Closing Recap

Friday, January 27, 2023

Index	Up/Down	%	Last
DJ Industrials	27.75	0.08%	33,977
S&P 500	10.03	0.25%	4,070
Nasdaq	190.30	0.95%	11,621
Russell 2000	8.68	0.46%	1,911

 

Equity Market Recap

·     What more can be said about the rally to start the New Year, putting the dismal 2022 in the rear-view mirror with Friday marking the latest of a strong of market closes on the highs, showing zero concern into next week’s FOMC meeting. Markets scored their 4^th straight strong Friday as stocks trade like its 2020 again, with short squeezes, Bitcoin popping, and risk assets leading while defensive sectors falling, buying now, and asking questions later. Tesla the perfect example after tumbling in 2022, is up over 65% in just 3-weeks, bouncing off the $100 level this month to $180 today. Consumer Discretionary, Technology, and Communications pacing the gains in January, up 15%. 10% and 15% YTD respectively while defensive Staples, Healthcare, and Utilities down on the year. Shares of financials American Express (AXP) and Visa (V) trade higher after earnings results, propelling the Dow Jones Industrial Average into positive territory. Data today showed the core PCE index rose 0.3% last month, lowering the 12-month inflation rate to 4.4% (vs. 4.7% in Nov and 5.1% in Oct), +2.9% at a three-month annualized rate (the lowest since Jan ’21) and +3.7% at a six-month annualized rate (the lowest since Mar ’21).

·     The battle between bulls and bears remains centered on the trends in inflation, monetary policy, and the economy. Stocks have surged to kick off the year on the idea that inflation will rapidly come down back to the Fed’s 2% target, without an economic recession, allowing the Fed to end and pivot its rate hikes the back half 0f 2023. The market also appears to be content to ignore the possibility of recession and discount strong earnings gains this year and next – but if earnings were going to move in an upward trajectory, wouldn’t it be hard for inflation to stay low?

·     So can the rally continue after the massive move the first 3-weeks of 2023 into such catalysts next week including the Feb 1^st FOMC meeting (25-bps hike expected) and ECB policy meeting (50-bps hike expected), as well as nonfarm payrolls data on Friday and key earnings results from AAPL, AMZN, CAT, PFE, GOOGL earnings all expected. Zero fear again this week (and month) as the CBOE Volatility index (VIX) down for 6th straight day, hitting lows of 17.97 earlier, lowest levels since January 2022. No concerns about more job cuts as GT and HAS become the 3rd and 4th non-tech co’s this week to announce layoffs (along with MMM, DOW) while staffer RHI talked about business softening in Dec and into January.

·     Bank America noted stocks see largest weekly inflow in 6 weeks at $13.9 bln; $12.2 bln into bonds, $500 mln to gold; $2.3 bln outflows from cash. Strongest inflows to investment-grade, high-yield credit since Sept’21 at average of $7.7 bln over past 4 weeks. Strongest EM debt and equity inflows since mar’21 averaging at $7.1 bln over past 4 weeks. US money supply, Treasury curve and leading economic index all signals that "hard landing will occur in 2023."

 

Economic Data:

·     December PCE inflation data in-line: December PCE Price Index M/M for Dec rose +0.1% (in-line with ests) and rose 5.0% Y/Y (also in-line w ests and down from the +5.5% prior month). The Core PCE Price Index M/M for Dec rose +0.3% (in-line with ests and up from prior month +0.2%) and Y/Y rose +4.4% (in-line with ests and down vs. prior month +4.7%).

·     Personal Spending for December fell (-0.3%) M/M from flat the prior month while Personal Income December rose +0.2%, in-line with consensus and down from prior month of +0.4%.

·     University of Michigan Confidence Jan-Final sentiment at 64.9 from a preliminary reading of 64.6; index at 59.7 in prior month as the expectations index rose to 62.7 vs. 59.9 prior and current economic conditions index rose to 68.4 vs. 59.4 prior month.

·     The UoM inflation expectations index for 1-yr in median prices during the next year fell to 3.9% vs. 4.4% last month, lowest since April 2021 and the expected change in median prices during the next 5-10 years unchanged at 2.9%.

