Closing Recap

Friday, October 01, 2021

Equity Market Recap

·     Another astounding rebound for U.S. stock markets, with major averages surging throughout the day, closing well off the lows to somewhat salvage an otherwise rough week of declines. After posting the worst monthly returns since the beginning of the year, the S&P, Dow, Nasdaq, and Russell 2000 started October with healthy gains on positive vaccine news from Dow component Merck (MRK) and as the debt ceiling crisis was averted for now in Washington D.C. House Speaker Nancy Pelosi said plans are for bipartisan infrastructure legislation vote later today which has been held up by a battle between moderate and progressive Democrats over President Joe Biden’s economic agenda. All in all, investors again took advantage of another dip buying opportunity as we head into the weekend near session highs. Earnings season around the corner as we head into the holiday seasonal quarter, with major earnings kicking off in two-weeks.

·     There were several market moving headlines in an extremely busy day of news: 1) MRK said it plans to seek emergency use authorization for its oral antiviral treatment for Covid, after the medicine showed “compelling results” in clinical trials (hit other vaccine makers but boosted “reopen” recovery stock sectors, 2) positives included U.S. Congress averted govt shutdown for now with 9-week extension, 3) Australia plans to start reopening its international border in November, ending one of the world’s strictest pandemic-era travel bans. On the flip side, items hurting sentiment include: 1) the House delayed vote on $1.0T infrastructure bill until Friday as Democrat rifts persist, 2) energy price increases are adding to concerns about inflation (PCE inflation data also showing no signs of price hike slowing), 3) European stocks slumped to their lowest in two months on Friday, as PMI Manufacturing hitting lowest level of expansion since the start of the year (with beats in UK, Italy; Misses in Germany, France, Spain)) and on inflation fears as Euro Zone Sept Flash CPI at decade highs (rose 3.4%); 4) The Fed recent comments about a reduction of asset purchases in November and a possible rate hike late next year.

·     Stocks/sector movers: MRK surges, leads markets higher after oral antiviral Covid treatment trial results were strong enough to stop trials and seek emergency use; vaccine names underperform on the MRK data with MRNA, BNTX plunge to lowest levels since July, NVAX losing as much as 25% to lowest level since 6/2, PFE slipping to lowest levels since late July JNJ < $160 for 1st time since April; news also sinks shares of companies making competing antiviral treatments – REGN tumbles to 4-mo lows, VIR drops over 20% to lowest price since January; rotation into reopen plays after the MRK data with LYV hitting ATH, travel EXPE, ABNB, casinos PENN, MGM, parks DIS, SIX, cruises RCL, CCL, NCLH, airlines UAL, LUV; Bitcoin and Ethereum rally to boost RIOT, MARA, MSTR, BTBT, SI, COIN, SBNY; CF, NTR, MOS among top gainers after Citi raised estimates on fertilizer names as companies begin to realize the run-up in spot prices with a typical 60-90 day lag, JPMorgan raised PTs; FIVN bounces on several analyst upgrades after terminating its merger agreement with ZM.

Economic Data:

·     U.S. Aug personal income rose +0.2% vs. est. +0.3% and vs. July +1.1%, while Personal Spending rises +0.8% above est. +0.6% and vs. July -0.1%; Aug real consumer spending +0.4% vs July -0.5%. On inflation readings, Overall PCE price index +0.4%, in-line with July while Core PCE rises +0.3% vs. est. +0.2% and July +0.3%. On a YoY basis, PCE price index +4.3% vs July +4.2% and core PCE YoY +3.6% in-line with estimates

·     September Markit PMI Manufacturing Index reported at 60.7, vs. 60.5 consensus, 61.1 prior; final output index for september at 55.7 vs flash reading 55.2 and final august 56.7; final input prices index for september at 87.0 vs flash reading 86.9 and final august 87.5; manufacturing input prices index decreases from previous month for first time since January

·     ISM Manufacturing Index for Sept reported at 61.1 vs. 59.8 expected and 59.9 prior; new Orders 66.7, unchanged from August; production to 59.4 from 60.0; employment to 50.2 from 49.0; supplier Deliveries to 73.4 from 69.5; prices paid index 81.2 in september vs 79.4 in august

·     University of Michigan surveys of consumers sentiment final sept 72.8 vs. consensus 71.0 vs preliminary sept 71.0 and final Aug 70.3; the current conditions index final sept 80.1 vs prelim sept 77.1 and final Aug 78.5 and expectations index final sept 68.1 vs prelim sept 67.1 and final Aug 65.1; the 1-year inflation outlook final september 4.6% vs prelim 4.7% and final August 4.6%

·     August Construction Spending Unchanged M/M to $1,584.1B vs. +0.3% consensus, +0.3% prior and construction spending +8.9% Y/Y vs. +9% prior.

