Closing Recap

Tuesday, October 05, 2021

Equity Market Recap

·     The U.S. stock market rebounded as most S&P 500 sector indexes rose, with financials, communication services and technology outperforming and energy again a leader amid surging oil prices (rising a 5^th straight day) as today marked the fourth straight day of 1% moves in either direction for the S&P 500. The last time the index saw that much volatility was in November 2020, when it rose or fell 1% or more for seven straight sessions. After nearly a calendar year, the S&P finally got the 5% pullback from record highs that many market watchers had been waiting for and it was met with open arms as investors jumped into stocks this morning. The questions is, can the gains hold up ahead of the debt ceiling limit in a few weeks, the start of earnings season, and a more “hawkish” path laid out by the Fed last week on asset tapering and interest rate hikes (with China a wildcard). Economic data was mixed today as U.S. services industry activity nudged up in September, but growth is being restrained by a persistent shortage of inputs and the resulting high prices as the pandemic drags on, while the trade deficit races to record highs. Next up private payroll data tomorrow (ADP) and nonfarm payrolls on Friday. After closing below its 200-DMA today for the first time in 378 trading days Monday and was down more than 9% from its Sept. 7th record close, the NY FANG+ Index jumped today as mega cap stocks rebounded.

·     Stocks/sector movers: Market rebound today was paced by big tech as the Nasdaq outperformed with NFLX jumping to all-time highs and FB recaptures some of yesterday’s losses despite whistleblower’s Senate testimony today, (AMZN, AAPL, GOOGL, MSFT each bounce); PEP gains after earnings beat and raised FY revenue forecast; athletic retailers were strong as LULU rallied on increasing its buyback by $500M, Wedbush says the athletic space is a long-term winner and initiates UAA NKE at Outperform; GS, JPM among the best performers in the Dow as 10-year yield goes back above 1.53% level; other financials also soar as IVZ among S&P leaders amid reports is in talks to merge asset management operations with STT; ABMD surges after a Jefferies survey of physicians was overly bullish on the company’s Impella heart pump.

·     In D.C., we remain 13-days away before the debt limit date of Oct 18 as both parties look for a compromise. Senate Majority Leader Chuck Schumer plans to set up a vote by Wednesday to increase the federal debt limit and avoid defaulting on U.S. debt, which Treasury Secretary Janet Yellen said could cause a recession. Schumer said in a Monday letter that Democrats needed to send a bill dealing with the debt limit to President Joe Biden by the end of the week, ahead of Oct. 18. On the infrastructure bill, President Biden is open to help lower price of reconciliation bill according to reports overnight, reiterates expectations topline figure will come down to $1.9T-$2.2T from initial $3.5T.

Economic Data:

·     The Institute for Supply Management (ISM) non-manufacturing activity index (services) edged up to a reading of 61.9 last month from 61.7 in August and above ests of 60.0. New orders received by services businesses inched up to 63.5 last month from a reading of 63.2 in August. Supplier deliveries dipped to a reading of 68.8 last month from 69.6 in August., while a measure of prices paid by services industries rose to 77.5 from a reading of 75.4 in August.

·     August International Trade in Goods and Services widens to (-$73.3B) vs. -$70.7B consensus and (-$70.3B) prior month, revised from (-$70.1B) as August exports were $213.7B, $1.0B more than July exports and August imports were $287.0B, $4.0B more than July imports.

·     IHS Markit September final composite PMI at 55.0 (vs flash 54.5) and September final services PMI at 54.9 (vs flash 54.4); final input prices index for september at 74.1 vs flash 74.2 and final august 72.5; input prices index for september at 76.2 vs flash reading 76.3 and final august 74.9

Commodities, Currencies & Treasury’s

·     Oil prices still going higher, with WTI crude rising $1.31 or 1.69% to settle at $78.93 per barrel, trading as high as $79.48 before paring gains, its best levels since 2014 after OPEC+ yesterday decided to maintain its plan to raise production by 400,000 barrels per day in November. Oil prices are also getting a boost from surging natural gas prices, which jumped over 10% to its best levels since 2008 as energy switching by power producers may overwhelm this increased supply.

·     Gold prices fall -$6.70 or 0.4% to settle at $1,760.90 an ounce, off session lows of $1,748.60 and its first loss in the last 4-trading days, while the dollar index was up only slightly on day. Natural gas buying accelerates as prices climb 10.3% to $6.392, highest since 2008. Treasury yields jumped this morning following better economic data but failed to hold their best levels with the 10-yr yield around 1.52%, off highs of 1.54%. Sterling rose to a three-week high against the euro on Tuesday as rising inflation expectations hit risk sentiment last week and saw bond yields climb higher, pushing risk-sensitive sterling to a two-month low versus the euro.

