Closing Recap

Friday, May 13, 2022

Equity Market Recap

·     Friday the 13^th ended up not being so scary after all, as major averages significantly pared weekly losses, putting in strong gains across the board, but was unable to snap the weekly losing streaks for the Dow Jones Industrial Average (7th straight losing week), and the S&P 500 and Nasdaq (posting weekly losses of 6-straight). We may not have finished at the highs but, for the first time in a while, the markets didn’t completely sell off a rally attempt. China gave early support to U.S. futures after Shanghai indicated it is aiming for Zero-Covid at community level by mid-month and will look to relax some closings and restrictions if they see three days of no community spread. The theme of the day quickly became no bad news is good news. Fed speakers (Mester and Kashkari) said nothing to shift current rate-hike expectations after Powell’s earlier reassurance with commentary indicating he believes 50-basis-point moves will be sufficient. Looking across the market, all S&P 500 sectors finished in the green. Consumer Discretionary led the way with gaming (LVS, WYNN, CZR) pacing the advance. Energy (OXY, APA, BKR) and Technology (NVDA, AMD) were also above-average gainers. Consumer Staples, Industrials and Utilities were laggards.  Growth outpaced value as one may expect in a bounce-back rally, but both were solidly green. Russell 1000 Value finished up around +1% and Russell 1000 Growth up better than 2%.

Economic Data:

·     April import prices unchanged vs. est. +0.6% and down from March +2.9%, while April export prices rose +0.6% vs. est. +0.7% and below March +4.1%; April year-over-year import prices +12.0%, export prices +18.0%; April non-petroleum import prices +0.4% M/M and 7.8% Y/Y

·     University of Michigan sentiment for May prelim down at 59.1, well below consensus 64.0 and the final April 65.2 and at its lowest reading since August 2011); expectations index prelim May 56.3 vs. consensus 63.0 and final April 62.5 and the current conditions index prelim May 63.6 below consensus 70.5 and final April 69.4.

Commodities, Currencies & Treasuries

·     Oil prices climb, with WTI crude rising $4.36 or 4.11% to settle at $110.49 per barrel, Brent crude rose $4.11 or 3.82% to $111.55 per barrel and gasoline prices hit a record high today at $3.957, up 4% today, which does not bode well ahead of the summer driving season. The National gas average made a new record high the last 4-days, up at $4.43 a gallon today. Natural gas prices end the session 1% lower at $7.663/MMBtu, down -4.7% for the week (only 3^rd loss in last 13-weeks and off recent 14-year highs of $8.78 mln Btu). The oil market has been all over the place this week, falling below $100 early in the week on worries about a U.S. and global economic slump that could weaken demand for crude. But prices have recouped most of those losses in the past few days as sharply falling U.S. inventories of refined fuels amid continued fighting between Russia and Ukraine puts the market’s focus back on the supply side.

·     Gold prices fell -$16.40 or 0.9% to settle at $1,808.20 an ounce, hitting its lowest closing level since early February and recorded a nearly 4% decline on the week (its fourth straight weekly decline). Precious metal prices tumbled across the board this week (silver, palladium) as the dollar extended its winning streak to six-weeks on rising rate expectations by the Fed.

·     Treasury yields rose for the first time in four days, with the benchmark 10-year finishing above the 2.9% level but remained nearly 30 bps off weekly highs. Investors fled to the safety of bonds as stock prices tumbled for the 6^th straight week and much of the anticipated Fed rate hikes have been somewhat “baked” into Treasury prices at this point.

·     The U.S. dollar edged lower today, but still posted a sixth straight week of gains as investors remained concerned about the possibility of global growth slowing and the Fed’s recent aggressive rate hike policy tilting the U.S. into a recession. The dollar index (DXY) hit best levels since Dec 2002 (high above 105 level) before fading but remains up more than 8% so for in 2022. The dollar showed little reaction initially to weaker confidence data and import prices that fell short of consensus. The euro dropped to lows of 1.0348 (weakest in 5-years) before paring losses but is down five of the last 6-weeks.

Sector News Breakdown

Consumer

·     Retailers; FIGS tumbles after reported worse than expected Q1 results and lowered its 2022 revs guidance to $510M-$530M from prior $550M-$560M citing macro factors and supply chain challenges; POSH reported a smaller-than-expected loss and beat Q1 revenue estimates rising 13% but did guide Q2 revs between $86M-$88M vs. est. $89.8M; MCW posted a top-line beat, citing UWC strength and slightly better churn, while reaffirming the FY guide

·     Leisure & Casinos: one of the better performing sectors today as news of a potential end to lockdowns in China by mid-May helped boost casinos (WYNN, LVS, CZR), as well as travel and hotel names (BKNG, ABNB ). AP reported overnight that officials in Shanghai are considering a reopening “in a few days” as case numbers fall.

·     Auto sector; TSLA shares outperform after CEO Elon muck tweet earlier this morning saying his $44 billion takeover of TWTR is “temporarily on hold” pending details supporting calculation that spam/fake accounts; China’s passenger vehicle retail sales drop 21% Y/Y in the first week of May according to a Bloomberg report (LI, XPEV, NIO); Ford (F) upgraded to Equal Weight from Underweight at Morgan Stanley; CVNA downgrade from Buy to Hold at Jefferies and slash tgt to $40 from $150 as believe upside could be capped until liquidity concerns subside (notes stock plunged from $377 in August 2021 to just $37 today); HMC Q4 net profit fell 41% Y/Y to 124.90 billion yen, beating the estimate of Y110.49B; ZEV guided Q2 revs $6M-$8M vs. est. $10.2M after Q1 revs $5.4M vs. est. $5.5M; expects Q2 vehicle and powertrain sales in range of 55-75 units

Energy

·     Energy stock movers: Oil prices rose but still posted its first weekly loss in three weeks as worries about inflation and China’s COVID lockdowns slowing global growth offset concerns about dwindling supplies from Russia. European Union nations may consider delaying a ban on Russian oil if the bloc can’t persuade Hungary to back the embargo. Europe braces for a shortage of a key gasoline component. A big drop is noted in Russian diesel exports; OXY rises as Berkshire Hathaway buys 902K shares on May 10th in a total transaction size of $51.7M, boosting its stake by about 1%; energy stocks in general surges behind another bounce in oil.

