 2.75% to settle at $85.60 per barrel amid rising inflation expectations and several Wall Street bulls calls for higher oil prices in recent weeks, with calls for $100 per barrel following a drop in domestic inventories and bets on near-term demand. A tight supply picture has been lifting prices. Gold prices hit 2-month highs, rising $10.80 or 0.6% to settle at $1,852.50 an ounce, as investors add to haven assets ahead of Fed meeting tomorrow and ongoing Russia/US tensions over Ukraine.

·     Treasury yield end lower; the 10-year yield hit one-week highs around 1.8% overnight, but as tock futures slumped into the morning, investors rotated back into haven Treasuries, pushing yields lower ahead of the yet FOMC meeting commentary tomorrow. The U.S. Treasury sold $55B in 5-yr notes at a yield of 1.533% vs. 1.547% when issued prior with the bid-to-cover at 2.50 vs. prior 2.41 and indirect bidders awarded 68.72% (highest since Sept 2017) and directs 16.48%

·     The U.S. dollar (DXY) pulled back off highs but ended mostly higher as the euro dropped below the 1.13 level. The buck extended gains early as tensions between Russia and the U.S. over Ukraine drew investors to safe-haven currencies as the United States put 8,500 troops on alert to deploy to Europe in the event of an escalation in the Ukraine crisis.

Sector News Breakdown

Consumer

·     Retailers; a solid day for consumer discretionary with shares of GPS, JWN, ANF, AEO, URBN among leaders; NKE upgraded to Overweight with $175 tgt at Wells Fargo as see a favorable risk/reward and view the pullback as a rare buying opportunity for this best-in-class global athletic name, particularly ahead of accelerating trends into FY23; VSCO announces partnership with Regina Miracle International (holdings) Limited for existing business in China;

·     Autos; GM will invest $6.5 billion in its home state of Michigan over the next several years to increase electric pickup truck production, build a new EV battery cell plant and update current facilities. The new investments are part of a plan to increase GM’s North American production capacity for build electric vehicles to 1 million units by 2025; RIDE Chairman said Lordstown pickups will begin shipping this year

·     Consumer Staples & Restaurants; IPAR Q4 sales rose 15% to $210.8M vs. est. $162.4M; raises FY21 EPS view to $3.00 from $2.45-$2.65 prior (est. $2.84) and boosts year revs to $975M vs. est. $833.76M; grocer KR was downgraded to Underweight from Equal Weight at Wells Fargo saying while expect Q4 earnings to exceed consensus once again, the risk/reward for this COVID beneficiary now looks skewed to the downside; CHUY upgraded at Berenberg; TAP enters exclusive agreement with KO to launch new brand inspired by simply® juices in the alcohol aisle

·     Casinos, Gaming, Lodging & Leisure sector; in casinos/gaming, BALY surges after Standard General proposes transaction to acquire all shares not currently owned for $38 per share; in leisure, PII Q4 adj EPS $2.16 vs. est. $2.03 and revs better $2.17B vs. est. $2.13B and guides year EPS and revs above consensus; in towables (WGO, THO, CWH), Bloomberg noted the U.S. shipped a record 600,240 recreational vehicles last year, up 40% from 2020, according to the RV Industry Association’s survey of North American manufacturers – though notes record year dampened by a slip of -0.1% in Dec RV shipments and motorhomes slumped 11%; DESP upgraded to Buy at Citigroup reflecting discounted valuation from the recent pullback despite long-term earnings power that actually improved since pre-pandemic

Energy

·     E&P, Services, and Majors; CHK signed an agreement to acquire Chief E&D Holdings LP from Tug Hill Inc. for $2B in cash and about 9.44M shares and to sell its Powder River Basin assets in Wyoming to CLR for about $450M million in cash in two deals expected to close in Q1; CRK increased their proved reserves by 9%, with pre-released Q4 gas production 1,337.3 MMcfpd missed consensus of ~1,400 and CapEx was $160.2M vs est. $132M; Wells raised their EBITDA valuation multiples on SLB and HAL as well as upping their PTs on those and BKR; Argus raised their FY22 EPS estimates on SLB with a new $45 PT from $38 based on their strong Q4 results and expected further margin and earnings growth; Goldman downgraded CNQ to Neutral; In refiners, Piper upgraded PBF to OW and downgraded MPC to Neutral

·     Pipelines: PAA upgraded to Outperform at Bernstein based on faster Permian growth in late 2021 than anticipated and a reasonably high likelihood that 1-2 crude pipelines will convert to gas or something else, which they think would be worth $3/share; HESM sees FY22 net income $630-660M, adj EBITDA $970M-1B (est. $977.4M), distributable cash flow $840-870M, adj FCF $615-645M, capex ~$235M, and extended its annual distribution per share growth target of 5% through 2024 while slightly raising its quarterly div to 51.67c/share from 51.4c

