Closing Recap

Monday, October 03, 2022

Equity Market Recap

·     Stocks surge as investors are happy to put an awful August and September behind them. Stocks finished off the highs with individuals putting money to work to start October, bouncing after S&P futures dropped below 3,600 overnight to lowest since Nov ’20 before tallying a strong 2.5% up day across the board for major averages (and posting best one day gains also since Nov ’20). The Nasdaq 100 fell -10.5% on the month of September, registering a new YTD closing low on Friday and leaving the NDX down -33% on the year, its worst start since 2002 – but investors stepped in big this morning. Gold and silver prices jumped as the dollar and Treasury yields eased on the back of the BOE’s temporary bond buying program and disappointing U.S. ISM manufacturing PMI data, raising hopes for the Fed to possibly reign back its aggressive rate hikes on signs of a slowing economy. It has been a rough stretch for US stocks heading into the final earnings quarter next week as CNBC notes declining operating margins by quarter – Q2’21 was record 13.54%, down to 13.41% in Q4’21, then 11.93% in Q1’22 and 10.86% in Q2’22. In stock news today, Tesla (TSLA) the standout loser on disappointing Q3 delivery totals.

·     Wall Street remains/gets more bearish: but stocks rally anyway: 1) Morgan Stanley’s Mike Wilson said he remains bearish and sellers of rallies until EPS forecasts de-rate, and the price is right. The light at the end of the tunnel. With financial stress now appearing in places where central banks are unwilling to tolerate it, the primary question on many investors’ minds has once again shifted to when the Fed pivots, not if. With global US dollar liquidity now into the danger zone where "bad stuff" happens, agree it’s only a matter of time before these stresses finally convince the Fed to back off. 2) Goldman Sachs said in a strategy note this weekend a weaker economy “will drive households to continue selling stocks… We expect households to sell $100 billion in equities in 2023.” 3) Credit Suisse lows their 2022 S&P 500 price Target to 3850 from 4300 and initiating our 2023 Target of 4050. This implies 7.4% upside through the end of 2022, and 5.2% next year. These forecasts are based on updated EPS estimates of $227, $230, and $240 for 2022-24, representing 8.4%, 1.3% and 4.3% growth. 4) Citi’s Scott Chronert, with his SPX price Target cut this morning, says he has lifted his "severe recession scenario" odds to 20% — from a prior 5%.

Economic Data:

·     S&P global Sept. Manufacturing PMI at 52 vs 51.5 prior; S&P global U.S. Manufacturing sector final output index for September at 50.6 vs flash 49.5 and final August 49.3 and Sector final output prices index for September at 64.1 vs flash 63.5 and final August 62.9

·     ISM U.S. Manufacturing activity index 50.9 in September (lowest since May 2020), down from 52.8 in August and below estimates of 52.0; prices paid index 51.7 in September vs 52.5 in August, new orders index 47.1 in September vs 51.3 in August (also lowest since May 2020), employment index 48.7 in September vs 54.2 in August

·     U.S. Construction Spending fell (-0.7%) vs. est. (-0.3%) to $1.781 trln, vs July (-0.6%); Aug private construction spending -0.6%, public spending -0.8%

Commodities

·     WTI Crude November futures settle at $83.63 a barrel, up $4.14, 5.21%. Oil prices rise as the OPEC+ alliance considered its biggest production cut since the pandemic, by more than 1 million barrels per day according to reports when it meets in person on Wednesday for the first time in more than two years. The national average for a gallon of unleaded gasoline has jumped to $3.78, up from $3.67 last week, a second consecutive weeks of gains, with prices boosted by refinery issues on the West Coast and Great Lakes region. Not oil prices have declined for four straight months since June, as COVID-19 lockdowns in top energy consumer China hurt demand while rising interest rates and a surging U.S. dollar weighed on global financial markets.

·     Big gains in precious metals on Monday as gold prices rose $30, or 1.8% to settle at $1,702 an ounce, while silver surged $1.55 or 8.1% to settle at $20.589 an ounce, helped by a further dip in the dollar and sliding Treasury yields. Palladium jumped 3.6% to $2,236.14. Platinum climbed 4.7% to $899.46 per ounce.

