Closing Recap

Monday, May 17, 2021

Equity Market Recap

·     Stocks open this week by retreating from last week’s late rise as investors await the Wednesday release of the FOMC minutes from their April 27-28 meeting (stocks did finish well off their afternoon lows). The recent trend of high-growth tech names facing the most pressure from inflation fears persisted today with the tech-heavy Nasdaq underperforming other major indices. With today’s pullback, the index appears to be in jeopardy of falling for the 5th consecutive week, which would mark its worst streak since it fell 6 straight weeks in Oct-Nov 2012. Amidst these inflation fears, investors fled to precious metals as gold, silver, and copper prices all rose more than 1% and consequently lifting related stocks. The cryptocurrency space, on the other hand, was hammered after Elon Musk’s tweets over the weekend fueled speculation that Tesla had sold its Bitcoin holdings.

·     Sector movers: DISCA opens +10%, AT&T (T) about 4% after announcing a merger between Discovery and AT&T’s WarnerMedia, but both stocks roll to red despite their strong open; VIAC also fell after gapping up on news of a George Soros stake, as other media names CMCSA, CHTR, ROKU, NFLX were weak; Bitcoin plummeted to its lowest price since 2/8 after Elon Musk’s comments over the weekend led speculation that TSLA sold all of its Bitcoin; the entire space was pressured as COIN fell below its $250 reference price for the first time after its IPO more than a month ago and RIOT, MARA, MSTR, SI also falter; prices for Gold, silver, and copper all rise, boosting NEM, NUE to record highs, HL to its 52-week high, and FCX, X, CLF, AUY, AEM also outperform; PLCE surges to its 52-week highs after Wedbush more than triples their previous price target in its upgrade of the stock as retail stocks outperform; data storage stocks WDC, STX led the S&P as they continued their rise last Friday on Morgan Stanley’s note of higher demand due to the new Chia cryptocurrency

Economic Data:

·     NY Fed’s empire state current business conditions index 24.3 in May mostly in-line with consensus of 23.90 and vs. 26.3 in April; NY fed’s empire state new orders index 28.9 in May vs. 26.9 in April; prices paid index 83.5 in May vs. 74.7 in April; employment index at 13.6 in May vs 13.9 in April; six-month business conditions index 36.6 in May vs 39.8 in April

·     NAHB Housing market index 83 (in-line with consensus and April figures); May index of current single-family home sales 88 versus 88 in April; index of home sales over next six months 81 versus 80 in April

Commodities, Currencies & Treasuries

·     Oil prices finish at their highest levels in over 2-years, with WTI crude up $0.90 or 1.4% to settle at $66.27 per barrel with commodity prices extending gains as the dollar remains weak. Optimism that an economic recovery in the U.S. and Europe will lead to higher energy demand also boosted sentiment.

·     Gold futures jumped nearly $30, or 1.6% to settle at $1,867.60 a ounce, its highest levels since the beginning of the year and strongest daily gain in more than week on the back of weakness in the U.S. dollar as well as losses in the U.S. benchmark stock indexes. Also providing support, Federal Reserve Vice Chairman Richard Clarida said the U.S. economy hasn’t hit the benchmark of "substantial further progress" needed for the Federal Reserve to scale back asset purchases.

·     Bitcoin prices (along with the rest of the crypto space) plunged after a tweet from Tesla Inc. Chief Executive Elon Musk prompted speculation that the electric-car maker had sold, or would sell, its holdings of the cryptocurrency. While Mr. Musk later tweeted that Tesla hadn’t sold any bitcoin, the selloff demonstrated his power to shift cryptocurrency markets. Last week, he said Tesla had suspended accepting bitcoin as payment for its vehicles, citing concerns over its carbon footprint.

Sector News Breakdown

Consumer

·     Retailers; PLCE was upgraded to Outperform from Neutral at Wedbush and boost tgt to $150 from $48, reflecting 90% upside from current levels saying approximately 70% of Q3 sales are generated in August and September; UBS raised price tgts for ANF to $50 from 46, FL to $62 from 52, ULTA tgt to $380 from 360 and URBN to $37 from $34; WHR positive mention in Barron’s calling the stock the way to play home appliances demand while noting limited supply has allowed the global appliance leader to pass along price increases in steel and other raw materials to its customers (notes is increasing prices 5% to 12% across the board); PRPL Q1 adj EPS beat by 3c on better revs of $186.4M on better mattress sales and boosted its year outlook to $860M-$900M from $840M-$880M;

