Closing Recap

Wednesday, October 06, 2021

Equity Market Recap

·     It was another volatile trading day on Wall Street which saw stocks surge mid-afternoon on reports U.S. Senate Republican Leader Mitch McConnell plans to offer a short-term hike to the nation’s borrowing limit that should last through November and will allow emergency debt limit extension into December. In the end, the Dow a 500 point bounce off lows and the Nasdaq 250 points closing at their best levels. The debt ceiling stand-off between Republicans and Democrats remains center stage, with the nonfarm payroll report Friday also in focus. Major averages finished well off morning lows, pushing higher on hopes of a debt resolution in D.C. Oil prices dropped along with Treasury yields while the dollar climbed. The streak of 4-straight days with closing move of 1% in either direction came to a halt today in the S&P 500. The slump for stocks this morning came as a report from ADP showed that 568K private-sector jobs were created in September, outpacing estimates for 425K (ahead of nonfarm payroll data Friday). While the jobs report is good for the economy it also raises chances the Fed continues plan to taper bond buying assets in November and may push its timeline up for rate hikes in 2022. Bitcoin prices spike, topping $54,000 as investors look to “safe-haven” plays. Oct. 18th is the date by which Treasury Secretary Janet Yellen said recently she expects the country to reach its limit on sovereign debt.

·     Stock/sector movers: STZ green early, but eventually fades and goes red on mixed earnings with an EPS miss but revs beat; airlines weak as Goldman downgrades of AAL JBLU and Wolfe downgrades of DAL, ALGT, HA weigh on peers; Bitcoin tops $55k for the first time since May, Ethereum jumps to highest levels in almost a month to lift crypto-related stocks COIN, MARA, RIOT; AFRM surges after partnering with TGT ahead of the holiday season; STX, CDW plummet after Morgan Stanley downgrades on cyclical concerns; AYI spikes, tops $200 for 1st time since August 2017 after its earnings report; X, NUE tumble in the steel sector after Goldman Sachs downgrades shares, while upgrading CLF, CMC – though metals were broadly lower on the day.

·     The Chinese property industry has suffered its first default on a dollar bond since the China Evergrande Group crisis worsened in recent weeks, fueling concern about other highly leveraged borrowers as the sector cools. Fantasia Holdings Group Co. failed to repay a $205.7 million bond that came due Monday. That prompted a flurry of rating downgrades late Tuesday to levels signifying default. One date in focus is Oct. 15, when Beijing-based Xinyuan Real Estate Co. must repay a $229 million outstanding on a dollar bond.

·     In Washington D.C., U.S. Senate Democrats planned a third attempt to get Republicans to help raise the federal government’s borrowing authority. After a months-long standoff in which Senate Republican leader Mitch McConnell repeatedly said his party would not vote to lift or extend the $28.4 trillion debt limit, President Joe Biden on Tuesday suggested he was open to fellow Democrats changing the filibuster to skirt the roadblock. On Wednesday, moderate Democratic Senator Joe Manchin, who has blocked other parts of Biden’s agenda as too expensive, poured cold water on the idea.

Economic Data:

·     The ADP Private Payrolls report was strong, as added +568K jobs vs. +428K consensus and +340K prior (revised), while goods producing sector added 102K jobs, while service producing sector added 466K jobs

Commodities

·     Oil prices hit a multi-year high on Wednesday as WTI crude rose just shy of $80 a barrel ($79.78 high), before slipping -$1.50 or 1.9% to settle at $77.43 per barrel following bearish weekly inventory data from the EIA. Prices slipped further late afternoon after the Financial Times reported that U.S. energy secretary Jennifer Granholm has raised the prospect of releasing crude oil from the government’s strategic petroleum reserve, declaring that "all tools are on the table" as the Biden administration confronts a politically perilous surge in the price of gasoline. Oil prices have pushed to 7-year highs recently, supported by OPEC+’s refusal to ramp up production more rapidly against a backdrop of concern about tight energy supply globally. Oil prices have also been buoyed by a recent surge in natural gas prices (to a record peak in Europe) while coal prices from major exporters have also hit all-time highs. Nat gas producers dipped today amid a pullback in prices after soaring to a 12-year high in the prior session.

·     Gold prices were subdued on Wednesday, as Dec prices edge higher by $0.90 to $1,761.80 an ounce; little changed on day but bouncing off earlier lows of $1,745.40 an ounce after pressure by another lift in the dollar, although a slight retreat in U.S. Treasury yields limited losses for the safe-haven metal, with investors awaiting U.S. labor market data due later this week. Copper prices slid on worries that the troubled Chinese property sector will further curb Chinese economic growth and metals demand.

