Closing Recap

Wednesday, November 09, 2022

Equity Market Recap

·     Stocks tumbled on market uncertainty related to midterm elections (Senate still undecided after yesterday’s vote), and fears over possible market contagion (funds, banks’ exposure, etc.) from Bitcoin (2-year lows) given the volatile decline in crypto related assets (Bitcoin, Ethereum, leveraged stocks) the last 2-days on liquidity fears, as investors sold stocks ahead of a key inflation data point tomorrow. Oct CPI m/m is expected to rise +0.6% (from +0.4% prior) and y/y headline CPI to rise +8.0% (from 8.2% prior). On a core basis, CPI ex food & energy, expected to rise +0.5% m/m (vs. prior +0.6%) and rise +6.5% y/y (vs. 6.6% prior). CPI inflation data has become a binary event the last few months, with huge swings following the results – will tomorrow be different? Selling pressure today was broad-based with all 11-S&P sectors closing lower, though biggest declines were in energy -4%, technology, and consumer discretionary each down over -2%. The dollar bounced with yields as commodities fell.

·     In election news, Control of the U.S. Senate still had not been determined as of Wednesday afternoon, a day after the Nov. 8 midterm elections. Republicans need to pick up only one seat to take the majority in the 100-seat chamber, which would allow them to block much of Democratic President Joe Biden’s agenda. The 8-races that markets focused on: 1) In Georgia, its DeJa’Vu all over again as Democratic Senator Raphael Warnock will head to a runoff on Dec. 6 against Republican Herschel Walker, as both failed to clear the 50% threshold needed to win in the first round. 2) Called this morning in Wisconsin, Republican Senator Ron Johnson defeated Democrat Mandela Barnes, the state’s lieutenant governor, 3) while in Pennsylvania, John Fetterman, the Democratic state lieutenant governor beat Republican Mehmet Oz (oz conceded this morning). 4) in New Hampshire, incumbent Democrat Maggie Hassan held onto her seat against Republican Don Bolduc; 5) North Carolina Republican U.S. Representative Ted Budd beat former state Supreme Court judge Cheri Beasley, a Democrat, for an open U.S. Senate seat. 6) Republicans took Ohio as well as J.D. Vance won Ohio’s open Senate seat, defeating Democratic U.S. Representative Tim Ryan. 7) two big races yet to be determined (and Georgia) is Arizona where Democratic Senator Mark Kelly is facing Republican Blake Masters and 8) in Nevada, Democrat Catherine Cortez Masto is defending her seat against state Attorney General Adam Laxalt.

·     Interesting Stat: Regarding the elections, in the year following midterm elections in the last 70 years (this is, since 1950), the S&P 500 has recorded eighteen positive returns and zero negative returns with the range of 3% to 33% and a mean average of 16%. Will the upcoming year follow this trend or is there enough unusual stuff to break this sequence? As per MKM Partners

Commodities

·     Oil prices dropped, with WTI crude down -$3.08 or 3.46% to settle at $85.83 per barrel following weekly inventory data showing that U.S. crude stockpiles rose more than expected and on concerns that a rebound in COVID-19 cases in top importer China would hurt fuel demand. Crude inventories jumped by 3.9 million barrels in the last week to 440.8 million barrels as oil production increased, above ests for 1.4M barrel build as per the EIA. Brent crude oil futures settle at $92.65/bbl, down $2.71, or 2.8%. Gold prices end lower, slipping -$2.30 to settle at $1,713.70 an ounce, snapping its 3-day win streak and falling off highest level in a month as the dollar rebounded, and positioning ahead of tomorrow’s CPI report

Currencies & Treasuries

·     The U.S. dollar rebounded against several major currencies ahead of tomorrow’s inflation report. Investors are waiting to see whether Thursday’s U.S. CPI data will spur the Federal Reserve to continue to increase interest rates well into next year in a bid to curtail inflation, or whether they might be able to ease policy tightening. The dollar has retreated from multi-decade highs in recent weeks as investors take profits following a months-long rally to 20-year highs.

