Closing Recap

Tuesday, May 17, 2022

Equity Market Recap

·     What looked like another sell the rally type of day after a morning pullback nearly erased sharp overnight gains, stock markets got it together, bouncing significantly as investors (for a change) bought every dip as stocks ended around their best levels. It wasn’t without a few hiccups though as markets slid late afternoon following a Fed Chairman Powell interview, but quickly regrouped as he concluded his remarks. Stock markets have been in a downtrend for weeks on all sorts of broader market fears (inflation, rising rates, geopolitical, supply chain issues), but seeing a little bounce today as the S&P and Nasdaq try to snap their 6-week losing streaks.

·     Retail sales data for April came in slightly better than expected and Home Depot (HD) earnings also allayed fears about slowing consumer spending (though WMT earnings stunk), helping boost consumer discretionary names such as travel, leisure, casinos, and cruise lines. Semiconductors outperformed in tech, with the SOX index rising over 4% behind an analyst upgrade of sector and raised AMD to Overweight. Energy stocks remain strong, while commodity (AA, CENX, FCX, STLD) and industrial stocks jumped after Shanghai reached the threshold of three consecutive days of no community spread cases, meaning they will proceed with lifting/easing lockdown restrictions, and boosted expectations of increased consumption by China.

·     Bank America strategist painted a slightly better n-t environment, but overall bearish in a note today as he said all signs point toward a bear market rally in the near term but warns ultimate lows yet to be reached. Results of the bank’s Global Fund Manager Survey (FMS) are “extremely bearish” with the highest cash levels since 9/11, biggest tech "short" since August 2006, and biggest equity Underweight since May 2020. Global growth optimism is at an all-time low while the fear of stagflation is at the highest since GFC. When it comes to risks, the No.1 tail risk is hawkish central banks, ahead of recession, inflation, and geopolitical risks.

·     Markets may have to start paying attention for employment concerns after recent comments as both WMT (today) and AMZN (recently) raise fears; WMT cited overstaffing as a reason for weaker margins while AMZN talked about downshifting its expenses/headcount, while Wayfair (W) today freezes hiring for 90 days citing macro uncertainty.

Economic Data:

·     Retail Sales for April rose a slightly better-than-expected +0.9% M/M vs. est. +0.8% and +1.4% prior (revised from +0.5%); retail sales ex-gas and autos: +1.0% M/M vs. +0.6% expected; retail Sales (less autos) rise +0.6% M/M vs. +0.4% expected and +2.1% prior (revised from +1.1%). April cars/parts sales +2.2% vs March -1.6%

·     April industrial output rises +1.1% above consensus +0.5% and vs. March +0.9%; Capacity use rate 79.0% vs. est. 78.6% and March 78.2%; U.S. April manufacturing output +0.8%

·     U.S. May NAHB Housing market index 69 versus 77 in April, the lowest since June 2020; May index of current single-family home sales 78 versus revised 86 in April (previous 85); May index of home sales over next six months 63 versus 73 in April

·     U.S. March Business Inventories +2.0% vs. consensus +1.9%; March inventory/sales ratio 1.27 months’ worth vs Feb 1.27 months; business sales +1.8% vs Feb +1.2%

Commodities, Currencies & Treasuries

·     WTI crude oil falls -$1.80 or 1.58% to settle at $112.40 per barrel, after jumping as high as $115.56 a barrel earlier, the highest in about seven weeks as the European Union kept pushing for a ban on Russian oil imports that would tighten supply. Prices retreated midday after Reuters reported that sources said U.S. President Joe Biden’s administration will authorize as soon as Tuesday for U.S. oil company Chevron Corp (CVX) to negotiate with Venezuelan President Nicolas Maduro’s government, temporarily lifting a ban on such discussions. Oil price decline snapped a 4-day win streak. Brent crude futures settle at $111.93/bbl, down $2.31, 2.02%.

·     Gold prices rose $4.90 to settle at $1,818.90 an ounce, its 2^nd straight gain as the dollar tumbled. The U.S. dollar index (DXY) fell -0.8% to 103.30, off recent 20-year highs (snapping its 6-week winning streak), amid mixed economic data and general profit taking after outperformance this year on expectations of rising interest rates from the Fed. Treasury yields higher all day as the 1-year yield topped 2.96%, more than 15 bps off last week lows.

