Closing Recap

Wednesday, May 11, 2022

Equity Market Recap

·     Another day of intense selling pressure for major averages, led by a 3% drop in the Nasdaq to its lowest levels since November 2020 (falling 400-points off intraday highs), and posting its 7^th day of more than 2% declines in the last 15 trading days (which includes 3 days of over 4% declines). Growth stocks extend their tumble on rising inflation fears with technology and biotech shares crushed this year. Consumer price (CPI) inflation surged a higher-than-expected 8.3% in April, holding near 40-year highs of 8.5% in March, as the Federal Reserve scrambles to cool the economy (ahead of PPI data tomorrow). Following the inflation data point, implied probabilities shift from 73% to 81% chance of +75bps from Fed in June as they look to combat soaring prices in several areas of the economy (over the last year: Gasoline: +43.6%, Used Cars: +22.7%, Gas Utilities: +22.7%, Meats/Fish/Eggs: +14.3%, New Cars: +13.2%, Electricity: +11.0%, Food at home: +10.8%, Transportation: +8.5% as per the CPI report). Concerns in China with lockdowns and impact on the economy and Russia/Ukraine commodity supply impact have been well documented, but consumers really starting to feel the impacts. Very few places to hide these days but gold bounced as well as Treasury prices and oil, while stocks were mostly lower outside a few pockets of strength (energy, utilities). More inflation data tomorrow with April PPI.

Economic Data:

·     Inflation data remains high: April Consumer Price Index (CPI) headline +0.3% vs. est. +0.2% M/M while on a Y/Y basis rises +8.3% vs. est. +8.1% (breaks streak of 7-beats in a row as down from 8.5% prior month). Core CPI Ex food & energy, rises +0.6% M/M vs. est. +0.4% and rises +6.2% vs. est. +6.0% (but down from prior month of +6.5%

·     The U.S. government posted a $308 billion surplus in April, a record for any month, as receipts nearly doubled from a year earlier amid a strong economic recovery, the Treasury Department said. The April surplus compares to a $226 billion deficit for April 2021, when receipts were reduced by a one-month delay in the annual tax filing deadline until May 17.

Commodities

·     Oil prices end higher, rising $5.95 or 5.96% to settle at $105.71 per barrel, recovering after plunging nearly 10% in the last two sessions amid supply concerns as flows of Russian gas to Europe fell and the European Union worked on gaining support for a Russian oil embargo. Oil prices remained strong all day despite a large and unexpected rise in crude inventories. The EIA said U.S. crude stocks unexpectedly rose 8.5 million barrels last week vs. the expected drawdown of -1.8M barrels. Gasoline inventories were down -3.6 million barrels, vs. expectations for a fall of 1.9 million barrels; distillate stocks fell 900K barrels versus a forecast for a 1.6M-barrel drop.

·     Gas prices in the U.S. hit another record high ($4.40/gallon national average) with California closing in on $6.00. Gold prices rise $12.70 or 0.7% to settle at $1,853.70 an ounce, as investors look to safety trade, helped by a modest drop in the dollar as well, a day after the precious metal hit a 3-month low. Natural gas prices settle at $7.64 mln Btus.

Currencies & Treasuries

·     Crypto volatility astounding over the last few days: Bitcoin touched lows of $29,011 (lowest since June 2021), falling over 6% as the crypto world has seen several negative stories over the last 48 hours. COIN shares tumble over 30% following revenue miss, larger quarterly loss, and less transactions, while the crypto space showing fears as Terra’s LUNA continued its third consecutive day of slide as the token fell 96% in the past 24 hours to reach price levels previously seen in August 2021. Meanwhile sister token TerraUST (UST) falls substantially further.

·     Treasury yields fall for a 3^rd straight session, reversing earlier morning gains as the ten-year Treasury yields hit as low as 2.92%, down 5 basis points on the day and over 25 bps lower from more than three-year highs above 3% hit on Monday; yields lower across the U.S. curve, with five-year yields also down about 5 bps on the day at around 2.86%. A big rotation back into bonds late day as stocks turned south late morning. U.S. Treasury sells $36B in 10-year notes at a yield of 2.843% vs. 2.929% when issued prior, with the bid-to-cover at 2.49 and indirect bidders awarded 70.3% and directs awarded 18.21%. U.S. treasury yields edged higher after the auction.

