Closing Recap

Thursday, October 27, 2022

Equity Market Recap

·     U.S. stocks finish mixed, similar to yesterday’s trading action as the Dow Jones Industrial Average rose for a 5^th straight session and the Smallcap Russell 2000 index higher (though gave up big gains end of day) while the tech heavy Nasdaq Composite declined amid earnings weakness, ending near the lows into big earnings tonight. While tech earnings have dominated market and media headlines with GOOGL, TXN, MSFT, META all disappointing broadly (META fell over 20% today on results ahead of AAPL and AMZN tonight) – several other high profile large cap giants in their respective sectors posted solid results with Dow component MCD beating in restaurants, Dow component CAT a beat and raise in industrials along with HON, while Dow component and Pharma giant MRK with a beat and raise, CMCSA stronger results in cable and airline LUV rising in transports. Investors continue to rotation out of growth given the aggressive rate hike cycle by the Fed and into value. Energy again dominated to the upside, with the XLE rising a 9^th straight session into earnings tomorrow for CVX and XOM. Biggest winners today were the energy, industrials, financials, and utilities. Stocks got a mid-afternoon bounce after Fox Business reporter tweet said: “Economists at @BlackRock are telling financial advisers that they expect "pivot language" at the next @federalreserve meeting when they expect Powell to announce a 75 BP FF hike followed by two smaller ones and a pause to get US to around 4.75%.” The Dow Jones Industrials remains on pace for MTD gains of over 12%, which would be its best monthly return since 1987 if holds – boosted by better earnings results from CAT, MCD, HON, and MRK today alone.

·     Economic data favorable for markets as the U.S. economy expanded at a 2.6% annual rate in the third quarter, topping views for a 2.4% rise, and ending the streak of back-to-back contractions that raised recession fears. The standout part of the data was lower inflation readings – Q3 PCE price index +4.2% vs. Q2 +7.3% and core PCE +4.5% (in-line with ests and down from +4.7% in Q2; Q3 Y/Y PCE price index +6.3% (vs. Q2 +6.6%), core PCE +4.9% (vs. Q2 +5.0%).

·     The European Central Bank (ECB), as expected, boosted interest rates by 75-bps for the second time in a row, moving to quash record inflation, even as the eurozone teeters close to recession. ECB said it would increase its policy rate to 1.5%, the highest level in more than a decade, and said it expects to raise rates further over the coming meetings. The ECB also changed the terms and conditions of its targeted longer-term refinancing operations, or TLTROs – a tool that provides European banks with attractive borrowing conditions, designed to incentivize lending.

Economic Data:

·     Q3 GDP (initial estimate) +2.6% vs. +2.3% consensus and -0.6% in Q2; inflation data points of GDP report better as Q3 GDP deflator +4.1% vs. est. +5.3% and vs. Q2 +9.1%; Q3 PCE price index +4.2% vs. Q2 +7.3% and core PCE +4.5% (in-line with ests and down from +4.7% in Q2; Q3 Y/Y PCE price index +6.3% (vs. Q2 +6.6%), core PCE +4.9% (vs. Q2 +5.0%)

·     Weekly Jobless Claims rose to 217K from 214K last week and below est. 220K; the 4-week moving average rose to 219,000 from 212,250 prior week; continued claims rose to 1.438M from 1.383M the prior week (and est. 1.388M) and US insured unemployment rate unchanged at 1.0%

·     September Durable Goods Orders rose +0.4% vs. +0.6% consensus and +0.2% prior (revised from -0.2%); Sept Durables ex-transportation orders -0.5% (vs. est. +0.2%) vs. Aug unchanged and Sept Durables ex-defense orders +1.4% vs Aug -0.3% (prev -0.8%). Sept nondefense cap orders ex-aircraft -0.7%, (vs. est. +0.5% vs. Aug +0.8% (prev +1.4%)

Commodities

·     Oil prices rose on Thursday, with WTI crude gaining $1.17 or 1.33% to settle at $89.08 per barrel, extending a rally of nearly 3% in the previous session, amid optimism over record U.S. crude exports and signs that recession fears are abating following the GDP report. The US SPR moved down for the 59th consecutive week to its lowest level since 1984. The 32% decline in reserves this year is the largest on record by a wide margin. Natural gas prices drop 7.5% to finish at $5.186/MMBtu in what was expiration day for the front-month contract for November delivery. Natural-gas prices were poised for their largest yearly percentage rise in 23 years before erasing much of that gain in the span of six sessions this month. Gold prices slip -$3.60 or 0.2% to settle at $1,665.60 an ounce as the dollar rebounded from prior few day losses.

