Closing Recap

Wednesday, March 08, 2023

Index	Up/Down	%	Last
DJ Industrials	-57.93	0.18%	32,798
S&P 500	5.71	0.14%	3,992
Nasdaq	45.67	0.40%	11,576
Russell 2000	0.75	0.04%	1,879

 

Equity Market Recap

·     Stocks finish mixed in choppy trading again, spiking in the final hour to get major averages into the “green”. Fed Chair Jerome Powell concluded his two-day testimony on monetary policy, with the main piece of information to gather from the Q&A being, the Fed is still worried about inflation and will continue to raise interest rates. There was a lot of tap dancing, less hawkish commentary from Powell today, saying the size of the March FOMC rate hike remains to be determined based on incoming data…and there is plenty for the Fed to chew on the next few days with nonfarm payrolls on Friday 3/10, and then inflation data of Consumer Prices (CPI) on Tuesday 3/14 and Producer Prices (PPI) 3/15. MKMRoth Strategist Darda said today Fed Chair Powell made it crystal clear yesterday that hot data would not be tolerated by the FOMC. In other words, if the string of hot releases for January were to continue, the Fed would consider BOTH a higher terminal rate AND larger rate increases to get there.

·     Major averages added to weekly losses with the Dow industrials down more than 2% this week as of early Wednesday afternoon, while the S&P 500 is off 1.7% and the Nasdaq Composite off 1.3%. The Smallcap Russell 2000 underperforms down about 3% this week as better eco data, Powell comments weigh. A weaker bond auction midday pushed prices lower and yields higher, also pressured stocks. Things can change quickly on Friday with the nonfarm payroll report, but today’s better ADP and JOLTs reading failed to move the market needle.

·     Market resiliency remains astounding as @KobeissiLetter notes, since February 1st: $SPX posted biggest earnings decline since Q3 2020; CPI/PPI data “revised” higher; PCE inflation rising for 1st time since Oct. 2022; added 75 bps in rate hike expectations – meanwhile, $SPX is down just 2%. What will it take to break this market? Note the S&P continues to hold above key technical support levels with the SPX 50-day MA 3,997, 200-day 3,940.

·     The Healthcare sector (XLV) hitting lowest levels since late October, and down roughly 10% from its December highs, while Biotech (XBI) -1.3% at lowest levels since late December around 81.00. Top three sectors in 2023 remains Communications (XLC +13%), Technology (XLK +12%) and Consumer Discretionary (XLY +10%), while Healthcare and Utilities (XLU -6.5%) remains weakest. Today, Financials (XLF) rolled late day, while Technology (XLK) held up due to strength in semiconductors which rose 2.6% as SOX rose to the 3,040 level.

 

Economic Data:

·     ADP Private Payroll data for February reported at +242k vs. estimates for +200k and above prior month upwardly revised reading of 119K from 106K. The ADP report comes two days before the government’s nonfarm payrolls count, which is expected to show a gain of 225,000.

·     JOLTS job openings for Jan at 10.824M above ests 10.5M, below prior month of 11M.

·     U.S. trade deficit for January (-$68.3B) vs. consensus (-$68.9B) and compares to Dec deficit reading of (-$67.2B), which was smallest since September 2020.

·     For the first time in about a year, the Bank of Canada kept its main interest rate unchanged at a scheduled policy decision, arguing economic data point to inflation sharply decelerating this year toward its 2% target.

·     Chair Powell’s prepared remarks for his semi-annual testimony opened the door to a return of 50bp hikes at the March meeting if the incoming data flow warrants it. Upside surprises to Friday’s payroll report could drive a faster and longer tightening cycle – Morgan Stanley.

·     Bank America said: For now, we retain our view that the Fed is likely to hike by 25bp in March. We have argued that the bar is likely high for a return to a faster pace of rate hikes. In our view, risk management concerns support staying at slower pace of rate hikes and monetary policy does work with "long and variable lags". Said, a reversion to 50bp hikes is data dependent.

 

Commodities, Currencies & Treasuries

·     Oil prices fall, with WTI crude -$0.92 or 1.19% to settle at $76.66 per barrel; Front-month gas futures for April delivery fell 13.6c, or 5.1%, to settle at $2.551 per million British thermal units, their lowest close since Feb. 24 as markets have been volatile in recent weeks as traders bet on the latest weather forecasts. Gold prices slips -$1.40 to settle at $1,818.60 an ounce.

