Closing Recap

Monday, July 11, 2022

Equity Market Recap

·     Stocks slide ahead of a potentially big news week for markets, including key monthly inflation data and the start of earnings season with big banks reporting Thursday. China concerns hit several sectors, namely casinos (with exposure to Macau) and commodity prices after Chinese cities tightened their coronavirus restrictions this weekend amid rising Covid cases. Treasury yields tumbled, the dollar jumped (fresh 20-year highs as the euro approaches parity), and commodity prices slid – all ahead of big inflation data readings with consumer prices (CPI) on Wednesday and Producer Prices (PPI) on Thursday which should provide another big jump in prices amid the spike in energy the early part of June (though energy slipped the tail end of June, which will likely be seen in next month data). The tech heavy Nasdaq Composite was the big loser today, down over 2% with consumer discretionary was the second biggest drag in the S&P 500 index while defensive REITs and Utilities held strong. Lot of choppy action as investors position ahead of key catalysts, ending near the lows.

·     Interesting facts: per Charlie Bilello data, the first half of 2022 was one of the most painful periods in history for investors. The S&P 500® Index fell 20%, on pace for its largest annual decline since 2008 and third largest ever (after 1931 and 2008). The 10-Year Treasury bond fell 11.5%, on pace for its worst year in history by a wide margin (the 11.1% record loss in 2009 was for the entire year). A 60/40 portfolio of U.S. stocks (S&P 500) and bonds (10-Year Treasury) declined 16.6%, on pace for its worst year in history (1931 currently holds that distinction).

Commodities

·     Oil prices fell on Monday, with WTI crude down -$0.70 or 0.67% to settle at $104.09 per barrel, in volatile trade (lows $100.89), reversing most of Friday’s gains as markets braced for a demand expected from mass testing for COVID-19 in China, which outweighed ongoing concern over tight supply. Natural gas prices jumped 7% to $6.426 mln Bus following an explosion at an Oklahoma plant over the weekend, raising supply concerns. Also, the biggest single pipeline carrying Russian gas to Germany, the Nord Stream 1 pipeline, began annual maintenance on Monday, with flows expected to stop for 10 days. So far this year, the front-month was up about 72% as much higher prices in Europe and Asia keep demand for U.S. LNG exports strong. Gold futures declined, falling -$10.60 or 0.6% to settle at $1,731.70 an ounce, their lowest in over nine months on recession fears, while the U.S. dollar rose.

Currencies & Treasuries

·     U.S. dollar strength continues to prevail as the euro slid to a fresh 20-year low below the 1.01 level, coming closer to parity against the buck. The dollar gained 1% against a basket of six major currencies, reaching 108.14, the strongest since October 2002. The U.S. dollar has gained on expectations that the Fed will continue to aggressively raise rates as it tackles soaring inflation. The Fed is expected to lift rates by 75-bps at its July 26-27 meeting. Fed funds futures traders are pricing for its benchmark rates to rise to 3.49% by March, from 1.58% now.

·     Treasury yields remained lower, with the 10-yr yield falling below 3% but remained inverted against the 2-yr yield which was at 3.07%. The U.S Treasury sold $43B in 3-year notes at a yield of 3.093% vs. 3.098% when issued prior with a bid-to-cover at 2.43 and indirect bidders awarded 60.37%, directs 19.35%. Next up, inflation data Wednesday (CPI) and Thursday (PPI). A yield curve inversion has in the past preceded recessions in the United States.

Sector News Breakdown

Consumer

·     Retailers; LULU downgraded to underperform and UAA downgraded to hold by Jefferies in athletic apparel firms, saying buy-rated NKE still best-in-class; KeyBanc lowers estimates across furniture and mattress coverage supported by industry checks and numerous data points (WSM, ETD, TPX, SNBR, and PRPL) and lower tgts on TPX and PRPL due to the more challenging env’t and our lowered EPS estimates; MAT upgrade from Neutral to Buy at Goldman Sachs with $31 tgt as believe that MAT stands out in benefiting from several company specific demand drivers in TV & film content releases, the returning Disney Princess toy license in 2023, and new product innovation; Bank America said they believe that retailers that benefitted the most on sales and margins in COVID could face greater downside risk in a recession. Net, see greatest risk to TGT, see gross margin risk to DLTR, and lesser extent to DG while view KR as best positioned.

