Closing Recap

Wednesday, September 29, 2021

Equity Market Recap

·     Stocks slid into the close after trading higher most of the afternoon in an otherwise choppy day of trading, as investors initially took advantage of the two-day pullback in broader averages (including a sharp drop Tuesday) to scoop up some beaten-up stocks before the late day pullback. Markets aren’t in the clear yet as we await news out of D.C. as Democrats in Congress said they would vote to avert a government shutdown before funding expires at midnight on Thursday. The Senate could vote on Wednesday or Thursday on a bipartisan resolution to fund federal operations through early December, Senate Democratic Leader Chuck Schumer said (more details below). Defensive sectors outperformed with Consumer Staples, Utilities and Consumer Discretionary leading as most sectors finished higher. The U.S. dollar saw increased buying, moving to 52-week highs for the dollar index, pressuring commodity prices including precious metals as gold and silver tumbled. Treasury yield slide overnight but crept higher throughout the trading day weighing on investor sentiment and again pressuring growth stocks amid inflation concerns.

·     Federal Reserve fears weigh on markets: Democratic Senator Elizabeth Warren said yesterday that she vehemently denounced Federal Reserve Chair Jerome Powell to his face as “a dangerous man” because he was making it too easy for big banks to take big risks. Meanwhile Fed’s Kaplan and Rosengren recently announced they were retiring citing the distraction of their financial disclosure for decision (raising ethical questions about the Fed). Lastly, the Fed last week pushed up their timeline for interest rate hikes into 2022 (now about half view that way), while Fed asset tapering is expected soon.

·     Speaker Nancy Pelosi suggested the U.S. House of Representatives may not vote Thursday as planned on a $1 trillion bipartisan infrastructure bill, as she and her fellow Democrats struggle to reach agreements on their spending proposals. Progressive House Democrats continue to say they won’t support the infrastructure bill unless the party’s $3.5 trillion package targeting “human infrastructure” moves ahead in tandem, but moderate Democratic senators are opposed to the larger measure’s price tag. Pelosi said she still planned a House vote on Thursday on the infrastructure bill, but noted she had the authority to delay it.

·     Stock/sector movers: MU falls after reporting a quarterly beat with weak guidance yesterday, while NXPI falls on a Bernstein d/g in semi space (semi’s in general pressured as SOX index hits 100-day MA support); in retail, DLTR spikes and leads the S&P after increasing its buyback program by $1.05B and adding price points above $1 across all Dollar Tree Plus stores; BA soars to lead the Dow, EADSY, SPR rise after Bernstein upgrades the names to Outperform on increased traffic, capacity, and delivery outlooks; LCID jumps after starting production of its Lucid Air with deliveries scheduled for next month and TSLA rallies as Wedbush expects strong Q3 deliveries to be reported Friday/early next week; AFRM bounces after saying it will soon allow users to buy and sell crypto directly from savings accounts they have with the company; EDIT tumbles after reporting clinical data from its Ph ½ trial to treat blindness.

Commodities

·     Oil prices slip as WTI crude dips -$0.46 or 0.61% to settle at $74.83 per barrel (off highs $75.79) after weekly oil inventory data was bearish and the U.S. dollar surged to one-year highs. The EIA posted a surprise weekly crude build of +4.6M barrels vs. -1.7M estimates (last week fell -3.5M barrels), while gasoline rose 200K barrels vs. +1.4M consensus, (+3.5M last week) and Distillates also a surprise build of 400K barrels vs. expected draw of -1.6M barrels. p next, OPEC+ meeting where expectations are for them to stick to an existing deal to add 400,000 barrels per day (bpd) to its output for November when it meets next week.

·     Natural gas futures dropped as much as 8% on Wednesday, pulling back from a more than seven-year high above $6 per million British thermal units hit during the prior session. The contract for November delivery fell to a low of $5.42 on Wednesday, before recovering some of those losses to settle 6.85% lower at $5.47

·     Precious metals fell on the day, as gold prices decline -$14.60 or 0.8% to settle at $1,722.90 an ounce, its lowest level in roughly 6-months as a surge in the dollar (1-year highs) put pressure on commodity prices. Spot silver prices fell even more, touching its lowest since July 2020.