·     Auto & Leisure sector; HOG tgt raised to $55 at Citigroup saying Harley has begun 2021 with strong 1Q results where NA retail sales were up +30% and market reaction to the new Pan American 1250 bike is strong; used cars and online dealers mentioned positively in Barron’s (CVNA, SFT, VRM) saying given the ongoing shortage of semiconductor components, there’s suddenly a rip-roaring bull market in used cars, and with dealers not able to keep enough supply; electric vehicle stocks saw early strength (LI, NKLA, RIDE)

·     Housing & Building Products; HOME top shareholder CAS Investments Partners plans to oppose a deal to take the retailer private because it says the $36 per share sale price is too low, the WSJ reported https://on.wsj.com/3tSS59B

·     Consumer Staples; CCEP upgraded to buy from Underperform at Bank America and raise our PO to $75, now based on forward P/E of 16.7x their est., given visibility on sales/profit runway; RBC Capital raised tgt on STZ to $300 as believes that improved capital allocation should push STZ shares to a new horizon; in tobacco, on May 14th ITC Judge Clark found that PM infringed on two of the three patents in question on a BAT lawsuit

·     Restaurants; TXRH was upgraded to Buy at Deutsche Bank with $116 tgt following the recent pullback, as we now see ~18% upside potential to our price target of $116, which represents our current base-case thinking; Piper said April/May checks suggest trends are improved sequentially with all concepts in positive territory with improving momentum into May and remain committed to top investment recommendations including EAT and SYY following structural changes, CMG and WING based on compounding global growth, and WEN as it related to low-ticket, high-frequency franchised models at scale

Energy

·     Energy stock movers; the sector was one of the bright spots today, with major oils, service, equipment and E&P names mostly higher as oil rose; in research, Mizuho upgraded OVV to buy, and said top picks remain COP, DVN, RDS, and XEC as they raise oil levered price tgts under coverage by 17% – says prior bull case of $70/bbl Brent is now the base case due to stronger than expected demand and an increasing likelihood that global demand hits pre-pandemic levels by 4Q21. We are raising our 2021 and 2022 Brent forecast to $66/$70/bbl from $60/$60/bbl.

·     U.S. oil output from seven major shale formations is expected to climb by 26,000 barrels per day (bpd) in June to 7.73 million bpd, the first rise in three months, the U.S. Energy Information Administration said in a monthly forecast on Monday. The biggest increase is set to come from the Permian, the top producing basin in the country, where output is expected to rise by 54,000 bpd to about 4.59 million bpd, the highest since March 2020.

·     Pipelines: Argus upgraded WMB to Buy after the company’s EPS topped their estimate and consensus earlier this month, operate pipelines with long-term contracts that are less susceptible to commodity price risk, and will benefit as natural gas continues to displace oil as the U.S.’s energy source; Piper increased their price targets on pipelines but also said the big move in equities has narrowed the return potential of the group, though they remain attractive for income-oriented investors, and named ET and EPD as their favorite names within the group

·     Utilities & Solar; NOVA offered privately $500 mln 5-yr convertible senior notes as plans to use net offering proceeds to repay debt, for other general corporate purposes, and to finance/refinance eligible "Green Projects"; activist investor Elliott Management is urging DUK to consider separating into three companies, WSJ reports, in what would be a major transformation of the company. https://on.wsj.com/3tVRVhG ; coal stocks surge (BTU, CEIX, METC, HCC) alongside a rally in natural gas futures, sparked by forecasts for warmer than normal U.S. weather over the next two weeks, which traders apparently figure will lift demand for the power-plant fuel and strain supplies

Financials

·     Bank movers; Baird downgraded ZION to Underperform due to its generally weak setup given its elevated forward P/PPNR valuations with consensus NII estimates that seem high and are not accounting for the eventual roll-off of PPP income; Wells raised their pt on PNC to $232 from $230 after raising their estimates for the 4^th time in as many months after Friday’s news that the bank is now targeting June 1 to complete its acquisition of BBVA USA, which is sooner than previously expected

·     FinTech & Payments; Goldman initiated OPEN at Neutral with a $17 target as it is well positioned to transform how homes are bought and sold, but is currently trading at an appropriate valuation; SQ announced a $2B offering of senior notes

·     Consumer Finance; JPM credit card delinquency rate 0.78% at April end vs 0.89% at March end, credit card charge-off rate 1.97% in April vs 2.03% in March; COF April domestic credit card net charge-offs rate 2.40 % vs 2.41% in March, 30+ day performing delinquencies rate for domestic credit card 1.92% at April end vs 2.24% at March end; DFS reported charge-offs for April of 2.55% vs. 3.98% YoY, April delinquencies 1.69% vs. 2.56% YoY and April total card loans $67.0 billion (-5.6% YoY); SYF April net charge-off rate 3.24% vs. 3.72% in March

