Closing Recap

Wednesday, January 26, 2022

Equity Market Recap

·     Today’s Federal Reserve meeting failed to stop the bleeding for U.S. stock markets, as the S&P 500 gives up a 2% gain, turning lower along with the Dow and Nasdaq in volatile trading late day as the Fed signals rate hikes are ahead to fight inflation. Treasury yields jumped to their highs (10-yr topped 1.84%) after Powell said at a press conference there was “quite a bit of room” to raise rates before it would hurt the labor market. “With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the FOMC statement said. The guidance from Powell was the only market catalyst late day, erasing some good gains in names like MSFT which had rallied earlier following a strong earnings report and guidance. Fear has popped its head into the market as the CBOE volatility index (VIX) topped yesterday’s closing high of 31.16, its highest since Jan 29, 2021.

·     Stock and Sector movers: MSFT jumps on a quarterly beat with a strong outlook for Cloud revenue, leads rally among big tech and overall market; other post-earnings gainers include TXN pacing a rally in semis and GLW leading the S&P after strong quarters and guides; decliners post-earnings include BA sinking after its wide quarterly miss due to incurring a charge from 787 Dreamliner delays, FFIV KMB ANTM tumbling on weak guidance to outweigh beats; MAT spikes after winning the license to produce toys from $DIS princess lineup and Frozen franchise from HAS who goes red on the news; homebuilders slide on rising rate fears; mortgage market index falls -7.1%, purchase index -1.8% and refinancing index -12.6% as the average 30-year mortgage rate rises 8 bps to 3.72%, the highest since March 2020; defensive consumer staples after analyst downgrades for CHD, CLX – overall foods and HPC names weaker.

FOMC Comments

·     The Federal Reserve kept interest rate benchmark unchanged at 0%-0.25% (as expected), while said they will soon be appropriate to raise the Target range for the federal-funds rate. The Fed also said asset repurchases will conclude in early March (all in-line with expectations). Fed funds futures still imply 4 rate hikes in 2022 after Fed statement. Powell comments about inflation, supply chains, the balance sheet unwind, rising rates were not well received by markets during his press conference.

Economic Data:

·     December International Trade in Goods showed a deficit of -$101.1B vs. -$95.1B consensus and -$98.0B prior (revised from $97.8B); imports were $258.3B, up $5.1B from November and exports were at $157.3B, up $2.2B from November

·     Advance wholesale inventories are estimated at $789.4B at the end of December, up 2.1% from November and +18.3% from December 2020; Retail inventories estimate is $643.8B at month-end, up 4.4% M/M and 3.8% from a year earlier.

·     New Home Sales rose 11.9% to an 0.811 mln unit ann. Rate vs. est. 0.760 mln and above Nov 0.725 mln unit rate; Dec new home supply 6.0 months’ worth at current pace vs Nov 6.6 months; the median sale price $377,700, +3.4% from dec 2020 ($365,300)

Commodities, Currencies & Treasuries

·     Oil prices rise with WTI crude gaining $1.75 or 2.04% to settle at $87.35 per barrel while Brent crude topped the $90 per barrel mark for the first time since 2014 (settled at $89.96), while weekly inventory data came in mixed (bullish gasoline/mixed crude). Growing concerns over the Russia-Ukraine situation also boosted U.S. benchmark prices

·     Gold prices end lower, falling -$22.80 or 1.2% to settle at $1,829.70 an ounce, sliding from 2-month highs on Tuesday as traders positioned ahead of the Fed meeting; in other metals, Palladium jumped over $160 or 7.4% to settle at $2,350.60 an ounce, highest since September.

·     The U.S. dollar was slightly higher into the Fed, with the dollar index (DXY) 96.05, euro down slightly at 1.1291 vs. the buck the JPY/USD at 114.30; the Canadian dollar gave back gains early after the Bank of Canada decision to maintain rates. The dollar index spiked to 3-week highs after the FOMC meeting results, trading above 96.50

·     Treasury yields were steady heading into the FOMC policy meeting, with the 10-yr at 1.78%, 2-yr 1.025%, 5-yr 1.568% and 30-yr 2.116%. Following the Fed comments, Treasury yields spiked, with the 10-yr yield topping 1.84% as the Fed appears on track for at least 4-rate hikes this year, starting with a March hike as Powell noted inflation remains high.