Commodities

·     Oil prices finish the day higher, with WTI crude rising $0.85 or 1.13% to settle at $75.88 per barrel, posting a 2.6% advance for the week ahead of OPEC+ JTC October Meeting next week where expectations are they will come under increasingly intense pressure from Washington to open the production release valve and cap the upside. Bearish factors this week included rising U.S. crude inventories and a strong dollar but was offset by an expected supply deficit in coming months due to Hurricane disruptions and reports that China was prepared to buy more oil and other energy supplies to meet growing demand which helped buoy prices.

·     Gold futures edge higher, rising $1.40 to settle at $1,758.40 an ounce, and closed out the week with a modest +0.4% advance rising after a reading on the cost of goods and services showed a sharp rise for August further boosting inflation fears. Gold futures posted a loss of 3.4% for September. Dips in the dollar and lower bond yields supported gold today.

Currencies & Treasuries

·     The U.S. dollar fell for a second straight session after outperformance in September (as dollar index traded to 1-year highs and euro dropped below 1.16), tracking declines in U.S. Treasury yields, as investors pared back their positions after recent sharp gains. The U.S. 10-year Treasury yields fell 4bps to 1.48% after hitting highs above 1.56% mid-week. The recent FOMC comments about a reduction of asset purchases in November and a possible rate hike late next year has boosted the Dollar. Cautious market sentiment due to COVID-19 concerns, wobbles in China’s growth and a Washington gridlock ahead of a looming deadline to lift the U.S. government’s borrowing limit has also lent support to the dollar, seen as a safe-haven asset. Bitcoin surged to its highest level since around mid-September, bolstered in part by seasonal factors as well as supportive comments overall from Federal Reserve Chairman Jerome Powell on Thursday. Powell, in testimony to Congress, said the Fed has no intention of banning cryptocurrencies.

Sector News Breakdown

Consumer

·     Retailers; DLTR downgraded at Keybanc as remain positive on its tools to improve long-term performance but thinks over the next 6-12 months, we are increasingly concerned these efforts will not offset cost pressures; KMX downgraded to Neutral at Guggenheim who removed their $154 PT on limited near-term earnings potential due to constrained inventory, DTC sourcing improvements not translating to higher GPU as it cuts prices to pass along cost savings to consumers, and elevated SG&A that is expected to persist on increased marketing and digital spending and higher wages, though Wolfe upgraded to Outperform with a $160 PT, and Morgan Stanley kept their OW rating and $165 PT; Barclays upgraded shares of PVH to Equal-weight while downgraded shares of CRCT and JOAN

·     Auto sector; GM Q3 deliveries 446,997 (-32.8% YoY) at an average price $47,767 (+20.35% YoY), estimated total light vehicle SAAR 13.4M (vs 15.5M YoY), said semiconductor supply disruptions and historically low inventories impacted wholesale but customer deliveries are improving and financial outlook is still expected to be within their previous calendar year guidance; LI delivered 7,094 Li ONEs in September 2021 (+102.5% YoY but -24.8% vs Aug), Q3 deliveries 25,116 (+19o% YoY, +42.9% Q/Q) and exceeding recently revised guidance of ~24,500 units; NIO September deliveries 10,628 vehicles (+125.7% YoY, +80.7% vs Aug), an all-time high monthly record, Q3 deliveries 24,439 vehicles (+100.2% Y/Y), exceeding the revised guidance of ~22,500 to 23,500 vehicles; XPEV delivered a monthly record 10,412 Smart EVs in September (+199% YoY, +44% vs. Aug) and a quarterly record 25,666 deliveries in Q3 (+199% YoY, +48% Q/Q); TSLA missed its deadline to deliver the Model X in Q3 2021, but a handful of units of the new electric SUVs were spotted in Fremont factory, Electrek reported. It gives some hope that deliveries might start soon https://bit.ly/2Y8L4ba; RIDE said it plans to sell its Ohio auto factory to Foxconn for $230M, updated its production plan and 2021 financial outlook as it now sees SG&A expenditure $105-120M vs prev. $95-105M after it reached an agreement with Hon Hai Technology Group to work jointly on electric vehicle programs in the company’s assembly plant in Lordstown, OH

