Closing Recap

Thursday, October 07, 2021

Equity Market Recap

·     U.S. stocks rise for a 3^rd straight session with the S&P 500 index reclaiming key technical levels after the U.S. Senate took a step toward passing a short-term $480 billion increase in Treasury Department borrowing to avert a debt default later this month for the U.S…but still sets up another showdown in early December (more kicking the can down the road). With the near-term debt concerns apparently put to the backburner (for now), focus turns to tomorrow’s nonfarm payroll report which is expected to show a rise of +500,000 jobs last month with the unemployment rate expected to dip to 5.1% from 5.2% in August. A strong number could raise the prospect of the Fed asset purchase tapering to start next month, while a weak number got create more confusion after a better ADP reading yesterday. Treasury yields pushed higher throughout, with the 10-year slowly nearing the 1.6% level and the dollar higher. Oil prices closed higher on reserves reversal and the debt deal. Stocks lost steam the tail end of the day, paring gains ahead of the jobs report in an otherwise stellar day on Wall Street.

·     Debt crisis averted for now: Senate leaders agreed to raise the Treasury Department’s borrowing authority until early December by $480B, averting a potential debt default later this month, Senate Majority Leader Chuck Schumer announced. Democrats had been trying to pass legislation that would have raised the debt limit through the end of 2022, but Republicans blocked that effort three times. If the new deal passes, Congress will have several weeks to attempt to agree on either a longer-term debt limit increase or another stop-gap measure. In December, Congress also faces a deadline for funding the government. Democrats also want to pass two massive spending bills that make up much of President Joe Biden’s domestic agenda in the coming weeks, including a multitrillion-dollar social policy package and a $1 trillion bipartisan infrastructure bill. Without congressional action to raise the $28.4 trillion debt limit, the Treasury Department has forecast that it will run out of ways to pay all its bills by Oct. 18.

·     Stock/Sector news: LEVI soars on its quarterly beat, raised guidance, and new $200M buyback, while COST, BKE jump on strong September sales in retail space; in staples, CAG steady after its beat and LW tumbles to lowest levels since May 2020 on its miss but does pare some losses throughout the day; SQ bounces after Jefferies re-assumes coverage at a Buy and calls the stock a must own in the long-term; TWTR, APP both spike after Twitter sells MoPub to AppLovin for $1.05B in cash and IAC shoots higher after acquiring MDP for $2.7B; auto sector among the leaders on the day with GM (post-Investor Day yesterday), Ford, BWA, APTV among S&P leaders, while NIO paces other EVs after Goldman upgrade to Buy; MRVL rises to ATHs in follow-through from yesterday’s Investor Day as Hallum upgraded the stock and several other analysts raised their PTs in response; FXI, KWEB, China ADR’s BABA, BIDU, PDD rebound on easing concerns over China-US relations and Evergrande’s recent debt crisis.

Economic Data:

·     Weekly jobless claims fell to 326K in the latest week, below the 348K estimate and down from upwardly revised 364K (from 362K) the prior week; the 4-week moving average rose to 344,000 from 340,500 prior week and continued claims fell to 2.714M from 2.811M prior week; the U.S. insured unemployment rate fell to 2.0% from 2.1% prior

Commodities

·     Oil prices finish the day higher as WTI crude gained $0.87 or 1.12% to settle at $78.30 per barrel, erasing earlier losses. Oil prices fell sharply initially, extending losses from the previous session and pulling further back off recent 7-year highs, as the U.S. Energy Secretary Jennifer Granholm said late yesterday it was considering selling oil from its strategic reserves (SPR) and as Russia said it was ready to stabilize the natural gas market in Europe, inserting itself as an energy power broker. Prices reversed higher this morning after an Energy Department Spokesperson said, “we have no plans at this time to tap into the oil supply” and are “also not pursuing a ban on crude oil exports” (countering the SPR comments yesterday). That coupled with the all out “risk-on” attitude for markets today bounced oil prices after both WTI and Brent contracts fell about 2% on Wednesday. Gold prices edged lower, down -$2.60 to settle at $1,759.20 an ounce ahead of tomorrows nonfarm payroll report and as investors looked to riskier assets. Natural gas prices finish a choppy session virtually unchanged, up a tiny 0.04% at $5.677/MMBtu despite another bearish storage report and a further narrowing of a storage deficit.