·     Treasury yields mixed again, as the shorter-end of the curve (much like yesterday), outperforms the longer-end, with the 2-yr +3.5bps at 5.047% and the 3-yr up 3-bps to 4.72% while the 10-yr slips -2.5bps to 3.948%. Yields jumped further after a weak auction as the U.S. treasury sold $32B in 10-year notes at a yield of 3.985% vs. 3.958% when issued prior, as bid-to-cover ratio 2.35 (vs. 2.66 prior), primary dealers take 17.73% of U.S. 9-year 11-month notes sale, direct 19.98% and indirect 62.29%.

·     The U.S. dollar held steady after jumping 1% the day prior, with the dollar index (DXY) up around 105.65, highest levels since late November 2022. Rising interest rate expectations heading into the FOMC rate meeting in 2-weeks boosting shorter-term yields, with futures now showing a 70% chance of a 50-bps hike at the next meeting. Canadian dollar weakens to lowest since October at 1.3811 to the U.S. Dollar.

 

 

Macro	Up/Down	Last
WTI Crude	-0.92	76.66
Brent	-0.63	82.66
Gold	-1.40	1,818.60
EUR/USD	-0.0005	1.0542
JPY/USD	0.06	137.21
10-Year Note	0.006	3.981%

 

 

Sector News Breakdown

Consumer

Autos:

·     GM’s rollout of two key electric vehicles, the Hummer EV, and the Cadillac Lyriq, is slower than expected, The Wall Street Journal reported Wednesday, citing people familiar with the matter.

·     TSLA downgraded to Hold at Berenberg, that that their Buy thesis, based on misplaced fears of a price war, appears to have been accepted by the market. They argued that Tesla can take market share at a gross margin of c25% (excluding credits), which indeed is where they see investor expectations heading for 2024.

·     TSLA also pressured after reports of two incidents in which the wheel detached from the steering column of 2023 Tesla Model Y vehicles while being driven.

 

Consumer Staples & Restaurants:

·     In food: CPB Q2 sales rose 12.6% y/y to $2.49B, topping $2.44B estimates and lifts annual sales forecast to up 8.5%-10% from prior view 7%-9% on higher prices and strong demand for its packaged meals and snacks (also boosted the lower end of 2023 adjusted profit forecast). UNFI shares tumble after Q2 adj EPS miss of $0.78 (vs. est. $1.46) while revs better at $7.82B, but gross profit rate fell to 13.7% of net sales, from 14.5% in the same period a year ago; also withdraws its long-term fiscal year 2024 financial targets after cutting 2023 views for EPS to $3.05-$3.90 from $4.85-$5.15 (est. $5.00). In beverages: BF Q3 EPS misses at $0.21 vs. est. $0.47 while sales rose 4.2% y/y to $1.08B vs. est. $1.01b; gross margin 57.7% down from 60% y/y, and operating margin 15.9% vs. 33.5% y/y.

 

Retailers:

·     SFIX reported mixed 2Q results, with active customers and revenue both slightly below consensus while profitability was above expectations. Average order value held steady y/y; says CFO Dan Jedda to step down, and SVP of Finance David Aufderhaar to succeed.

·     In research: JWN upgraded from Hold to Buy at Argus with $23 tgt noting it has been hurt by weaker economic conditions, unproductive inventory, and soft sales to lower-income customers…but has also divested unprofitable businesses and reduced unwanted inventory.

·     BBBY said it has received about $135 million in gross proceeds from the exercise of preferred stock warrants that were issued as part of a public equity offering conducted on Feb. 7, and has now produced total proceeds of $360 million.

·     HNI to acquire KBAL in a cash and stock deal valued at about $485M, expected to close by mid-2023 as combined co will have pro forma annual revenue of about $3.1B https://bit.ly/3L8Dpj0

·     VRA shares jump after Q4 adj EPS $0.16 on revs $147.1M (est. $137.5M) top views as guides year EPS $0.40-$0.50 vs. est. $0.36 and revs sees $490M-$510M vs. est. $507M; said inventory fell -4.6% y/y and margins also down y/y to 40.8% from 50.9%.

 

Energy

·     OPEC’s top official said slowing oil demand in Europe and the US is posing a concern for the global market, even as Asia experiences “phenomenal” growth. “We see a divided market — almost like two markets,” OPEC Secretary-General Haitham Al-Ghais said at the CERAWeek.