·     Treasury yields edge slightly high ahead of tomorrow’s October inflation report and following a weak 10-year auction. The US Treasury sold $35B in 10-year notes at a yield of 4.14% vs. 4.106% when issued prior (3.4bps tail, biggest tail since 2016), with the bid-to-cover ratio 2.23 vs. 2.34 prior auction, primary dealers take 24.43% of 10-year sale, directs 18.07% and indirect 57.5%

·     Bitcoin prices –15% over past 24 hours, breaking intraday 52-week lows of $17,592 set on 6/18/2022, the crypto is now trading at levels last visited on 11/28/2020 sub $16,200. On Tuesday, Binance signed a letter of intent to acquire Bahamas-based FTX, after the crypto trading platform faced billions of dollars in customer withdrawals and a liquidity crunch. The letter was nonbinding, and it’s not yet certain that the deal will be completed. Today comments from Binance mgmt did not confirm that their due diligence is complete currently, prompting escalating declines in the crypto sector and stocks leveraged to it. Separately, several reports indicated the SEC has expanded an investigation into cryptocurrency platform FTX following its sudden implosion this week, focusing on potential securities-law violations by its U.S. affiliate.

Sector News Breakdown

Consumer

·     Retailers: CPRI Q3 EPS $1.79 vs Street at $1.55 as Kors strong at 9.2% revs growth, including currency ding, Versace up 28% constant currency and Jimmy Choo +15%, but cuts holiday sales Q3 view to $1.53B from $1.65B estimate on lower profit; price tgt changes for BURL $136 (Prior $144) ROST $88 (Prior $83) TJX $78 (Prior $77) at Cowen in Off-Price retail saying checks suggest solid buys for Marmaxx with better/best vendors while trends for BURL and ROST are likely in line with Consensus expectations but with risk to Q4 SSS and EPS guidance vs consensus; BBBY entered into a privately negotiated exchange agreement with a holder of some of its debt; WWW shares tumbled as much as 30% after earnings results; dollar stores DG, DLTR tumbled late day

·     Auto sector: TSLA CEO Elon Muck, according to regulatory filings, sold at least $3.95 billion of shares just days after closing his buyout of Twitter Inc. Musk unloaded 19.5M shares (he’s sold more than $19B worth of Tesla shares this year); CARG reported 3Q rev./EBITDA 11%/$15M below guidance and guiding 4Q rev./EBITDA 39%/$39.6M below the Street on its CarOffer wholesale segment underperforming expectations; LCID slides after results as Q3 EPS loss (-$0.40) vs. est. loss (-$0.31); Q3 revs $195.5M vs. est. $209M; Q3 Deliveries of 1,398 EVs and reaffirms FY guidance of 6k-7k deliveries

·     Housing & Building Products: homebuilder DHI reports EPS $4.67 vs. est. $5.09; Q4 revs $9.64B vs. est. $9.97B (both missing ests) and raises quarterly dividend to $0.25 from $0.22 – shares fell initially before rebounding; n mortgage data this week from MBA, US mortgage market index falls 0.1%, the purchase index rises 1.3%, and refinancing index falls 3.5% to lowest since aug 2000 – avg 30-yr mortgage rate rises to 7.14%

·     Consumer Staples: grocer KR was upgraded to Outperform from in-line at Evercore/ISI as expects consumers will trade down from restaurants to cooking food at home, as food inflation would be higher for longer, which bodes well for grocers including KR; KDP invests $50M in non-alcoholic beer leader Athletic Brewing Company; SFM reported stronger-than-expected Q3 EPS of $0.61 topping forecast of $0.51, comps increased 2.4%, ahead of a Street figure of +1.5% and 3-year geometric comp trends remained sluggish at +0.9% in Q3; TSN downgraded to underperform from neutral at Bank of America, ahead of next week’s release of quarterly results