Currencies & Treasuries

·     U.S. Treasury yields rose all day, with the 10-year yield up over 4 bps to highs above 1.56% ahead of tomorrow’s September employment data, while volatility at the shortest end of the curve eased in the wake of a potential plan to avoid a default on government debt this month. The long-end of the curve saw biggest jump in yields with the 30-yr rising over 5 bps to 2.13%. A risk-on sentiment fueled by a near-team deal reached in D.C. over the debt-ceiling standoff lifted stocks and saw a pullback in bonds. The Fed has their eyes on the jobs data as they determine when to start reducing the central bank’s $120 billion of monthly bond purchases.

Sector News Breakdown

Consumer

·     Retailers; sector among top gainers in the S&P 500 after better LEVI results and improving sentiment into holiday season (UAA, HBI, PVH rise); COST reported net sales $19.50B (+15.8% YoY) for the five weeks ended October 3, 2021, total comparable sales +14.3%, E-Commerce sales +10.6%, and Cowen raised their price target to $520 from $440 after the report; LEVI Q3 results beat expectations with adj EPS 48c vs est. 37c on revs 1.5B vs est. $1.48B, adj EBIT $222M vs est. $198M, raised its FY EPS forecast to $1.43-1.45 from $1.29-1.33 and above est. $1.33, and authorized a $200M buyback; LULU said it will offer its interactive at-home gym, Mirror, in 40 Canadian stores starting November 22; HELE Q2 adj EPS $2.65 vs est. $2.17 on sales $475.2M vs est. $430M, raised FY22 outlook for core EPS to $7.68-8.11 from $6.60-7.28, adj EPS to $11.26-11.56 from $10.46-10.97, and sales to $2.02-2.07B from $1.93-1.98B; BKE Sept. comp sales +17.8%, net sales $111.2M (+17% y/y); Morgan Stanley upgraded FIVE to OW on discounted valuation as its unchanged $230 PT as meetings with management provided more comfort around supply chain headwinds.

·     Auto sector; TSLA shares popped late day ahead of shareholder meeting tonight; in auto dealers, Guggenheim said despite weaker-than-expected new car volumes, amid historically tight inventory levels, they are increasing our 3Q estimates above consensus and remain BUY-rated on LAD (raising PT to $542 from $523) and give it our Best Idea designation and remain BUY rated on AN (raising PT to $167 from $143) given its compelling capital allocation strategy (focused on buybacks and standalone used car store expansion) and potential for positive strategic change under a new CEO; NIO was upgraded to Buy at Goldman Sachs with an unchanged price target of $56 and raises 2021-23 revenue forecasts by 2% and 7%, respectively, to reflect the differentiated ET7 product launch, but maintains profit estimates and valuation; NKLA and TRP announced a deal to collaborate on large-scale hydrogen hubs.

·     Consumer Staples; CAG said it expects higher inflation for its full year and posted lower quarterly profit, as sales slipped from last year’s surge in at-home food demand due to the Covid-19 pandemic; LW slides after reporting net Q1 sales $984M, missing the average analyst estimate of 41B on weaker earnings and said it sees FY22 revenue above low-to-mid single digits and 2022 net, adjusted ebitda under pressure.

·     Casinos, Gaming, Lodging & Leisure sector; IFIT has been postponed due to market conditions with no further information available at this time (boosted shares of PTON); LTH 39M share IPO priced at $18.00; in gaming, PENN receives approval from the Minister of Canadian Heritage under the Investment Canada Act for the acquisition of sports-betting firm SCR; in cruise lines, CCL laid out restart plans that would bring its US-based operations to 90% of its US-based capacity while at the same time canceling certain cruises.

Energy

·     Energy stock movers; Oil prices fell sharply initially, extending losses from the previous session and pulling further back off recent 7-year highs, as the United States said late yesterday it was considering selling oil from its strategic reserves and as Russia said it was ready to stabilize the natural gas market in Europe, inserting itself as an energy power broker all but guaranteeing increased NG deliveries to the region. Prices reversed higher late morning after an Energy Department Spokesperson said, “we have no plans at this time to tap into the oil supply” and are “also not pursuing a ban on crude oil exports” (countering the SPR comments yesterday).

