Closing Recap

Friday, June 11, 2021

Equity Market Recap

·     The S&P 500 finished the day with its 2^nd consecutive record close, though could not break yesterday’s intraday record high. Its current weekly winning streak now stands at 3 and the Nasdaq posted its 4^th straight weekly gain, though it remains more than 1% off its intraday record. Markets again traded in a tight range, closing out the week out with another quiet session as this week saw the lowest trading volume for the S&P year-to-date. The moves higher in stocks come as the VIX, CBOE’s Volatility Index, touched lows of 15.15 today and Tuesday, the lowest reading since before the pandemic-related selloff in February 2020. Additionally, the 10-year yield hit overnight lows below 1.43% for the first time since March 3. The yield declined by approximately 100bps for the week, its worst performance since the second week of last June and the largest absolute move since the last week of February. The Nasdaq remained in the green most of the session, only briefly dipping to red while the Russell 2000 outperformed as growth stocks in tech and Smallcaps were buoyed by falling yields. In political news, a bipartisan group of 10 senators put forth an infrastructure plan that would cost nearly $1 trillion over 5 years or $1.2T over 8 years, with $579B in new spending though it will be financed without tax increases. However, doubts over an infrastructure bill passing has weighed on industrial stocks with CAT, ADM, DE among industrial stocks declining on the week. The Biden administration is also weighing ways to provide relief to oil refiners from biofuel blending mandates.

·     Despite the muted volume in broader markets, there was a flurry of activity in the biotech sector as several companies issued trial data or updates. Notably, VRTX discontinued its AAT Deficiency trial after Phase 2 trial met the primary endpoint but would be unlikely to provide substantial clinical benefit, the FDA extended its review of INCY’s new drug application to treat atopic dermatitis by three months, CRSP said its gene-editing therapy trial with VRTX showed a consistent and sustained response in 22 patients, a doctor became the third to resign from the FDA advisory committee following its approval of BIIB’s Aduhelm as he said it was probably the worst drug approval decision in recent history, and EDIT, KROS, CRIS, TGTX, PGEN, SRRK were also among companies who provided trial updates. Elsewhere, retailers (VFC, CPRI, COTY, TPR, GPS) led the S&P, PLAY opened higher after its strong earnings but rolled to red while CHWY slid despite its strong earnings, ZM rallied to its highest level in more than 3 months after RBC named the stock as its top pick, SNOW slipped after providing long-term financial targets that analysts said might not justify its valuation.

Economic Data:

·     University of Michigan sentiment prelim June 83.8 (above consensus 79.0) and tops final May 78.8; the consumers current conditions index prelim June 90.6 (vs. est. 92.3) and vs final May 89.4 and expectations index prelim June 83.8 (vs. consensus 79.0) and vs final May 78.8

Commodities

·     Oil prices rose $0.62, or 0.88%, to settle at $70.91 per barrel, the highest sentiment since October 2018. Crude futures were higher for their third straight week on optimistic demand forecasts, and the Baker Hughes oil rig count increased by 6 to 365, the most since April 2020. The IEA forecasts global oil demand to recover to pre-pandemic levels late next year and urged OPEC and its allies to keep markets balanced by tapping their plentiful spare production capacity.

·     Gold prices fell to its lowest settlement since June 3, sliding $16.80, or 0.9%, to settle at $1879.60, as the Dollar index (DXY) topped its weekly high despite falling bond yields.

Currencies & Treasuries

·     Benchmark 10-year U.S. Treasury yields suffered their biggest weekly decline in a year as the market deemed a spike in inflation to be transitory, squeezing bears out of short positions. The 10-year yield, which falls when prices rise, touched as low as 1.428% earlier in the session, its lowest since March 2, before rebounding. Traders attributed the bond rally to short covering after markets shook off the highest inflation data since 2008 due to the belief that it is transitory and will not cause the Fed to taper its support. JPMorgan had noted that short positions in Treasuries were at their highest since 2018 last week.

