Closing Recap

Wednesday, June 01, 2022

Equity Market Recap

·     Stocks faded from overnight highs and slid through the morning after mixed economic data and cautionary comments from Jamie Dimon. Dimon equated the economy to a “hurricane: and advised we “brace ourselves”, while also noting he expects price turmoil in commodities to continue as fallout from the Ukraine war. Comments from Fed speakers Daly and Bullard, though, were less hawkish than feared and gave support to an afternoon rally before fading into the close. Daly reiterated a stance that we get to neutral policy and be prepared to continue or stop raising as needed, while Bullard indicated the already-announced plan to raise rates by 50bps per meeting is a good path with forward guidance already affecting the economy. 

·     Both the S&P 500 and Nasdaq finished modestly lower. Consumer Staples and Healthcare lead S&P sector decliners, finishing lower by about 1.25% each. CLX, KR and WMT were particularly soft in Staples while MDT, COO and DVA led Healthcare decliners. Only Energy and Technology managed gains across S&P sectors. BKR, COP and HES paced Energy gainers, all up more than 2.75%. CRM and HPQ leveraged solid earnings to lead Tech performers. In an unusual twist for a down day, the Russell 1000 Growth outperformed the Value index, with both slipping less than 0.75%. For the next three months, the Fed will stop reinvesting the proceeds from its $9 trillion pile of bonds to reduce the balance sheet by $47.5 billion each month – next obstacle for stocks.

Economic Data:

·     ISM U.S. Manufacturing activity index 56.1 in May vs April 55.4; prices paid index 82.2 in May vs April 84.6; new orders index 55.1 in May vs April 53.5; employment index 49.6 in May vs April 50.9 (below 50 for first time since August 2021)

·     April construction spending rose +0.2% vs. est. +0.5% to $1.745 trln, vs March +0.3%; April private construction spending +0.5%, public spending -0.7%

·     April Job Openings (JOLTs) 11.4M, in-line with consensus and 11.855M prior (revised from 11.549M); Job openings rate 7% vs. 7.1% prior; Quits rate was 2.9% vs. 3% prior

Commodities, Currencies and Treasuries

·     Oil rises as WTI crude oil futures settle at $115.26/bbl, up 59 cents, 0.51%, the highest closing price since March 8 when WTI crude finished at a 14-year-high $123.70, while Brent gained 69c or 0.6% to settle at $116.29 per barrel. There remain several factors pushing energy prices higher including the EU beginning to phase out Russian oil imports, a weaker dollar of late and some talk yesterday of phasing out Russia production for OPEC+, opening the door for Saudi Arabia and others to up production. Attention now turns to a weekly US oil inventory report from trade group API at 4:30 pm ET, followed by the official EIA data tomorrow morning.

·     Gold futures bounced off overnight lows ($1,830) to post a narrow gain, up 30 cents to close at $1,848.70 an ounce on Comex, shaking off a rise in Treasury yields (as the 10-yr topped 2.93%) as U.S. stocks slumped. The U.S dollar also posted strong gains, rising +0.7% as the dollar topped 130 against the yen and the euro dropped back below 1.07.

Sector News Breakdown

Consumer

·     Retailers: luxury retailer CPRI posts Q4 adj EPS beat of $1.02 vs. est. $0.82 on revs $1.49B vs. est. $1.41B and announced new $1B authorization while guides FY23 EPS to a $6.85 vs Street at $6.54 and sees 2023 revs about $5.95B from $6.1B prior and est. $6.08B; BARK reported mixed Q4 results, with active customers and profitability coming in below expectations while total revenue beat – both the 1Q23 and FY23 revenue and profitability outlooks came in below expectations; TPX downgraded to Neutral in mattress retail following a round of checks for Memorial Day weekend that suggest a disappointing selling period; CONN posted Q1 EPS beat of $0.08 but revs fell -56% to $339.8M below estimates amid a -9.5% drop in comp store sales; VSCO Q1 profit topped views and guides Q2 sales to be up low-single digits to down low-single digits, vs. estimates of a -1.8% decline (but EPS midpoint misses); SPWH forecast Q2 sales and profit below market estimates as expects Q2 same-store sales to fall 16%-10%

