Closing Recap

Monday, September 26, 2022

Equity Market Recap

·     September is certainly living up to its reputation as the worst month of the year, with major averages all on track for losses of more than -6% or more month-to-date into the final week of trading for quarter and month. Stocks were unable to hold early gains, as selling pressure again intensified midday as Treasury yields and the dollar continue their upward surge. The aggressive move by the Federal Reserve last week, raising rates by another 75 basis points last week (its 3rd straight 75-bps hike) with calls for more aggressive hikes this year changed the game for Wall Street who was hoping for a more dovish tilt – but Powell essentially said no rate cuts until at least 2024. The US dollar and Treasury yields have been on cruise control higher since and dented optimism with slowing global growth in the process. The 10-year yield hit 3.9%, the 2-yr above 4.3% and the dollar index (DXY) printed fresh 20-year highs above 114, helped in part by the collapse of the British Pound, hitting a historic low of $1.0327 earlier before paring losses (plunged last Friday as well after UK tax plan news). Bespoke Investment notes we’re now at six 3%+ down months in the last nine. February 2009 and November 1974 are the only times since WW2 where we’ve seen similar negative action in the stock market (over a rolling 9-mo period). Oil continues to slide on the strong dollar and recession fears.

Commodities, Currencies and Treasuries

·     Gold prices tumble again to fresh 2 ½ year lows, sliding $22.20, or 1.3%, to settle at $1,633.40/oz on Comex as the dollar ramped to fresh 20-year highs (above 114 for the DXY). Higher U.S. interest rates dull zero-yielding bullion’s appeal, while bolstering the dollar and bond yields. Note gold has lost more than $400, or over 20%, since scaling above the key $2,000 per ounce level in March as major central banks raised interest rates.

·     Oil futures fell, with WTI crude down -$2.03 or 2.6%, to settle at $76.71 barrel on the NYMEX, the lowest front-month contract finish since Jan. 3. Global macro risks and energy policy risks across Europe continues to support the U.S. dollar, making oil even more expensive in European markets and overshadow supply disruptions from Hurricanes approaching the Gulf of Mexico this week. Brent crude futures settle at $84.06/bbl, down $2.09, 2.43%.

·     Treasury yields start the week where they left off, making new decade highs as the 2 and 10-year yield are on track for a 9^th straight week of gains. The benchmark U.S. 10-year Treasury yield hit 3.902%, which is a fresh high back to April 2010 and the 2-year a 15-year high above 4.3% this morning as investors bank on more aggressive rate hikes from the Fed. Coming into today, the 10-yr yield is up 2.353 percentage points from its 52-week low of 1.342% hit Friday, Dec. 3, 2021 and the 2-yr up 3.948 percentage points from its 52-week low of 0.264% hit Friday, Oct. 1, 2021.

·     The British pound sank to an all-time low against the dollar before recovering, as traders waited to see if the Bank of England would intervene to ease concerns that Britain’s new economic plan will stretch the country’s finances. The Pound’s slide, having already plunged -3.6% on Friday following the unveiling of historic tax cuts, funded by the biggest increase in borrowing since 1972, rippled across markets, falling as much as 4.9% to an all-time low of $1.0327. The euro now 400-bps below parity vs. the US dollar as well. The US Dollar Index is at its highest level in over 20 years, up 58% from its low in 2008.

Sector News Breakdown

Consumer

·     Retailers; AMZN Announces Prime Early Access Sale, a new two-day global shopping event exclusive to Prime members on Oct 11-12^th; LESL will replace GCP in the S&P SmallCap 600 effective prior to the opening of trading on Wednesday, September 28; PLNT upgraded to Strong Buy at Raymond James reflecting its highly resilient business model and value gym positioning; FTCH initiated Sell rating and $6 tgt at Citigroup; Jefferies said DG, COST best positioned, see markdowns and estimates risk to other specialty apparel and footwear; DLTR named Michael Creedon as its new COO, coming to the job from AAP, where he served in several roles; PRPL announces formation of special committee to evaluate unsolicited takeover proposal from Coliseum Capital Management; PTON’s Dara Treseder, who has been Peloton’s chief marketing officer since 2020, is leaving the Co, the New York Times reported

·     Auto sector: Ford (F) mentioned positively in Barron’s saying even after its warning of parts shortages sent its shares tumbling this week, the stock is still worth owning, arguing the automaker stuck with its earlier full-year operating forecast; in Chinese EV space, LI now expects to deliver approximately 25,500 vehicles for Q3, revised from the previous vehicle delivery outlook of between 27K-29K; watch other Chinese auto EV makers NIO, XPEV on headlines; LYFT downgraded to Neutral from Buy at UBS and cut tgt to $16 from $50

·     Consumer Staples & Restaurants: UL CEO said he decided to retire from the company at the end of 2023 after five years in the role; BUD downgraded from Buy to Hold at Jefferies and cut tgt to $54 from $68 the company is delivering on numbers but is not as cheap vs peers; food and beverage names outperform with K, GIS, MDLZ, PEP strong early

·     Casinos, Gaming, Lodging & Leisure sector: Macao casino operators WYNN, MLCO, LVS, others move higher after local government and China announce plans to resume group tours for mainland China residents to visit Macao (Citi raised tgts on several names); Dan Niles of Satori Fund noted on CNBC he has been buying online gaming names DKNG, PENN; AMC slips after hires Citigroup to distribute up to 425 mln units of AMC Preferred Equity Units or (APE)