·     Utilities & Solar; CEG upgrade from Neutral to Buy and up tgt to $70 from $51 at Guggenheim on the strength of our latest commodity Marks, an improving policy backdrop, and our increasing comfort with several fundamentals following the spin earlier this year; FSLR upgraded to Overweight from Neutral at Piper and up tgt to $90 from $80 saying recent bookings momentum provides strong volume and pricing visibility into 2024/said sees 2022 as a "trough margin year (solar space outperformed SEDG, ENPH.

Financials

·     Broker, Bank movers; sector saw a modest reprieve after weeks of selling pressure, with Treasury yields edging higher after 4-days of weakness, and investors scooping up beaten up stocks; HOOD rises after Emergent Fidelity Technologies and Sam Bankman-Fried, CEO of FTX Trading, report 7.6% stake in HOOD, saying the shares represent attractive investment; said they intend to hold the shares as an investment, according to the filing

·     Financial Services; PAYO reported strong 1Q22 results (both revenue/EBITDA above consensus) and raised its CY22 guidance, saying it believes it can retain ~50% of the previously excluded ~$46M Russia/Ukraine revenue impact; EXFY strong 1Q results with adjusted EBITDA of $11.0M (consensus $8.4M), on revenue of $40.4M (consensus $39.3M), up 36% Y/Y, down from 57% last quarter, and paid members of 706,000, up 12% Y/Y

·     FinTech & Payments; AFRM a big rebound after quarterly results beat and issued FY rev guidance above views, Q3 revs $354.8M vs. est. $343.64M; active merchants on platform grew from 12,000 to 207,000 Y/Y, and active consumers increased 137% to 12.7M while sees year revs $1.33B-$1.34B above prior $1.31B (lifts shares of UPST); for UPST, Wedbush lowered tgt to $20 and said Kroll Bond Rating Agency (KBRA) data confirmed their prior analysis in which they highlighted the risk of Upstart potentially breaching early amortization triggers

Industrials & Materials

·     Aerospace & Defense; BA rallied early with broader market as attempted to snap 6-day losing streak; MRCY upgraded to BUY and raise our PT to $71 from $60 at Truist citing stock’s recent 25% sell-off (peers down 9%), renewed confidence in organic growth acceleration in FY23+ and strengthening and recessionary-resistant global defense end market

·     Industrial & Machinery; in research in the waste sector, WM upgraded to Neutral from Underperform (tgt to $165 from $155) and RSG to Buy from Neutral (tgt to $150 from $140) at Bank America; Bank America upgraded TEX to buy as sees the stock with a multi-year transformation under CEO Jon Garrison, while downgraded OSK to Underperform and cut tgt to $92 from $103 noting outperformance vs. peer TEX; also at Bofa, downgrade commercial vehicle producer PTRA to underperform with top Machinery pick URI as structurally gaining share, low balance sheet leverage, domestic exposure levered to Infrastructure; Top Underperform is IPGP: wide tail risks given China & Russia exposure, cycle over cycle margin degradation; Bloomberg reported CD&R is said to near $3 billion deal for a unit of ROP

·     Transports; Ryder (R) shares rally after received a takeout bid worth $86 per share in cash from HG Vora Capital Mgmt. after disclosing a 9.9% stake in SEC filing https://bit.ly/3wq506q ; UPS downgraded to Neutral from Overweight at JPMorgan after pressure continues mounting on the U.S. consumer and e-comm growth decelerates; we previously flagged these risks to parcel pricing in early March and April

Technology, Media & Telecom

·     Internet, Media & Telecom: TWTR volatile all day after Elon Musk tweeted that his $44 billion takeover of Twitter is “temporarily on hold” as he awaits data on its proportion of fake accounts; DUOL strong beat and raise quarter with accelerating growth across nearly all metrics including MAUs, DAUs, and subscribers as bookings and revenue came in 9% and 5% above consensus, respectively; SQSP upgraded to Outperform from Neutral and raising PT to $34 from $25 at Wedbush as reported better than expected 1Q22 results, with 2Q guidance in-line; AVYA downgraded at Cowen and cut tgt to $6 from $26 saying weak results and a worse near-term outlook cast doubt on a successful transition to a recurring revenue model.

·     Semiconductors; broad rebound for beaten up semiconductors (SOX -28% YTD) as investors scoop up beaten up tech stocks, semi rally led by AMD, NVDA, MU and equipment names LRCX, AMAT with the SOX rising 4%; Samsung Electronics (SSNLF) is in talks with its clients to produce chips about raising prices as much as 20%, according to Bloomberg – said chip prices may rise anywhere between 15% and 20%, with older legacy chips facing bigger price hikes

·     Software movers; TOST raised top and bottom-line guidance considerably, taking FY revenue growth from 40% to 48% (at the midpoint), and FY EBITDA margin from -9% to -7%; NEWR reported disappointing F4Q22 results and lowered the FY23 outlook, as revs growth decelerated back to <20% and FY23 guide no longer implies acceleration; ENFN delivered a mixed quarter, highlighted by a top-line beat driven by key customer wins, international expansion