·     US December pending home sales rise 2.5% m/m vs. est. down (-1.0%)

 

Commodities

·     Nymex WTI crude March futures settle at $79.68 a barrel, down $1.33, 1.64%; natural gas February futures settle at $3.1090/MMBtu; Nymex gasoline February futures settle at $2.5886 a gallon; Nymex diesel February futures settle at $3.2655 a gallon. Natural gas prices rebounded after hitting fresh 20-month lows earlier Friday ahead of the expiration of the front-month and a growing belief that there is more than enough gas in storage for the rest of the winter.

·     Gold prices slipped 60 cents, or less than 0.1%, to settle at $1,929.40 an ounce – up fractionally on the week (+0.1%) with no big bets ahead of the FOMC Policy meeting next week. A weaker US dollar and sliding Treasury yields have kept precious metals higher this month.

 

Currencies & Treasuries

·     Treasury yields edge higher, with the 10-year holding just above the 3.5% level, but bonds on track for best start to a new year in more than three decades, powered by a wave of money from investors fearful of missing out. The Federal Reserve is still expected to increase its benchmark interest rate by another 50-bps over its next two meetings but slowing inflation data points raises prospect for a pause at following meetings. The job market remains tight. And inflation is still well above the central bank’s target, even if it’s come down from its peak.

·     The US dollar index (DXY) no rally again, holding down at 102 level as the euro stays up around 1.09 ahead of next week central bank meetings (FOMC expected +25-bps and ECB +50bps). Year-to-date Bitcoin’s price has expanded by a remarkable 39% to ~$23,000, while these levels are still far below the November 10, 2021, all-time high of $68,789, is lows around $16,500 to start the year in what has been a massive run higher for risk assets.

 

 

Macro	Up/Down	Last
WTI Crude	-1.33	79.68
Brent	-0.81	86.66
Gold	-0.60	1,929.40
EUR/USD	-0.0025	1.0864
JPY/USD	-0.32	129.89
10-Year Note	0.033	3.524%

 

 

Sector News Breakdown

Consumer

Autos:

·     TSLA makes it a 6^th straight day of gains, adding to yesterday’s 10% earnings related advance, and now up over 65% in 3-weeks after tumbling to lows of $100 earlier this month; other EV related stocks moved in sympathy NKLA, RIVN, FSR, LCID

·     ALV outperformance, rising as much as 10% after earnings.

·     Ford (F) said it is recalling 462,000 vehicles worldwide because video output may fail, preventing the rearview camera image from displaying.

·     AZO removed from Citi focus list ahead of earnings for AAP, ORLY in the auto retailer space, saying tracker points to solid DIFM trends, but the level of optimism is moderating as shown by normalizing business conditions, decelerating hiring activity, and auto parts disinflation.

 

Consumer Staples & Restaurants:

·     In consumer good, CL reports in-line Q4 EPS of $0.77 as sales rose 5% y/y to $4.63B topping views and organic sales +8.5% tops estimate +7.7% but missed in N.A (+4.5% vs. +5.6%), while sees low-to-mid single digit EPS growth in FY23.

·     In food, GIS upgraded to Buy from Neutral at UBS with $88 tgt noting it has been the worst-performing stock among their coverage since last earnings (-12% vs avg -5%) as investors are concerned that structural headwinds are beginning to form in Pet – thinks fears are misplaced. MKC upgraded to Outperform at Bernstein citing a recovery in fundamental performance, remains the strongest company in coverage over the longer term, and attractive valuation.

·     In beer sector (BUD ), Wells Fargo notes December saw the worst decline in US tax paids ever in their tracker back to 2012 and says read-through to TAP is not good for Q4 and yet the stock is +2.4% YTD vs XLP -2.0%.

 

Retailers:

·     In toy names, HAS announces organizational changes; to eliminate approximately 1,000 global full-time positions in 2023 and implement leadership and other organizational changes; issues prelim Q4 EPS of $1.29-$1.31 vs. est. $1.48 and revs of $1.68B (est. $1.92B).