Energy

·     Energy stock movers: S&P MidCap 400 constituent EQT will replace DRE in the S&P 500, and S&P SmallCap 600 constituent EXLS will replace EQT in the S&P MidCap 400; APA trades at half the valuation of its peers but it could become hard to ignore given its bets in Suriname as well as a contract to sell LNG to European and Asian buyers, according to Barron’s; in research, HP upgraded to Equal Weight at Morgan Stanley and downgraded NEX to Equal Weight and CLB to Underweight saying the North American cycle is maturing, and cash generation/returns are taking primacy over EBITDA revisions. Service companies adopting payout models will be rewarded, in their view; BP said it is shutting in production at offshore oil platforms Na Kika and Thunder Horse in the U.S. Gulf of Mexico ahead of Hurricane Ian

Financials

·     Insurance: names like ALL, PGR, TRV, AIG, CB, WRB, RNR among active movers to the downside as additional rapid strengthening is expected today for Hurricane Ian which will produce significant wind and storm surge impacts in western Cuba as it approaches Florida – raising fears of P&C related exposure

·     FinTech & Payments: U.S. Payments, Processors & IT Services price tgts lowered at Barclay’s, cutting ACN to $340 (from $370), FIS to $110 (from $130), RSKD PT to $6 (from $7), WU PT to $12 (from $17) while awaits PAYX FQ4 earnings this week; DLO downgraded to Underperform as see more headwinds than tailwinds at SMBC Nikko and the broker also downgraded PAY to Neutral following an underwhelming 2Q print

·     Consumer Finance: Piper lowered estimates for ALLY, COF, DFS, SYF and tgts lowered as well saying the rapid rise in Fed funds combined with outsized loan growth has led to a significant increase in funding costs for digitally based depositories and estimate deposit betas have already reached 60%+ on savings accounts since the Fed started increasing rates six months ago.

·     Real Estate & REITs: Wedbush lowered estimates for RDFN and ZG to reflect the rise in mortgage rates this year – Zillow tgt goes to $31 from $39 as anticipate Zillow’s revenues grow in line with the annual forecast averages and anticipate Redfin’s results are near the bottom of the guidance ranges

Healthcare

·     Pharma movers: LVTX shares surge after giving exclusive worldwide license for experimental cancer drug to SGEN as LVTX to get upfront payment of $50 million, with potential for up to ~$650 million in milestone plus royalties; PFE and BNTX said they applied to the U.S. FDA seeking an emergency use authorization for their bivalent vaccine booster for use in children aged 5 to 11 years of age; AVIR said the FDA granted Fast Track Designation to AT-752, a novel, orally administered, direct-acting antiviral for the treatment of dengue virus infection

·     Healthcare Services: on Friday 9/23, the Nebraska Department of Health and Human Services selected Molina Healthcare of Nebraska (MOH), Nebraska Total Care (CNC), and UnitedHealth Care of the Midlands (UNH), to provide services in Nebraska’s Medicaid managed care program. The contracts are for five years with two-year optional renewals and begins on 1/1/ 24. CNC and UNH both hold their current positions while MOH displaces Healthy Blue of Nebraska

Industrials & Materials

·     Industrials, Aerospace & Defense: FFIE secured up to $100 million in new financing to fund operations after reaching a deal with one of its largest shareholders to resolve a governance dispute; shares of GNRC, PWR, MTZ and others move higher early on headlines of increased Hurricane impact along Southeast; The U.S. Transportation Department proposed requiring airlines disclose fees for baggage, ticket changes and family seating the first time an airfare is displayed.

·     Transports: heading into the final week of trading for September, the Dow Transports are down -13% this month alone, with FDX tumble on lower guidance the main culprit; DSX, GOGL and SB downgraded to hold from buy at Jefferies and lowered dry bulk estimates to reflect the decline in dry bulk charter rates with the decline in Chinese output adding to woes – though sees resurgent coal demand for several quarters due to ongoing tight energy supplies in Northern Hemisphere; ATCO rises after the SPAC Poseidon said they have increased their bid price to acquire all shares not controlled by majority shareholders to $15.50 per share in cash from $14.45 per share; FDX, UPS, CSX, LUV among transports hitting 52-week lows today on slowing economy fears

·     Metals & Materials: TROX lowered Q3 adjusted EBITDA to be $240-$255 million compared to the previously guided range of $275-$295 million due to softer than anticipated TiO2 sales volumes and increasing energy costs in Europe (shares of other TiO2 names active CC, KRO, VNTR); industrial metals were weaker initially (copper, aluminum, iron ore) on weaker global demand and growth outlooks, but pared losses

Technology, Media & Telecom

·     Media, Internet: in online travel (ABNB, BKNG, EXPE, TRIP), Oppenheimer said they hosted an expert call with AirDNA, and September short-term rental (STR) bookings are holding up well relative to a strong August and said holiday travel ADRs are pacing well-above 4Q ADR expectations; CHGG was upgraded to Buy with $28 tgt at Needham as analysis of Chegg’s 3Q and FY22 guidance assumptions combined with our forecast for Fall 2022 enrollment expectations suggest the company is positioned well to report upside to conservative expectations.

·     Hardware, Software & Service movers; PLTR awarded $95.9M contract to support Homeland Security Investigations; CHTR, CMCSA, and DISH all among top decliners in the S&P 500 early as cable/satellite names underperform