Closing Recap

Thursday, May 26, 2022

Equity Market Recap

·     Rally caps were out on Thursday, as solid reports in retail helped ease some of the recent gloom in the sector, but the rally was broad based on a slow, light volume rally heading into the three-day holiday weekend. Also helping matters, weak economic data as sentiment is starting to shift that the Fed may not be as aggressive as indicated in recent weeks amid signs of a slowing economy and as inflation may have peaked. All 11 S&P sectors were higher with Consumer Discretionary leading and Healthcare the weakest. Travel and leisure stocks jumped behind upbeat forecasts from airlines (LUV JBLU) on strong summer demand. The tech heavy Nasdaq rose around 3% as shares of NVDA recovered from overnight declines to rise 5% after mixed quarterly results (beat for qtr, lower guidance). After being punished for weeks after a quarterly miss or lower guide, some stocks have since rallied post weak results, a sign that the Ukraine/Russia impact, supply chain issues and inflation worries are possibly being “baked-in” at this point. Retail earnings from Macy’s, William-Sonoma, and dollar stores DG and DLTR helped the sentiment today. It was a nice catch-up day for markets as the S&P and Nasdaq remain on track to snap their 7-week losing streaks while the Dow rises a 5^th straight day, on pace to snap its 8-week losing streak. Coming into today: as nearly all 11-S&P Sectors jumped on the day, reminder of 2022 S&P Sector Returns: Energy (XLE) +58%, Utilities (XLU) +5%, Consumer Staples (XLP) -3%, Materials (XLB) -6%, Health Care (XLV) -6%, Financials (XLF) -10%, Industrials (XLI) -11%, Real Estate (XLRE) -15%, Tech (XLK) -22%, Communications (XLC) -25% and Consumer Discretionary (XLY) -28%.

Economic Data:

·     GDP data out this morning as 1Q Prelim GDP (-1.5%) vs. (-1.3%) consensus and (-1.4%) initial estimate and +6.9% in Q4. Inflation readings show: PCE price index: +7.0% vs. +7.0% prior, core PCE prices +5.1% vs. +5.2% consensus and 5.2% prior; Q1 Prelim Real Final Sales (-0.4%) vs. advance (-0.6%); q1 exports (-5.4%) from (-5.9% prior), imports +18.3% vs. +17.7% prior

·     Weekly Jobless Claims fell to 210,000 in latest week from 218,000 prior and consensus 215,000; the 4-week moving average rose to 206,750 from 199,500 prior; continued claims rose to 1.346M in latest week from 1.315M and U.S. insured unemployment rate rose to 1.0% from 0.9%

·     Pending Home Sales (M/M) for April fell (-3.9%) vs. est. (-2.1%) and prior month (-1.6%); on a Y/Y basis, Pending Home Sales NSA (Y/Y) (-11.5%) vs. est. -7.6%)

Commodities

·     Oil prices climb $3.76 or 3.41% to settle at $114.09 per barrel, fresh two-month highs in a mass “risk-on” day that saw stocks and commodity prices outperform. Prices were buoyed on signs of tight supply ahead of U.S. summer driving season. Brent rose for its sixth straight daily gain and highest close since March 25. WTI was headed for its highest close since March 23. OPEC+ meets on June 2 and is expected to stick to an oil production deal agreed last year and raise July output targets by 432,000 barrels per day, six OPEC+ sources told Reuters.

·     Natural-gas prices slide off earlier 14-yr highs, snapping the 3-day win streak; Natural gas prices give up earlier gains to finish the session 0.7% lower at $8.908/MMBtu in what was expiration-day for the front-month June delivery; holding above the $9.00 mln btu level ahead of air-conditioning season, adding pressure to household budgets and manufacturing costs. Futures for June delivery rose to $9.30 per million British thermal units, up more than 25% this month. Prices have tripled over the past year and haven’t been so high since 2008. U.S. gas inventories ended last week more than 15% lower than the five-year average, the EIA said.

·     Gold prices edge slightly higher, rising $1.30 to $1,847.60 an ounce, getting a boost from a weaker dollar. Minutes of the Fed’s May 3-4 policy meeting yesterday highlighted most participants favoring additional 50 basis point rate hikes at the June and July meetings, but the outlook after hat appears uncertain, giving markets a boost.