·     Consumer Staples; COTY agrees to sell partial stake in Wella to KKR at a 50% valuation premium versus initial Wella sale in exchange for approximately half of the preferred Coty shares owned by KKR. Coty will continue to own 30.6% of Wella, with a $1.38b implied value for the retained stake; KDP aid to plan up to $4B stock buyback; GIS upgraded to Buy at Citigroup noting the food co delivered a much better-than-expected fiscal 1Q last week, and the market barely noticed. We think that this is a good story in a tough sector that deserves a second look

·     Restaurants; First Watch Restaurant (FWRG) 9.459M share IPO priced at $18.00; PZZA has surged 50% YTD yet remains one of Oppenheimer’s top picks as believe the investment story has strengthening legs and identify multi-year upside to average-unit-volumes and unit growth; Truist updated Q3 store opening estimates at WING, TXRH, SHAK and NDLS, based on automated and manual web scrapes saying of the 4, WING appears to have beaten their est. and consensus which demonstrates franchisees’ confidence that sales gains during the pandemic are sustainable – SHAK’s 3Q21 openings are in-line with est., while TXRH’s and NDLS are below

·     Casinos & Gaming; in casinos (WYNN, LVS, MGM, MLCO) Macau gross gaming revenue rose 166% year-over-year in September to 5.88B patacas ($735M) to miss the consensus expectation for growth of 200%. The GGR tally for the month was up 32%% from the level in August on some incremental improvement of traffic levels during the first three weeks of the month before new COVID cases led to tighter restrictions; MGM downgraded to negative at Susquehanna as see DKNGs bid for Entain as consistently aggressive, out-maneuvering MGM for control of BetMGM and weakening its digital prospects in all likely scenarios; EBET entered a pact to buy Aspire Global’s portfolio of business-to-consumer proprietary online casino and sportsbook brands

·     Lodging & leisure; ABNB tgt raised to $190 at BTIG and raise ests with changes based on mix impacts to ADR and improving view of leverage in the model.; overall “reopen” sectors such as theme parks, leisure, travel, lodging saw strength on positive COVID-vaccine news from MRK

Energy

·     E&P and Majors; XOM said gas prices will boost Q3 earnings by about $700M, oil prices will boost earnings by about $400M, and downstream margins will boost earnings by about $600M; Into Q3 earnings, Cowen likes the tactical setup for XOM and maintain RDS CVX as their top picks and are 60% above consensus on 4Q21 and 1Q22 with international gas prices hitting record levels and climbing, while Mizuho continues to prefer CVX over XOM due to a higher cash return outlook but raised their quarterly EPS on both to above consensus estimates; PDCE pre-announced Q3 production of 63-65k bpd that was sharply below expectations for the 3^rd consecutive quarter, lowered its FY21 oil production to 60-63k bpd from 64-66k and anticipates production at low end of previous range of 190-195k bpd, and was removed from JPMorgan’s Analyst Focus List after the disappointing update and recent outperformance (+190% vs XOP, +276% vs broader market since last Sept.), though they remain OW given depressed valuation

·     Pipelines: Wells said MLPs re-working their contracts to mostly fee-based with high natural gas prices could drive an uptick in drilling in Haynesville and Stack plays, saying it would be positive for ENLC, DTM, ET, WMB, while DCP, ENBL, TRGP, EPD, OKE are among the companies with the greatest percentage of proceed processing contracts, EPD, ENBL, MPLX, WES, DEP, ET, WMB have keep whole contracts, and highlight GEL due to soda ash mining operations using natgas as an input cost for heat and power operations; Credit Suisse initiated Tidewater (TWMIF) at Outperform with a C$2 PT as it offers differentiated, niche energy infrastructure exposure to Western Canada at an attractive valuation; HESM downgraded to Neutral at UBS given the belief that current fundamentals are priced in, limited positive earnings revision potential next year, and limited near-term catalysts