Sector News Breakdown

Consumer

·     Retailers; MAT reclaimed the rights to produce toys based on Walt Disney Co’s "Frozen" franchise and Princess lineup, more than seven years after losing it to rival Hasbro (HAS); Bank America said they remain cautious on BBBY especially in the near-medium term given its comp underperformance vs. the industry and see risk that repurchases will be more limited following the completion of its $1bn buyback program which ends F4Q; in mattress retailers, Truist lowered 1H22 estimates on LEG and PRPL on commentary from an industry trade show of a very notable fall-off in demand ending 2021 and so far in 2022; CPRI downgrade from Positive to Mixed at OTR Global

·     Auto sector; TSLA earnings tonight will be next driver for the auto, tech and EV space; RIVN PT lowered to $84 from $104 at JPMorgan and Ford (F) tgt raised to $23 from $20 in Q4 Automakers preview as see better GM & F earnings on strong pricing; FREY has selected DNV, the assurance and risk management company, as its partner to supply third-party certification services; MNRO posted Q3 EPS miss at $0.49 vs. est. $0.52 on slightly better sales $341.8M vs. est. $339.1M; BLNK signed a cooperation agreement with Bridgestone Retail Operations to deploy dual-port 50 Blink IQ 200 charging stations at 25 Firestone Complete Auto Care

·     Housing & Building Products; Mortgage refinance demand plunges 13% as interest rates climb toward two-year high according to the weekly MBA mortgage data; mortgage market index falls 7.1%, purchase index falls -1.8% and refinancing index falls -12.6% as the average 30-year mortgage rate rises 8 bps to 3.72% in latest week, the highest since March 2020 – shares of housing stocks tend to move on rising rates – LEN, KBH, PHM, TOL, MTH

·     Consumer Staples; Credit Suisse downgraded CHD to Neutral on valuation after shares rose 18% since Q3 earnings in October and CLX to Underperform as its valuation assumes accelerating growth is a guarantee even though a large portion of their growth came during the start of the pandemic in categories that are now slowing, named YETI as a new Top Pick followed by MNST, KOsaid they see risk in HPC, and raised their PT on KDP, PEP, KO, REYN while lowering it on TAP, CELH, OTLY, COCO, DTC, COOK, YETI after considering relative multiples and the changing outlook for growth names after the latest major market rotation; KMB Q4 adj EPS $1.30 vs est. $1.24 on revs $5B vs est. $4.89B but shares were pressured on weaker guidance of FY22 sales growth 1-2% that would miss estimates above $20B and earnings $5.60-6 also below est. $6.72; Into earnings, Stifel upgraded IFF to Buy as they see sales growth ahead of peers continuing as well its reduced discount to European peers, said MNST remains its favorite name for 2022, continues to recommend FRPT as appealing to investors with a longer horizon given near-term supply chain challenges, and named REYN as their favorite value stock; Piper said that BYND McPlant burger is selling ~3x faster than expected at its MCD test rollout

·     Casinos, Gaming, Lodging & Leisure sector; Macquarie downgraded RRR to Neutral as they see more value in other names after shares were +132% last yr (vs gaming +41%), upgraded PENN to Outperform and trim tgt to $71 from $80 as they see the market giving its online business little to no value at current levels that includes its recent SCR acquisition; DKNG upgraded to Overweight at Morgan Stanley with an unchanged price Target of $31 as recent pullback presents an opportunity to invest for the long term; Truist trimmed their estimates and PTs on marine stocks BC, HZO, MBUU, MCFT, ONEW to reflect supply chain pressures now likely to carry into 2023

Energy

·     Energy stock movers; Oil rose to a seven-year high as brent hit $90 a barrel, supported by tight supply and geopolitical tensions in Europe and the Middle East. U.S. crude oil and gasoline inventories rose last week, alleviating a bit of the market’s concerns about supply, though fuel demand surged close to record highs, the EIA said. Crude inventories rose by 2.4M barrels in the week to Jan. 21 to 416.2M barrels vs. ests for a 728,000-barrel drop, while gasoline stockpiles rose a less-than-expected 1.3M barrels vs. est. 2.5M build

·     E&P and Majors; stocks leveraged to natural gas (AR, CHK, CTRA, RRC, SWN) rise as prices jump over 4% to $4.24 on colder changes to February weather outlook; HES posted a 9c EPS beat for Q4 cash and cash equivalents of $2.71B and debt and finance lease obligations totaling $6.1B at December 31; in pipelines, ET raises dividend 15% to 17.5c; the oil/energy complex has outperformed to start the year following a jump in oil prices to 7-year highs.