·     Utilities & Solar; NEE 4Q adj EPS 41c vs est. 40c, guides FY22 adj EPS $2.75-2.85 vs est. $2.75, and expects 6-8% annual growth for 2023-25 off the FY22 adj EPS guide, NEP sees FY22 adj EBITDA $1.78-1.98B above est. $1.17B; Evercore downgraded EVRG and OGE to In-Line as their 2021 outperformance leaves limited upside and upgraded SO to In-Line as their thesis was predicated on Vogtle delays, but this is now expected to be in service in 3Q22 vs Nov 2021 target, XEL to Outperform after being one of the worst performers last year driven by an active regulatory calendar, and PEG to Outperform as expect cleaner portfolio post-fossil sale to attract investor interest; PCG proposed 9 new battery storage projects for nearly 1,600 MW of new battery usage

Financials

·     Financials all eyes on Fed outlook for interest rates tomorrow – sector had started 2022 with strength on rising yields, but have since pulled back after mixed earnings results in large cap banks; WFC raises its dividend; More smaller banks reporting as NWBI EPS beat on continued credit improvement and lower operating expenses; SFBS 4Q21 results that beat consensus estimates by $0.01, while Raja said PTPP earnings fell short by $4.4 million exclusively due to elevated expense; BSRR 4Q21 core EPS that were modestly below forecast with a PPNR miss

·     Consumer Finance; Dow component AXP rises early as 4Q EPS $2.18 easily tops est. $1.87 on revs $12.15B which was above est. 11.36B saying they reached record levels of card member spending in qtr, says expect to generate elevated levels of rev growth in 2022 in range of 18-20% vs est. +15.4% – says plans to increase regular qtrly dividend by about 20%; MGI gets binding acquisition offers from Madison Dearborn Partners LLC, Siris Capital Group LLC and Advent international Corp according to a Reuters report this morning; AFRM tgt reduced to $100 from $140 at Mizuho to reflect more realistic multiples, while saying proprietary survey shows healthy appetite and a promising start to the AFRM checkout option on Amazon

Healthcare

·     Pharma movers; JNJ Q4 adj EPS $2.13 vs. est. $2.12; Q4 sales $24.8B vs. est. $25.32B; Sees adjusted EPS $10.40-$10.60 vs. est. $10.32; sees FY sales $98.9B-$100.4B vs. est. $97.76B; Q4 Pharmaceutical sales $14.29B, +16% y/y and worldwide medical devices sales $6.86B, +4.1% y/y; BNTX and PFE said they are launching a trial to evaluate an omicron-based COVID-19 vaccine in healthy adults aged 18 to 55; CKPT said a trial of cancer-treatment cosibelimab met its primary endpoint, demonstrating a confirmed objective response rate of 47.4% based on independent central review of 78 patients enrolled in the trial

·     Healthcare Services; MDRX said sees Q4 rev between $390-$395M, topping Street consensus of $386.8M and boosts FY21 adj EBITDA of $295-$300M from prior $275-$285M previously; SDC announced plans to cut jobs and suspend operations in some countries; OSUR announced they are expanding their OraQuick HIV self-test into six European countries; PETS Q3 EPS $0.21 vs consensus $0.30 and revenue $60.7M vs consensus $64.1M; EBITDA $7.6M vs consensus $7.8

Industrials & Materials

·     Aerospace & Defense; AJRD and LMT have been informed by the FTC that the planned purchase of Aerojet will raise antitrust concerns – AJRD said believe it is highly likely that FTC will vote to sue to block deal and expect they will decide before Jan. 27, 2022; RTX posted mixed Q4 as EPS topped views but sales of $17.04B missed the $17.3B estimate and expects FY EPS in the range of $4.60-$4.80 on revs $68.5B-$69.5B below ests. $4.96/$70B; LMT 4Q $7.47 vs est. $7.16 on sales $17.7B vs est. $17.7B; qtr end backlog $135B; guides FY22 net sales about $66B vs est. $66.3B, sees FY EPS about $26.70 vs es.t $26.27 and cash from operations less than or equal to $7.9B