Currencies & Treasuries

·     Treasury yields tumbled on Monday with the 10-year falling as much as 20 bps to below 3.6% and the 2-yr down as much as 15 bps to 4.05% (before paring declines). Global yields fell after UK Prime Minister Truss reversed a tax cut to the highest rate of income tax implemented just 2-weeks ago after the move sparked turmoil in financial markets and a rebellion in her party. Finance minister Kwasi Kwarteng said the decision had been taken with "humility and contrition", after some reacted with fury to suggestions that public and welfare spending could be cut to fund tax cuts for the richest. Meanwhile the US dollar sells off for a second week after jumping to 20-year highs just a week ago, ahead of key employment data later this week. The British Pound neatly 1,000 bps move off record lows in just a week (1.1268 vs. 1.0327 low last week).

Sector News Breakdown

Consumer

·     Retailers: Cowen said for UAA, BURL, ADDYY, BIRD, HBI, PVH, SKX, FIGS they are most cautious on Q3/Q4 guidance vs highest conviction in LULU, DECK, TJX and DKS guidance and models as see increasing risk to growth and consensus projections as well as a rapidly changing valuation environment; FXLV confirms receipt of unsolicited proposal from Kennedy Lewis Investment Management LP at a price per share equal to $4.00 in cash; NKE downgraded to Hold at Argus which reflects concerns about the co’s high inventory, which rose by 44%, to $9.7B, in fiscal 1Q23

·     Auto sector: TSLA disappoints as reported total Q3 deliveries grew to 343,830 units during the quarter, a 35% increase compared to 254,695 units delivered during 2Q22 (when China factories were idle), and a 42% increase compared to 241,300 units delivered in 3Q21 – but below consensus between 365K-371K – Tesla delivered 18,672 Model S/X and 325,158 Model 3/Y; XPEV reported vehicle deliveries for September of 8,468 units vs. 10,412 y/y; Vehicle deliveries 8,468 units, -19% y/y; Year to date deliveries 98,553 units, +75% y/y; TM reported U.S. September 2022 sales of 179,050 vehicles, up 17.1% on a volume and daily selling rate (dsr) basis; GM sold 555,580 vehicles in the United States in Q3, up 24% year over year

·     Consumer Staples & Restaurants: APRN said prelim net rev down "primarily due to a shift in the timing of an anticipated bulk sale of approximately $15 million to an enterprise customer, that had been expected in 3Q"; sees Q3 revs $109M-$112M vs. est. $130M; CALM announced that its Board of Directors has named Sherman L. Miller President and Chief Executive Officer of the Company, effective immediately.

·     Casinos, Gaming, Lodging & Leisure sector: Macau’s gross gaming revenue (GGR) came in at MOP2.96bn in Sep, +35% mom or -87% vs. pre-COVID Sep 2019 level and was down 49.6% year-over-year to 2.962B patacas (shares of WYNN, LVS, MLCO active); in leisure, THO downgraded to Hold from Buy and lower ests at Argus as it is now facing pressure from rising costs and supply-chain issues, and plans to reduce production this year to reflect current retail demand; NCLH said it was removing all COVID-19 testing, vaccination and masking requirements from its health and safety protocols

Energy, Industrials and Materials

·     Energy stock movers: outsized move to the upside in the energy sector (MRO, APA, DVN, PXD, etc.) amid a jump in oil prices after reports OPEC+ is set to consider Wednesday its most drastic reduction of production since the pandemic to help prop up falling oil prices. OPEC+, is considering a cut of more than 1 million barrels a day, delegates in the group said. Concerns about a slowing global economy have dragged oil prices down. SWN upgraded to Buy at Truist and raise tgt to $11 from $7 as believe Southwestern has ample takeaway capacity, positive upcoming financials, and efficient operations that will all take advantage of the continued strong natural gas prices we forecast; PBR rises on Brazil election headlines