Currencies & Treasuries

·     The U.S. dollar rebounded on the day with the euro moving back below parity against the buck after topping it the first time in a month yesterday, while edging higher vs. Pound and yen. The ECB raised rates by 75 basis points in line with market expectations prompting the move in currencies (and ahead of the FOMC next week). U.S. Treasury 30-yield falls to one-week low of 4.073%, U.S. Treasury two-year yield drops to two-week low of 4.338%, and 10-year dropped to lows around 3.91% before paring losses on all. U.S. Three-month/10-year yield curve hits deepest inversion since March 2020; curve last at -9.9 bps. The US Treasury sold $35B in 7-year notes at a yield of 4.027% vs. 4.016% when issued prior 9first tail since June), with the bid-to-cover at 2.43 vs. previous auction 2.57, Direct bidders awarded 22.7% (vs. prev 24.7%) and indirects award 63.2% (vs. prev 62.5%). Follows weak 2-yr on Tuesday and better 5-yr yesterday.

Sector News Breakdown

Consumer

·     Retailers: AMZN earnings after the close tonight; SHOP surges on smaller than expected Q3 EPS loss and revs $1.37B vs. est. $1.34B saying monthly Recurring Revenue increased 8% to $107M, Gross Merchandise Volume increased 11% to $46.2B, up $4.4B over Q3; VFC reported a top- and bottom-line miss, and guided down again, less than a month after just lowering estimates; SNBR tumbles after the mattress retailer reported 3Q sales and EPS above expectations due to better-than-expected deliveries and cost cutting, but lowered guidance due to a weaker demand and continued supply chain inefficiencies; BOOT Q2 sales, margins and EPS above views but forward outlook slightly overshadows the strong reported quarter, with 3Q EPS set 15% below expectations and full-year sales and EPS guidance lowered 1% and 2%; OSTK slides after mixed Q3 results as EPS beat revs miss and said active customers of 5.8 million, a decrease of 33% y/y

·     Auto sector: Ford Motor (F) beats as Q3 adj EPS $0.39 vs. est. $0.27; Q3 revs $39.4B vs. est. $36.25B; raised its goal for full-year adjusted free cash flow to between $9.5B-$10B from prior $5.5B-$6.5B, while lowered FY guidance ~4% at the midpoint and announced the shutdown of their autonomous JV, Argo; also several mixed earnings results in auto supplier space today with BWA, DAN and VC all posting numbers; Volvo (VLVLY) reported Q3 volumes and revenues were in line with consensus, but the company missed on gross profits; auto retailers also active after results from ORLY, ABG and AN (mixed results); The European Union has reached an agreement to effectively prohibit new combustion-engine cars starting in 2035, Bloomberg reported.

·     Housing & Building Products: there were a handful of homebuilders out with earnings results today with MDC posting an EPS miss, TPH a beat, CCS a beat and MTH mixed with EPS beat but revs miss; as reported midday Wed, ZG has cut ~300 people, or ~5% of its workforce, amid a further slowdown in the housing market; US 30-yr fixed rate mortgages 7.08% October 27th week vs 6.94% prior week – Freddie Mac; in furniture, ETD rises on earnings beat

·     Consumer Staples: MO said it is forming a partnership with Japan Tobacco Group to develop and sell heated tobacco devices in the U.S. and abroad. The move pits Altria against its former strategic partners, PM, and Juul Labs Inc. https://on.wsj.com/3Fi7ERL ; Separately, MO 3Q adj EPS $1.28 vs est. $1.30 on revs $6.55B vs est. $5.59B; guides FY adj EPS $4.81-4.89 vs est. $4.85, says expect adverse macroeconomic and geopolitical landscape to continue to impact business in near-term; retain 35% economic stake in JUUL but exploring all options; in food, KHC Q3 adj EPS $0.63 vs. est. $0.56 and sales rose 2.9% to $6.5B vs. est. $6.27B; qtrly organic net sales increased 11.6% y/y; in beverages KDP reported in-line Q3 results, while BUD reported Q3 EPS and Ebitda beats and raised the bottom end of its organic Ebitda growth range to 6%-8% from 4%-8%

·     Restaurants, Lodging & Leisure sector: MCD beat across the board as Q3 comp Sales +9.5% top est. +5.8% as US Comp Sales +6.1% vs. est. +3.7%) while adj EPS $2.68 and revs $5.87B top ests. $2.58 and $5.71B; HZO surges after results in boating sector but BC remains down -2% after its results; IMAX and Saudi Cinema Company, operating as AMC Cinemas, plan to further expand their longstanding partnership

Energy, Industrials and Materials

·     E&P and Majors: SHEL posts Q3 profit of $9.45B, down from prior qtr due to weaker refining and gas trading, as it announced plans to sharply boost its dividend and announced plans to buy $4B of stock; EQT a mover on earnings; in pipelines: MMP said it was boosting 2022 guidance after posting a higher net income for the third quarter versus a year ago; OII surges after its quarterly results topped consensus; refiners, PBF a winner after earnings