·     Casinos, Gaming, Lodging & Leisure sector: Sports betting revenue through September has already reached an all-time annual high of $4.78 billion, beating 2021’s full-year record of $4.34 billion, according to a @AmericanGaming; AMC slides after Q3 results; AGS posted another beat, with Q3 Adj. EBITDA +4% ahead of Consensus; in theme parks, SEAS reported Q3 EPS miss of $1.99 vs. est. $2.15 on light revs $565.2M; in RV’s (THO, CWH, WGO) BMO said September North American RV Retail Registrations -20% y/y, -8% vs. 2019 to 33,615 units. Registrations declined -33% compared with 2020 (towables -33%, motorized -30%) and -8% vs. 2019

Energy

·     E&P and Majors: OXY reported 3Q22 CFFO/FCF higher than consensus estimates driven largely by better than expected three-stream production, FY22 capex guidance of $3,900-4,300mm was unchanged; TDW 3.99M share Spot Secondary priced at $30.25; NOG reported higher 3Q earnings, but lower FCF than consensus driven primarily by higher-than-expected production and spending; overall profit taking today in energy stocks, which still remain top performer in 2022; GTLS shares tumbled -30% after saying earlier it will buy UK-based industrial equipment maker Howden for $4.4 billion

·     Utilities & Solar: in solar, ARRY 3Q Street expectations on higher ASPs as it passes on its higher input costs – 3Q adj EPS $0.18 vs est. $0.10 on revs $515Mm vs est. $399.4Mm and better guidance; shares jump +16% (follows recent upbeat results in space from SEDG); PLUG missed results but maintained FY and FY 2023

Financials

·     Bitcoin news: Cryptocurrencies extend drop as doubts about Binance’s potential takeover of rival exchange FTX grow with Bitcoin falling again and Ethereum 4-month lows. Mid-morning CoinDesk reported Binance is highly unlikely to go through with its proposed rescue of FTX after glancing at crypto exchange’s books (the headlines tanked crypto assets, Bitcoin, Ethereum). Earlier this morning were comments from Binance chief Changpeng Zhao saying the near collapse of FTX has “severely shaken” confidence in the crypto industry and will trigger tougher scrutiny by regulators, said a day after orchestrating a rescue of the exchange’s arch-rival. Shares of names leveraged to bitcoin including COIN, SI, MSTR, MARA, SQ, RIOT and others remain pressured. SI shares extend losses as analyst weigh in on weakness (fell -22% on Tuesday) as liquidity crunch at FTX, 3rd largest crypto exchange and SI client, ripples through ecosystem

·     FinTech & Payments: AFRM tumbles as reported mostly in-line Q1 results but lowered FY23 guidance, citing a faster-than-expected reduction in business from Peloton as well as overall macro conditions (sees Q2 revenue $400M-$420M vs. est. $433.6M and FY23 revs $1.60B-$1.68B below est. $1.71B); UPST plunges on larger Q3 EPS loss ($0.24) vs est. loss ($0.07), Q3 revs $157.23M vs est. $171.16M, a decrease of 31% y/y and total fee revenue was $179M, down -15% y/y and sees Q4 revenue about $125M-$145M vs. est. $185M

Healthcare

·     Biotech & Pharma movers: MACK shares more than doubled after Ipsen provided an update on its Phase 3 NAPOLI 3 trial of Onivyde in mPDAC with the trial meeting its primary and key secondary endpoints. Ipsen intends to file a supplemental NDA with the FDA on the back of this data – MACK is entitled to up to $450M upon approval of additional indications of ONIVYDE; HALO reported strong 3Q results, beating on the top line and reiterated 2022 guidance; NVAX Q3 EPS loss ($2.15) vs. ($4.31) last year; Q3 revenue $734.6M vs. est. $586.25M; cut its full-year revenue forecast to be about $2B, the lower end of its prior $2B-$2.3B view; CLVS said that it will likely file for bankruptcy protection due to dwindling sales of its sole product, mounting financial losses, and a crushing debt load

·     MedTech Equipment: GMED Q3 results were roughly in-line with consensus on the top-line with 12.6% CC growth, above estimate of 12.0% as performance in Q3 was driven by US Spine growth of +9% and OUS Spine of +25% CC; MDRX upgraded to Buy from Neutral at Goldman Sachs on strong fundamental performance that it expects to continue in MDRX’s core businesses; MASI slides as Q3 results top expectations but guides Q4 below views at Q4 EPS $1.11-$1.22 vs. est. $1.25 and Q4 revenue $581M-$611M vs. est. $617.16M