·     Aerospace & Defense: LHX announced the signing of a definitive agreement to acquire VSAT’s Tactical Data Links product line for approximately $1.96 billion, subject to customary adjustments; In business jets, Cowen lowers tgt on BDRBF to $30 from $35) and GD to $245 from $260 saying Bizjet demand is easing from overheated levels but extended backlogs support delivery ramp in 2023-24 – GD is their favorite for its new product ramp while deleveraging story BDBRF offers upbeat Q3 B-B and FCF

·     Metals & Materials: strength in industrial and precious metals early with AA, CENX, FCX, others rebounding from last week losses; LTHM downgraded to Underperform from Neutral at Bank America and cut tgt to $27 from $31, while raises ALB tgt to $332 from $262 and stays neutral in lithium space; gold miners jumped following the bounce in gold

·     Chemicals: in fertilizer sector, RBC Capital upgraded CF to Outperform as believe should benefit from a favorable nitrogen market outlook and attractive energy spreads between the US and international markets that may persist long-term; RBC downgraded MOS to Sector Perform as believe now favor nitrogen and potash vs. phosphate, says valuation discount to peers has narrowed, and sees less upside potential to consensus estimates vs. peers

Financials

·     Bank movers: outperformance in financials despite a sharp drop in Treasury yields; in research, WFC upgraded to Buy at Goldman Sachs on underappreciated earnings growth from solid revenue upside and efficiency improvement (rates and loan growth driven NII, and further idiosyncratic expense rationalization) and believe WFC will have less downside credit risk in the event of a recession relative to peers. The firm downgraded Citigroup (C) to Neutral on higher capital requirements and earnings downside risks and cut tgt to $47 from $54; CS shares fell to record lows on concern of its financial health despite recent efforts by the Swiss bank to reassure staff, investors, and clients about its financial health.

·     Financial Services: for MCO, Goldman Sachs reduced revenue estimates after September debt issuance declined a significant 63% (the worst y/y decline in any given month since the Global Financial Crisis); INTU resumed coverage at Neutral (from prior OW) as anticipate solid near-term execution, but expect earnings growth to be offset by multiple contraction, and do not think 10-15% organic growth will continue to carry a mid-20s-plus PE & FCF multiple; for Information Services, RBC Capital said investors believe CSGP, FDS, and VRSK are more defensive, while SPGI, TRU, and EFX may guide to the lower end of FY22 guidance, and MCO may likely cut guidance.

·     Insurance: JPMorgan provided P&C Insurance 3Q22 Preview saying their positive sector view reflects healthy fundamentals & defensive profile and names ALL their top pick, while downgrading RYAN from Neutral to Underweight and BRP from Overweight to Neutral. Said they remain constructive on personal lines (due to an expected recovery in auto margins) and are incrementally positive on brokers (pullback in stock prices) and less negative on reinsurers

·     Bitcoin, FinTech & Payments: Kim Kardashian has agreed to pay more than $1 million to settle SEC charges for failing to disclose a payment she received for touting a crypto asset on Instagram; UPST remains Underperform rated and $15 tgt at Wedbush noting DriveTime pulled its $400 million subprime auto ABS deal called DTAOT 2022-3 last Wednesday, September 28, according to International Financing Review (IFR).

·     REITs: BTIG noted REITs closed out their second challenging quarter in a row with another down week in which the sector underperformed the broader averages. REITs declined 3.9% for the week and 10.8% for the quarter compared to a 2.9% and 5.3% respective decline for the S&P 500. This underperformance comes despite a relatively strong 2Q22 earnings season and generally rising consensus estimates during the quarter.

Healthcare

·     Pharma movers: MYOV said a special committee of its board rejected a $22.75/share offer from Sumitovant Biopharma to buy the remaining shares of the biopharma company it doesn’t already own https://bit.ly/3RAaKTw ; LOGC to be acquired by AZN for about $68 million, as AstraZeneca agreed to pay $2.07 a share in cash for LogicBio, more than 7x Friday closing price; CALA said the FDA granted fast-track designation for the company’s investigational treatment for adults with unresectable or metastatic squamous non-small cell lung cancer.