·     Utilities & Solar; 3Q earnings dominate the news flow for utilities as NWE, POR, AGR, and FE reported results earlier this week, followed by a handful of utility earnings results this morning from AEP, CMS, DTE, PCG, SO and XEL KeyBanc noted in other news, the NJ BPU issues an order on the offshore wind transmission docket; POR announces a forward sale agreement for $375M of common stock; AGR’s NECEC project gets a temporary setback as a requested injunction is denied; the Public Citizen is requesting that FERC expedite the ruling to name Blackstone and Icahn as FE affiliates; the CA DoF files a lawsuit against EIX for the Silverado Fire; POR upgrade from Underperform to Neutral at Credit Suisse following an eventful 3Q print

Financials

·     Bank movers: CS unveiled a strategic plan that will see the bank undertake a multi-billion-dollar capital raise, a carve out of its investment bank and thousands of job cuts as it seeks a return to profitability; Wall Street bonuses in 2022 are expected to fall 22% or more from last year’s bumper payouts, according to a report from New York State Comptroller; RJF revenues beat by $55M, or 2% but brokerage and investment banking revenues fell short by $55M said JMP; SCHW shares jumped late afternoon after providing Fall business update

·     Lending, FinTech & Payments: MA Q3 adjusted EPS of $2.68, beats analysts’ estimates of $2.56 though said operating expenses in Q3 surged 17%, outpacing net revenue growth of 15% and says it expects Q4 net revenue in low double digits; FISV 3Q adj EPS $1.63 vs. est. $1.70 on revs $4.52B vs est. $4.28B; sees FY adj EPS $6.48-6.55 vs est. $6.48, sees FY organic revs +11% vs est. +8.7%; LC reported a mixed quarter as most underlying fundamental trends exceeded forecasts, but higher loan retention (33% of originations) drove a higher-than-expected CECL provision; WEX increases share repurchase program up to $650M through Dec ’25

·     REITs: DLR had a bit of a mixed Q3 — record leasing, particularly with U.S. scale deals, was offset by the impact of FX / higher rates in its financials. Same-store cash NOI metrics worsened to -7.2% y/y due to both FX and higher opex; GTY in-line Q3 FFO of $0.54 and tweaked its FY22 AFFO guidance higher by 0.7% at the midpoint; INVH reported disappointing 3Q22 results, which included a 3Q22 core FFO miss, and management decreased 2022 guidance by 2.4% at the midpoint; PLD 3Q showed strong 9.3% cash SSNOI growth, 97.8% occupancy, and an increase in rent change to nearly 60% and rent change on lease signings in the quarter grew to 84%; SITC 3Q results were better than expected, driven by steady operational improvements and significant enhancements to the balance sheet; UDR 3Q22 FFOA beat, and a 2022 guidance increase of ~1% at the midpoint while same-store revenue growth accelerated in 3Q22 and was better than Keybanc ests; MPW in-line Q3 FFO of $0.45 as revs fell -9.8% y/y to $352.3M vs. est. $394M

Healthcare

·     Biotech & Pharma movers: MRK Q3 adj EPS $1.85 vs. est. $1.71; Q3 revs $15B vs. est. $14.08B; raises FY22 adjusted EPS view to $7.32-$7.37 from $7.25-$7.35 and boosts FY22 revenue view to $58.5B-$59B from $57.5B-$58.5B, vs. consensus $58.51B; AMRN Q3 total net revenue $89.9M compared to $142M in Q3’21, down -37% and said will continue to suspend 2022 revenue guidance; BMRN Q3 revs were down -5% sequentially driven by FX headwinds and Kuvan’s sales erosion but Voxzogo sales beat/raise and reiterated 2022 total revenue outlook; WST falls as 3Q revs miss by 6%, lowers FY guidance; VRTX tumbled ahead of earnings tonight

·     MedTech Equipment: ALGN shares tumble as Q3 sales were about 8% below consensus as continues to deal with macro headwinds, which led to adjusted EPS of $1.36, or $0.80 below consensus; MMSI posted a strong top and bottom-line, with Q3 revenue of $287.2M (+7.5% Y/Y; +10.5% Y/Y organic CC) beating consensus of $273M while adjusted EPS beat as well; LH slides following its quarterly results

·     Healthcare Services: TDOC a nice surprise as shares rally following a narrower quarterly loss while slightly exceeding revenue expectations – the midpoint of Q4 EPS and revs were below views; AMED slides as posts its 7^th Q3 top-line miss in last 8-quarters according to William Blair and EBITDA missed despite substantial adjustments; EHC reported 3Q results that beat expectations on revenue but fell short on EBITDA; MOH 3Q adj. EPS of $4.36 exceeded GS/consensus of $4.31/$4.22 by 1%/3%, and the company raised 2022 guidance by ~1%.