Currencies & Treasuries

·     U.S. Treasury yields fell, with the 10-year down to 1.52% after touching 1.57% overnight, though the outlook for rates remained tilted to the upside amid optimism about growth after better private payroll data today from ADP (and ahead of nonfarm payrolls on Friday). The recent bounce in prices reflected investor concerns that soaring energy prices could drive broader inflationary pressures with oil at 7-year highs and natural gas 13-yr highs. At the same time, taking cues from surging energy prices that could spur inflation and interest rate hikes, the U.S. dollar rose on the day with the euro holding below 1.16 915-month lows). Yields on 20-year and 30-year Treasuries jumped to their highest since June. In midday trading, 20-year yields were down nearly 3 basis points at 2.02%, while those in 30-year bonds slid 2 basis points to 2.08%.

Sector News Breakdown

Consumer

·     Retailers; WMT, COST and AEO all mentioned favorably in Jim Cramer Investment club newsletter overnight; said AEO is a stock we think is undervalued, and we are sticking with this position for the charitable trust; REAL Q3 GMV was approximately $367.9 mln, an increase of 50% YoY; September gross merchandise volume was approximately $127.3 mln, an increase of 44% YoY; Macy’s (M) jumped after Jana Partners calls for Macy’s to spin off e-commerce unit

·     Auto sector; GM held its investor Day saying it plans to double annual revenue by the end of the decade to $280B while growing EBIT-adjusted margins as it transitions to an all-electric future; AZO to buy back up to additional $1.5B of stock; HYZN pressured after being named as new “short” call by Iceberg Research citing trouble at its parent company, Singapore-based Horizon; Wedbush said the Electric vehicle sector is going through a massive transformation that is marking a new era in our Green Tidal Wave thesis for the next decade. While today EV’s only represent 3% of total auto sales globally, they believe this will reach the 10% threshold by 2025 and 20% by 2030.

·     Housing & Building Products; U.S. MBA reported mortgage applications plunged -6.9% in the October 1 week following a prior decline of -1.1% while a-9.6% slide in refi’s pace the decline after falling -0.9% previously, and more than erases the 6.5% bounce in the September 17 week. The purchase index fell -1.7% after previously slipping -1.2% – weakness was caused by the pop in the 30-year fixed mortgage rate which rose to 3.14% from 3.10% previously; Loop Capital upgraded construction aggregates companies MLM and VMC to Buy from Hold

·     Consumer Staples; STZ Q2 EPS $2.52 missed est. $2.83 on sales $2.37B vs est. $2.3B, raised FY22 view for EPS to $10.15-10.45 from $10-10.30; Barclays upgraded ABEV to OW as ongoing improvements in their innovation strategy and a moderate mix improvement between price/volume should increase financial results in 2022 and beyond; PEP commenced cash tender offers for up to $4b aggregate purchase price for certain outstanding debt securities; HRL formed an exclusive partnership with food tech startup The Better Meta Co. to offer plant-based protein products

·     Restaurants: RBC lowered estimates on EAT, TXRH to reflect a more cautious stance on margins, and sees potential for further choppiness in casual dining as they expect cost pressures to come into greater focus as the sector’s top-line trend improves from August’s deceleration; Loop initiated Buy ratings on CBRL, PLAY, DPZ, PZZA, WEN, MCD, TXRH and Hold ratings on CMG, QSR, SHAK, YUM, WINGStephens started NDLS at OW with an $18 PT as it is positioned to accelerate its unit growth, advance its average unit volumes, and expand its restaurant margins now and over the coming years; TACO signed its first deal to expand to North Carolina

·     Casinos, Gaming, Lodging & Leisure sector; VICI was upgraded to Overweight at Keybanc following the stock’s 7% decline since the start of the 3Q, coinciding with the announced acquisition of MGP on August 4 and $3.6B equity raise that launched September 8; FUBO announce Long-Term Partnership with first NBA team, Cleveland Cavs, designed to promote brand across Cavs marketing territory in Ohio; cruise lines CCL, RCL saw weakness early along with other travel and leisure names; DASH ests and tgt raised (to $250 from $220) at Truist in anticipation of sustained momentum and better than expected 3Q21 results

Energy

·     Inventory data: the American Petroleum Institute (API) showed a build of 951K barrels of oil for the week ending October 1; gasoline inventories showed a build of 3.68M barrels, distillate inventories show a build of 345K barrels and Cushing inventories show a build of 2M barrels. This morning, the Energy Information Administration (EIA) said weekly crude stockpiles unexpectedly rose +2.3M barrels vs. -0.4M consensus (vs.+4.6M last week, while gasoline rose +3.3M vs. -0.3M consensus, and distillates fell -0.4M vs. -1.0M consensus (all bearish data points).