·     Services & Refiners: the weekly Baker Hughes (BKR) rig count rose 7 to 528, with gas rigs up 7 to 428 and gas rigs unchanged at 99; Bank of America issued a double-downgrade on INT to Underperform from Buy with a lowered target of $33 from $0 due to near-term headwinds that are building on the outsized impact of the COVID-19 Delta variant on Aviation volumes

·     Utilities & Solar; Rosenblatt downgraded XYL to Hold with a $120 PT from $140 despite a generally positive Investor Day as parts and components shortages worsened throughout Q3 and will push out ~4% of 2H21 sales into next year; SPWR will be added to the S&P MidCap 400 index before trading begins on Tuesday October 5; Barclays upgraded CNP, XEL to OW; BMO started coverage at Outperform on RUN ($65 PT), ENPH ($200), SEDG ($357), NOVA ($50), and Market Perform on BE ($22), PLUG ($30); coal stocks broadly higher today BTU, ATCH, HCC

Financials

·     Bank movers; JEF Q3 EPS $1.50 vs est. $0.99 on rev $1.94B vs est. $1.74B; Morgan Stanley removed WFC from their Global Top Picks List as they delay their base case asset cap removal from 3Q22 to 4Q23 following new OCC consent order and Powell comments, as well as a tough expense outlook; SC to pay $134K to settle a federal lawsuit; Citi upgraded TFC, PNC, MTB to Buy; Goldman started SIVB at Buy with a $770 target; ING will start a buyback program of EUR 1.74B (~$2.01B) on Oct. 5 that is expected to end no later than May 5, 2022; IBKR Sept daily average rev traders 2.26M (+16% YoY), 1.54M client accounts at month-end (+57% YoY, +3% vs Aug), ending client equity %353.8B (+52% YoY, -3% vs Aug)

·     Bitcoin, FinTech & Payments; cryptocurrency-exposed stocks rally (BTBT, NCTY, MARA, SI, RIOT, MSTR) after Bitcoin jumped back above $47,000, rising nearly 10% at one-point; COIN shares underperformed rest of crypto leveraged sector after reports that hackers robbed thousands of Coinbase customers using MFA flaw; Wedbush said they continue to believe that stablecoins backed by banks, such as SI’s Diem, should be looked at more favorably by regulators than non-bank stablecoin issuers given the already existing robust regulatory infrastructure in place in the banking industry

·     Financial services; SPGI tgt to $536 from $550, MCO to $428 from $418, and MSCI up to $685 from $659 at Oppenheimer and continues to recommend these and SEIC though strong YTD performance, high expectations, hyperinflation/rising rates, and the view of weaker than expected IG and HY issuance in 3Q21 present near-term risks; In student lending, Credit Suisse maintained their estimates and PT on SLM, NAVI while raising NNI estimates and PT to $90 from $83 83 due to the potential to earn some of PHEAA’s servicing volume, higher EPS, and improving market multiple

Healthcare

·     Pharma movers; Dow component MRK surges after its experimental oral drug for COVID-19, molnupiravir, reduced by around 50% the chance of hospitalization or death for patients at risk of severe disease, according to interim clinical trial results. Merck and partner Ridgeback Biotherapeutics plan to seek U.S. emergency use authorization for the pill as soon as possible, and to submit applications to regulatory agencies worldwide. Due to the positive results, the Phase 3 trial is being stopped early at the recommendation of outside monitors (shares of other vaccine makers tumbles following the better MRK data, with MRNA, NVAX, PFE, BNTX sliding)

·     Biotech movers; OMER tumbles after saying that FDA had identified deficiencies in its marketing application for narsoplimab in hematopoietic stem cell transplant-associated thrombotic microangiopathy (HSCT-TMA); SPRO downgraded to Perform from Outperform at Oppenheimer as view potential $250M RIF payment upon change of control as unfavorable to shareholders