Financials

·     Bank movers; banks started the day among top gainers amid expected hawkish commentary from the Fed during their policy meeting, with Citi, JPM, WFC and regionals leading in the S&P; SF rises as Q4 revs jump 23% YoY and boosts dividend; other banks with earnings included CADE, TRMK; in services, ADP raises year revs outlook to +8% to +9% from prior view up +7 to 8%; UBS signed an agreement to acquire Wealthfront in an all-cash transaction valued at $1.4 billion to deliver digital wealth management offering to millennial and gen z affluent investors

·     Life Insurance: Jefferies initiated coverage on the US life insurance space into 4 categories: 1) diversified (MET ); 2) asset gatherers (AMP, PFG, PRI ); 3) businesses with a wider range of outcomes (AEL, BHF, EQH, JXN, LNC ) and 4) businesses with a narrower range of outcomes (AFL, CNO, GL ). While the prospects of rising interest rates and falling overreacted mortality claims could support continued sentiment improvement, believe that valuations across the sector are high, creating a bumpy road ahead. Said four stocks (AMP, MET, LNC ) are long-term buy-and-hold stocks due to structural advantages in key businesses; PGR 4q net premiums written $10.75B while Q4 net premiums earned $11.60B; RNR declines after Q4 revs missed views

·     Bitcoin, FinTech & Payments; a nice rebound early for Bitcoin, Ethereum and other crypto assets after getting blasted to start 2022, with Bitcoin back above $38K ($4K bounce in 2 days) and Ethereum above $2,600 ($400 bounce in 2 days); BITG reduced price targets for 10 of the stocks within coverage universe primarily to reflect the decline in equity multiples that has occurred in recent weeks – cut CCRD to $50 from $58; GDOT to $46 from $72; IIIV to $31 from $42; LSPD to $60 from $112; MOGO to $9 from $13; PAR to $60 from $110; PAYA to $10 from $15; PYPL to $270 from $345; RPAY to $24 from $31; and SQ to $230 from $320.

·     Consumer Finance; COF Q4 earnings beat the average analyst estimate while loans increased, led by its credit card segment – December domestic credit card charge-off rate of 1.76% increases from 1.66% in November and compares with 2.42% in December 2020, while the delinquency rate of 2.22% rises from 2.13% in November; AXP was upgraded to Buy at Bank America after solid earnings the day prior pushed shares higher; UPST rises early after Corning Credit Union selects its AI lending platform

Healthcare

·     Biotech movers; MRNA was upgraded at Deutsche Bank to Hold from Sell saying investors can stop selling after the recent precipitous decline (stock has plunged 31.6% during its 8-day losing streak, and has plummeted 68.5% since its Aug. 9, 2021 post-pandemic peak of $484.47; INCY withdrew the New Drug Application (NDA) for parsaclisib for the treatment of patients with relapsed or refractory follicular lymphoma; GILD announced the FDA placed a partial clinical hold on its study of magrolimab in combination with azacitidine due to a potential safety signal; VRTX earnings tonight; TYME discontinues SM-88 with MPS arm of Phase 2/3 trial in metastatic pancreatic cancer for futility on primary endpoint of overall survival

·     MedTech Equipment; ABT Q4 EPS $1.32 vs. est. $1.21; Q4 revs $11.47B vs. est. $10.71B; sees FY22 adjusted EPS at least $4.70 vs. est. $4.78; DGX launches COVID-19 rapid antigen test with observed collection for consumers through Quest Direct; the FDA classified medical equipment maker PHG recall of certain new ventilators in December as "class 1", or the most serious type

·     Healthcare Services; ANTM Q4 adj EPS $5.14 vs. est. $5.11; Q4 revs $36.58B vs. est. $36.51B; raises quarterly dividend to $1.28 from $1.13 per share; Q4 premiums grew 13.5% to $30.77 billion to miss expectations of $31.01 billion; total medical membership was 45.37 million as of Dec. 31, up 5.7% from a year ago; expects 2022 adj EPS "greater than" $28.25" vs. est. $28.59; shares down over 3%; NXGN F3Q results beat, led by higher revenue and diligent cost control, balanced against ramping growth-related investments. Bookings of ~$38M were in line