Industrials & Materials

·     Aerospace & Defense: for BA, Reuters reported China Southern Airlines Co Ltd has scheduled domestic flights with the 737 MAX on Oct. 30, a booking search on its website shows, marking a possible return to service for the Boeing Co model in China after more than three years; NOC posts Q3 EPS miss of $5.89 vs. est. $6.11 and revs $9B vs. est. $9.13B and expects 2022 sales and earnings per share near the low end of its guidance ranges (shares rebounded late day off earlier losses); TXT rises after earnings

·     Industrial & Machinery: Dow component CAT Q3 adj EPS $3.95 vs. est. $3.18; Q3 revs rise 21% y/y to $14.99B vs. est. $14.43B; increase in sales volume in qtr driven by impact from changes in dealer inventories, higher sales of equipment to end users; HON Q3 profit rose 27% as Q3 EPS $2.25 tops $2.16 est. revs $8.95B vs. est. $8.98B; Q3 aerospace sales up 10% on an organic basis – lowers FY22 revenue view to $35.4B-$35.7B from $35.5B-$36.1B (hurt by ongoing supply chain issues) and narrows FY22 adjusted EPS view to $8.70-$8.80 from $8.55-$8.80 (est. $8.66); LII in-line Q3 results but now sees 2022 revenue up 12%-15%; had seen up 10%-15%; EME hits 52-week highs after earnings and raised guidance (lifts PWR, MTZ early)

Technology, Media & Telecom

·     Media, Internet: another tech giant reporting earnings, another disappointing as META missed on profits and warned of near-term sales challenges. Revenues fell by 4%, better than expected, to land at $27.71B. While that beat expectations, costs and expenses rose 19%, and so operating income fell by 46%, to $5.66B; META noted it now expects 2022 CAPEX in the range of $32-$33B – midpoint ($32.5B) would imply +69% y/y, or up from Meta’s CAPEX spend at $19.244B in 2022 and Wells Fargo said impact cap-ex guide a positive for ANET, NVDA, AMD; in China ADRs, PDD upgraded to Overweight at Barclays, impressed by its recent progress in adding more brands to its platform in China and gaining early traction with its efforts in the US

·     Semiconductors: Samsung (SSNLF) operating profit fell to 10.85 trillion won ($7.7 billion) for the July-September quarter, from 15.8 trillion won a year earlier, but in-line w views; KLAC posts a beat-and-raise quarter like others in the chip-equipment sector as long-term goals underscored – follows better results from ASML and LRCX last week in the equipment sector; WOLF shares tumble over -20% early after disappointing December quarter revenue guidance, softer margin guidance through F2024 and increased near-term CAPEX with no clear plan on source of funds; PI reported strong Q3/22 results ahead of guidance and estimates, primarily driven by strong demand and execution with upside mainly from endpoint ICs and reader ICs; STM shares slide post earnings; in HDD space, WDC follows up STX results yesterday same way, missing and guiding lower as sees Q2 revs $2.9B-$3.1B vs. est. $3.5B after Q1 EPS miss (revs beat); UBS downgrades STX to Hold from Buy and cuts its PT to $55 from $85 after results/news yesterday.

·     Hardware &Software movers: AAPL earnings results tonight after the bell; NOW posted strong 3Q22 results on a constant currency basis, bouncing back from largely disappointing results in 2Q22, with non-GAAP EPS of $1.96 (consensus $1.85) on revenue of $1.83B (consensus $1.85B) up 21% y/y – subscription revenue of $1.742B (consensus $1.750B) up 22% y/y as reported but up 28.5% – reported 3Q cRPO growth of 25% cc, above guide of 23.5%; AZPN posted slightly better F1Q ACV growth of 7.7%, though heritage annual spend growth came in modestly below; NTGR falls Q4 lower guidance overshadows Q3 beat

·     Telecom movers: in cable, CMCSA rises as top and bottom line beat for Q3 (EPS $0.96/$29.85B vs. est. $0.90/$29.6B), Video Net Change -561,000 and High-Speed Net Change +14,000 – said 4% cable revenue decline offset by 6% price hike – also noted steady rebound in its theme parks and studios businesses – reported 15M paid subs for its Peacock streaming service, up from 13M; in towers, AMT 3Q AFFO/shr $2.36 vs est. $2.48 on revs $2.67B vs est. $2.65B; guides FY AFFO/shr $9.57-9.74 vs est. $10.05