·     Oil services: Citigroup said they continue to foresee multiple expansion for BKR, estimate upside for HAL and NEX on frac pricing, robust medium-term growth for SLB, and a discounted valuation for CHX as they remain bullish on OFS into 3q results saying the recent spike in commodity prices should ensure healthy growth rates into next year

·     Refiners: PSX was upgraded to Overweight from Neutral at Piper and up tgt to $87 saying poised for the first material beat on refining since pre-pandemic, they believe that PSX is finally at an inflection point

·     Utilities & Solar; Dominion Energy (D) executed its definitive agreement to sell Questar Pipelines to SWX, in a transaction valued at $1.975 billion, including the assumption of $430 million of existing indebtedness; NGG was downgraded from Buy to Hold at Argus; PLUG and SK Group say they have formed a joint venture to build a Gigafactory in South Korea by 2024, with mass capacity for hydrogen fuel cells and electrolyzer systems to supply markets.

Financials

·     FinTech & Consumer Finance; AFRM shares jumped as much as 18% after TGT shared its updated Buy Now, Pay Later (BNPL) offerings with customers ahead of the holiday shopping season, while the company also added Sezzle as a new BNPL option alongside AFRM, which Target has been offering since 3Q19; MA SpendingPulse said U.S. retail sales grew 5.4%* year-over-year in September; RDN reported new defaults of 2,791 in September compared to 2,592 in August and 2,749 in July; said cures increased to 4,963 from 4,784 in August dipped from 4,728 in July and claims paid narrowed to 29 from 151 in August and 141 in July; PAYX was downgraded to Neutral at Citigroup saying with the economy recovering ~80% of jobs lost during the height of the pandemic, believe the stock’s multiple is beginning to peak and has priced in a full recovery.

·     Bitcoin news; Bitcoin prices rise as global equity markets sell-off, as crypto assets seen as “safe-haven” play, while precious metals failed to rally (seen as safe-haven play in past); RIOT said in September it produced 406 Bitcoin, an increase of approximately 346% over its September 2020 production of 91 Bitcoin. At end of Sept, it held approximately 3,534 Bitcoin, all of which were produced by its self-mining operations; COIN shares higher today with Bitcoin bounce, while Oppenheimer notes shares had a rough September with the stock declining by 12.2% versus down 4.8% for S&P 500 as believe the underperformance is attributable to a combination of reasons including 1) increased regulatory scrutiny, 2) retreat of BTC, 3) COIN’s decision to end its Lend product, 4) a $2B debt raise, and 5) macro risks from Evergrande

·     REITs; RBC Capital boosted estimates and price targets for Residential REITS given final September rent figures, which continued to advance at a rapid pace across most of the U.S. Firm said they continue to see the most upside for the single-family rental names (AMH/INVH), while think ESS is the most attractive apartment company and SUI is the most attractive MH/RV name; NLY and AGNC downgraded to Neutral from Overweight at Piper given they see increasing rate volatility over the next several months, especially as we approach a potential tripping of the debt ceiling in late October/early November

Healthcare

·     Pharma movers: Sweden’s Public Health Agency announced on Monday its decision to use the PFE COVID-19 vaccine for children aged 12-15, opting against the MRNA vaccine; GRFS upgraded to Buy from Neutral at Citigroup noting they have been cautious for 18 months, though we now view the risk-reward more positively; VYGR announces license option agreement with PFE for next-generation tracer AAV capsids to enable neurologic/cardio gene therapy programs; TAK slides after announcing that a safety signal has emerged in its Phase 2 studies of TAK-994, and as a precautionary measure, the company has suspended dosing of patients and has decided to stop both Phase 2 studies early

·     Biotech movers: VXRT said it has begun recruiting subjects for its Phase II COVID-19 oral tablet vaccine clinical trial; XENE 8.47M share Secondary priced at $29.50; ACER and its Swiss partner Relief Therapeutics said the FDA has allowed it to file a new drug application for its experimental drug, ACER-001, to treat urea cycle disorders; DNA falls on negative “short” report by Scorpion Capital calling it a colossal scam, a Frankenstein mash-up of the worst frauds of the last 20 years

·     MedTech Equipment; BSX entered an agreement to acquire Baylis Medical Co. Inc. for an upfront payment of $1.75 billion to expand the Boston Scientific electrophysiology and structural heart product portfolios; CNMD was upgraded to Buy at Needham saying its AirSeal and Buffalo Filter products will drive revenue and margin growth over the next few years