·     E&P and Majors; HES announces increase in recoverable resource estimate for Stabroek block and significant discovery at Cataback, offshore Guyana saying the increase in gross discovered recoverable resource estimate for Stabroek block to about 10 bln barrels of oil equivalent; in research, Truist increased 4Q21-2023 oil price deck by >6%; natural gas liquids by >22% and natural gas by >34% as expect supply/demand will likely remain constrained for months to come and raised ests and tgts on several names (CLR, NOG, WLL, OAS, APA, DVN, OVV, EOG, MRO, MUR, OXY, BCEI, PDCE, MGY, CPE, CDEV, ESTE, FANG, MTDR, PXD, REI, ARCRK, EQT, GDP, GPOR); in oil services, SLB upgraded to Overweight and raise tgt to $37 from $28 at JPMorgan which reflects the company’s advantaged portfolio that is poised to deliver strong earnings growth from the global recovery in upstream spending and further margin expansion; SLCA said to explore strategic alternatives for industrial & specialty products (ISP) segment; PDCE said the Colorado Oil and Gas Conservation Commission has approved the permit application for its Spinney Oil & Gas Development Plan

·     Refiners: at Cowen, they upped tgts for some names as they see upside to consensus EPS for the first time in several quarters and are become incrementally more bullish on mid-term supply/demand into 2023. PSX (PT to $79 from $73) has the most upside out of large caps though it is becoming quickly embedded in stock while HFC ($32 from $31) has upside among SMIDs. The global strength in natural gas prices should be supportive for US cracks, particularly diesel, and thus we also like high beta names including PBF ($14 from $10) and VLO ($79 from $70) as well as high diesel yield PARR beyond 3Q earnings.

·     Utilities & Solar; the defensive sector saw selling pressure early as Treasury yields pushed higher (making high dividend paying sectors less attractive) as well as pressured amid a rotation back into riskier/high growth stocks on the day as the debt ceiling concerns in the U.S. appears to have been averted for now; ATO downgraded to Hold from Buy as neutral view of ATO reflects our expectations for rising interest rates and weaker near-term prospects for Utility stocks, offset by the company’s strong fundamentals and rising U.S. demand for natural gas; PNW shares pressured after Guggenheim downgraded to Sell with $58 tgt and Wells Fargo cutting ests below consensus following a 3-day rate hearing in Arizona

Financials

·     Bank movers; In mid-cap, Wells upgraded EWBC to OW and raised its target to $95 from $80 as its credit performance through the pandemic gives increased confidence that it will be able to maintain mid-double digit TBV growth, FIBK to OW as it has capitalized on the strong currency and excess capital with the acquisition of Great Western expanding the footprint to eight new states, said SBNY remains its top pick and upped its target to $390, and also likes PACW into earnings; UBS lifted its PT on CBOE to $127 from $124 and raised its estimates on better volume and pricing; Wolfe downgraded BAC to Peer-perform on rich valuation vs peers and their view that consensus fee income forecasts appear too aggressive, upgraded NTRS to Peer-perform as its P/E multiple has finally converged with Wealth peers given YTD underperformance, and said STT screens too cheaply with shares not reflecting improving organic growth and higher asset sensitivity from BBH deal; Raymond James upgraded COLB to OP, downgraded CAC to MP, and LOB, FHN, PPBI to OP from Strong Buy

·     FinTech & Payments; SQ was assumed with a Buy rating at Jefferies who called it a long-term must-own amidst a backdrop of accelerating disruption within payments and the broader FinTech ecosystem, while RBC reduced Q3, FY21 gross profit and adj EBITDA estimates to reflect what their belief of a slowdown in cash app volume and gross profit growth from the previous July forecast, though they reiterate their OP rating and $312 PT as they believe the Afterpay acquisition will prove to be hugely strategic and further differentiated the company in a crowded FinTech space