Sector News Breakdown

Consumer

·     Retailers; CHWY posted Q1 EPS $0.09 vs. est. ($0.03) on sales $2.14B vs. est. $2.13B, guided Q2 revs $2.15-2.17B (est. $2.14B) and FY revs $8.9-9B that sandwiched est. $8.95B; ICON entered into a definitive agreement and plan of merger to be acquired by Iconix Acquisition Corp., an affiliate of Lancer Capital, LLC in an all-cash transaction that values Iconix at approximately $585 million, including net-debt ($3.15 per share cash) https://bit.ly/2SjpHkv

·     Auto sector; TSLA late Thursday marked the delivery of a souped-up version of its luxury sedan which Musk called the quickest production car on the market. The vehicle, dubbed Model S Plaid, can accelerate from zero to 60 miles an hour in less than two seconds and is priced starting around $130,000; Didi Chuxing, China’s biggest ride-hailing firm, made public the filing for its long-anticipated U.S. stock market listing (note UBER sold its China business to Didi in 2016, retains a 12.8% stake in the company).

·     Housing & Building Products; Wells Fargo cautious on homebuilders saying the recent downdraft could continue as estimate their coverage universe has further downside of 3% to 13% before stabilizing – says stocks at continued higher risks are CCS, LGIH, TOL and PHM in this order while stocks that are already closer to finding support are TMHC, MTH, NVR, MDC and FOR (recall yesterday Zelman Associates’ homebuilder survey shows a fourth straight month of weaker-than-seasonal order activity in May (and downgraded BZH, CCS, DFH, NVR)

·     Consumer Staples; PM announces new three-year share repurchase program of up to $7 billion, with target spending of $5 to $7 billion; KHC reached agreement to purchase Assan Foods from privately held Kibar Holding in a deal that values enterprise at approximately $100 mln

·     Restaurants; MCD confirms a data breach that involved a small amount of customer data in Korean and Taiwan being exposed, btu said it quickly closed off access after identifying the issue; CAKE 3.125M share Secondary priced at $56.00; PLAY with better-than-expected Q1 results and forecasting Q2 revenue above consensus ($335M-$350M vs. est. $287.4M) as Raymond James said EBITDA expected to fully recover in 2Q21 vs. 2Q19 and 2021 EBITDA now expected to exceed 2019 levels

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines active after RCL said two guests who were sharing a room onboard its Celebrity Millennium ship had tested positive for COVID-19. Celebrity Millennium was one of the first cruises in North America to restart sailing last week; in lodging, Wells Fargo said hotel EBITDA margins could normalize more than 150bps above 2019 levels in 2023 and including returns on 2018/19 ROI projects, 2023 EBITDA may be 14% above consensus (said would imply considerable share price upside to 2023 remains for the lodging REITs, led by HT, SVC, PEB, XHR, and SHO); ELY to replace GrubHub in the S&P 400 at open on 6/15

Energy

·     E&P and Majors; Goldman said higher oil prices provide a constructive backdrop for Energy equities and raised their longer-term mid-cycle oil price assumptions by $5 per bbl, and upgraded CNQ to Buy with a $44 pt from $38 as they expect it to generate 20% FCF yield in 2022 that would enable deleveraging and their US focus is on Buy-rated XOM as they expect positive consensus earnings revisions; Truist initiated GPOR with a Buy rating and $79 target after it recently emerged from re-structuring with revised management, a strong balance sheet, improved firm transportation, and solid assets; Bank of America upgraded OGE to Buy on the view that potential incremental capex is on the way with the potential to accelerate RAB growth above 6% and EPS growth to the industry standard of 5-7% from 4-6%

