Closing Recap

Wednesday, May 25, 2022

Equity Market Recap

·     U.S stocks teetered between gains and losses this morning ahead of the Fed minutes of the May policy meeting. Stocks then jumped, dumped, and then spiked following the digestion of the commentary at 2:00 PM, with major averages surging in the final hour of trading, before slipping into the bell. With today’s advance, major averages are on track to snap their lengthy weekly losing streaks, with the S&P and Nasdaq riding 7-week losing streaks and Dow 8-week. Markets remain on edge with rising expectations for aggressive rate hikes in upcoming Fed meetings, but supply chain issues can’t be fixed by central bankers, as they can’t drill for oil, grow more crops or repair global supply chains. That means the only quick fix available for cooling the fastest inflation in four decades may be raising interest rates so much that they can send the economy into recession. Homebuilders outperformed behind better results from TOL overnight, a nice rebound after the recent pullback on slowing housing data and rising interest rates fears impacting mortgages (and rates); software center stage tonight with SNOW and SPLK earnings as well as NVDA in the semiconductor sector (group surged). Consumer discretionary and retail also rebounded after recent earnings weighed on the group.

·     FOMC Minutes from the May meeting: All participants at the Federal Reserve’s May 3-4 policy meeting backed a 50bps rate increase to combat inflation they agreed had become a key threat to the economy’s performance and was at risk of racing higher without central bank action. The 50-basis-point rate increase this month was the first of that size in more than 20 years and has set the Fed on course for a quick tightening of monetary policy, with "most participants" judging that further half-percentage-point increases would "likely be appropriate" at upcoming Fed sessions in June and July, according to the minutes, which were released on Wednesday.

·     JP Morgan equity quants said that potentially more than $250 billion could flow into stocks by the end of June as American mutual funds and pension funds, along with foreign pensions and sovereign wealth funds, "rebalance" by buying stocks and selling bonds to compensate for the latest drop in stocks. In their latest report on equity flows and liquidity, the team said it expects between $34 billion and $56 billion of buying by "balanced" mutual funds (that is, funds that aim to maintain a 60:40 weighting of stocks to bonds in accordance with the principles of Modern Portfolio Theory). https://on.mktw.net/3wRUu7U

·     This is the 4th worst start to a year in history for the S&P 500, down 17.3% in the first 99 trading days. The only years with a worse start: 1932 (Great Depression), 1940 (World War II), 1970 (Vietnam War, US Recession) as per Charlie Bilello. He also noted that after 144 consecutive monthly increases (12 years), the US Money Supply declined in April for the first time since March 2010. The year-over-year growth rate of 8% is the slowest since Feb 2020.

Economic Data:

·     Durables Goods Orders for April rose +0.4% vs. est. +0.6% and vs. March downwardly revised reading of up +0.6% from +0.8%; April Durables ex-defense orders +0.3% vs. est. 1%; Machinery orders +1.0%, electrical equipment -0.1% and defense aircraft/parts +1.0%; April Durables shipments +0.1% vs March +1.4%

Commodities

·     Oil prices rose with WTI crude +$0.56 or 0.51% to settle t $110.33 per barrel, helped by tight supplies and the prospect of rising demand from the summer driving season. Diesel June futures settle at $3.8664 a gallon and gasoline June futures settle at $3.8317 a gallon. Prices slipped earlier after a weekly EIA report that showed refinery activity speeding up to its highest level since before the pandemic hit.

·     Natural gas prices topped $9.00 per mln BTUs today (started the year around $3.50), rising to fresh 13-year highs and are up nearly 150% this year alone as much higher prices in Europe and Asia kept demand for U.S. LNG exports strong, especially since Russia’s Feb. 24 invasion of Ukraine boosted fears Moscow might cut gas supplies to Europe.

·     Gold prices retreat following 4-day rally, falling -$19.10 or 1% to settle at $1,846.30 an ounce ahead of the release of the Federal Reserve’s early May policy meeting for hints about its future policy course.

Currencies & Treasuries

·     The U.S. 10-year treasury yield fell below 2.71% this morning after the weaker Durable Goods data, lowest since April 14 before rebounding back above 2.75%, and strength on the long-end of the curve ahead of the FOMC May meeting minutes were released at 2:00 PM.

·     The U.S. Treasury sold $48B in 5-year notes at a yield of 2.736% vs. 2.732% when issued prior, with the bid-to-cover (demand) at 2.44 vs. 2.41 prior auction and indirect bidders awarded 62.93% of auction (vs. 64% prior) and directs 20.03%

·     U.S. dollar rebounded after a week of declines, with the dollar index (DXY) +0.5% to 102.30, rising into the FOMC May policy meeting minutes this afternoon. The buck had pulled back from 20-year highs last week as the ECB gets more aggressive with its rate hike outlook. Bitcoin prices rebounded but remained below the key $30,000 psychological level.