Industrials & Materials

·     Aerospace, Industrial & Machinery; BA is set to introduce an air-freight version of its 777X jetliner within the next few weeks and is in advanced talks with Qatar Airways and other potential buyers, Bloomberg reported; ITRI downgraded at Oppenheimer saying with pre-Covid fiscal 2021 financial targets largely moved to fiscal 2024, stepping to sidelines; AYI rises on earnings as Q4 adj EPS $3.27 vs. est. $2.85; Q4 revs $992.7M vs. est. $963.96M; says they improved our operations and delivered solid performance in a challenging environment and are entering FY22 from a position of strength

·     Transports; airlines under fire this morning as Goldman Sachs downgraded AAL to Sell from Neutral and cut tgt to $18 from $19 and downgraded JBLU to Neutral from Buy and lower tgt to $17 from $20; Wolfe also lowering ratings on ALGT, DAL, HA to Peer Perform from Outperform while the recent rise in oil prices also a headwind for airlines; in rails, Susquehanna remain Positive on larger U.S. rails NSC, CSX, and UNP and willing to capitalize historically high valuations to gain exposure against an inflationary backdrop; FDX pressured after Cowen trims tgt to $283 from $297 citing higher labor and fuel costs (noted In September, FDX posted a 7% drop in quarterly profit and cut its FY forecast as labor shortages crimped earnings, slowed package)

·     Metals & Materials; Goldman Sachs upgraded shares of CLF, CMC while downgrades X, NUE saying they see opportunities for investors to get tactical. They express a more cautious view on the sheet steel space, with a downgrade of X to Sell on higher capital intensity driving negative free cash flow momentum, and NUE to Neutral from Buy following outperformance, and an upgrade of CMC to Neutral following relative underperformance and the lack of HRC exposure and highlight underappreciated idiosyncratic opportunities in the space with upgrade of CLF to Buy from Neutral (remains Buy rated on STLD, SCHN); gold miners fail to rally as defensive play despite the stock market pullback; AEM was upgraded to Outperform at RBC Capital saying it is now also benefiting from lower costs, and improved balance sheet

·     Chemicals; RPM Q1 adj EPS $1.08 vs. est. $1.03 on sales $1.65B vs. est. $1.64B, expects Q2 sales to increase in mid-single digits and expect raw material, freight and wage inflation to persist; DOW expects planned investments to add more than $3 billion of earnings before interest, taxes, depreciation and amortization to its results, including projects to produce its chemical products with lower emissions; Bank of America downgraded FMC to Neutral; CNBC’s Brian Sullivan said that surging energy prices could impact food production as natural gas (highest prices in U.S. in a decade, UK natural gas trading at the equivalent of oil at ~$200/barrel) is used to make fertilizers (CF, MOS, NTR); CC announced a multi-year contract renewal with the NHL to provide environmentally sustainable refrigerant services.

Technology, Media & Telecom

·     Semiconductors; MRVL paced gains for sector after raising its long-term growth outlook at its investor day today; NVDA has offered concessions in a bid to secure EU antitrust approval for its $54 billion acquisition of British chip designer Arm Holdings (deadline is 10/27), though the EU competition enforcer did not provide details of the concessions in line with its policy; STX was downgraded to Equal-weight at Morgan Stanley saying they are bullish on the long term outlook for STX and the HDD industry, but notes it isn’t immune to cyclical demand weakness, and see early signals pointing to moderating cyclical demand into year end and 2022; Cowen noted yesterday’s Infineon message was positive for the group that includes STM, NXPI, and CREE as they raise FY’22 estimates in line with Street on strong; MCHP collaborated with Acacia, now part of CSCO, to enable market transition to 400G pluggable coherent optics for data center routing

·     Software movers: TeamViewer (TMVWY) cut its full year guidance as now sees billings 535M-555M euros vs. prior range of 585M-605M saying the contribution from large enterprise deals grew more slowly than expected; PLTR announced it will be progressing to the next phase of the Distributed Common Ground System-Army Capability Drop – 2 contract worth $823M; CRNC upgraded to Outperform at RBC Capital & adjusts tgt to $110 noting the stock is down -28% from its August highs and -11% QTD and believe the sell-off is mostly macro concern related while see little change to the long-term story with some ultimate potential for upside to FY24 targets

·     Hardware, Components & Services; Reuters reported that AAPL will be hit with an EU antitrust charge over its NFC chip technology, a move that puts it at risk of a possible hefty fine and could force it to open its mobile payment system to rivals; CDW was downgraded at Morgan Stanley due to near-record valuation and ~45% revenue exposure to PCs; GOGO downgraded to underweight at Morgan Stanley with competitive landscape expected to pressure valuation and free cash flow over coming year.