·     In apparel, RL downgraded to Underperform at BMO Capital after its ~4 month ~50% rally noting shares are almost back to pandemic peaks despite lowered results and they worry Asia’s strength masks domestic pressures (N.A. margins are well below pre-pandemic).

·     In mattress retailers, SNBR slides after sees prelim FY22 EPS $1.60 below consensus of $1.71 and revs $2.04B vs. est. $2.11B while CFO David Callen to step down.

·     Pet retailer CHWY upgraded to Outperform at Wedbush saying they expect acceleration in net adds and continued material improvement in EBITDA margins.

 

Leisure, Gaming & Lodging:

·     In casinos, LVS upgraded to Buy from Hold at Argus with $68 tgt a day after earnings, saying they expect LVS to benefit from the end of China’s strict COVID policies. Chinese authorities eased travel restrictions in late 2022, which should increase traffic at the company’s casinos in Macau.

·     In leisure vehicles, PII downgraded at UBS with $112 tgt from $165, driven by lower ORV shipment estimates, and slightly lower gross margin.

 

Energy

·     In majors, Dow component CVX quarterly profit for 2022 more than doubles to record $36.5 bln, but still falls shy of estimates, undercut by asset write-downs and retreat in oil and gas prices; Q4 profit hit by higher expenses and weaker oil and fuel profits; HES downgraded at Goldman; SU said it was buying a smaller stake in the Fort Hills oil sands mine in northern Alberta from TECK

·     Baker Hughes (BKR) weekly gas rig count rose 4 to 160 – US oil rig count down 4 to 609 – US total rig count 771.

·     Refiners saw weakness, with late morning declines in PSX, MPC, DK and others.

·     NOG will replace SJI in the S&P SmallCap 600 effective prior to the opening of trading on Thursday, February 2.

 

Financials

Bitcoin, FinTech, Payments:

·     Credit card giant (and Dow component) AXP missed Q4 results ($2.07/$14.18B vs. $2.22/$14.22B) but forecast full-year profit above consensus as sees net revenue growth +15%-17% and EPS of $11.00-$11.40 vs. est. $10.55; said total network volumes rose 12% in the quarter; provisions for credit losses were $1.03B in Q4 vs. $53M year ago; boosts dividend.

·     Dow component Visa (V) said a rise in cross-border travel helped the co deliver Q1 results that came in ahead of Wall Street’s expectations; posts Q1 EPS $2.18 vs. est. $2.00; Q1 revs rise 12% y/y to $7.9B vs. est. $7.69B; total cross-border volume growth, on a constant dollar basis increased 22% in Q1; qtrly payments volume increased 7% y/y.

·     Crypto bank SI announced it has suspended the payment of dividends on its 5.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, in order to preserve capital.

·     In auto lending (ALLY ), the percentage of subprime auto borrowers who were at least 60 days late on their bills rose to 5.67% – compares to 5.04% in January 2009, the peak during the Great Recession, Bloomberg reported.

 

Insurance & Services:

·     Wells Fargo says remain Underweight on ALL and believe lingering issues could continue to pressure EPS. Ests. have been revised down significantly over the past year; we think investors should expect further negative revisions.

·     AJG reported Q4 EPS of $1.54 beating consensus of $1.49 as saw better-than-expected results in Brokerage and Risk Management and reported 11% Brokerage organic (10% ex-timing).

 

Healthcare

Services, Biotech & Pharma:

·     Morgan Stanley adjusts rating in biotech, upgrading AKRO and CABA to Overweight; upgrade VIR to EW; and downgraded TSHA to EW and YMAB to Underweight saying upgrades are driven by visibility to catalysts that could drive upside later in the year while downgrades come on lack of meaningful catalysts.

·     Hospital operator HCA guided 2023 EPS $16.40-$17.60, below consensus of $18.23 citing impact from the COVID-19 pandemic and high inflation, while Q4 revs $15.5B and EPS $4.64 miss ests ($15.6B/$4.78) as same facility revenue per equivalent admission down -2.6%.