·     Consumer Finance; ALLY downgraded to EW from OW at Stephens; AXP Platinum card is now offering rewards from WMT for everyday purchases and a statement credit for the cost of a Walmart+ monthly membership, and is also offering a $300 statement credit on purchases of the SoulCycle at-home bike through Equinox; Visa (V) partnered with bank AZN and Quest Payment Systems to bring Visa Installments, a BNPL option, to Australia; Credit Suisse said credit quality has continued to show improvement and outperform expectations by a wide margin in 3Q while loan balances have continued to grow sequentially and spending trend has been resilient despite some impact from the Delta variant, and they continue to believe SYF, DFS will have the best balance recovery, with AXP, COF lagging behind; Jefferies resumed KKR at Buy with a $74 target

·     Bitcoin news; BTIG lowered their PT on VYGVF to C$31 from C$36 but reiterated their Buy rating as they say the share price declining over 65% from early April’s highs is somewhat difficult to fathom given the company’s continued strong growth in verified users and funded accounts, which is significantly more important to its long-term prospects than near-term swings in trading volume that reflect the volatility of the market on which it is focused; IVZ launched SATO (Invesco Alerian Galaxy Crypto Economy) and BLKC (Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce), two passively managed ETFs focused on digital assets and blockchain

·     REITs; JPMorgan upgraded ESS to OW as their pick to play the snapback in apartment rents especially given their West Coast exposure that has lagged East Coast metros, and their forecast for same-store rev growth next year is at the top of the pack vs other apartment REITs and their 2022-23 FFO estimates are 4-5% above Street estimates; Berenberg initiated Buy ratings on LSI ($143 PT), NSA ($63), EXR ($198) and Hold ratings on CUBE ($52), PSA ($321); Raymond James upgraded DBRG to Outperform from Strong Buy as it nears the end of its digital transformation

Healthcare

·     Pharma movers; BMY phase 2 study of deucravacitinib in patients with moderate to severe ulcerative colitis did not meet primary nor secondary endpoints; TLRY Q1 EPS (8c), wider than est. (6c) on revs $168M vs est. $173.6M, adj EBITDA $12.7M vs est. $13.6M, said it was on track for at least $80M in cost savings from its deal to merge with Aphria; FMTX initial Phase 1 trial results for ft-7051 in men with metastatic castration-resistant prostate cancer shows it is well-tolerated and demonstrates evidence of activity; ABBV Phase 3 study of Rinvoq for non-radiographic axial spondylarthritis met its primary endpoint and the first 12 of 14 ranked secondary endpoints; PFE, BNTX to seek FDA vaccine authorization for ages 5-11

·     Biotech movers: for MRNA, Finland recommends men under 30 to take the PFE COVID shot, not MRNA. Finland’s decision comes a day after Sweden and Denmark decided to halt vaccinations with Moderna Inc.’s Covid-19 shot for younger people because of potential side effects; MRNA also announced it will build a mRNA facility in Africa with the goal of producing up to 500M doses of vaccines each year at the 50-microgram dose level; BBI announced strong Phase 3 data for sofpironium bromide, with statistical significance met on all primary and secondary endpoints. Company remains on track for submit an NDA by mid-2022; Jefferies initiated Buy ratings on ARGX ($362 PT), CYTK ($75), ENTA ($95), EXEL ($28), GBT ($68), MDGL ($151), Hold ratings on XLRN ($180), BNTX ($230), ZYME ($32), upgraded ALKS to Buy with a $36 PT, and downgraded SAGE to Hold with a $50 PT; TAK downgraded to EW at Morgan Stanley; OSMT shares fell after pricing its public offering of 14M shares and warrants at $2.50/share for expected gross proceeds of $35M; AMGN, MRTX reported Phase 1b data from its study patients with KRAS g12c-mutated cancers that STAT news’ Adam Feuerstein said was disappointing and did not show enhanced tumor responses vs KRAS alone and had more side effects

·     MedTech Equipment; PKI received FDA emergency use authorization for its respiratory sars-cov-2 panel and labs can now use the test for simultaneous qualitative detection and differentiation of SARS-CoV-2, influenza A, influenza B and respiratory syncytial virus isolated from swabs