·     Auto sector; TSLA CEO Elon Musk sent an email to workers saying they must be in the office for a "minimum (and I mean *minimum*) of 40 hours per week or depart Tesla; China auto deliveries for May: 1) LI said it delivered 11,496 Li ONEs in May 2022, up 165.9% year over year, 2) NIO delivered 7,024 vehicles in May 2022, representing 38% growth sequentially and +4.7% Y/Y, 3) XPEV delivered 10,125 Smart EVs in May 2022, representing a 78% increase Y/Y; Citigroup cut its tgt on Ford (F) to $15 from $18 and GM to $87 from $98 to reflect macro risks, says sees increased near term risk from Europe exposure; CHPT posted a slightly higher then expected Q1 EPS loss but revs rose 102% to $81.6M vs. est. $75.7M and guided Q2 revs $96M-$106M vs. est. $105.6M; auto supplier VC upgraded from Underweight to Equal weight at Morgan Stanley and up tgt to $93 from $72 saying VC has a powertrain agnostic product portfolio that we believe may be amongst the better positioned based on the current macro backdrop; TM reports may 2022 U.S. Sales of 175,990 vehicles, down 27.3% on a volume basis

·     Casinos, Gaming, Lodging & Leisure sector; WYNN, MLCO, MGM, LVS shares active after plunging casino revenues in Macau, posting one of its worst monthly gambling revenues since September 2020, as May gambling revenues dropped 68% Y/Y to 3.3 billion patacas ($400 million), and – while up 25% from April – it remains far off the 26 billion patacas hit in May 2019.

Energy

·     Energy stock movers; again outperformance in energy – the “go to” sector so far in 2022 with oil and natural gas prices extending gains today; TELL announces signing definitive agreements for $500 million offering of senior secured convertible notes; NE upgraded from Neutral to Buy at BTIG noting while they have been positive on the Noble and Maersk Drilling merger since it was announced last November, they expected a few bumps in the road (potentially forced rigs sales) as it moves to the finish line.; in pressure pumping, Piper downgraded PTEN to Neutral while PDS remains the top pick saying they continue to chase estimates higher for the land drillers and pumpers against a backdrop of tight utilization and pricing/margin gains that continue to outstrip consensus expectations; LPI announced a stock buyback

Financials

·     Bank & Insurance movers: banks still lagging broader market, down again today; AOMR downgraded to Neutral from Buy at UBS and cut tgt to $14.50 from $19.50 and lower estimates citing the rapid rise in mortgage rates, credit spread widening and AOMR’s pipeline of below-market loans pressures this securitization-based model; FNB agreed to buy fellow bank-holding company UB Bancorp for about $117 million in stock

·     FinTech & Payments; Piper said recent trends for app downloads for SQ Cash App are strong, rising over 50% YoY and said they think that the integration of Credit Karma Tax this tax season might be a helpful factor; AFRM shares tumbled after the WSJ reported “Buy now, pay later” companies promised a credit revolution that would change the way people pay for things…but rising delinquencies and a slowing economy are clouding that outlook.

·     Exchanges & Services: SPGI suspends 2022 financial guidance due to extraordinarily weak market conditions for its ratings business; expects to re-introduce with second quarter 2022 earnings results; Jefferies issues update on exchange volumes for May (CME, ICE) saying activity levels remained robust, led by US equities and options as U.S. equity ADV increased +11% M/M and +23% Y/Y while OCC monthly options volume increased M/M by +6% and Y/Y by +31%.

Healthcare

·     Pharma movers; SNY said its experimental hemophilia drug got breakthrough therapy designation from the U.S. FDA, which could speed up its approval process; SNOA and partner MicroSafe Group DMCC said that Nanocyn hospital grade disinfectant has been added to the list of Covid-19 disinfectants maintained by the U.S. EPA; ENTA upgrade from Underperform to In Line at Evercore/ISI saying we are over the hump on several programs that they were cautious on (FXR for Nash, RNA destabilizer for HBV and RSVP study in RSV) and ready to turn our eyes to COVID; VRTX upgraded to Buy from Hold at Maxim with $325 tgt; TNXP rises after USPTO issued a patent to the company’s poxvirus vaccine and its recombinant poxvirus platform

·     Biotech movers; SAGE and BIIB said their experimental drug to treat postpartum depression met the main goal of a late-stage study, showing improvement in depressive symptoms among women with postpartum depression at day 15 and also met its secondary goals; BPMC upgraded to Buy from Hold at Jefferies but lower tgt to $78 from $88 after US hematologist & allergist survey on Ayvakit potential in expanded/3rd indication; PASG Bruce Goldsmith to step down as President, CEO, Board Member effective immediately; for ALNY, Jefferies previews upcoming APOLLO-B ATTR-CM data readout that is expected mid-year as see 60% POS with 60% upside driving shares to ~$200 range, while in a bear-case scenario they see downside to ~$80