·     Metals, Industrial & Machinery; GE reported Q4 revenue that missed the average analyst estimate; Q4 EPS $0.92 vs. est. $0.87; Q4 revs $20.3B vs. est. $21.48B; Q4 Industrial organic revenues $19.6B, down 3% and adj industrial profit margin 9%; sees 2022 organic revenues to grow in the high-single-digit range; MMM Q4 adj EPS $2.31 vs est. $2.01 on revenue $8.61B vs est. $8.6B; CR Q4 adj EPS $1.25 vs est. $1.13 on sales $771M ahead of est. $745.7M, sees FY22 adj EPS $7-7.40 on revenue ~$3.3B vs est. $3.36B; STLD Q4 adj EPS $5.78 vs est. $5.72 on in-line sales $5.3B; PCAR Q4 EPS $1.47 vs est. $1.31 on revenue $6.69B that topped est. $5.5B, global truck deliveries increased 17% YoY to 47,600 vs est. 40,100; TRQ rises as RIO and Mongolia settle dispute over Oyu Tolgoi copper mine – prompts analyst upgrades; JCI, CARR, TT upgraded to Positive from Mixed at OTR Global; Global crude steel output falls 3% to 158.7M Tons In December 2021 vs. December 2020 – World Steel Association

·     Transports; DAL was upgraded from Hold to Buy with $50 tgt at Berenberg saying Delta offers a high-quality way to play the US recovery, with shares trading at a discount to history and expect the company to regain its margin premium versus the rest of the sector; in rails, Deutsche bank said rail volumes were down 9.2% YoY vs down 7.9% YoY in the prior week – there could be some risk to Q1 consensus numbers – notes all rails were down with UNP (-0.4%) and KSU (-5.4%), being the most resilient.

Technology, Media & Telecom

·     Internet; EBAY said it is expanding its "Authenticity Guarantee" to trading cards sold for $750 or more by mid-2022, and will extend the guarantee to those sold for $250 or more after that – svc also includes handbags sold for $500 or more, watches for $2,000 or more, and sneakers sold for $100 or more; earnings previews coming in ahead of earnings season, with UBS today cautiously optimistic on the online ad names into 4Q saying for TWTR and PINS see downside risk to Street estimates while GOOGL stands out among our ad checks as likely to have a solid 4Q; theinformation reported that PINS has lost at least seven senior executives in roles ranging from creator marketing to corporate development in recent weeks

·     Semiconductors; NVDA shares slid after Bloomberg reported overnight the co is quietly preparing to abandon its purchase of Arm Ltd. from Softbank Group Corp. after making little to no progress in winning approval for the $40 billion chip deal https://on.mktw.net/3qYPKvN ; Jefferies said they are positive on semis heading into the 4Q21 earnings season and 2022. We think the recent SOX underperformance since early December sets the table for positive stock reactions on beats (favor MCHP, ADI, TXN, KLAC, AMAT and LRCX heading into the 4Q21); in chip space, report showed that AMD Ryzen 9 6900HX ‘Zen 3+’ APU Benchmark Leaks Out: 33% Faster Than Ryzen 9 5900HX But 30% Slower Than INTC Core i9-12900H https://bit.ly/3H3d3tN

·     Software movers; all eyes on Dow component MSFT with earnings after the close; SNOW was upgraded to Buy at Loop Capital with $370 tgt saying the pullback in the enterprise software sector since its mid-November highs has driven many stocks in the group down 30% or more vs. a 15% decline in the Nasdaq and 23% decline in the broader IGV software index; NEWR was upgraded to Overweight at Morgan Stanley as see the co poised to accelerate revenue in 2022 and sustain 20%+ growth thereafter in the $22Bn observability market; Unity Software (U) said it reached an agreement to acquire Ziva Dynamics for $133M; QTWO, BL, PLAN all downgraded to Sector Weight from at Keybanc as recommend investors focus on disruptive platforms with a multitude of untapped growth vectors like SHOP, GLBE, BILL, COUP, and companies where valuation multiples may be overly discounting highly recursive revenue streams in attractive end markets like AVDX and ALKT

·     Hardware, Components & Services; IBM posted Q4 top and bottom-line beat, but analysts note consensus was noisy given the recent Kyndryl spin; however, 4Q and the 2022 outlook was largely in-line with estimates; XRX Q4 adj EPS $0.34 vs. est. $0.33; Q4 revs $1.78B vs. est. $1.82B; sees FY22 revenue ‘at least $7.1B in actual currency,’ slightly above consensus $7B

·     Media & Telecom movers; Dow component VZ Q4 adj EPS $1.31 vs. est. $1.29; Q4 revs $34.1B vs. est. $33.89B; Q4 Verizon 4q wireless retail postpaid churn 1.01%, net FiOS internet customers up 51,000, net FiOS TV customers down 69,000, Q4 retail postpaid net additions 1.06 million, broadband net additions 106,000, sees 2022 organic service, other rev growth of around 3% and sees 2022 wireless service rev growth 9%-10%; VIAC was upgraded to Sector Weight at KeyBanc as data is picking up on improving momentum of gross adds and churn where direct-to-consumer subscriber upside could improve sentiment; CMTL said its Board of Directors has unanimously rejected the unsolicited proposal to acquire Comtech received from Acacia Research Corporation (Acacia) on October 29, 2021.