Currencies & Treasuries

·     A wild ride for Bitcoin and other crypto today, with Bitcoin hitting lows of $28,000 down over 3% before rebounding back to $29,500 along with other crypto names (Litecoin, Ethereum) off lows Bitcoin trades more than 55% below its all-time high in November. The US dollar dipped against the euro and is slightly stronger against the yen as the DXY (dollar index) dipped below the 102 level (off 20-yr highs above 105 2-weeks ago). The Russian Rouble extended losses, falling more than 9% on the day to 65.13 vs dollar after the Bank of Russia Thursday lowered its key interest rate to 11% from 14%, cutting its key interest rate for a third time since early April.

·     The U.S. Treasury sold $42B in 7-year notes at a yield of 2.777% vs. 2.801% when issued prior, with the bid-to-cover at 2.69 (vs. 2.41 prior) and indirect bidders awarded 77.86% (vs. 65% prior auction) of the auction and directs 15.76% (strong auction) that pushed Treasury yields off their highs (10-yr was around 2.8% prior to auction). CNBC noted dealers only took 6.4% of 7-yr auction (lowest on record), meaning investors took the rest. Despite the strong auction, yields still end higher almost across the board (short-term yields lagged).

Sector News Breakdown

Consumer

·     Retailers: Department store Macy’s (M) 1Q adj EPS $1.08 vs est. $0.82 on comps +12.8% owned (+12.4% owned & licensed), inventory +17% Y/Y (-10% vs 2019), gross margin 39.6% vs 38.6% (merch margin up on higher avg unit retail, lower promos); guides FY net sales $24.46-24.7B vs est. $24.5B and adj EPS $4.53-4.95 vs est. $4.34 and prior guide $4.13-4.52; off-price retailer BURL missed on both top and bottom lines with a sharp -18% drop in comp sales (vs. ests for decline of -14%) – follows better TJX results and weak ROST results in the space; LULU upgraded to OW at Morgan Stanley calling it a topline grower, supported by compelling secular tailwinds, a market share gain opportunity, & credible future revenue drivers; DXLG, GCO, GES, MOV, BKE among other retailers with earnings today; ELY announces new $100M stock repurchase program

·     Dollar stores with earnings: and reacting well to them as DG Q1 EPS of $2.41 beats by 10c as sales rose 4.2% to $8.75B vs. est. $8.71B, reports Q1 merchandise inventories $6.1B vs. $5.1B a year ago and sees FY sales about +10% to +10.5%, saw about +10% and backs EPS growth of 12%-14%; DLTR Q1 EPS $2.37 vs. est. $2.00 as revs of $6.9B top $6.76B estimates, as Q1 comps rose 4.4% vs. est. +2.1%, Gross profit margin 33.9% vs. 30.3% y/y, estimate 31.5%, but guides Q2 EPS $1.45-$1.55 below est. $1.73B and mid-point of sales view $6.5B-$6.78B misses the $6.75B est.

·     Housing & Building Products; home retailer WSM rises on results as Q1 EPS were $3.50 vs est. $2.90 on revs $1.89B vs est. $1.81B, comps +9.5% (incl pottery barn +14.6% and west elm +12.8%); reiterates FY and long-term outlook (shares of RH, W, ETH also active on results); broad strength in home improvement retail as well with HD, LOW rebounding as well

·     Restaurants & Consumer Staples; ELF reported F4Q22 results with sales and adjusted EBITDA ahead of consensus, $105mm, consensus $91mm, and $13mm, consensus $11mm, respectively; KHC downgraded to Sell at UBS saying if the company is not able to pass through pricing in 2H22, they believe this would serve as a negative catalyst to the shares; SYY upgraded to Overweight and $90 tgt at JPMorgan saying after mgmt meeting, came away with a sense of comfort in the near term, and considerable supply chain and sales-driven work was accomplished to transform the medium term of the business; FLO increases share buyback plan to 25.4m shares; JACK weaker Q2 results ($1.16/$322.2M vs. est. $1.38/$340.8M) and weaker guide for FY22 EPS $5.80-$6.10 vs. est. $6.59;