·     MedTech Equipment; MDT downgraded from Overweight to Neutral at Atlantic Equities and cut tgt to $105 from $125 after 4Q22 results missed estimates by 3.6% on revenues and 2.6% on adj. EPS last week citing China lockdowns and supply chain issues; DHR upgraded to Outperform from Sector Perform at RBC Capital as believe that its high quality, defensive portfolio looks incrementally more attractive given the higher Wall of Worry/macro fears

·     Healthcare Services: ABC issued a long-term growth outlook that includes adjusted operating income growth of 5%-8%, capital deployment growth of 3%-4% and adjusted diluted EPS growth of 8%-12%; HUM reaffirmed its Fy22 outlook; THC announces $1.8 billion private offering of senior secured notes

Industrials & Materials

·     Industrial & Machinery; XYL upgraded to Market Perform from Underperform at Cowen noting shares remain quite expensive, but that has now evolved into the primary negative argument, as operational/EPS risks have largely now passed or are known to investors; MMM CEO said continues to see disruptions in the supply chain continuing for the foreseeable future and says that sees inflation continuing but confident that can manage that with price; in Housing & Building Products; weekly MBA mortgage applications fell -2.3%, vs -1.2% last, while home purchases fell -0.6%, vs +0.2% and refis dropped -5.4% on the week vs -3.9%

·     Transports; DAL guides Q2 revenue $12.4B-$12.5B vs. consensus $12.93B and sees non-operating expense $200M-$230M – said it expects strong current-quarter results and adjusted total revenue at pre-pandemic levels – Capacity forecasts, meanwhile, were cut by up to 2% from prior guidance to 84% of 2019 levels

·     Metals & Materials; SEE was downgraded from Neutral to Underweight at JPMorgan a saying the change does not reflect pessimism concerning Sealed Air’s business prospects but reflects their inclination to invest in other equities in the various material sub-sectors; in fertilizers, Barclays initiates coverage saying even though the sector has outperformed against major indices, it expects low supply and high demand for agricultural products well beyond 2023 – OW rated on NTR ($116 tgt), CTVA ($71 tgt), EW rated on CF ($103 tgt), ICL (12 tgt) and UW on MOS ($59 tgt); lithium producers (ALB ) fall a second day – yesterday, Goldman said it sees sharp correction in lithium prices over the next two years

Technology, Media & Telecom

·     Internet & Media Movers: FB announced that COO Sheryl Sandberg is stepping down; KeyBanc warned NFLX 4^th season kickoff of “Stranger Things” this weekend may not drive Netflix subscriber adds just yet; Deutsche Bank said attendance trends have been stronger over the last couple of weeks at DIS, following a seasonally weak part of the quarter as attendance was up 10% and 3% week/week at Disney World and Universal Orlando, respectively; WIX removed from Tactical Underperform List at Evercore

·     Semiconductors: AMBA reported in-line F1Q results and guided F2Q lower (sees Q2 revs $78M-$82M vs. est. $91.4M) primarily due to the impact of the China COVID lockdowns, which is exacerbating kitting issues and negatively impacting AMBA’s customer supply chain; Bank America highlights favorite themes/picks. Our top large-cap sector pick is NVDA; top SMIDCap-pick is ON and top 3 themes: 1) Cloud: NVDA, AMD, MRVL; 2) Cars: ON, ADI, NXPI; and 3) CAPEX: KLAC, GFS, AMAT, LRCX, TER

·     Software movers: CRM rises after Q1 top and bottom line beat and raised its full-year adjusted profit forecast for fiscal year ending January 2023 to $4.75 from its prior forecast of $4.63; APPS reported net revenues in-line with previous commentary and the Street after revenue conversion from a gross to net basis; adj. EBITDA was slightly below at $50.4M vs. the Street’s $51.7M and the June revenue guide came in flat q/q

·     Hardware, Components & Services; HPQ reported F2Q EPS at the high end of guidance driven primarily by higher revenue, with strong operating margin for the Print business being the standout of the quarter while reiterated its full year FY22 FCF target of $4.5B

·     Telecom movers: KeyBanc said they came away from Connect(X) 2022 conference neutral on Towers (AMT ) and came away more negative on Wireless Carriers (T ) noting the industry is very focused on converged infrastructure: business expansion from Fiber/Small Cells, Data Centers/Edge-compute, and private networks