Sector News Breakdown

Consumer

·     Retailers; shares of HD, TJX, TPR, PVH among names hitting 52-week lows today; KSS says all of its 13 directors have been re-elected according to preliminary voting data; BOOT EPS beat with comps +33% & +69% on 2-year, as all 52 weeks of FY22 grew >55% on 2-year and FY23 guide better; PRPL reported 1Q22 revenue and EBITDA that was better than its guidance and consensus expectations, while forward-looking guidance underwhelmed; BIRD slips after lowering its year rev outlook to $335M-$345M from $355M-$365M (est. $362.35M) citing impact on international business; REAL Q2 GMV +31% (slightly above guidance 25-30%) and revenues +49% (vs. guidance 32%-42%, while Q2 guidance was a bit light of expectations

·     Auto sector; TM issued an operating profit outlook for the fiscal year ending in March 2023 that was below analysts’ expectations; said it expects operating profit in the current fiscal year of 2.4 trillion; GOEV slides early after filed shelf and said last night sees doubt about ability to continue as a going concern; CVNA extends slump early as Stifel downgraded to Hold and cut tgt to Street-low $40 saying deteriorating capital market conditions and worsening trends in the used vehicle industry have eroded their conviction in the path for Carvana to secure the necessary capital

·     Housing & Building Products; shares of FBHS, SWK, DHI, LEN among names hitting 52-week lows in the space given rising rate hike fears post the CPI data; BZH announces $50 million share repurchase program; TREX upgraded to Neutral at Credit Suisse based on better-than-expected results in 1Q, management’s confidence in its ability to maintain higher pricing despite rising costs, and its more attractive valuation given the pullback in the stock; GRWG tumbles as net sales declined 9.2% Y/Y due to softer industry demand and comparable store sales fell 35.5% Y/Y but on a two-year basis, same-store sales increased 7.3% vs. 1Q20.

·     Consumer Staples & Restaurants; PM officially agreed to a 61.2 billion Swedish crowns ($16 billion) cash offer to buy Swedish Match; GO upgraded to Buy at Deutsche Bank after earnings as 1Q EPS of $0.22 vs Consensus $0.20 and EBITDA of $49M vs Consensus $47M while sales beat by 2.5% and comp sales of +5.2% beat consensus +3.1%; PFGC with Q3 EPS 51c vs est. 52c on in line revs. EBITDA $238mm vs est. $226mm. Total Case Vol +35%; WEN posted higher sales but lower profit as Q1 EPS $0.17 vs est. $0.18 on lighter revs. EBITDA $107mm vs est. $113mm. Comps 2.4% vs es.t 2.5% and margins 11.6% vs est. 14% and lowered year profit outlook

·     Casinos, Gaming, Lodging & Leisure sector; in golf, leisure space, ELY 1Q EPS of $0.36 vs Consensus $0.22 and EBITDA 20% above on better revs and guides 2Q revenues above and EBITDA also above at $185-$200M vs Consensus $173M; in casinos, WYNN 1Q EBITDA of $178M topped est. $157M, tough revenues light by 3% as Macau missed on both revenues and EBITDA ($5M) vs Consensus +$25M, with Vegas better on both revenues and EBITDA; strength in travel and discretionary names early with cruise lines, lodging, airlines higher (RCL ); ABNB said it will allow travelers to split their holiday between two properties to facilitate longer stays

Energy

·     Energy stock movers: OXY Q1 profit beats estimates and raises Q2 production forecast by about 6%; overall energy sector among top S&P leaders with oil prices jumping and investors rotating further out of high growth areas such as tech which lagged today. Even bearish weekly inventory data failed to dent interest in energy names with MRO, APA, EOG, FANG, XOM, PXD among leaders. Utility stocks also outpaced other sectors, remains one strong on year despite rising Treasury yields which tend to negatively impact high dividend players; natural gas levered stocks rise (AR, CHK, CTRA, EQT, RRC, SWN) after Kyiv halted use of major route carrying Russian gas through Ukraine, which helped boost U.S. gas futures

Financials

·     Asset managers: AB preliminary assets under management decreased to $685 billion during April 2022 from $735 billion at the end of March. The 7% decrease was primarily due to market depreciation, coupled with firm-wide net outflows: IVZ prelim month-end assets under management (AUM) of $1,476.1 billion, a decrease of 5.1% versus previous month-end. The firm experienced net long-term outflows of $1.3 billion in the month; LAZ preliminary assets under management as of April 30 totaled approximately $236.6B. The month’s AUM included market depreciation of $9B, foreign exchange depreciation of $5.9B and net outflows of $1.2B

·     Bitcoin touched lows of $29,011 (lowest since June 2021), falling over 6% before a sharp recovery back above the $31,000 level as the crypto world has seen several negative stories over the last 48 hours. COIN shares tumble over 20% following revenue miss, larger quarterly loss, and less transactions, while the crypto space showing fears as Terra’s LUNA continued its third consecutive day of slide as the token fell 96% in the past 24 hours to reach price levels previously seen in August 2021. Meanwhile sister token TerraUST (UST), an algorithmic stablecoin, falls substantially further from its $1 peg during a broad selloff in cryptocurrencies. COIN posted a greater than expected Q1 loss while revs fell 35% to $1.165B, below consensus $1.48B and said retail trading volumes were down 38% and filed a mixed shelf (shares declined again after falling over 40% the prior 4-days into earnings) – shares of MSTR, SI, MARA, RIOT, SBNY, OSTK and other names leveraged to crypto fell initially

