Closing Recap

Monday, November 28, 2022

Equity Market Recap

·     U.S. stocks dropped while the dollar bounced following last weeks holiday shortened market rally with slowing growth concerns exacerbated by events in China this weekend after widespread Covid protests resulted in not only fears of an economic slowdown, but a political crisis with crackdowns on the protests expected. Stocks extended losses this afternoon after St. Louis Fed President James Bullard said the Federal Reserve needs to raise interest rates quite a bit further and then hold them there throughout next year and into 2024 to gain control of inflation and bring it back down toward the U.S. central bank’s 2% goal. Note the Fed has raised its policy rate by 375 basis points this year, the fastest pace of tightening since the early 1980s as it tries to quash stubbornly high inflation. Buyers remained on the sidelines much of today ahead of Fed Chair Powell’s speech mid-week as well as huge potentially market moving economic data points (PCE inflation, GDP reading, ADP, JOLTs, and Nonfarm Payrolls data just some of the biggies). Weakness in Apple contributed to the negative tone as well as its iPhone production in China is seen seriously disrupted. There are also concerns over the holiday shopping season where heavy discounting could weigh heavily on the bottom line. Despite today’s pullback, major averages are still on track for a 2^nd straight up month – which would be the first time in 2022 it saw back-to-back gains. S&P Global Ratings says it expects the US will fall into recession in 2023. High prices and aggressive rate increases by the Fed are causing households to reduce spending and businesses to cut costs, S&P said.

Commodities

·     U.S. oil prices rebound, with WTI crude rising $0.96 to 1.26% to settle at $77.24 per barrel after earlier erasing 2022 gains and moving to lowest levels of year ($73.60) as China protests stoke demand fears. Prices reversed higher after headlines from Eurasia Group saying that OPEC+ will seriously consider new cut at next meeting. Bespoke noted that oil prices were up more than 70% YTD back in March. This morning’s declines for crude takes prices into the red on a year-to-date basis. WTI -13% from its October 2021 high.

·     Gold prices dropped on Monday, erasing overnight gains to settle at $1,740.30 an ounce, down -$13.70 or 0.8% (off overnight highs $1,763.50) as the dollar and U.S. Treasury yields edged up from session lows, ahead of Fed speakers this week as well as jobs data and PCE inflation results.

Currencies & Treasuries

·     The US dollar recouped losses after falling to a near two-week low earlier in the session. The US dollar index (DXY) rebounded, rising +0.45% to 106.45 as the euro and Pound pared gains. The dollar index caught a bounce at its 200dma (105.37) overnight. The euro dropped back below 1.04 and the Pound below the 1.20, down over 1%.

·     Benchmark U.S. 10-year bond yields also edged up from a near two-month low. Treasury yields edged higher this afternoon, with the 10-yr moving back above 3.7% after hitting earlier lows of 3.62% after the Fed’s Williams and Bullard threw cold water on hopes a slowing in Fed rate hikes could mean a sooner and lower end point. Markets have seen a big 11% rally for Bonds since November lows but took a break today. As per Charlie Bilello, the 3-Month Treasury bill yield is now 0.73% higher than the 10-Year Treasury bond. In the last 60 years, only periods with a more inverted yield curve: 1) 2000-01 (recession in 2001), 2) 1979-82 (recessions in 1980, 1981-82) and 3) 1973-74 (recession in 1973-75).

Sector News Breakdown

Consumer

·     Retailers: Black Friday and Cyber Monday dominate headlines for retail. A record $9.12 billion was spent online for Black Friday, Nov. 25, up 2.3% y/y as electronics were the major driver of the increase in sales, with online sales up 221% over the average day in October 2022, according to data from Adobe Analytics. Spending on Cyber Monday, the biggest U.S. online shopping day, is set to hit a record $11.2 billion, according to Adobe Analytics (AMZN, WMT, TGT). SHOP said Shopify Merchants break Black Friday records with $3.36B in sales or +17% y/y (well above the 4Q cons GMV growth est. of +8.5% y/y); MasterCard indicated Black Friday Retail sales ex auto rose +12% v est. +15%; another round of earnings this week for retail: HIBB, CTRN on Tuesday, WOOF, FIVE, VSCO on Wednesday, DG, BIG, LE, DLTH, ULTA, TLYS on Thursday

·     Auto sector: TSLA is developing a revamped version of Model 3, according to four people with knowledge of the effort, as the top EV maker aims to cut production costs and boost the appeal of the five-year-old electric sedan, Reuters reported; auto supplier BWA upgraded from Underweight to Equal Weight at Morgan Stanley and up tgt to $45 as believe the market will be willing to pay a higher multiple for the longer tailed ICE business once it becomes more evident it will be accretive to long term margins; XPEV downgraded to Underperform at Jefferies and cut tgt to $4.20 from $18.60 telling investors that they expect a challenging year for China’s automakers as the "honeymoon” stage of early NEV adoption is coming to an end; Average interest rates on used-car loans have risen to almost 12% vs. 7.6% on new-car loans, Cox data.