Sector News Breakdown

Consumer

·     Retailers: WMT reported Q1 sales beat but Q1 EPS of $1.30 missed the $1.48 estimate on slightly better comps +3% vs. est. +2% but cuts Q2 EPS view to flat to up slightly from up low to mid-single-digits and lowers year outlook, sending shares lower; TGT expected to report tomorrow morning to see if broad issue or co specific; PLBY Board of Directors has authorized a $50 million common stock repurchase program; ONON 1Q EPS at CHF0.05 vs est. CHF0.08 and EBITDA of CHF 15.7M vs (CHF 4.9) as sales beat and raises guidance; FXLV Q1 EBITDA $17.7M vs consensus $17.2M and revenue $50.0M vs consensus $50.4M; comps +6% – US +40%

·     Housing & Building Products; home improvement retailers benefitted from strong beat and raise results from Dow component HD which posted Q1 EPS $4.09 vs. est. $3.67; Q1 revs $38.91B vs. est. $36.71B; Q1 comp sales increased 2.2% vs. est. loss of (-3.0%) and comparable sales in the U.S. increased 1.7%; raises FY22 EPS view to up mid-single digits from up low single digits and raises FY22 revenue view to up 3% from up slightly (shares of LOW rising in sympathy ahead of earnings results tomorrow); RH announces $500M incremental term debt financing

·     Consumer Staples: TAP downgraded to Market Perform at Bernstein after having rallied 22% year-to-date, outperforming the S&P 500 by 38%; HLF downgraded to Hold from Buy at Argus saying the company is now facing a tough prior-year comparison, with headwinds from rising commodity and freight costs, and management projects declines in both revenue and earnings; DLTR, COST, KR, DG grocers/discounters among decliners after WMT said it saw higher costs for fuel and labor ravage its Q1 bottom line

·     Restaurants: SHAK upgrade from Underperform to Market Perform at Raymond James following the stock’s recent sharp decline (down ~35% YTD), which creates a more balanced risk/reward, though continue to believe post-COVID per-store sales volumes and store margins will likely settle below pre-COVID levels; EAT announced the CEO will retire on June 5th and be replaced by Kevin Hochman, the prior President of KFC US

Energy, Industrials and Materials

·     Aerospace & Defense; BA shares jumped after the WSJ reported Flight data indicates someone in the cockpit intentionally crashed a China Eastern jet earlier this year, according to people familiar with U.S. officials’ preliminary assessment; MAXR downgraded from Neutral to Underperform at Bank America and cut tgt to $25 from $36 as update model post 1Q22 to account for lower revenue and margin expectations; RKLB misses on top and bottom line as Q1 EPS loss (-$0.06) vs. est. loss (-$0.04); Q1 revs $40.7M vs. est. $41.0M; sees Q2 revs $51M-$54M vs. est. $54.3M; AER reported better Q1 EPS, said it will cease all leasing activities to Russian airlines and booked a $2.7B pretax charge in quarter as 113 aircraft and 11 engines remain stranded in Russia; BA tgt cut to $150 from $180 to at Bank America as see a significant number of "unexpected" challenges Boeing could still face in the near term

·     Energy; Reuters reported that the U.S. Government to issue authorization for oil major Chevron (CVX) to engage in talks with Maduro’s government – Venezuelan president Maduro’s government and opposition to announce as soon as Tuesday a plan to restart political talks in Mexico

·     Materials Industrial & Machinery; CAT approved a new $15 billion stock repurchase program and said at its investor day achieved Investor Day targets for adjusted operating profit margin and generated strong ME&T free cash flow; Expecting higher long-term sales growth as energy transition expands Caterpillar’s addressable market; Reaffirming adjusted operating margin targets; fertilizer company shares strong today (MOS, NTR, CF)

·     Transports; UAL guidance lifts airlines after raised its Q2 revenue estimate despite trimming capacity, underscoring booming travel demand and sees 23%-25% RASM/Deutsche Bank noted it’s not too often we observe RASM gains in the mid-to-high teens (occurred in the early 1980s, a few instances in the mid-1990s, 2006, and 2010) – even rarer are RASM gains that exceed 20%; RYAAY upgraded to Strong Buy at Raymond James; Cowen noted U.S. diesel pricing continues to stay elevated, passing along significant costs to shippers via fuel surcharges they believe sustained high diesel pricing will ultimately benefit the railroads as see Eastern carriers NSC and CSX benefiting, and HUBG and JBHT well positioned; in rails, Goldman Sachs noted Total traffic -2.7% YoY in Week 19, roughly in-line with -2.4% YoY in Week 18. Intermodal volumes were -2.7% YoY compared to -4.2% YoY reported last week

Financials

·     Bank, Insurance movers; Citigroup (C) shares rise after a quarterly 13-F filing showed Warren Buffett’s Berkshire Hathaway took a stake in the bank; ALLY also active after regulatory filing showed Warren Buffett’s Berkshire Hathaway Inc acquired a stake in the company; shows Berkshire Hathaway owns 2.78%, or 8.97 million shares, in ALLY as of March 31; VOYA and Allianz Global Investors announce plans to enter long-term strategic partnership, including transition of selected AllianzGI U.S. investment teams to Voya Investment Management

·     Financial Services: UPWK downgraded to Hold at Stifel, incrementally more cautious given (1) the potential setup for a weakening labor environment, (2) the possibility of reduced growth investments / hiring by leading technology companies, (3) recent commentary from FVRR, and (4) the uncertain macro environment; NU solid earnings as top-line and loan volume beat expectations with slightly higher provision for NPLs