·     Bitcoin news; Bitcoin prices dropped to an overnight low around $42K, along with a plunge in other crypto currencies ($ETH Ethereum overnight low around $3,100 and Bitcoin cash $BCH low under $1k) after a Twitter war broke out over the weekend between Musk and bitcoin fans, with TSLA CEO Musk suggesting Sunday that Tesla has already or intends to unload its $1.5B in Bitcoin holdings before Musk clarified comments overnight in a tweet saying he has not sold any Bitcoin

·     Real estate & REITs; Barron’s surmised that BXMT and KREF will benefit from the reopening despite not offering much growth as each yield about 8% and should be able to maintain or lift distributions as commercial real estate improves; Bank of America downgraded NYMT to Underperform and kept its $4.50 pt after shares have outperformed peers but do not have any near-term catalysts, and also downgraded CWK to Underperform on valuation and its lesser exposure to cyclical capital market activity; KeyBanc upgraded AAT to OW because of the stronger-than-expected recovery in the West Coast and Hawaii with potential for a strong inflection in fundamentals and earnings growth into next year; Berenberg upgraded PEAK to Buy with a $37 target; Barron’s said that RLGY shares look cheap as the owner of familiar brands like Century 21, Coldwell Banker, and Corcoran has rebounded from pandemic lows but still trades at just a third of its all-time high

Healthcare

·     Pharma movers; APLS said the U.S. FDA approved its EMPAVELI for treatment of adults with paroxysmal nocturnal hemoglobinuria, an acquired blood disorder; ADMP announces that it has resubmitted the New Drug Application for ZIMHI, a naloxone injection product candidate intended for the treatment of opioid overdose, to the U.S. FDA.; SNY reported that its Phase 2 trial of its adjuvanted recombinant COVID-19 vaccine candidate achieved strong rates of neutralizing antibody responses, with 95%-100% seroconversion following a second injection all age groups

·     Biotech movers; MRTX was downgraded to Perform from Outperform at Oppenheimer and cut tgt to $160 from $245 saying they are concerned about the potential for adagrasib to catch up in the KRAS inhibitor competitive arena; INCY announces positive results from phase 3 true-v program evaluating ruxolitinib cream in patients with vitiligo/primary and key secondary endpoints met in both true-v1 and true-v2 studies; REGN and SNY announce detailed results from a Phase 3 trial in which Dupixent (dupilumab) significantly reduced severe asthma attacks, and improved lung function in children aged 6 to 11 years

·     Healthcare Services; AMWL upgraded to Buy with $15 tgt at Guggenheim saying with the significant selloff last week and consensus estimates coming down to more reasonable levels, they now believe the setup for the stock is much improved; CRL signed a definitive agreement to acquire Vigene Biosciences, Inc., a premier, U.S.-based gene therapy contract development and manufacturing organization for $292.5M in cash; UNH files prospectus for potential 5-part notes offering

Industrials & Materials

·     Industrials & Transports; JBLU announced CFO Steve Priest steps down effective June 11; as internal choice Ursula Hurley named acting CFO; UNP files prospectus supplement related to a potential three-part note offering; UAL said it will be adding more than 400 daily flights to July schedule and increasing service to reopened European destinations; CMI was upgraded to Buy at Bank America; in rails, KSU shares dipped falls after regulator says merger waiver provision does not apply to Canadian National offer

Technology, Media & Telecom

·     Internet; SPOT shares slipped after AAPL Music announces spatial audio with Dolby Atmos; will bring lossless audio to entire catalog and says is coming to subscribers June 2021 at no additional cost; AMZN announced that going forward, its high-quality streaming tier, Amazon Music HD, will be available to all eligible Amazon Music Unlimited subscribers at no extra cost; BIDU, VIPS shares active after a report billionaire George Soros’s investment firm bought stocks linked to Archegos meltdown as they were being sold off (as well as VIAC, TME)

·     Semiconductors; semi’s got a boost on Friday after reports that lawmakers in Washington are close to unveiling a $52 billion dollar proposal to aid U.S. microchip production. Today prices hit again as rising Covid cases in Taiwan prompted shutdowns in Taipei and New Taipei over the weekend, weighing on semis as Taiwan is home to some of the world’s largest semi foundries

·     Media & Telecom movers; AT&T Inc. (T) and DISCA reached a deal to combine their media assets into a new publicly traded company, unwinding the telecom company’s big bet on entertainment after less than three years. The new company will be led by current Discovery CEO Zaslav. In exchange, AT&T said it would receive $43B of cash, debt securities and WarnerMedia’s retention of certain debt; CCO said it plans to offer $1.05B principal amount of Senior Notes due 2029 in a private offering; VIAC shares active after a report billionaire George Soros’s investment firm bought stocks linked to Archegos meltdown as they were being sold off (VIAC, TME