·     Biotech movers: AXSM said that Sunosi met the primary endpoint in the SHARP study and significantly improved cognitive function, as compared to placebo in cognitively impaired patients with excessive daytime sleepiness associated with sleep apnea; CLNN topline results demonstrating survival signal for CNM-Au8 in Healey ALS Platform Trial – primary endpoint of adjusted ALSFRS-R and secondary endpoints of CAFS and SVC were not met at 24 weeks; OMER said it has received $125 mln from DRI Healthcare Trust through the sale of a portion of royalty payments for eye disease drug Omidria

·     MedTech Equipment: Canaccord provided thoughts on coverage post-Hurricane Ian in MedTech saying companies with least amount of impact: NARI Florida is an outsized state for NARI and shipments are typically post-use throughout the quarter with a bit for new account/product stocking historically; for MMSI, Florida is a big state for MMSI and the company ships throughout the quarter with some OEM customers at quarter end. Significant OUS mix should lessen any FL headwinds. Procedural impacts into Q4 could result in headwinds; for STIM, Florida is a decent-size state for STIM, but very little exposure to Fort Meyers/Naples areas. Shipping is throughout quarter and STIM had ample warning to pre-ship orders as needed. Q4 may start out a little slower due to the amount of devastation across the state of Florida and up the East Coast; for LUNG Florida is a very small percent of the company’s overall US business (under-indexed), and customers reorder on use, likely limiting the impact to LUNG in Q3 and going forward; for STAA, the US is a very small percent of revenue (<5%) and Florida is under-indexed for US sales, which should result in minimal impact to 2H/22 and for VAPO, Florida is under-indexed for US sales (typically in the mid-single digits as a % of US revenue), with customers reordering based on use.

Technology, Media & Telecom

·     Media, Internet: GOOGL discontinued its Google Translate service in mainland China citing low usage, marking another retreat by the U.S. tech giant from the country; TV channels owned by DIS are back on DISH’s satellite broadcasting and streaming platforms after the two companies reached a tentative agreement on a new contract; for PINS Guggenheim said September data review points towards enhanced interest across the company’s user and advertiser base in aggregate; RBLX was initiated at Underperform and $19 tgt at Moffett

·     Semiconductors; INTC filed for an initial public offering (IPO) of its self-driving technology business, Mobileye Global Inc. The company didn’t give an expected size for its IPO; IDCC raises Q3 revenue view to $112M-$115M from $96M-$100M (est. $98.83M) as includes approximately $100M of recurring revenue and reflects continuing success in the core smartphone licensing program as well as new licensing agreements. This weekend, the SIA monthly data in August followed up a weaker July with a slight beat – Total industry sales decreased -4.0% on a YoY basis in August (primarily on weak memory sales), after decreasing -1.8% YoY in July. August makes the second straight negative YoY month for the industry since the end of 2019. Memory fell -36.7% YoY while non-memory rose 11.4% YoY.

·     Software & Hardware movers: DOCU downgraded to Underweight and $47 tgt citing post-Covid demand normalization, sales force productivity challenges, leadership turnover and macro create an uncertain, difficult transition ahead, mostly reflected in shares; BOX upgraded to Overweight at Morgan Stanley citing solid relative macro positioning w/ compelling ROI and value in Box Suites, strong execution, a more favorable competitive landscape, and upside to margin expansion; LAZR is probably the best of the lidar makers that launched via SPAC, said Barron’s; The U.S. Supreme Court declined to hear AAPL’s bid to revive an effort to cancel three QCOM smartphone patents despite the settlement of the underlying dispute between the two tech giants.

·     Telecom movers: in cable sector, RBC Capital lowers tgts on ATUS from $19 to $12, CHTR from $575 to $480, CMCSA from $55 to $45, and WOW from $20 to $18 in as takes an in-depth look at the impacts of move activity across cable operators and AT&T/Verizon, quantifying net adds associated with move activity