Industrials & Materials

·     Aerospace & Defense; BA incurred a $3.5B charge in Q4 due to longer-than-expected delivery delays of its problem-plagued 787 Dreamliner, leading to adj EPS ($7.69) to widely miss est. ($0.42) on revs $14.79B also below est. $16.67B, though adj FCF $494M beat est. ($1.21B) in its first positive cash quarter since early 2019, and said its 737 Max production rate is still progressing to reach 31/month by early 2022 from current 26/month; GD Q4 EPS $3.39 vs est. $3.37 on revenue $10.29B vs est. $10.67B; OSK 4Q adj EPS $1.13 vs est. $0.41 on sales $1.79B vs est. $1.68B, guides FY22 sales $8.0-8.5B vs est. $8.34B with EPS $5.75-6.75 vs est. $6.69

·     Transports; in truckers, Barclays downgraded CHRW to EW from OW, HTLD downgraded to Underweight from EW and JBHT upgraded to OW from W and up tgt to $235 from $220; in rails earnings from CNI as Q4 adj EPS C$1.71 vs. C$1.43 last year; Q4 revs C$3.75B vs. C$3.66B; Q4 operating ratio improved to 58.3% – company’s profits increased $168M yoy on $97M increase in revenue – reflecting strong pricing (rev/RTM was up over 14% yoy in the Q); NSC Q4 profit and revenue that topped Wall Street estimates, as the railroad company’s operating ratio improved; in research, CAR upgraded to from Underweight to Neutral at JPMorgan after the stock price declined materially since the time of our last update following 3Q earnings; HA earnings show ramp-up of service to Japan delayed, lowering capacity and driving higher CASM

·     Metals & Materials; copper producer FCX posted a 56% jump in Q4 profit as supply concerns and the global economic recovery boosted prices; said Freeport’s average realized price of copper soared 30% in the fourth quarter ended Dec. 31 to $4.42 per pound; GATO downgraded to Underperform at RBC Capital saying the disclosure that the 2020 resource model could be overestimated by 30-50% and should no longer be relied upon is a significant negative event; South African miner HMY cut its forecast for annual gold production by 4% and made a similar increase to its cost guidance due to operational challenges at its Papua New Guinea mine.

Technology, Media & Telecom

·     Semiconductors; TXN shares popped as posted an easy beat for Q4 (EPS $2.27 vs est. $1.94 on revs $4.83B vs est. $4.43B) and issued better 1Q revs $4.5-4.9B vs est. $4.37B driven by strong demand in industrial and automotive (results boosting other chip makers AVGO, QRVO, AMAT, NXPI; INTC won its appeal against a 1.06-billion-euro ($1.2 billion) EU antitrust fine handed down to them twelve years ago for stifling $AMD by giving rebates to computer makers $DELL, $HPQ and Lenovo, in a major setback for EU antitrust regulators; UMC sees FY revenue at least +20% y/y vs. prior +12% and gross margin to reach 40%; MU will shut its DRAM chip designing operations in Shanghai by the end of this year, the South China Morning Post reported

·     Software movers: MSFT posted a top and bottom line beat for Q2 but shares initially fell as Azure growth came in at 46% YoY, missing some of Wall Street’s bullish estimates – the stock rebounded after issuing guidance for Q3 that beat for Intelligent Cloud and More Computing; in video games, Bloomberg reported ATVI’s next three Call of Duty titles will be available on SONY’s PlayStation and Microsoft’s Xbox

·     Hardware, Components & Services; FFIV shares tumbled after soft guidance as sees 2Q revs $610-650Mm vs est. $692.7Mm, sees FY revs +4.5-8% vs est. +8.3%; GLW surges as Q4 EPS 54c tops est. 52c on revs $3.71B vs est. $3.6B, guided Q1 adj EPS 48-53c vs est. 48c on revs $3.5-3.7B vs est. $3.4B, and said they expect gross margin to expand due to revised pricing terms taking effect throughout this year

·     Media & Telecom movers; VZ was downgraded to Neutral from Overweight at JPMorgan and lowered YE22 price tgt to $56 from $62 as are increasingly concerned about the subscriber growth outlook for postpaid phones in 2022 for Verizon and the industry overall, even beyond 1Q which is seasonally soft; AT reported 4Q21 Revenues of $41B vs. est. $40.4B driven primarily by a beat in the Warner Media segment, which did Revs of $9.8B vs. est. $9.1B. The company reported +884k post-paid phone net adds and EPS Of $0.78 vs. cons. $0.76. For 2022, they expect consolidated revenue growth in the low-single digits range; NLSN downgraded from Neutral to Sell and lowering tgt from $23 to $17 at Goldman Sachs as believe NLSN faces secular and competitive challenges associated with the fragmentation of media consumption