·     Refiners: President Joe Biden’s administration, under pressure from labor unions and U.S. senators including from his home state of Delaware, is considering ways to provide relief to U.S. oil refiners from biofuel blending mandates, three sources familiar with the matter said according to a report in Reuters. The article notes law requires them to blend billions of gallons of ethanol and other biofuels into their fuel each year or buy credits from those that do – and notes the credits, known as RINs, are currently at their highest price in the program’s 13-year history (names leveraged to RINS include REGI, DAR, GPRE, VLO, PSX)

·     Coal, Utilities & Solar; in the coal sector (ARCH, BTU, HCC), Bloomberg noted coal miners in Asia rose as the commodity’s price continued to surge after China’s plan for faster construction of a reserve for the commodity exacerbated already tight supply and demand

Financials

·     Bank movers; the banking and financial sector saw its worst daily decline in about 2-months yesterday as Treasury yields tumbled to its lowest levels since March, hurt by unanticipated inflation as the money they get paid back has less purchasing power than the money they loaned out; MN reports preliminary AUM $22.1B as of May 31; VCTR reported assets under management (AUM) of $160.9 billion as of May 31, 2021; Morgan Stanley initiated coverage on exchanges with an OW rating on NDAQ ($205 pt), EW ratings on CME ($228 pt) and ICE ($122 pt), and an UW rating on CBOE ($104 pt); Goldman initiated OWL at a Buy with an $80 tgt as they see EPS and revenue growth driven by growth in direct lending, robust deployment of its Dyal Fund V, and multiple revenue synergies

·     Bitcoin news; China’s Qinghai province orders shutdown of cryptocurrency mining according to a Reuters report saying authorities in China’s Qinghai province in northwest China and a district in adjacent Xinjiang instructed cryptocurrency mining projects to shut down this week; RIOT said in May, it produced 227 Bitcoin, an increase of about 220% over the year-earlier period and at end of month, says it held about 2,000 BTC, all of which were produced by its mining operations; JPMorgan raised their tgt on SBNY to $375 from $350 and maintained it as a top idea after mgmt meetings were bullish on potential growth from the crypto sector as it’s still only the bottom of the first inning for growth and the bank builds a moat as a first-mover in the institutional crypto space; Despite yesterday’s preliminary proposal from the Basel Committee that could increase the risk weighting for crypto holdings to 1,250%, Wedbush kept the Outperform on SI due to its very strong deposit and transaction growth, strong network effects that discourage new entrants, significant fee income opportunity from the recently announced Diem partnership, and the vast potential stemming from the rapidly expanding digital currency market

·     REITs; Morgan Stanley raises KIM price targets by 6.4%/8.1%/8.7% on increased conviction that Strip REITs can recover a portion of revenue from cash tenants from prior periods that hadn’t been collected yet. This results in a higher trough than anticipated, but occ. gains are the key to mid-2023e NOI normalization; UBS said the NAREIT conference was highlighted by an optimistic outlook among both the REITs and investors in attendance, and they remain very bullish on industrial REITs remain as strong US retail sales growth and inventory shortages across the supply chain are driving robust demand for warehouse space, while RBC’s takeaways from the conference included seeing improving fundamentals and demand/activity in nearly every space, and they favor sectors best positioned to thrive in the new post-COVID environment such as industrial (FR, STAG), life science (ARE, PEAK), seniors housing (VTR), and single family (AMH, INVH); Wells lifted their EBITDA estimates on lodging REITs, led by HT, SVC, PEB, XHR, SHO

Healthcare

·     Pharma movers; VRTX shares fell after abandoning further development of VX-864 for alpha-1 antitrypsin deficiency saying that the treatment benefit seen in a phase 2 study “is unlikely to translate into substantial clinical benefit” – shares of ARWR rises in reaction (RBC said VRTX’s decision to discontinue VX-864 is a clear positive for ARWR as it may now be first and best in class); ADMP rises after co says begun clinical trial process for its covid-19 treatment; JANX 11.4M share IPO priced at $17.00; NOVN shares jump after announcing positive topline efficacy and safety results for the phase 3 clinical study of SB206, a topical antiviral gel, for the treatment of molluscum contagiosum; EQ announces positive topline results from the equate study in first-line treatment of acute graft-versus-host disease; FDA tells JNJ to discard 60M doses of #covid19 vaccine made at EBS plant, allows 10M to be distributed but with warning