Sector News Breakdown

Consumer

·     Retailers; COLM downgraded to Neutral from Buy at Bank America and lowering tgt to $108 from $137 as believe supply chain constraints could pressure outlook and believe factory closures are likely to impact F1H22 shipments and lower our F22 EPS; LULU approved $500M boost in buyback program; Cowen lowered its tgt on FL to $61 from $82 and lowered ests on higher costs, lack of visibility and weakness in units sold – which they say will likely be down well into the double-digits into Q3, Q4 and Q1 due to supply chain issues; VFC tgt cut to $83 from $94 as expect management to lower full year sales and gross margin guidance, and are adjusting lower estimates given a lack of visibility and confidence in the name; BBBY reinstated Underperform and $14 tgt at Bank America saying results continue to materially underperform the industry. Wedbush initiated retail with outperform ratings on NKE, ADDYY, UAA, POSH, TDUP, RVLV, PVH, SHOO and RL as think the most compelling long-term risk/reward comes from UAA (early-stage turnaround story), though we expect short-term volatility due to supply chain issues.

·     Auto sector; for auto suppliers, Wells Fargo said Q3 will likely be an important reset for auto suppliers as they expect all suppliers to miss Q3 consensus and significantly lower FY guidance as their revised 2021 EPS outlook is on average ~17% below consensus EPS estimates (firm said see BWA as relatively better positioned, helped by commercial & aftermarket exposure as well as high Ford exposure); RIDE was downgraded at Morgan Stanley and cut tgt to $2 from $8 saying its agreement to sell its plant to Foxconn for $230M is less than 20% of the firms plant value estimate; HYZN rejected a recent report by Blue Orca, saying it was inaccurate and misleading, and was solely intended to generate profits for the short seller.

·     Consumer Staples; PEP Q3 core EPS $1.79 vs est. $1.73 on revs $20.19B vs est. $19.39M, sees FY core EPS at least $6.20 vs est. $6.24, raised its FY organic rev growth to +8% from +6%; BMO downgraded ACI to Underperform given the risk to their margin outlook based on significantly greater margin expansion relative to key grocery peers and SFM to Underperform as well on risks to outsized gross margin gains and efforts to cut costs despite weak comps; NAPA beat on sales and EBITDA driven by both vols and price mix and guided FY22 sales above consensus while EBITDA was in line with street; AGFY agreed to buy two companies that provide equipment for processing marijuana plants in a deal that could be worth as much as $65 million; Bank of America reinstated coverage with a Buy ratings on EL ($345 target) due to strong innovations, customer loyalty, leverage to reopening, skincare, and China growth, as well as the entry point with shares -10% MoM and PG ($160) given best in-class innovation with global share gains and easier 2H comps, and Neutral on CL ($80).

·     Casinos, Gaming, Lodging & Leisure sector; for cruise lines, Bank America said on a capacity-weighted basis, month-on-month prices were -4.5% for CCL, -9.2% for RCL and -3.1% for NCLH in a deceleration from the prior trend. Looking at cruise itineraries by quarter, the recent pricing weakness has been focused on 2022 sailings with 2023 pricing staying relatively flat across the industry versus prices seen over the summer; in online gaming, Morgan Stanley noted DKNG ended the month with 32% app download market share to improve from the 30% level seen in August; Flutter Entertainment’s (PDYPY) FanDuel came in with 27% market share, which was up notably from the 20% mark in August; BetMGM (MGM) improved a full point in September to 12% app download market share; CZR also has 12% share in September (down from 18% share seen in August) and PENN’s Barstool dropped to 7% market share from 12% in August

Energy

·     E&P and Majors; BCEI to offer $400M of senior unsecured notes due 2026 in a private placement; CPE raised its production forecast for Q3 to 98.5k-99.5k mboepd from 95.5-97.5k and full-year 2021 after completing its acquisition of the Delaware Basin assets from Primexx Energy on Tuesday and on strong well performance, and separately entered into an agreement to sell non-core acreage in the Eagle Ford Shale for about $100M; USEG acquired oil and gas assets from a group of sellers for $99.5M; CEI shares tumbled after a short report call from Kerrisdale Capital which noted the company’s only real asset is a 73% stake in Viking Energy, which has a negative book value and a going concern warning that recently violated the maximum leverage covenant on one of its loans.

