Closing Recap

Friday, October 07, 2022

Equity Market Recap

·     Dreadful day for US equities, nearly erasing nearly all its big gains from Monday and Tuesday as a stronger than expected monthly jobs report essentially solidified another 75-bps interest rate hike by the Fed when they meet next and likely further aggressive hikes going forward. Every minor bounce was sold today, with major averages showing no let up into the weekend outside of oil prices rose a 5^th straight day (though energy stocks gave up gains late day) as the S&P posts its 9^th drop of 3% or more this year! Any hopes for a Fed “pivot” to slowing rates disappeared today on the jobs data. There were several sector movers on news: AMD weighed on tech/semiconductors following its 2nd revenue guidance warning in months citing lower than expected client segment revenue; transports dropped after reports FDX is expected to lower volume forecasts, while CHRW was downgraded at Citigroup, and rising oil prices (up over 12% this week) weighed on airlines; Managed care stocks sunk, led by CVS after saying the newly-released Star Ratings for Medicare Advantage plans in 2023 lowered the rating for the company’s Aetna National PPO plan (CNC, UNH, ELV fell as well); energy stocks a standout to upside (APA, COP, HAL, SLB) amid resurgence of oil prices on week after OPEC+ production cuts.

·     The Fed remains resolute in its aggressive interest rate view since the Jackson Hole meeting in September of higher for “longer” and “faster”, and stock markets have not liked it. Just today and yesterday: 1) Fed’s Williams (voting member) repeated rates need to be lifted to around 4.5% over time, with focus on getting inflation back down to 2% – said growth is slowing and expects it to be positive in 2023 while sees inflation coming down significantly next year. 2) Last night, Fed’s Mester said, “we have to bring interest rates up to a level that will get inflation on that 2% path, and I have not seen the compelling evidence that I need to see that would suggest that we could start reducing the pace at which we’re going.” 3) Fed’s Waller said sees additional rate hikes into early next year; watching data to decide appropriate pace of tightening. 4) Fed’s Evans said rates headed to 4.5%-4.75% by spring of 2023 ‘; inflation very high right now; supply chains are healing, shelter prices continue to rise, and car prices have stayed surprisingly strong, policymakers do expect to increase policy rate another 1.25 bps next two meetings.

·     Another big week coming up, with plenty of market moving catalysts including key inflation data as producer (PPI) and consumer prices (CPI) mid-week, another heavy round of Fed speakers (unreal how many speak daily) as well as earnings season kickoff with PEP, DAL and slew of banks JPM, WFC, C, MS, and others. At the same time, several macro factors still at work with mortgage rates recently topping 2008 financial crisis highs, US trade war with China back in news, while OPEC+ this week a direct attack on US after cutting production quotas, sending oil prices higher. Bespoke investment noted the extreme market we are in noting “an "all or nothing" day is when the S&P’s daily advance/decline line is more than +/-400. We’ve had 3 "all or nothing" days in each of the last two weeks (6 "all or nothing" days in the last 10 trading days). 

Economic Data:

·     September nonfarm payrolls rose +263K vs. estimate +250K; private payrolls at +288K vs. est. +265K private jobs and manufacturing jobs rose +22K vs. est. +19K; the unemployment rate dropped to 3.5% vs. prior and estimate 3.7% and average hourly wages rose +0.3% M/M, in-line with consensus views. Labor participation rate 62.3% vs. 62.4% prior month. Average hourly earnings +5% y/y, slowest annual gain since December 2021.

·     As per Charlie Bilello: the Fed’s balance sheet hit its lowest level of the year this week, down $206 billion from its peak in April and $74 billion over the last 3 weeks. This is the largest 3-week decline since July 2020. The Fed is finally starting to ramp up the pace of QT.

·     August consumer credit up 8.3%; revolving credit up 18.1%; nonrevolving credit up 5.1%

Commodities

·     What a day and week for oil prices, with WTI crude rising $4.19 or 4.74% to settle at $92.64 per barrel after starting the week at $79.49, rising to a five-week high (up 16.5% on week, a 5^th straight day of gains and 2^nd straight up week). Prices jumped on the week after OPEC+ decision this week to make its largest supply cut since 2020 (to lower their output target by 2 million barrels per day) despite concern about a possible recession and rising interest rates. For the week, Brent was up about 11% and WTI up about 16%, the biggest weekly percentage gains since March for both. U.S. heating oil futures jumped 19% this week. Gold prices slip -$11.50 or 0.7% to settle at $1,709.30 an ounce, though prices for the most-active contract ending the week 2.2% higher as the dollar eased off 20-year highs the week prior.