·     Biotech movers; CVAC slips following a Bloomberg report Germany will drop the company’s Covid-19 shot from its current vaccination campaign; MBIO announced updated interim data from the ongoing Phase 1/2 clinical trial investigating the safety and efficacy of MB-106 CD20-targeted therapy for non-Hodgkin lymphomas and chronic lymphocytic leukemia; AUTL presents data related to AUTO1 in relapsed/refractory (r/r) indolent B cell lymphomas and r/r adult Acute Lymphoblastic Leukemia at EHA 2021; PGEN rises after saying its phase 1b/2a study of AG019 ActoBiotics, a novel therapy designed to address the underlying cause of type 1 diabetes, met primary endpoint; CRIS falls as announces updated data from ongoing phase 1/2 study of ca-4948 monotherapy in patients with relapsed or refractory acute myeloid leukemia

Industrials & Materials

·     Aerospace & Defense; WSJ reported that a faster-than-expected recovery in domestic air travel is helping Boeing Co. (BA) find new homes for unclaimed 737 MAX jets whose buyers walked away or collapsed during the pandemic; LDOS selected to enter the final phase of the U.S. Special Operations Command’s Armed Overwatch aircraft prototype program.

·     Metals & Materials; ATC rises after Reuters reported MKSI has approached the specialty chemicals group with an acquisition offer https://reut.rs/3ziVRNA ; IP upgraded to Buy with $75 tgt at Argus as view it as a well-run company with a strong track record in its industry and expect its products and services to be in high demand on the other side of the pandemic; ESI said it made a binding offer to buy Coventya Holding SAS, a provider of specialty chemicals for about $510.3M in cash, including the assumption or repayment of debt. https://bit.ly/358fDgO ; LAC delays plans to excavate its Thacker Pass lithium mine site in Nevada, while a federal judge considers whether former Trump administration erred in approving the project that opponents say could threaten sage grouse and other wildlife.

Technology, Media & Telecom

·     Semiconductors; MX jumps as received an unsolicited proposal from Cornucopia Investment Partners to be acquired for $35 a share in cash. Recall on March 25, MagnaChip entered into merger agreement with Wise Road Capital for $29 a share https://on.mktw.net/2TmGcwh; in hard-disk drive space, STX upgraded from Negative to Neutral with $100 tgt at Susquehanna, increasing estimates to account for better HDD ASP/ Margin trends and WDC tgt raised to $155 from $125 saying checks suggest WDC is finally able to increase 18TB HDD shipments to above 3M/Q; overall Philly semi index (SOX) moves back around the 3,200 level; NVDA agreed to acquire DeepMap, a startup committed to building high-definition maps for autonomous vehicles to navigate the world safely

·     Software movers; SNOW outlines path to earn $10 bln in FY29 revenue and sets 10% margin target at its analyst day as the company expects 1,400+ $1 mln+ customers in next eight years vs 77 now (analysts lowered tgt prices) – shares dipped as analysts lower price tgts on view the margin target was disappointing, although many suggested it could be conservative; QUMU downgraded to hold at Hallum on belief the sales process QUMU was targeting is not working; MDLA shares rose after the company said it is exploring a potential sale

·     Hardware, Components & Services; Morgan Stanley downgraded LOGI, CRCT to Equal-weight as downgrade overall IT Hardware sector to in-line after outperformance saying its time to be more selective as names NCR, NTAP, DELL, STX as top picks; TEL approves additional $1.5 billion share repurchase

·     Internet; AMZN and GOOGL slipped after Dow Jones reported House lawmakers are preparing to propose bipartisan legislation that could require Amazon.com Inc. and other technology giants to effectively split into two companies or shed their private-label products