·     Healthcare Services: GDRX 3Q22 revenue and EBITDA were 1.3% and 40.5% above consensus, respectively; the EBITDA upside was driven by a headcount reduction; HCAT reported 3Q earnings exceeding its revenue and adjusted EBITDA guidance, and proceeding to raise its FY22 guidance on better-than-expected bookings

Industrials & Materials

·     Aerospace & Defense: AXON achieved record Q3 revenue, beating estimates on revs and EPS with growth in both segments and raised FY22 guidance, due to both the strong Q3, and Q4 expectations, despite continued supply chain limitations.

·     Metals & Materials; AMRS slump after Q3 results miss as EPS loss ($0.50) greater than est. ($0.21) on revs $71.1Mm below est. $91.2Mm; sees 4Q core revs more than $100Mm vs est. $139.5Mm blaming $193.6M increase in operating expenses; gold miners held up better than industrials given the bounce in gold in recent days

Technology, Media & Telecom

·     Media, Internet: DIS reported Q4 revenues 5% below the Street, while segment operating income also missed consensus estimates driven by higher DTC dilution and weaker parks margins; Q4 EPS of $0.30 fell below est. at $0.57, Disney+ subs ended Q4 at 164.2M, reflecting 12.1M net adds in the quarter, which was above consensus at 9.8M – ESPN+ paid subscribers of 24.3M, up from 17.1M a year ago; NWSA Q1 revenue of $2.48B (-1% y/y) missed est. $2.49B on 3c EPS miss though outperformance at News Media, Book Publishing, SVS, and Digital Real Estate; IAC weaker print with EBITDA much lower on $18.5M in Meredith restructuring costs

·     Advertising: In digital ad-tech sector, few earnings as PUBM lower by 8% after reported mixed 3Q22 results though results worsened through the quarter and into October as 4Q guidance calls for ~1% Y/Y revenue growth; DV reported solid 3Q22 results as revenue and EBITDA both came in 3% above consensus while 4Q guidance bracketed consensus; TTD rises as Q3 EPS $0.26 vs est. $0.22 and revs $394.77M vs est. $385.98M, while guides Q4 2022 revenue $490M vs est. $509.1M; SSP downgrade to Equal Weight at Wells Fargo and cut tgt to $11 from $20 saying challenges include weaker political (which drives our -19% ’22E FCF cut), a lot of ad softness at Networks (esp. the Dr market), and higher leverage due to the ION deal.

·     Internet: META to reduce workforce by ~13% (~11k employees); reaffirms Q4 rev forecast of $30-32.5B; note Meta reductions are among the largest to date of any co; AKAM reported upside 3Q22 results but gave downside 4Q22 guidance; more ongoing weakness in high growth names with GOOGL, SNAP, SHOP and others tumbling

·     Hardware & Software movers: RBLX disappoints with Q3 EPS loss (-$0.50) vs est. (-$0.30) as revs grew 2% y/y to $517.7M below consensus est. $686.79M, average Daily Active Users (DAUs) were 58.8M, up 24% y/y, hours Engaged were 13.4B, up 20% y/y and average Bookings per DAU was $11.94, down 11% y/y; NEWR top and bottom line beat and issued lower guidance that expectations, but given stock reaction, better-than-feared; TLOS plunged after the company cut its full-year revenue guidance and reported a wider loss for the third quarter; DDD 3Q22 revenues of $132.3M were slightly below consensus of $133.7M

·     Media & Telecom movers: VOD agreed to sell its majority stake in its tower unit to KKR, GIP at EU16.2b valuation; in research in broadcasting; NXST downgrade from Overweight to Equal Weight at Wells Fargo and cut tgt to $175 PT from $227 as think early 2023 will bring a cut to FCF guidance driven by higher cord cutting and higher cash interest; Wells also downgraded GTN from Overweight to Underweight and slash tgt to $7 from $25 saying it is carrying more leverage than Broadcast peers due to station acquisitions from late 2021.