·     The yield on the benchmark U.S. 10-year Treasury note advanced after a solid report on the labor market was likely to keep the Federal Reserve on its path of aggressive interest rate hikes to combat inflation. The 10-yr yield rose as much as 8 basis points above 3.9% before paring gains. The U.S. dollar strengthened against major currencies on the data as well. Reminder bond markets are closed on Monday in observance of Columbus Day.

Sector News Breakdown

Consumer

·     Retailers: LEVI Q3 EPS $0.40 vs. est. $0.37; Q3 sales rose 1.3% y/y to $1.52B, missing the $1.60B estimate; lowers FY22 EPS view to $1.44-$1.49 from prior $1.50-$1.56 (est. $1.54); lowers year revs to up 6%-7% from prior rise of 11%-13%; total inventories in Q3 increased 43% y/y; Oppenheimer said they look upon clearer signals of substantially moderating overseas shipping costs as a likely positive for discretionary consumer and select names within Consumer Growth & eCommerce coverage, namely FIG, LULU, LOVE and NKE; CHWY initiated with an Outperform rating and $42 PT at Oppenheimer noting shares are now down 70% from all-time highs in February 2021, underperforming a 4% decline in the S&P 500

·     Auto sector: TSLA is kicking off production of its long-awaited Semi truck and will start deliveries to its first customer Pepsi from Dec. 1; LYFT downgraded to Sector Perform at RBC and lowers PT to $16 from $30 as U.S. driver supply analysis makes prior bullish thesis look increasingly less likely and believe UBER’s structural advantages are driving increased competitive intensity; Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) decreased 3.0% in September from August. The Manheim Used Vehicle Value Index declined to 204.5 and is now down 0.1% from a year ago. The non-adjusted price change in September was a decline of 2.1% compared to August, moving the unadjusted average price down 2.3% year over year (negative read for likes of auto dealers AN, CVNA, KMX, PAG and others)

·     Housing & Building Products: the average 30-year mortgage rate has risen by 3.7 percentage points over past year, largest increase since November 1981; Truist lowered 2023 EBITDA estimates on MLM based on lower residential activity and a slower build on infrastructure spending; Truist also said Hurricane Ian damage could be needle mover for roofing, as they highlight roofing players BECN and OC and Florida based window producer PGTI

·     Casinos, Gaming, Lodging & Leisure sector: in gaming, DKNG shares jumped after Action Network’s Darren Rovell reports, citing sources, that the co and Disney are near signing an exclusive partnership saying ESPN was seeking a partner in hopes of securing $3B over a period that would lead to a sportsbook rebranding itself with the ESPN brand https://bit.ly/3CEJ9MB

Energy, Industrials and Materials

·     Energy stock movers: the only sector that has been immune to mass selling pressure as Oil prices surge; HES among names that hit 52-week highs as energy stocks outperform with rise in WTI crude prices; CLB upgrade to Neutral from Sell at Citigroup saying prior rating premised on a valuation for the stock that was out of line with our forecasted pace of recovery in the company’s fundamentals.

·     Pipelines: Wells Fargo said as we head into Q4, they remain bullish midstream and expect the sector to outperform on a relative basis. Favorite ideas are natural gas focused names where they see the most attractive fundamental backdrop combined with defensive fee-based names which should fare better in a volatile market: LNG, WMB, ET (natural gas), and ENB, MMP, MPLX (defensive).

·     Transports, Industrial & Machinery: rising oil prices, rising interest rates taking its toll on travel and transport industry over the last few weeks; CHRW was downgraded to Neutral from Buy at Citigroup, becoming more concerned that weakness will show up in Global Forwarding, where Robinson is heavily exposed to spot ocean rates; Citi also lowered ests tgts on several truckers (ARCB, GXO, SAIA, SNDR, WERN) as sees an ongoing freight trend deceleration; FDX said expects to lower volume forecasts, according to Reuters report, as forecast change is the result of customers expecting to ship fewer holiday packages

·     Metals & Materials: LAC shares fell following story late yesterday that a U.S. federal judge has set a January 5, 2023, hearing for a lawsuit over Lithium Americas Corp’s proposed Thacker Pass lithium mine in Nevada; TECK provided a mixed Q3’22 coal update with weaker than expected coal sales of 5.6mt vs. CSe at 5.9mt and recent guidance of 5.5-5.9mt (provided on Sep 20th) and also reported Q3 coal ASP of $304/t, which came ~$30/t above the estimated ~$275/t ASP; just bloodbath in metals and mining today on slowing global growth fears.