·     Pipelines: Stifel downgraded TGP to Hold from Buy; Mizuho upped its price target on EPD to $29 as shares have underperformed peers as investors are lukewarm following the company’s earlier Q2 update, though they believe apathy is overdone and the company should benefit from crude prices around $75/barrel; the Pennsylvania AG filed 48 criminal charges against ET with 45 of the charges relating to the illegal release of industrial waste.

·     Utilities & Solar; SPWR acquired Blue Raven Solar; REGI increased its line of credit to $250M and extended its existing line of credit by 5 years through September 2026; Raymond James downgraded MAXN to Outperform from Strong Buy with a new $23 PT from $26 and also downgraded GLTS and EVA while upgraded BE to Strong Buy from Outperform with a lower $29 PT from $33; Evercore upgraded CWEN to Outperform as it is gaining traction with its new private sponsor vs its previous publicly-traded sponsor, adding more capacity outside of California, and the belief that investors will rotate out of expensive Canadian names into cheaper US peers; SWX shares rose after the WSJ reported activist shareholder Carl Icahn said a proposed $2B purchase of Questar Pipeline would diminish shareholder value.

Financials

·     Bank movers; a good day for banks and brokers after Treasury yields jumped following a better ISM Services reading, lifting the 10-yr above 1.53%; TFC downgraded from Outperform to Underperform with $65 tgt at Wolfe research while upgraded CMA to Outperform from Underperform as expect CMA to be among the greatest beneficiaries of the two hikes implicit in the Fed funds curve by the end of 2023 and upgrade shares while cutting TFC; For Trust banks (STT, BK, NTRS), Jefferies lowers ’22 EPS forecasts by 3%-4%, driven mostly by weaker marks than our prior forecasts, but introduce ’23 ests and see a cleaner set up with EPS growth potential of 25%-30%, driven mostly by better NII and diminishing fee waivers.

·     Financials Services and Insurance; in credit cards, the WSJ reported that Visa (V) plans to change the way it processes certain Apple Pay (AAPL) transactions, saying the planned change would trim fees that banks pay to apple on recurring transactions; TW reported Sept total trading volume of $21.7T; ADV stood at $1.02T (+17.4% Y/Y) and said for Q3, total trading volume was $62.1T and ADV was $964.5B (+23.6% Y/Y), with prelim average variable fees per million dollars of volume traded of $2.70.

·     Bitcoin, FinTech & Payments; Crypto stocks including MARA, RIOT, SI, BTBT, MSTR and others were higher early after Bitcoin prices topped the $50K resistance and Ethereum reached as high as $3.5K before pulling back some; recall on Monday that bitcoin tested $50K just a week after the digital token bounced off $41K; USB said it had launched a cryptocurrency custody service for institutional investment managers who have private funds in the U.S. and Cayman Islands, acting as a sub-custodian and the service will soon support cryptocurrencies besides bitcoin as well.

·     REITs; Fantasia Holdings Group Co., a developer of luxury apartments in China, said it didn’t make a $206 million U.S. dollar bond payment that was due Oct. 4, adding to the malaise surrounding the country’s highly indebted property companies (follows recent bond payment miss by Evergrande); EQIX and DLR downgraded to Neutral at Credit Suisse and make slight model adjustments, coming in slightly below consensus for 2021E/2022E to account for industry headwind saying supply chain pressures to impact DLR and EQIX, albeit in different ways; AHT reported prelim occupancy rate of 59.7% for September with an average daily rate of $158.

Healthcare

·     Vaccine news: JNJ submits data to the U.S. FDA for emergency use authorization of a booster shot of its COVID-19 vaccine in people aged 18 years and older as data from late-stage study that found a booster given 56 days after the primary dose provided 94% protection against symptomatic COVID-19 in the U.S. and 100% protection against severe disease, at least 14 days after the booster shot; PFE Covid shot protects people from hospitalization even as effectiveness against infection drops, Lancet study says. Said effectiveness in preventing infection by the coronavirus dropped to 47% from 88% six months after the second dose, while analysis showed that the vaccine’s effectiveness in preventing hospitalization and death remained high at 90% for at least 6-months; MRNA announces European medicines agency authorizes third dose of covid-19 vaccine for immunocompromised individuals aged 12 years and older

·     Pharma & Biotech movers; ZYME and ALXO said the first patient has been dosed in the early-stage trial of zanidatamab in certain patients with breast cancer; BHVN said it expects Q3 revenue from its Nurtec ODT migraine drug at $136M, up 46% from $93M in Q2 and above ests of $114M – said it has now tallied $336Mn in net product revenue for Nurtec ODT since the initial product launch in March 2020; KLDO slips after the company reported topline data from the non-IND clinical study evaluating KB295 in mild-to-moderate ulcerative colitis