·     LEGN and partner JNJ said their blood cancer therapy Carvykti met the main goal in a late-stage study, according to data from an interim analysis.

·     WMT said it would adjust working hours for its U.S. pharmacy team and implement it nationwide in 4,600 locations, with drugstore operator CVS doing the same for about two-thirds of its retail pharmacies, amid a tight labor market.

 

Industrials & Materials

Transports

·     In truckers, KNX reported a sharp drop in 4Q profits amid a weakened freight market (EPS $1.00 vs. est. 41.12) as revs fell ex fuel -9.5% y/y and net income slumps 42% to $148.7M – co also guided year EPS $4.05-$4.25 vs. est. $4.16 as CEO said qtr was "the most benign peak shipping season in recent memory" as retailers worked through excess inventories.

·     In airlines, ALK downgraded from Outperform to Peer Perform @ Wolfe – ALK had industry leading margins last year and trades at the lowest EV/EBITDAR valuation among the airlines. But ALK is seeing the biggest deceleration in TRASM among the airlines in 1Q and thus is counting on the biggest re-acceleration in TRASM the rest of the year. ALK’s competitive capacity trends are also accelerating in 1Q (on a y/y basis).

 

Aerospace & Defense

·     BAH raises revenue growth forecast to 9.5%-10.5% vs prior guidance of 8.0%-10.5% for fiscal 2023 and raises lower-end of adj. EPS guidance to $4.35-4.50 from prior range of $4.25-4.50

·     LHX rises on beat and raise; 4Q adj EPS $3.27 vs est. $3.26 on revs $4.6B vs est. $4.34B; sees FY23 revs $17.4-17.8B vs est. $17.56B, adj EPS $12.00-12.50 vs est. $12.49, adj FCF $2.0B+

·     NOC downgraded Outperform to Market Perform at Cowen and lower tgt to $478 from $500 saying the co’s 10-K revelation of "reasonably possible" loss on B-21 LRIP work looks like an extended overhang to what’s been the sector’s cleanest growth story.

 

Materials, Metals & Mining

·     In chemicals, EMN the latest co to miss earning as Q4 adj EPS $0.89 vs. est. $1.26; Q4 sales $2.37B vs. est. $2.43B; said expect to grow adjusted 2023 EPS by between 5 and 15%; OLN reported 4Q22 EBITDA of $442M, vs. consensus of $448M, beating in Chlor-Alkali Products & Vinyls (CAPV) while missing in both Epoxy and Winchester said Keybanc.

 

Technology

Hardware & Software movers:

·     In Internet security, PANW, CYBR, FTNT, and OKTA overweight rate at Keybanc, and Sector Weight on CHKP, RPD, and FORG ahead of C4Q earnings saying their surveyed security meets/beats and 4Q security growth both softened, with growth expectations for 2023 down from 2022, if each of these cases to a more modest degree than for IT overall. FTNT downgrade to Neutral at Mizuho saying recent checks were more subdued than expected, elevated macro challenges could exert more pressure on its ability to execute consistently.

·     In video games, EA rises for an 8th straight day to $130 ahead of earnings next Tuesday (1/31); at Cowen today, they keep TTWO (top pick), and remain OP rated on PLTK, SONY, EA and Underperform on RBLX into earnings saying they remain bullish on the video game space. Note last year’s transactions highlight the industry’s attractive long-term fundamentals and expect a return to growth in consumer spending in 2023, which should significantly benefit sentiment. PLTK was downgraded to Neutral at DA Davidson on market share loss, Rovio offer.

 

Semiconductors:

·     INTC tumbles following weak Q4 results and provided a Q1 outlook well below consensus expectations noting that the slowdown in PC demand accelerated into year-end as channel inventory digestion continues – guided Q1 revs to fall -22% q/q, the worst q/q decline since the financial crisis – $10.5B-$11.5B vs. est. $13.9B after Q4 miss.

·     Semi equipment co KLAC slides after cautious outlook overshadows Q2 beat; sees 3Q revs $2.2-2.5B vs est. $2.55B, adj gr mgn 60.5-62.5%, adj EPS $4.52-5.92 vs est. $5.89.