·     Housing & Building Products; RDFN says home sales are getting canceled at highest rate since start of the pandemic; roughly 60,000 home-purchase agreements fell through in June, equal to 14.9% of homes that went under contract that month; Wedbush with a few changes in realtor space as downgraded RDFN to Neutral from OP in transition of coverage an cut tgt to $9 saying while the increased data disclosure promised for F2Q22 may provide more clarity about RDFN’s segments, the enhanced disclosure cannot change the fact that Redfin consistently lost money during one of the best sales/demand/pricing environments ever; OPEN was assumed at Outperform at Wedbush as anticipate OPEN achieves the low end of management’s revenue guidance but comes in below the AEBITDA guidance; and upgraded ZG to Outperform and up tgt to $41 saying the close out of the Homes division leaves Zillow in an interesting position with a net cash balance sheet and opportunities galore; TMHC upgraded to Outperform at Credit Suisse as believe that the company’s ongoing actions to increase margins and its efforts in controlling orders and working with buyers will enable the company to maintain strong earnings

·     Casinos, Gaming, Lodging & Leisure sector; Casinos with operations in China’s Macau gambling hub (WYNN, LVS, MGM, MLCO) fell after city officials ordered all businesses aside from essential services to shut down for a week, with residents required to stay at home; JMP Securities noted regional gaming revenue increased 11% in May; trending +9% in June with an unfavorable calendar (GDEN, PENN) saying gaming revenue has remained resilient through June despite broad macro pressure across the economy and government stimulus in the prior year.

Energy

·     Energy stock movers: oil names fall along with lower oil on rising demand fears given China covid shut down for a week in several cities this weekend on renewed outbreak; Bespoke Investment noted the Energy sector just had its fastest 20%+ drop from a 52-week high since at least 1990; this is the 14th bear market for the Energy sector and the average Energy sector bear market sees a drop of 32.5% over 159 days.

·     E&P and Majors; OXY was downgraded from Buy to Neutral with $70 tgt at Goldman Sachs following outperformance as year-to-date shares are up +110% vs. the XLE up +31%; Wells Fargo upgraded natural gas producers SWN to Equal Weight from Underweight, and RRC to Overweight from Equal Weight while downgrading CNX, CIVI to equal weight and CDEV to Underweight as top picks in the sector remain DVN, CTRA, and PDCE Notes after outperforming the S&P500 by ~89% until early June, U.S. E&Ps (XOP) have underperformed the market by ~24% since 6/8/22, as investors have focused on the likelihood of a recession.

·     Refiners: Cowen with [price tgt changes for DINO to $60 from $56, PBF down to $25 from $28, PSX down to $104 from $117) and VLO to $134 from $140) as expect structural benefits from 2Q earnings (stock buybacks, balance sheet improvement) to result in equity upside in the revision cycle – see near-term downside in cracks, which could result in a volatile post-earnings env’t

Financials

·     Bank movers: big week for bank earnings, with JPM kicking things off Thursday morning, followed by BK, BLK, C, PGR, PNC, STT, USB, and WFC on Friday morning; Second quarter profits at big U.S. banks are expected to fall sharply from a year earlier on increased loan loss reserves, as the pandemic recovery gives way to a possible recession. Analysts expect JPM will report a 25% drop in profit on Thursday, while Citigroup Inc and WFC will show 38% and 42% profit declines, respectively on Friday, according to Refinitiv data. BAC, which like its peers has big consumer and business lending franchises, is expected to show a 29% drop in profit when it reports on July 18. – Reuters; TROW downgrade from Neutral to Sell at UBS and slash tgt to $88 from $138 based on substantially lower estimates (’23E -36%), a weak flow outlook driven by deteriorating performance, and lower expected fee adjusted organic growth

·     FinTech & Payments; UPST downgraded to sell from neutral at Goldman Sachs amid a deteriorating growth outlook and slash tgt to $14 from $40 (follows lower guidance from the company last week)

·     Consumer Finance: Klarna Bank AB said that it has closed a new $800 million financing at a $6.7 billion valuation, saying the financing attracted strong support from both existing and new investors and will primarily be used to expand its market position in the U.S.

·     Bitcoin news: Cryptocurrency lender Celsius Network is said to have hire new advisers to advise on options including a possible bankruptcy filing – WSJ. Celsius had hired lawyers from Kirkland & Ellis to advise on its options, replacing law firm Akin Gump Strauss Hauer & Feld LLP https://on.wsj.com/3c4uobl ; COIN falling alongside crypto related stocks (MARA, RIOT, MSTR) as Bitcoin resumes downward momentum, falling back near $20,000

·     REITs: Deutsche Bank lowers tgts on Mall Strip REITs BRX, FRT, KIM, REG , turning a bit more cautious on the Strip REITs headed into 2h22 and 2023 as a US recession is likely – more concerned looking through to the second half of 2022; Truist slightly lowering their FFO estimates and taking our price targets down an average of 7%, mostly due to impacts from higher interest rates for CHCT, DOC, HTA, MPW, SBRA, NHI