·     Consumer Finance & Services; LDI downgraded by two firms after 1Q results swung to a quarterly loss as its expense base couldn’t decline as much as mortgage production and gain on sale (GOS) margins; HRB reported F3Q22, increased adjusted EBITDA guidance, and provided volume results to compare full tax season performance; RKT downgraded at Citigroup post earnings saying the near-term mortgage picture is more challenging than expected prompting the change; MQ expected to report earnings tonight; FOUR announced a $100M share buyback plan

Healthcare

·     Pharma movers; RHHBY said an experimental immunotherapy tested in combo with the cancer treatment Tecentriq failed to meet the primary co-endpoint of progression-free survival in a Phase 3 clinical trial; RCUS tgt cut to $42 from $67 at Wedbush noting Roche reported that the Phase 3 SKYSCRAPER-01 study failed to meet the Co-primary endpoint of PFS, which they believe casts a shadow on RCUS’s mNSCLC programs given the similarity of study designs (other Tigit exposed names include GILD, ITOS); VERU said it plans to request emergency-use authorization for its experimental Covid-19 treatment sabizabulin from the U.S. FDA in Q2; PRGO 1Q results were ahead on revs of $1.075B (vs. $1.057B cons) though EPS was $0.33 (vs. $0.42 est.) citing cost headwinds and unfavorable FX movements while raised its FY22 guide to $2.30 to $2.40 (from $2.10 to $2.30 prior) to reflect $0.35 from the HRA acquisition

·     Biotech movers; Biotech ETF (XBI) came within a few pennies of its Covid lows, down over 43% this year alone in a decimation of the space; MRNA CFO Gomez, who joined the vaccine maker this week, has left amid an investigation by his former employer, XRAY into matters that include financial reporting; INO tumbles as the current CEO resigned and was replaced by the COO, the INNOVATE, INO-4800 COVID-19 vaccine trial was discontinued due to higher hurdles for a COVID-19 vaccine, and prelim discussions with the FDA suggested a registration filing for VGX-was not possible

Industrials & Materials

·     Industrials & Transports; BA said today that supply chain disruptions slowed production and deliveries of its 737 MAX cash cow narrowbody plane but does not see its overall plan for the year being disrupted. Boeing also said China was close to clearing the 737 MAX to return to service, but progress with regulators and customers was delayed by stringent COVID protocols

·     Metals & Materials; materials among top gainers early led by bounce in metals; Goldman noted MOS mgmt highlighted continued tightness in Potash and Phosphate markets – good news for pricing and profits; BLL and CCK shares strong early following article earlier in DJ nothing that Novelis Inc. said it intends to build the largest aluminum-rolling plant in the U.S. in nearly 40 years to supply a growing market for beverage cans

Technology, Media & Telecom

·     Media & Internet; FVRR tumbles Q1 adj EPS $0.11 vs. est. $0.02; Q1 revs $86.7M in-line with ests; Q1 active buyers as of March 31, 2022, grew 11% Y/Y to 4.2M, vs. 3.8M; cuts FY22 revenue view to $345M-$365M from $373M-$379M (est. $377.24M) and cuts FY22 adj EBITDA to $10M-$17M from $27M-$33M; large cap Internet lagged again as growth broadly underperformed value on the day, with AAPL, AMZN, FB, SHOP, MSFT, NFLX all falling; DIS earnings tonight

·     Software movers; Unity Software (U) shares tumble following management’s disclosure of internal challenges within its monetization products that are curtailing its ability to meet FY22 FactSet Consensus/ Street expectations revenue and profitability expectations; EA Q4 net bookings missed by 2.4%, however better than expected cost management kept operating income and Adj. EPS in-line with forecast while provided its initial FY23 outlook; DV reported beat and raise 1Q22 results whereby revenue and EBITDA came in 6% and 7% above the high end of guidance, as improving sales execution drove strong product cross-sales; no place safe as Internet Security names trampled as well of late CRWD, OKTA

·     Hardware, Components & Services; GLW downgraded to Equal Weight from Overweight at Barclays and cut tgt to $38 from $53 as still sees a number of long-term drivers, but believes stock upside is limited as more concerned about a few of the key consumer end markets; RXT reported 1Q22 revenue in-line with expectations of $775.5m (+6.8% Y/Y, +7.3% cc) and EPS of $0.22 which was slightly above consensus but Q2 guidance came in well below expectations for revenue, EBIT, EPS and FCF with the growth outlook also reduced for 2H22 as well; RBLX Q2 revenue of $537M (+39% y/y) missed the Street by 5% though Bookings of $631mn (down 3% y/y) was in line. Adj. EBITDA of ~$68mn missed the Street’s $100mn estimate by >30%