Financials

·     Bank movers: CS said it will spend around $3 billion to buy back senior bonds to save on interest payments as it prepares to reshape itself. Credit Suisse said it would repurchase parts of 12 dollar-denominated bonds it issued previously, for up to a total $2 billion and offering to buy back eight Euro and sterling bonds it issued, for up to a total of 1 billion euros; in research, GS upgraded from MP to OP at KBW based on valuation coupled with strong risk/reward returns while downgraded ZION to MP based on valuation and potential headwinds to TCE/TA due to the negative impact that higher rates have on AOCI and prefer CMA over ZION

·     Insurance: AMBC shares surge after BAC agreed to pay the mortgage insurer $1.84 billion, closing the last of the lender’s major lawsuits stemming from the 2008 mortgage crash; Wells Fargo said with Hurricane Ian insured losses hovering around $50 billion and potentially higher they believe Auto has the potential to see outsized losses in an environment where loss costs are already in the double-digits and car valuations are near record-highs (lowers ests on PGR)

·     Consumer Finance & Services: PAYO will join the S&P SmallCap 600 index before trading opens on Oct. 12, replacing LNTH; Morgan Stanley initiated with Underweight ratings on student lenders NAVI saying valuations look cheap, but near-term risks skew negative and think consensus earnings are likely headed lower on 3 near-term headwinds: higher rates, rising delinquencies, and political/regulatory headline risk

Healthcare

·     Biotech & Pharma movers: ALLO announced that it has received FDA clearance to start the Phase II registration trial "ALPHA2" ALLO-501A in large B cell lymphoma (LBCL); BIIB upgraded to Buy at Argus noting recent data from the company’s study of lecanemab, a separate potential treatment for Alzheimer’s, have proven robust, with the drug leading to a 27% reduction in patients’ clinical decline on the global cognitive and functional scale; MRK COVID-19 pill was no better than placebo in lowering the risk of hospitalization, STAT news reported late day

·     Cannabis stocks (MSOS, ACB, CRON, CGC, TLRY, GTBIF, CURLF, CRLBF, TCNNF) erased part of Thursday’s rally after President Joe Biden pardoned thousands of Americans for possession and ordered a review of the drug’s legal status. BTIG said they believe the White House’s expungement announcement is directionally positive for the effort to advance cannabis banking legislation during the lame duck insomuch as it provides a modicum of restorative justice while also highlighting the need for more action

·     MedTech Equipment: for diabetes/insulin names (ABT, MDT, DXCM) Piper noted yesterday afternoon, a proposed LCD hit the CMS website that would provide coverage for basal insulin patients and a portion of the NIT2 population if finalized. This is a positive update as it would, at minimum, expand the CGM TAM in the US by 2x and potentially even more depending on the number of NIT2 patients it includes. Based on some rough estimates, this would add about $2B in domestic revenue to the CGM category over the coming years, which we would expect ABT and DXCM to largely fight over (and MDT to some extent); Oppenheimer said they remain cautious on NVRO following an update from UNH, which released an updated community plan (effective 12/1/22), deeming the usage of implanted spinal cord stimulators for non-surgical refractory back pain as unproven and "not medically necessary."

·     Healthcare Services: CVS falls after saying the newly-released Star Ratings for Medicare Advantage plans in 2023 lowered the rating for the company’s Aetna National PPO plan to 3.5 stars from 4.5 (news weigh on HMO’s in general with UNH, CNC, ELV falling); CANO shares rose after Bloomberg reported CVS is in exclusive talks to acquire (follows weeks of speculation as reported by WSJ in late September); ACCD reported Q2 revenue and EBITDA above the guidance range and consensus estimates and raised the bottom end of full-year revenue guidance while maintaining EBITDA guidance provided in F1Q23; in the CRO sector, UBS said TMO and IQV are our top picks for the quarter, while we are less favorable on the 3Q set up for CYRX, ILMN (no guidance update at the I-day), MEDP and SYNH

Technology, Media & Telecom

·     Semiconductors tank: AMD issued its 2^nd revenue warning in less than 3-months, guiding preliminary Q3 revs about $5.6B, lower than prior outlook of $6.7B plus or minus $200M saying results reflect lower than expected client segment revenue (the lower guidance weigh on other chip stocks INTC, NVDA, QCOM, etc. as SOX falls as much as 6% late day); AEHR reported net sales growth and improved adjusted earnings in the fiscal first quarter; some chip names bounce after reports The White House is set to issue sweeping restrictions on selling semiconductors and chip-making equipment to China, an attempt to curb the country’s access to technologies https://nyti.ms/3V9PdUL

·     Telecom movers: in Telecom preview, Wells Fargo said they recommend staying long TMUS into Q3’22 earnings as the only carrier they confidently feel can meaningfully grow both subscribers and EBITDA and see upside to both consensus mobile and FWA subs in Q3 for TMUS, while a $3B buyback in Q4 should provide some degree of support in choppy markets (said maintain a cautious stance on VZ); in the tower sector, Deutsche Bank lowered tgts on AMT to $232 from $285, CCI to $160 from $185, and SBAC to $323 from $385, taking an incrementally cautious tone heading into the Q3 results, seeing downside risk to FFO forecasts due to higher interest rates