·     The American Petroleum Institute said crude stocks drew down -3.835mm barrels last week – the first draw in 11 weeks, while Cushing saw a small build of 24K barrels. Gasoline (+1.84mm) and Distillates (+1.927mm) both with big weekly builds. The EIA weekly data showed U.S. crude oil and gasoline stockpiles fell while distillate inventories rose last week (oil ending a 10-wek streak of increases). Crude inventories fell by 1.7 million barrels vs. est. for 400K rise, crude stocks at the Cushing, Oklahoma delivery hub fell by 890,000 barrels in the last week, and gasoline stocks fell by 1.1 million barrels in the week.

·     In majors: OXY rises after Berkshire Hathaway bought almost 6 million shares of Occidental Petroleum in recent days, bringing its stake in the big energy company to 200.2 million shares worth $12.2 billion, according to a filing late Tuesday.

·     In solar: MAXN shares rise after Q4 revs top views ($323.5M vs. $315.7M) and guides Q1 revs above views (but guides year lower) and said its subsidiary enters into a Product Reservation and Performance Agreement with Primergy Solar. SHLS public offering of 24.5M shares of company’s Class A common stock at a price to public of $24.70 per share.

·     In utilities: CMS upgraded to Buy from Neutral at Bank America arguing that the company’s de-risked, above-average earnings outlook stands out against its utility peer group and warrants a widening relative premium. SWX 3.57M share secondary priced at $60.12 per share. WTRG named as a “short” call by SprucePoint Capital as questions Essential Utilities model, and said sees 35%-50% downside.

 

Financials

Banks, Brokers, Asset Managers:

·     In banks: BAC downgraded to Hold from Buy at Odeon saying the company could deal with a minor recession at the end of this year. Its loan growth is expected to slow Its loan losses are expected to rise. Despite the possible recession, interest rates are not expected to fall.

·     In FinTech: PYPL CFO Jorgensen to step down following a leave of absence for health reasons that started in Sept; will remain w/ the co as a senior advisor through 9/15/23. SI shares active after Bloomberg reported last night that US regulators have been sent to the crypto bank’s headquarters, as the troubled bank looks for a way to stay in business. FDIC officials have been discussing with management ways to avoid a shutdown, the report said.

·     REITs were the best performing sector in the S&P 500 today. Mortgage REITs: AGNC upgraded to overweight from Neutral at JPMorgan as expect shares to begin to rally in front of the cyclical peak in rates. When rates ultimately begin to recede, AGNC’s positive duration shifts to a tailwind. Residential: OPAD downgraded to Neutral from Overweight at JPMorgan saying overall they continue to like the L-T opportunities ahead but believe there is meaningful downside risk to consensus expectations, which partly drive their downgrade to Neutral.

 

Healthcare

Biotech & Pharma:

·     MESO said the US FDA agreed to review company’s resubmitted marketing application for its investigational therapy remestemcel-L used for treatment of the graft-versus-host disease in children which occurs due to complications after bone marrow transplants.

·     OPK said it signed a deal with MRK, potentially worth up to $922.5 million, for its experimental Epstein-Barr virus vaccine; to receive an upfront payment of $50M and is eligible for milestone payments of up to $872.5M, plus royalties on global sales.

·     RIGL rises as Q4 EPS $0.01 vs. est. loss (-$0.11); Q4 revs $51.3M vs. est. $27.97M; said as of December 31, 2022, had cash, cash equivalents and short-term investments of $58.2M.

·     SAGE and BIIB shares active after saying the FDA won’t hold an advisory committee meeting during its review of zuranolone for major depressive disorder and postpartum depression.

·     TRVI announces notice of allowance for U.S. Patent application covering use of Haduvio (nalbuphine er) for the treatment of chronic cough in idiopathic pulmonary fibrosis.

·     Stocks offerings: BBIO 8.824M share Secondary priced at $17.00. INBS 569K share Secondary priced at $3.90. MIRO 6.25M share Spot Secondary priced at $1.60.

 

Healthcare Services & MedTech movers:

·     CNC downgraded from Buy to Hold at Deutsche bank, increasingly concerned that the risk of redeterminations and the risks to Medicare Advantage membership/profits are not fully reflected in the share price or consensus estimates (said most concerned with 2024 EPS estimates).

·     EW was downgraded to Equal Weight from Overweight at Wells Fargo on lower tricuspid sales; limited upside to TAVR market growth w/ asymptomatic data likely in late ’24; TAVR share loss; & slow ramp of Pascal. Lower our PT to $78, based on 28x ’24 EPS.