·     Healthcare Services; in managed care, Cowen said they think UNH (reports on 10/14) will lead off with an MLR beat and endorsement of 2022 consensus EPS, setting the tone for a group bounce. ANTM is a non-consensus pick to beat MLR (without the use of reserves). HCA remains a top pick to beat 3Q EBITDA, but that seems a relatively-consensus view. UHS has traded far worse; we expect acute EBITDA upside to offset behavioral downside. Firm adds ANTM to their near-term tactical portfolio (joining HCA ) and remove LFST; SDC said the United States Patent & Trademark Office will issue a patent on the company’s innovative SmileBus concept.

·     Medical Technology: ABMD shares rise early as Jefferies raises numbers after bullish survey saying overwhelming majority of docs see the ECP design capable of limiting AEs and improving outcomes while Class I guidelines will increase Impella utilization in HRPCI by 30%+ if secured; BSX said two-year data from a randomized controlled trial showed that its Ranger Drug-Coated Balloon (DCB) remained unobstructed with 84% effectiveness in patients with peripheral artery disease (PAD).

Industrials & Materials

·     Industrial & Machinery; in heavy-duty trucking, October prelim Class 8 from ACT truck orders was 27,400 units, down from 36,900 in August and 25,480 in July as shortages of semiconductors and other components challenge equipment makers’ ability to meet demand for new big rigs (shares of CMI, PCAR, ALSN among names leveraged to ACT data); AOS upgraded to Outperform from Neutral and up tgt to $85 from $82 at Baird; PCAR, SAIA both upgraded to Outperform at Wolfe Research saying if supply chain headwinds in fact start to ease, they’d expect the laggards in transports this year to start outperforming again.

·     Transports; LUV said staff must be vaccinated against Covid by Dec. 8 under federal rules; ahead of earnings, Cowen with airline preview saying stocks to own include UAL, ALK, ALGT as believe 3Q21 started strong sagged in the middle and then finished strong as people started planning holiday trips; Dow Transports reclaimed its 200-day MA (of 14,310) and approached its rolling 50-day MA just above 14,500 amid broad strength (CAR, FDX, JBHT, NSC).

Technology, Media & Telecom

·     Internet & Media; FB and its Instagram, Messenger and WhatsApp reconnected late on Monday afternoon after a nearly six-hour outage that prevented the company’s 3.5 billion users from accessing its social media and messaging services; U.S.-listed Chinese stocks climb early as the beaten down shares rebound after hitting their lowest in 17-months and as the rout in technology names appears to be easing; IHRT shares rise after Morgan Stanley raised estimates and tgt to $25 following higher 2Q21 results with both increased digital (podcast) and broadcast advertising expectations.

·     Semiconductors; Infineon said it expects revenue to grow in the mid-teens in the current fiscal year, and is guiding for a segment result margin of around 20%; the company met its targets for fiscal 2021 of approximately EUR11 billion ($12.78 billion) in revenue, and a margin above 18%, according to preliminary figures released; KeyBanc said recent findings are positive for SYNA (increasing estimates and price target to $230), NVDA (increasing estimates and price target to $260), and TXN (increasing estimates and price target to $250); while negative for QCOM (increasing estimates and lowering price target to $175); and positive for Apple suppliers (AVGO, CRUS, QRVO, and SWKS); MRVL extends data infrastructure leadership with TSMC 3nm platform – enabling unique cloud-optimized silicon solutions with advanced IP and packaging technologies

·     Software movers: ASAN PT to $115 from $85 and TEAM to $420 from $350 at Oppenheimer to reflect confidence in their respective product/go-to-market execution and the large market opportunity. Says collaboration/work management vendors (Asana, Atlassian, monday.com, Smartsheet) saw their combined June/July-quarter sales increase 39.5% YoY (vs. +42.4% QoQ); APPN reiterated confidence at its analyst day its ability to drive sustained 30% cloud sub growth (we model 36% in FY21 & 30% in FY22) & updated LT GM target of 80-85% vs 75-78% prior but maintained LT op margin target of 20%.

·     Hardware, Components & Services; COMM downgraded to neutral from outperform at Credit Suisse, which cites equipment supply concerns that may limit revenue recognition and potential; CMTL with Q4 miss and lower guide as 4Q adj EPS $0.23 vs est. $0.24 on net sales $145.8Mm vs est. $149.7Mm; guides FY22 adj EBITDA $70-76Mm vs est. $80.5Mm