·     REITs; ESS upgraded to Buy from Sell at Goldman Sachs as see an improved backdrop for West Coast-based apartment REITs driven by inflecting RTO trends, see a greater appeal for the company’s preferred equity program amidst a tighter financing backdrop, and see upside from moderating supply while also downgrade CPT to Neutral; EQR seen as an intriguing risk/reward at Mizuho as they upgrade to Buy from Neutral, noting the stock has meaningfully lagged Apartment peers and the RMZ over the past two weeks

Healthcare

·     Pharma movers; TEVA upgraded to Neutral from Underperform at Bank America based on valuation and risk/reward as believe recent opioid settlements, progress of other’s (JNJ) toward a global opioid accord and management/media reports that TEVA may be closer to a global opioid deal that comports with our modelled liability, we at least see a potential path to upside if the deal can get done in ‘22E vs. more limited downside at the current company valuation; AVRO reported positive clinical trial results for an investigational gene therapy for cystinosis.

·     Biotech movers: GILD said the FDA lifted a clinical hold placed on the company’s investigational new drug application for injectable lenacapavir; said the FDA had placed a hold on injectable lenacapavir in borosilicate vials due to a vial compatibility issue; DNA 1Q adj EBITDA ($2Mm) vs est. ($28.4Mm) on revs $168Mm vs est. $105.7Mm; sees FY revs $375-390Mm vs est. $333Mm

·     MedTech Equipment; ABT announced yesterday post close that it entered a Consent Decree with the FDA which would create a pathway for the company to reopen in Sturgis, Michigan infant formula plant within two weeks of initial requirements being met; U.S. health regulators took steps to allow more foreign baby formula on American shelves, easing rules that had effectively prevented shipments from many overseas manufacturers. The FDA said it encouraged the overseas manufacturers to apply to ship their formula to the U.S. Government officials said the moves will allow more formula products to enter the U.S. baby market, which is dominated by Abbott Laboratories, Reckitt Benckiser Group PLC, and Nestlé SA’s Gerber business.

Technology, Media & Telecom

·     Internet: TWTR shares slide early, trading down now as much as $20 below its $54.20 per share, or $44 billion deal that Tesla CEO Elon Musk offered, after saying he can’t move forward until the company is clearer about how many of its accounts are fake; SE reported Q1 EPS loss ($0.80) vs est. ($1.17) on revs $2.9B vs est. $2.8B and lowers GAAP revenue for e-commerce to be $8.5B-$9.1B, or 71.8% growth Y/Y at the midpoint of the broader guidance vs. prior view $8.9B-$9.1B; NRDY Q1 revs $46.9M vs. est. $46.7M; but shares slip after guides Q2 revs $37M-$40M vs. est. $45.9M; sees FY22 revs $160M-$175M vs. est. $197.9M; GLBE decreased its 2022 revenue outlook by $23M (down -5%) at the midpoint to $383-403M (+60% y/y); JD reported 1Q22 results that came-in well ahead of moderated expectations

·     Semiconductors: AMD upgraded to overweight from neutral at Piper Sandler, saying that the company’s core businesses are running well and mid-to-long-term catalysts remain intact as it raises its tgt to $140 from $98; TSM has told clients for the second time in under a year that it intends to raise prices, citing inflation worries, rising costs, and its own major expansion plans to help alleviate global supply issues, the Nikkei reported

·     Software movers; WDAY downgraded to Neutral from Buy at UBS ahead of earnings print on May 26th saying after speaking with 9 checks (including 8 partners) to assess the current demand backdrop and Workday’s vulnerability in a downturn – said not convinced that Workday shares fully reflect the risk that back-office HR/Fins projects might be disproportionately delayed; TTWO reported F4Q22 results that were relatively in-line, and provided a FY23 outlook that was more or less consistent with market expectations; ZBRA approves additional $1B share buyback

·     Hardware, Components & Services; for AAPL, KeyBanc said checks showed iPhone 13 sell-through remains resilient amid seasonally slower April; checks indicate customer demand for iPhone 13 in April remained healthy with sell-through largely in line with store expectations, aided by: 1) better supply; 2) tax refunds; and 3) robust foot traffic; 3D company SSYS reported Q1 revs rose 22% to $163.4M, topping consensus of $157.5M with better FY22 rev guidance of $685M-$695M (est. $686.5M), prompting an upgrade at JPMorgan

·     Media & Telecom movers; VZ slipped as Warren Buffett’s Berkshire said it sold nearly all an $8.3 billion stake in Verizon that it had amassed in late 2020, revealed in filing yesterday; PARA rises after Warren Buffett’s Berkshire Hathaway invested about $2.6 billion in during the first quarter of 2022 in the co, according to an SEC filing; TME Total revenue of RMB6.6b (down (15)% YoY and (13)% QoQ), in-line with as online music rev dropped (5)% YoY to RMB2.6b with 18% YoY growth in sub rev offset (41)% YoY decline in sub-licensing and ad revenue; AVYA downgraded to Underweight at Barclay’s (2^nd analyst cut in a week) following recent results