 

Industrials & Materials

Transports

·     In package delivery: UPS backed its prior guidance in a new SEC filing saying it still sees full-year revenue of $97.0B-$99.4B vs. est. $98.3M and guided for a full-year adjusted operating margin of 12.8% to 13.6% vs. 13.3% consensus.

·     In airlines: GOL posted a Q4 profit as demand for air travel continued to recover; posted net income of 230.9 million reais ($44.7 million), or R$0.55 a share. Recall airlines were the best performing sub-sector of Transports yesterday despite general weakness in stocks overall.

·     In tankers, Baltic Dry Index rises 2.23% to 1,327 in London, up for a 14th day as the index has risen 120% in the past month. Capesize +5.33% to $12,851; Panamax +0.82% to $12,989; and Supramax 58k tons -0.04% to $12,770. STNG initiated at Overweight and $87 tgt at JPMorgan, implying 50% upside potential noting the group is undergoing a sharp inflection in prospects, moving from weak earnings and overleverage to strong earnings and rapid deleveraging, with a current FCF yield of 30%.

 

Materials, Industrials, Aerospace & Defense

·     AXON rated new Buy and $263 tgt at Goldman Sachs reflecting 17X their NTM+1Y gross profit, which is in line with AXON’s current NTM EV/gross profit with upside driven by growth compounding and upside to consensus.

·     BA is reportedly close to solidifying an order with Japan Airlines (JAL) for at least 20 of its 737 Max planes, Bloomberg reported. The news on Wednesday followed confirmation from Boeing that certain aircraft deliveries are facing delays.

·     GE tgt raised to $98 from $82 at Oppenheimer, based on 15.5x ’24E Aviation EBITDA (vs. 14.0x prior), more consistent with high-quality large cap peers; also Target 6.5x ’24E GEV (Vernova: Power & Renewables) vs. prior 5.5x, and remove 8%-time value discount.

·     In chemicals: DSEY to be acquired by Solenis for $4.6 billion with shareholders to receive $8.40 per share in cash in "go private" transaction https://bit.ly/3l1XZqv ; in lithium, PLL shares slip after short seller Blue Orca Capital released it was “short” the shares in new report.

 

Technology

Internet, Media & Telecom

·     ETSY shares among top S&P decliners early after comments yesterday at conference with CFO sounding downbeat on Feb flagging shift in consumer spending / shift to experiences.

·     YEXT 4Q results came in above expectations on both revenue and profitability (OM 300 bps ahead), but fiscal 2024 revenue guidance was below expectations with the company guiding revenue to be flattish next year.

 

Hardware & Software movers:

·     Internet security co CRWD rises after reported a strong F4Q, as ARR growth of 48% Y/Y significantly exceeded the Street’s ~45% forecast while also added record net new logos this quarter, and NRR remained very healthy; guidance also upbeat.

·     BASE reported solid 4Q results, beating on the top and bottom-lines, and offering mixed guidance for FY2024. ARR growth in CC was 24%, while revenue growth was 19% (FX had an immaterial impact on revenue growth).

·     DDOG sustained a major service outage this morning that has continued to impact the availability of its services. Wells Fargo said depending on how long the outage lasts, they remain concerned with the impact to revenue, given this is a consumption-based model.

·     LOGI said it expects revenue between $1.8-1.9B in H1 2023/24, which would represent a decline of 18-22% in constant currency and non-GAAP operating income $160-190M (weaker), maintains its long-term sales growth of 8-10% with an operating profit margin of 14-17%.

 

Semiconductors:

·     Strength early in semiconductors, with the Philly semi-index (SOX), rising over 2% above 3,040, taking out yesterday highs of 3,011, with most names in the space surging.

·     In Memory sector: Bank America upgraded Samsung, Nanya Tech to Buy / downgrade Phison to Underperform. Upgrade Samsung Electronics from Neutral to Buy; key catalyst will be market-share gain after 2023 downturn; new PO W80,000. Upgrade Nanya Tech to Buy as a pure DRAM play vs downgrade Phison (NAND downturn); reiterate U/P on SK Hynix due to high risk. Memory cycle will not recover well even in 2H23-1H24.

·     ON tgt raised to $10 from $90 at Bank America and reiterate its Buy rating calling it top autos chip pick on confident company president plus recent BMW EV win.

·     QCOM raises quarterly dividend to $0.80 from $0.75.