·     Housing & Building Products: in home furnishing, WSM was downgraded to underweight from equal weight at Morgan Stanley, saying that earnings revisions could turn sharply negative in 2023; BLDR announced that its Board of Directors approved an increase to the Company’s existing stock repurchase plan in the amount of $1B, for a total of approximately $1.5B

·     Consumer Staples: in the food space, BYND and TSN were downgraded to underweight from equal weight at Barclays saying most protein companies are facing a difficult outlook; in tobacco, the Financial Times reported that the European Union will propose a sharp increase in excise duties on cigarettes across the bloc, affecting British American Tobacco (BTI) and Imperial Brands, among others; CPB, CAG, GIS, SJM hitting 52-week highs today in food sector

·     Casinos, Gaming, Lodging & Leisure sector: WYNN upgraded to Overweight from Neutral at JPMorgan and raise tgt to $91 from $71 saying Wynn should benefit from a Macau recovery as COVID restrictions are eased; the firm downgraded DKNG to Underweight from Neutral with an unchanged price target of $12 as sees downside in the shares following the post-earnings rally and also downgraded PENN from Overweight to Neutral as think Penn trades near fair value with less upside potential than LV Strip centric or LV Locals centric operators, so we see it as a relative underperformer. Other casino names in Macau advanced after the Macau government on Saturday 11/26 announced that the six incumbent gaming operators (WYNN, MLCO, LVS, MGM, Galaxy, and SJM) were the "provisional winners" for new 10-year gaming concessions.

Energy

·     Energy stock movers: U.S. oil price erases 2022 gain as China protests stoke demand fears, sending shares of energy stocks lower; APA provided an update on exploration activities in Block 58 offshore Suriname. APA holds 50% working interest, while TotalEnergies is the operator on the block with a 50% working interest; FANG downgraded to Underperform at Bank America saying valuation is disconnected; energy stocks COP, MRO, DVN among top S&P decliners on the day given the drop in oil; CVX said the U.S. will allow them to resume pumping oil from its Venezuelan oil fields after President Nicolás Maduro’s government and an opposition coalition agreed to implement an estimated $3 billion humanitarian relief program and continue dialogue in Mexico City; in pipelines: ENLC appoints Chief Operating Officer (COO) Benjamin Lamb as chief financial officer (CFO), replacing Pablo Mercado as senior vice president of operational excellence Walter Pinto will take COO’s role; in solar, FSLR downgraded to Neutral at JPMorgan given the stock’s outperformance since the announcement of the US Inflation Reduction Act.

Financials

·     Financial Services & Insurance movers: Business Development Companies ARCC, ORCC, FSK and others in the sector offer dividend yields of around 10% but investors should steer clear given the economy looks to be on the verge of a downturn said Barron’s; AMG was upgraded to Buy from Hold at Jefferies and tgt raised to $192 from $149 saying its unique business model allows for multiple avenues of EPS growth (new investments & buybacks)

·     Bitcoin, FinTech & Payments: SI extends recent declines amid weakness in crypto/Bitcoin space after FTX bankruptcy and concerns about exposure to FTX; Digital-asset lender BlockFi Inc., a cryptocurrency company that once enjoyed a valuation of $3 billion, has filed for Chapter 11 bankruptcy protection in New Jersey, according to a Monday press release; STNE upgrade from In Line to Outperform w/ $16 PT (from $10) at Evercore; in consumer Finance: for SOFI Bank America trimmed tgt to $8 from $9 and are lowering estimates given the recent extension of the student loan forbearance moratorium to June 30, 2023 from January 1, 2023 previously

Healthcare

·     Pharma movers: CINC shares tumble after saying its experimental drug Baxdrostat to treat patients with uncontrolled high blood pressure did not meet main goal in mid-stage study; SRPT said the FDA granted priority review to its application seeking accelerated approval of SRP-9001 for the treatment of ambulant individuals with Duchenne Muscular Dystrophy (DMD) and if approved, would be the first gene therapy for Duchenne (PDUFA 05/29/23); KTRA rises after U.S. FDA grants fast track designation to its breast cancer therapy; TNYA said that regulators granted orphan drug designation to its treatment for arrhythmogenic right ventricular cardiomyopathy

·     Biotech movers: AXSM announced its Phase 3 trial of AXS-05 in Alzheimer’s Disease Agitation met its primary and key secondary endpoint in delayed time to relapse of Alzheimer’s disease agitation (p=0.014) and prevented relapse of AD agitation (p=0.018), respectively; BIIB shares slip after a woman receiving lecanemab, an experimental Alzheimer’s drug from Biogen and partner Eisai, in a study recently died from a brain hemorrhage, research paper publisher Science.org reported on Sunday, Reuters reported; separately, UBS noted BIIB’s upcoming Phase III Clarity AD data at CTAD’22 (Nov.29 at 4:50pm PT) is one of the biggest events in the biotech space in ’22.