Sector News Breakdown

Consumer

·     Apparel Retailers & Department Stores: JWN boosted its annual profit and revenue forecasts counting on demand from affluent consumers to help it overcome decades-high inflation (revs guided to +6-8% vs est. +5%; board authorized new $500Mm share repurchase program); EXPR Q1 sales rose 30% Y/Y to $450.8M, topping ests $435.3M, raises full year comp sales outlook to +8%-10% and provides outlook for a mid-single digit increase in Q2 comps; BIRD entered into a retail partnership with department store owner Nordstrom; URBN 1Q EPS was below cons. due to lower-than-expected GM and SG&A deleverage on lighter revs $1.5B vs. est. $1.7B; CAL strong beat with EPS $1.32 vs Street at $0.83 and raised the year by the beat on strong footwear; KSS shares popped after Reuters reported bidders competing to acquire Kohl’s are preparing to make binding offers that are lower than the indicative bids they submitted earlier this year to reflect the market downturn https://bit.ly/39VLVRG

·     Broadline, DKS reported a top/bottom line beat – EPS $2.85/$2.7B vs. $2.47/$2.59B) on smaller comp store sales decline of (-8.4%), but cut its FY22 adj EPS view to $9.15-11.70 from $11.70-$13.10 (est. $12.56) and cut FY22 comp sales view to (8%)-(2%) from (4%)-flat (shares of ASO, HIBB, BGFV in sympathy – as well as golf names ELY, GOLF); COST to report earnings tomorrow; BBY bounces a second day despite EPS miss and lower guide – Citi cut tgt to Street low $65 saying there continues to be “significant risk” to 2H estimates and multi- year earnings power amid worsening economic conditions (also downgraded at Barclay’s)

·     Housing & Building Products; homebuilder jump (DHI ) as TOL 2Q EPS of $1.85 exceeded consensus of $1.50 per share based on higher-than-expected adjusted gross margins (26.1% vs. consensus of 25.8% and guidance of 25.5%) and slightly higher closings but comment that demand has "moderated" over the past month in terms of post-quarter activity; mortgage rates dip on week as the MBA reported 30-year mortgage rate decreases 3 bps to 5.46%, the mortgage purchase index rises 0.2%, refinancing index falls 3.9%

·     Restaurants & Consumer Staples; GIS said it agreed to sell its Helper main meals and Suddenly Salad side dishes businesses to a portfolio company of private-equity firm Kelso & Co. in a cash deal valued at about $610 million; WEN rises after its largest holder Trian proposed a potential acquisition of the fast-food chain; Nelson Peltz’s Trian Partners disclosed owning a total of 41.6M shares, or a 19.4% stake, in a 13D filing; Early votes have Icahn coming up short in proxy fight with MCD the WSJ reported

·     Casinos, Gaming, Lodging & Leisure sector; LYFT said it will slow hiring and dial back on spending as the company responds to Wall St concerns about margins/profitability; seeing strength in gun stocks (SWBI, RGR) on fears of increased regulation, bills making it harder to acquire guns after horrific school shotting in Texas

Energy

·     Energy stocks: investors continue to pile into with energy prices broadly higher (oil, gasoline, natural gas); Inventory data showed: API weekly data reported another large draw in gasoline inventory, falling 4.2mn barrel versus a 0.6mn draw expected, following 4.7mb draw the week before. Crude inventories rose 0.6mb versus a draw of 0.7mb expected. This morning, the EIA showed crude stocks in SPR last week fell to its lowest since sept 1987. Crude Oil Inventories Actual -1.019M (Forecast -2.129M, Previous -3.394M), Distillate Inventories Actual 1.657M (Forecast 1M, Previous 1.235M) and EIA Gasoline Inventories Actual -0.482M (Forecast -1.641M, Previous -4.779M)

·     E&P and Majors; EQNR said it has exited its Russian joint ventures due to the war in Ukraine, in line with plans first presented on Feb. 27; in research, Barclay’s upgraded FANG to OW from EW based on Q1’22 being the clearing event the stock needed and increasing cash returns in H2’22. They like DVNs Delaware, efficiencies, discipline, and cash return leadership but downgrade to EW based on recent stock outperformance; shares of RRC, SWN, CTRA, CHK outperform in natural gas sector on surging prices; in pipelines: MMP upgraded from Neutral to Overweight at JPMorgan as raises tgt to $57 from $52 saying while inflation fears permeate the market, MMP stands well positioned to benefit from higher inflation.