Energy

·     Energy stock movers: Reuters reported this morning that OPEC+ set to adhere to policy at June 2 meeting, raising July output targets by 432,000 bpd – citing six OPEC+ sources. British officials said Thursday they will introduce an "energy profits levy" of 25% that will eventually phase out as oil and gas prices decline. They said the surcharge amounts to an additional tax on top of current rates, effective immediately and lasting potentially to the end of 2025 (could impact BP, SHEL)

·     E&P and Majors; SHEL is in talks with a consortium of Indian energy companies to sell its stake in a major liquefied natural gas plant in Russia which the British company abandoned following Moscow’s invasion of Ukraine, three sources told Reuters; RRC, SWN, AR another strong day of gains on surging natural gas prices

·     In equipment, JPMorgan upgraded PTEN to Neutral while downgraded PUMP to Underweight in the U.S. pressure pumping market, as expect for tight conditions to persist in frac through at least 2023 driven by supply attrition, fleet cannibalization, and increased horsepower requirements at the wellsite – top picks remain OW-rated HAL and NEX

·     Pipelines: ENB it would build a pipeline project to supply natural gas to Venture Global LNG’s Plaquemines liquefied natural gas (LNG) export facility in Louisiana.

Financials

·     Bitcoin, FinTech & Payments; a wild day in crypto wit Bitcoin hitting lows around $28,000, falling 3% before rebounding back to $29,500; shares of crypto leveraged stocks such as MSTR, COIN, MARA, RIOT, SI, and other started the day weaker with Bitcoin, but rallied along with the bounce in stocks; COIN was initiated with an Outperform and $85 tgt at Cowen

·     Staffing & Services; BMO Capital with several downgrades, cutting ASGN to Market Perform calling it the best positioned in out-of-favor sector as believe it is relatively more insulated against economic cyclicality than its staffing peers. Firm also downgraded MAN to Market Perform from Outperform as part of our sector downgrade citing its sizable European exposure (about 65% of 2022E revenues), the stock had been lagging its US-based peers; cuts RHI to Market Perform noting slowing staffing-related indicators, negative investor sentiment and downgraded shares of TBI for four downgrades in staffing space

Healthcare

·     Pharma & Biotech movers; AVDL falls as FDA cites patent issue in sleep disorder drug FT218 filing; expects tentative approval in 2023; NRXP said that its ACTIV-3b study for experimental COVID-19 drug Zyesami (aviptadil) did not reach key goals; CTMX said the first patient was dosed in a phase 1 dose-escalation study of CX-904 in patients with advanced solid tumors.

·     MedTech Equipment; MDT reported Q4 results that missed expectations and fell short of guidance issued months ago (EPS $1.52/$8.09B vs. est. $1.56/$8.42B) while guides Q1 EPS $1.10-$1.14, consensus $1.40 and sees Q1 organic revenue down 4.5%-5.5% with lower FY outlook; APYX said it has received 510(k) clearance from the U.S. FDA for the use of the Renuvion Dermal Handpiece for specific dermal resurfacing procedures; ABT said it is actively developing a test for monkeypox, as the disease spreads in various countries.

·     Healthcare Services; Several changes in managed care at Bank America as they double downgraded MOH to Underperform from Buy saying the industry is going to have to manage through rapidly declining Medicaid membership, as well as the expiration of the expanded ACA subsidies, which not only would slow growth, but could cause a risk Pool shift in both the Medicaid and exchange businesses – Bofa also downgraded CNC to Neutral from Buy and trim tgt to $90 from $95 as sees greater medical loss ratio uncertainty into 2023 and cut OSCR to Neutral. The firm upgraded CI from Underperform to Neutral on what we see as a stronger than average growth outlook for commercial and PBMs and raised ALHC to Buy as sees an improving risk/reward profile with a "relatively strong setup" into 2023 for the company

·     In drug distributors, ABC was upgraded to Overweight at Barclay’s and up tgt to $182 as believes the company will showcase positive specialty drug distribution industry trends that will drive 10%-13% long-term earnings growth at next week’s investor day; while the firm downgraded CAH to Equal Weight with a price target of $64 from $70 saying the company should benefit from outsized traditional generic pipeline tailwinds, but it has less leverage to faster-growth specialty drug distribution versus peers and a further inferior asset mix (projects only 6%-8% long-term earnings growth for Cardinal versus 10%-14% for peers)