·     Healthcare Services: AMWL is in talks to buy TALK, an online therapy platform, for about $1.5 per share, Calcalist newspaper reports, without saying where it got the information. The deal would value the company at around $200 million https://bit.ly/3VtpRRH ; in hospitals (CYH ), Cowen said October Hospital Survey showed 302 NFP hospitals report +0.4% y/y October revenue growth; better than September’s decline but primarily driven by weekday seasonality; CTLT shares rebounded the 483s were cleared over the weekend and SRPT got BLA accelerated approval by the FDA. The 483s getting cleared is more n-t as it was an overhang said Barclays.

Industrials & Materials

·     Aerospace & Defense: TDG downgraded from Overweight to Equal Weight at Wells Fargo and cut tgt to $660 from $735 as see less upside for the stock with worsening mix trends and more expensive capital (notes TDG trades at a 20-30% premium to its historical multiple); Cowen reiterated Outperform on RTX calling it the top A&D growth story as aftermarket-driven aero recovery in 2023 and accelerating defense lift in 2024-25 suggest adj. EPS will grow ~15% in 2023-25 ex non-cash pension swings.

·     Transports: for airlines (DAL, AAL, UAL, LUV, JBLU), the U.S. Transportation Security Administration (TSA) said it screened 2.56 million air passengers on Sunday, the highest number since December 2019 and the busiest day since the start of the COVID-19 pandemic. The number was, however, below the 2.88 million screened on the same day in 2019

·     Metals & Materials: CLF announced that it is increasing current spot market base prices for all carbon hot rolled, cold rolled and coated steel products by a minimum of $60 per ton, effective immediately with all new orders; industrial and precious metals saw early weakness

Technology, Media & Telecom

·     Media, Internet: Elon muck accused AAPL of threatening to block Twitter Inc from its app store without saying why in a series of tweets that also said the iPhone maker had stopped advertising on the social media platform; PDD hits 52-week highs after earnings results – reported 3Q22 earnings well ahead of expectations as revs were RMB 35.5bn (+65% y/y) vs. est. RMB 30.9bn (vs. 2Q RMB 31.4bn) driven by strength in both OMS (+58% y/y) and transaction services (+102% y/y); LYV upgraded from Neutral to Buy at Citigroup while lower tgt from $90 to $82 saying if Live Nation remains a single firm, they believe the shares are worth $90 per share – though if Live Nation is forced to split into two firms, they believe the shares are worth $48 (says 80% chance stays on firm and a 20% likelihood that Live Nation is forced to unwind the 2010 merger)

·     Software movers: big week for cloud and security software earnings results: Tuesday INTU, WDAY, CRWD, on Wednesday SNOW, SPLK, CRM, OOMA, OKTA, SNPS, ESTC, and on Thursday VEEV, SMAR, ZS, PATH; in research, TWLO downgraded from Buy to Hold at Jefferies and slash tgt to $50 from $110 as see sustained headwinds to near-term growth and do not have high conviction the Software rev can grow 30%+; HUBS assumed w/ Buy and $380 PT at Needham and adding HubSpot to the conviction list, and removing ZUO as expect HubSpot to gain market share due to its highly efficient GTM effort combined with organic product development; TBLA and Yahoo announced that they have entered a 30-year, exclusive commercial agreement

·     Video Game software: Morgan Stanley upgraded ATVI to Overweight (ATVI was also upgraded at Wells Fargo and Truist), resumed Unity (U) at Equal weight and downgraded APP to EW from Overweight saying they see a growing divergence as mobile gaming underperforms PC/console, leading them to reduce their mobile gaming forecasts by 8%/17% in ’22/’23, though remain bullish the long-term opportunity; Truist upgraded ATVI to Buy and downgraded SCPL to Hold with stock at PT, relative multiple (to market and parent) back at/near highs, tough 4Q hurdle. For EA, maintain Buy with shots-on-goal in F2H (World Cup, Star Wars Jedi, Wild Hearts), buyback support; TTWO maintain Buy at 25x FY23 P/E (weak slate; merger/macro/FX disruption) with pipeline (GTA) and bulk of synergies/deleveraging still ahead (out-years); RBLX maintain Hold on valuation (vs growth/volatility). Positive fundamentals. Risk-reward improving

·     Hardware, Components & Services: AAPL shares slip on report of disruption in China production; Apple will see a production shortfall of nearly 6 mln iPhone Pro units due to unrest at Foxconn’s Zhengzhou plant – Bloomberg; big week of earnings for storage and enterprise names with HPE, NTAP, NTNX, PSTG, BOX among names expected to report

·     Semiconductors: earnings this week from MRVL, AMBA, SMTC upgraded to buy at Deutsche Bank and raise tgt to $50 as see the bear case related to industry/consumer exposure and high leverage is not as bad as feared