·     MedTech Equipment; ISRG & SILK both downgraded to Neutral from Buy at Citigroup saying they enter the earnings season with particularly low expectations, and believe that most investors are willing to look forward if the fundamentals are intact for group, upped tgt prices for ABT, DXCM and IRTC while decreasing ZBH and believe more diversified stocks with comprehensive product pipelines (ABT, BSX, and MDT) and those more consumer interfacing also with a pipeline (Diabetes stocks: DXCM, PODD, and TNDM) are best positioned to manage the noise; BMRA shares jumped after saying WMT has begun selling co’s EZ Detect colorectal disease screening test through its online sales channel

Industrials & Materials

·     Aerospace & Defense; $BAH, $LDOS – Defense IT Preview – Q3 A Likely Bottom – We see mostly lackluster Q3 sales & bookings but underlying demand is good and the group looks badly oversold with reset upside as investors look to accelerating results in Q4 @ Cowen – Our favorites are growth leaders LDOS & BAH as well as KBR but this really is a group call given healthy 1.4x sector average LTM B-B, growing bid pipelines, the sector’s 25% ytd underperformance and modest 11.3x TEV/EBITDA. We see reset upside on expected upbeat BAH & LDOS investor days and Q3 call commentary.

·     Transports; Dow transports outperform, rising over 1% led by airlines amid the strength in the reopen and recovery stocks on MRK vaccine news; JPMorgan upgraded LUV in the airline sector and downgraded SAVE that they believe the current equity rally has room to run, in part given encouraging Chase travel spend data, the recent planned relaxation of US borders, and equity values that remain significantly below their vernal highs; package delivery names mixed with FDX shares moving higher and UPS slipping early

·     Metals & Materials; CF, NTR, MOS shares outperform in the S&P 500, with general strength in chemicals, as Citi raised estimates on fertilizer names as companies begin to realize the run-up in spot prices with a typical 60–90-day lag. High grain prices are sustaining farmer economics and fears of any demand destruction impact on inputs have so far been suppressed by low grain stocks. In fertilizers our rank order is NTR, CF Also said like NTR’s diversified business model. Among Ag chemicals, we prefer CTVA over FMC Wells Fargo raised tgt on HUN from $32 to $36 on higher estimates, reflecting better than expected MDI pricing amid supply tightness and strong demand for HUN’s Polyurethanes segment in 4Q21; in lithium sector, Piper initiated LTHM with an Overweight and $29 tgt saying it is currently building new capacity additions to its Brine and Carbonate operations in Argentina, and a neutral rating on LAC

Technology, Media & Telecom

·     Internet; BABA downgraded to Outperform from Strong Buy with a price target of $240, down from $300 saying while they remain positive on Alibaba long-term and believes valuation remains attractive, feels the recovery in shares could take longer; NFLX tgt raised to $685 at Guggenheim, updating model to reflect higher multi-year revenue and operating profit estimates driven by the output of continued investments in production facilities and content globally.

·     Software movers; FIVN said its $14.7B merger agreement with ZM has been terminated by mutual agreement as did not receive the requisite number of votes from Five9 shareholders to approve the merger with Zoom (FIVN upgraded by Canaccord, Evercore, Barclay’s and Wells following the news as we believe the implied post-announcement value of FIVN is below its intrinsic value); ZUO upgraded to Equal-weight at Morgan Stanley saying after two quarters of consistent execution leading to improving fundamentals, they are encouraged by the product momentum and focus on partnerships to support growth; GWRE hosted its annual investor day on 9/30, with mgmt providing additional color on the recent cloud momentum evidenced in its recent 4Q, the uptick in adoption of the platform’s analytics tools (~50% of all deals in fiscal 2021 included at least one data or analytics offering), and an updated view of competitive env’t; ATVI rises for the 6th time in 7-days and EA up a 7th straight as video gamers rebound after weakness in early September – for EA, FIFA 22 went on sale on Fri, with positive early reviews

·     Semiconductors; Westpark Capital initiated ON at Hold with a $50 target as new management’s strategic shifts to higher value markets and towards a more fab-lite manufacturing strategy that is likely to drive longer-term growth and profitability above the peer-group average is well understood and revenue headwinds are likely to cap growth over the next 2 years and MRVL with a Buy rating and $80 target on its strategy execution that centers on data center and infrastructure end markets with a long-term view that the company will emerge as a leading supplier into the fastest growth markets for semiconductor; Digitimes reported STM and XLNX have both notified their clients about price increases for their chip solutions starting the fourth quarter of 2021