Industrials & Materials

·     Industrial & Machinery; in rental sector (URI ), UBS said its April’s survey bullish for rental industry saying rental rates score improved m/m to 8.10, the third highest score on record; TITN advanced following quarterly results in machinery

·     Transports; airlines with better monthly metrics as JBLU raised guidance after saying the demand environment continues to be strong with bookings exceeding its expectations – now sees Q2 revenue at or above high-end of previous guidance range of 11% to 16% growth vs. the 2019 level and expects flown capacity for Q2 to increase in a range between 2%-3% (from prior 0%-3%); LUV said sees q2 operating revenue compared with 2019 up 12% to 15%; continues to experience strong load factors and an acceleration in bookings for summer travel; says barring any unforeseen events and based on current trends, expects solid profits, operating margins, excluding special items, in Q2; rails UNP and CNI downgraded to in-line at Evercore/ISI

Technology, Media & Telecom

·     Internet; TWTR rises after Elon Musk dropped plans to partially fund his purchase of Twitter with a margin loan tied to his Tesla stake and increased the size of the deal’s equity component to $33.5 billion; several U.S. listed Chinese stocks with earnings today: BABA Q1 revenue rose 9% to 204.05 billion yuan ($30.35 billion) topping expectation of 199.25 billion yuan; BIDU, IQ, BZUN among other China names with better earnings this morning

·     Semiconductors: NVDA reported a solid quarter but offered a weaker outlook (guides Q2 revs $8.1B vs. est. $8.44B) and attributed it largely to Gaming demand/supply headwinds in China and Russia (Data Center grew 15% QoQ (83% YoY), ahead of our 10% growth estimate. Hyperscale revenue grew >100% YoY driven by natural language processing) – stock fell over 7% overnight but surged on the day; WOLF removed from Citi’s North America Focus List but maintaining our Buy rating as we still believe in the fundamental growth story at Wolfspeed

·     Software movers; AVGO to acquire VMW in a $61B cash and stock deal as Broadcom will assume $8 bln of VMware net debt and to target adding approximately $8.5 bln of pro forma EBITDA from acquisition within three years post-closing https://on.wsj.com/3wPfjCv ; SNOW shares fall initially (as much as 15%) as reported F1Q23 results that only modestly exceeded expectations, but the marginal revenue beat fell short of expectations as management highlighted some customers are consuming less than originally anticipated (also left guidance unchanged) – but rebounded with broader market recovery; SPLK reported F1Q total revenue growth of 34% Y/Y, which came in well above the Street’s 26% forecast as benefited from some very large on-premises renewals – margins were also better than expected. Conversely, total ARR and RPO came in slightly below Street expectations.

·     Hardware, Components & Services; AAPL slipped initially after Bloomberg reported the tech giant is looking to keep iPhone production "roughly flat" this year, pointing to a difficult environment for consumer electronics, notably smartphones 9but bounced w mkt); NTNX tumbles over 30% on weaker Q4 revenue forecast as sees revs $340-360Mm vs est. $439.5Mm (downgraded to Neutral w $22 tgt at Bank America); BOX slips as Q1 EPS missed by $0.02 on slightly better revs, while raises midpoint of FY23 revenue and EPS forecast, both exceeding analysts’ average estimates; DXC reported F4Q and guided FY22 (Mar) below consensus while reiterated its FY24 (Mar) roadmap, including its $1.5bn FCF guide ($1.1-$1.3bn including capital leases); PLUS Q1 sales of $451.5mn, grew 28% y/y and beat consensus, driven by 28% y/y growth in product revenue while EPS of $1.01 was well ahead of our $0.62

·     Media & Telecom movers; DIS has become entangled in a corruption scandal unfolding in Anaheim, the southern California city where its Disneyland Resort is based, that this week prompted its mayor to resign as per the WSJ. In an affidavit filed in a California federal court, federal investigators describe a "cabal" of business leaders and elected officials in Anaheim who allegedly meet privately to influence public policy decisions https://on.wsj.com/3lLr7z6