·     Utilities & Solar; SRE to sell about 2.25 million tonnes per annum of liquefied natural gas (LNG) to Germany’s largest power producer, RWE AG, which is trying to wean itself off Russian gas; TotalEnergies SE said it would buy a 50% stake in U.S. renewables company Clearway Energy Group, in a deal worth about $2.4 billion. The co is acquiring the stake from Global Infrastructure Partners for $1.6 billion in cash plus an interest in a TotalEnergies unit that owns about half of U.S. residential solar business SunPower Corp. (SPWR)

Financials

·     Bank, Brokers & Exchanges: little rebound for financials, trying to build on Monday strength post JPM investor day; CME upgraded from Perform to Outperform at Oppenheimer and introducing a price Target of $223 predicated upon assumption that no extreme events and recession are imminent, and there is a defensive angle in this call-in light of current volatility and uncertain environment; Treasury yields teetered between gains and losses after mixed data

·     Lending, FinTech & Payments; Visa (V) added to US 1 List at Bank America and removed MA; COOP said expects roughly break-even net income in q2, excluding potential mark-to-market gains on its MSRS and severance charges/reduced originations pretax operating income guidance for Q2 to $40M-$50M

·     Financial Services; INTU delivered upside to FY3Q expectations and raised full year targets as growth was broad-based across all segments, with Credit Karma growing +48% Y/Y; EFX, TRU shares active after the WSJ reported Lawmakers are probing how Equifax Inc., Experian Plc and TransUnion handled consumer complaints about errors on their credit reports during the pandemic

Healthcare

·     Biotech & Pharma movers; Wells Fargo said despite recent weakness in ABBV, this stock is their top pick given its strong growth prospects post-2023 and multiple meaningful catalysts over the next 12-18 months; VRCA tumbles after announced that the FDA has issued a Complete Response Letter (CRL) regarding its New Drug Application for VP-102 for the treatment of molluscum contagiosum; KDNY 6.429M share Spot Secondary priced at $14.00; KPTI doses first patient in EMN29/XPORT-MM-031 study; TEVA reaches pact with West Virginia to settle state’s opioid suit as total settlement value $110M

·     MedTech Equipment; OSUR said its InteliSwab Covid-19 Rapid Test has been selected by the US Department of Health and Human Services to be distributed to schools nationwide; ABT said it plans to restart manufacturing formula at its plant in Sturgis, Mich., on June 4, and it will prioritize production of EleCare, a hypoallergenic, amino acid-based formula.

Industrials & Materials

·     Aerospace & Defense; National reconnaissance office announced results of largest-ever commercial imagery contract effort, awarding electro-optical commercial layer (EOCL) contracts to MAXR, BKSY and PL which all surged; AJRD sets shareholder meeting on June 30 to vote on rival board slates, the WSJ reported

·     Industrials, Metals & Materials; APD was upgraded to Overweight from Neutral at Atlantic saying industrial Gases stocks provide relatively defensive growth and the industry has proven pricing power that means even extreme inflationary pressures are quickly recovered; DY jumps after Contract revenues grew +20.45% Y/Y to $876.3M and adj EBITDA rose +44.56% to $63.72M; VVV shares jumped midday after the WSJ reported Aramco approached Valvoline about takeover saying deal talks are early-stage https://on.wsj.com/3yYqiuA

Technology, Media & Telecom

·     Internet, Media & Telecom movers; U.S. listed China stocks (BABA, BIDU, JD, PDD) remained pressured after falling Tuesday as reports of "significant issues" not yet resolved to reach deal with China on auditing US-listed companies; SHOP pressured early after a second prominent shareholder advisory firm ISS joined its peer Glass Lewis & Co to oppose its plan to give CEO Tobi Lutke a special “founder share” that will preserve his voting power; SNAP shares rebound from worst single-day slide after profit and revenue warning (fell over 43%) while other social media names recover as well ETSY, PINS, FB; CARG raised Q2 guidance at its investor day $0.27-0.30 v $0.29e (prior $0.26-0.29), Rev $490-520M v $501Me (prior $480-510M)

·     Digital advertising names, which were crushed yesterday due to SNAP negatively pre-announced Q2 yesterday, citing a further and faster deterioration of the macro than they expected when they issued guidance back on 4/21; RBC Capital said today they caught up with 10 public and private ad-tech vendors after Snap negatively pre-announced and said the reaction from the ad-tech vendors spoken to, which included TTD, DV, PUBM, and MGNI was surprise, as not one of the 10 companies has seen an incremental negative impact from a worsening macro since Snap guided on 4/21

·     Semi’s & Software movers; NOW held its Analyst Day yesterday where it raised FY24 and FY26 targets from the prior mid-term guidance issued last year – the company is now looking for over $11B in subscription revenues, up from the prior forecast of $10B; ORCL names INFA a preferred partner for enterprise cloud data integration and data governance for data warehouse and Lakehouse solutions; SNOW, SPLK, ZUO earnings tonight in software, NVDA in semis

·     Hardware & Components: AAPL weak initially after reports iPhone development schedule hit by China lockdowns, citing the Nikkei Asia; also, Loop Capital cut tgt to $180 from $210 saying Wall Street’s estimates for iPhones shipped in the June quarter may be too high; DELL added to Tactical Outperform List, $60 PT at Evercore/ISI; RAMP rises on earnings

·     IT Services; ASGN downgraded to Underperform at Credit Suisse and cut tgt to $90 from $110 saying while view it is one of the highest quality companies in our staffing coverage, the macro environment has become too uncertain to remain Neutral at current levels; TWOU downgraded to Underweight at Piper amid increased regulatory risk related to revenue sharing arrangements, University partners looking to in-source online program management, and potential pressure from digital learning fatigue and in-person return