Industrials & Materials

·     Aerospace & Defense; RKLB announced it has been selected to launch NASA’s Advanced Composite Solar Sail System, or ACS3, on the Electron launch vehicle; AER signed lease agreements for 42 aircraft (5 widebody aircraft and 37 narrowbody aircraft), purchased seven aircraft (5 Airbus A320neo Family aircraft and 2 Boeing 737 MAX aircraft) and executed sale transactions for 11 aircraft during the period; UBS previewed sector saying they see steady oppty for RTX and HII while LMT, HWM and ALK all present opportunity for "bad news baked in/behind them" stories

·     Industrial & Machinery; RBC Capital previews the Multi-industry sector for Q3, saying with valuations still elevated, they maintain negative sector view and note the best positioned names into the print are CARR, NVT; least favorites are MMM, ETN and on stock positioning, continue to be 75% overweight cyclicals/higher-beta names (GE, CARR, XYL, AQUA, GGG, NVT, WCC, ATKR, GTES) and 25% defensive/high-quality (ROP, IEX, AME)

·     Transports; in truckers, KeyBanc said they remain largely neutral on truckload names into 3Q21 earnings, but near-term, are constructive on KNX given spot exposure and potential acquisition accretion and are cautious on WERN given elevated 4Q21 consensus expectations; in rails, UBS lowered Q3 EPS between 4%-6% for UNP, CSX, NSC to reflect softer than anticipated volumes in 3Q and softer volumes in 4Q versus our prior forecasts

·     Paper & Packaging; SON said it is raising the price of uncoated recycled paperboard in the U.S. and Canada by $60 per ton effective Nov. 1; the price change will apply to all grades of URB; Citigroup lowered ests ahead of earnings season for Paper (-3% on avg.) & Packagers (-1%) and are now -2% below consensus and largely expect producers to lower FY guides on a trifecta of higher costs, supply chain woes, and lingering pandemic impacts (IP, WRK, PKG). Citi noted the one Packager that recently raised guidance (OI) saw shares outperform ~800bp same day, suggesting a fair amount of negativity is priced in.

Technology, Media & Telecom

·     Internet; U.S.-listed Chinese stocks (BABA, BIDU, JD, NTES) rising as concerns around U.S/China trade relations and Evergrande’s debt crisis appeared to ease. Fund giant Fidelity is putting money back into Chinese stocks and thinks the recent "indiscriminate" selling caused by the debt crisis at property giant Evergrande is presenting opportunities in the country’s beaten up bond markets. Reuters reported. "There are companies that have seen good haircuts on their debt that are not justified," Fidelity’s global Chief Investment Officer Andrew McCaffery said during a roundtable, adding that some other parts of Asia had also been impacted.

·     Semiconductors; TER upgraded to Buy from neutral and up tgt to $140 from $135 at Davidson; SIMO said it sees Q3 prelim rev growth slightly exceed high end 7.5%-12.5% and sees Q3 prelim adj. gross margin to slightly exceed 50%; not mush specific in the chip sector, but overall higher with broader market rally extension, led by tech

·     Software movers; AZPN rises on reports EMR is in talks to merge its software assets with the industrial software company, Bloomberg News reported citing people with knowledge of the matter. https://bloom.bg/3AlySkj ; CTXS downgraded to Neutral at Citigroup following the sudden departure of CEO David Henshall announced last night, saying the timing just weeks ahead of the Q3 report/analyst day, suggests that the company is unlikely to be sold to a financial buyer, and long-term targets may be more unachievable; APP announced that it has entered into a definitive agreement to acquire Twitter’s MoPub business for $1.05B in cash

·     Media & Telecom movers; IAC reached a deal to buy MDPs digital and magazine publishing business, which includes publications like People, InStyle and Real Simple, for $2.7B in cash. As a result of the deal, Meredith will become part of DotDash, IAC’s digital-publishing division; GOGO upgraded to Neutral at JPMorgan with $16 tgt as they like the improving outlook and expect the elevated level of activity will continue post-pandemic; WWE Q2 OIBDA ests raised at Guggenheim noting sponsorship up 25% vs 2019 and SummerSlam in late August highlights the strong fan demand WWE is seeing for its live product; AT was upgraded to Neutral from Sell at MoffettNathanson LLC