Healthcare

·     Pharma movers; LJPC to be acquired by INVA for $6.23 per share in cash, implying an enterprise value of ~$149M, the companies announced on Monday; RHHBY upgraded to Neutral from Sell at UBS noting its trading on a 15% discount to the sector which in our view more appropriately reflects its profile and the challenge to grow a revenue base of this size; PLRX rises after positive data from their key proof-of-concept study of lead drug ‘809 in idiopathic pulmonary fibrosis (IPF), showing clear directional benefits on lung function; PRGO submitted an application to the U.S. FDA for approval of an over the counter (OTC) birth control pill; MDWD announces positive initial data from its U.S. Phase i/ii study of mw005 for the treatment of basal cell carcinoma; ITRM said it reached a special protocol assessment agreement with the FDA, lifting shares; TEVA slips after Attorney General James uncovers evidence that Teva Pharmaceuticals lied to evade accountability for opioid crisis in New York

·     Biotech movers: NVAX said the U.S. government has agreed to secure an initial 3.2 million doses of Novavax’s Covid-19 vaccine if it is cleared by U.S. regulators for emergency use; MGNX suffered a significant setback with one of its two most-advanced cancer drug candidates as a mid-stage clinical trial involving its antibody treatment enoblituzumab was shut down by safety monitors after bleeding events caused the deaths of seven patients

·     MedTech Equipment; Medical Supply and technology names downgraded at Citigroup: PODD and LUNG downgraded to Neutral from Buy, and SILK and BDX to Sell from Neutral, and initiating a Negative Catalyst Watch on TNDM. Stand behind our 2022 Top Picks of BSX, DXCM, and NUVA

Industrials & Materials

·     Industrial & Machinery; several previews ahead of earnings season: at Bank America, HON, APG both upgraded to Buy, ITT raised to neutral and downgraded ALLE to Underperform and both AME, ITT to neutral in multi-industry saying more long cycle, less consumer/Europe into 2H22: favor aero/O&G & better operators; also upgrade FLS to Neutral from Underperform saying while execution has been challenged, view end market strength (44% oil & gas), valuation as offsets; WSO mentioned positively in Barron’s noting shares of the air-conditioning distributor have cooled off, creating an opportunity for investors to buy the stock; Citigroup Top picks into 2Q are TT (positive Catalyst Watch), IR, and EMR; 3 longer term top picks include DOV, HON and ROK; and also open a negative Catalyst Watch on GE

·     Transports: Low-cost carrier ULCC has declined to further raise its bid for takeover target SAVE, potentially ending its months-long bidding war with JBLU. Spirit signed a cash-and-stock deal with rival Frontier in February to form a new no-frills airline and compete against big national carriers. In April, JetBlue jumped into the fray with an all-cash offer; GBX hits 52-week lows after the company reported lower-than-expected Q3 results as EPS miss as revs rose 76% but gross margin contracted from the prior quarter to 9.6%

·     Metals & Materials; for containerboard, IP $WRK $PKG – Over the weekend, Fastmarkets RISI’s PPI Pulp & Paper Week reported weakening global box demand and falling prices in Europe and China; the price declines likely would be the first in these markets in over two years @ KEYB

Technology, Media & Telecom

·     Internet & Media movers; TWTR declines after Elon Musk, in a 13D filing after the close Friday, terminated the merger agreement with Twitter because of a material breach of multiple provisions of the agreement and Twitter appears to have made false and misleading misrepresentations; DWAC shares outperform following the TWTR news; META downgraded from Hold to Underperform at Needham as recommend investors use Meta as a source of funds noting Meta has stated that it is investing in the Metaverse at the same time it is guiding to slower revenue growth; in digital advertising (CRTO ), Stifel trims estimates across the digital advertising landscape to account for slower GDP growth, more cautious outlooks from the advertising industry and own conversations with ad industry participants; U.S. listed Chinese stocks tumble (BABA, JD, TCEHY, BIDU) on Covid shutdowns for a week as well news that China has imposed fines on the technology giants as well as a range of other firms for failing to comply with anti-monopoly rules on the disclosure of transactions

·     Semiconductors; QRVO was downgraded from Outperform to Market Perform at Cowen and cut tgt to $108 from $150 as low/mid-tier Android weakness likely weighs further on revenue, margins, and sentiment; NVDA estimates lowered at Piper based on continued issues in China and Russia, gaming laptop weakness, consumer pressure, and our concerns on crypto; QCOM, AAPL, SWKS, QRVO ests lowered saying following CY21’s pandemic recovery driven growth, they see macro slowing as a headwind for the smartphone market in CY22-23 and reduce their CY22 shipment outlook to -6% Y/Y (prior 1%) and expect CY23 to be -2%.

·     Software, Hardware, Components, & Services; NEWR downgrade to EW from OW at Morgan Stanley with a $64 PT saying with a tougher spend environment on the horizon, sales execution in a consumption model likely becomes a challenge; DOCN downgrade to Underweight from EW at Morgan as well and cut tgt to $45 from $61 saying recent outperformance reflects benefit from pricing increases but fails to incorporate mounting risks; lastly, FSLY downgraded to UW from EW at Morgan and lower PT to $12 from $18 as see a less favorable risk/reward