Currencies & Treasuries

·     The U.S. dollar index (DXY) rises over 0.6% to 94.35, its best levels on over a year; the euro extends its sharp declines vs. the dollar, trading below 1.16 for the 1^st time since July 20th; the dollar/yen rises as much as 0.3% to 111.93, highest since Feb. 2020; the Turkish Lira hit an all-time low against the U.S. dollar amid concerns over President Tayyip Erdogan’s influence over monetary policy after the central bank unexpectedly cut interest rates (lira weakened beyond a previous record of 8.9995). Crypto assets sliding as Bitcoin prices drop below $42K, and off more than 10% in September, its biggest decline since May. Treasury yields fell more than 6 bps to lows of 1.495% this morning after yesterday’s pop but yields slowly gravitated higher throughout the trading day, moving back above 1.55% late day.

Sector News Breakdown

Consumer

·     Retailers; Warby Parker (WRBY) hit the NYSE via a direct listing, assigned a reference price of $40 to $WRBY with 111.5M outstanding shares (valuation of around $4.6B) and shares opened at $54.05; DLTR approves an increase in its share repurchase to take the total buyback firepower to $2.5B. In a separate announcement, DLTR disclosed that it plans to begin adding new price points above $1 across all Dollar Tree Plus stores; GPS shares active after Kanye West announced a new product launch this morning; LEVI positive mention at Stifel saying ahead of F3Q results they see strong potential for upside to our above consensus FY3Q estimates and an upward revision to guidance led by Wholesale strength; FL to raise $400M of senior notes due 2029

·     Auto sector; Wedbush said TSLA Q3 deliveries (expected Fri or early next week) should be strong despite the current chip shortage as they see deliveries possibly approaching 230k with early whispers near 220k vs their current 212k projection as EV demand and delivery has accelerated in the US and China over the past 4-6 weeks; Morgan Stanley upgraded AN to EW with a $116 PT from $70 as their new CEO Mike Manley (ex-CEO of FCA) significantly changes the narrative; DAN secured a long-term contract with Bosch to jointly develop and optimize design and manufacturing processes of metallic bipolar plates for fuel cell stacks, and OpCo continues to see shares as undervalued after their 2021 Capital Markets Day provided strong proof of the company’s ability to be a winner in the energy transition; TM August sales 813,415 (+4.2% YoY), vehicle production 632,489 (-12.5% YoY, its 1st YoY contraction in 12 months); HMC produced 274,356 vehicles in August (+70.4% YoY); LCID rises after starting production of its Lucid Air with deliveries scheduled for next month

·     Consumer Staples; CAG upgraded to Neutral at Credit Suisse and raising EPS estimate for FY22 to $2.48 (from $2.46), now above consensus as view the risk-reward as neutral given that consensus already assumes an EPS miss in FY22 off of reduced earnings guidance and valuation; SAM pt cut to $440, Underperform at Jefferies while remain Buy on TAP and STZ after U.S. beer distributor survey suggests flat volumes in ’22/next 3-5 years (close to mkt view), though below + low-single-digits (%) from our Fall ’20/Spring ’21 surveys given the seltzer slowdown; CALM reported 1Q22 GAAP EPS of ($0.37), vs. consensus estimates of ($0.82)/($0.62) as earnings beat was primarily driven by higher gross profit (+$0.28) and larger tax benefit (+$0.17); BYND launched a plant-based Beyond Breakfast Sausage Links at grocery stores across Canada; SBUX partners with NotCo for plant-based options in Chile, sending shares of OTLY lower

·     Restaurants; WING tgt (to $205 from $183) and ests raised at Piper as believe same-store sales are benefiting from digital application, media support, and recently implemented menu price increases; PZZA announces brand’s largest domestic development deal ever with leading multi-brand franchisee operator sun holdings

Energy

·     Energy stock movers; little bit of a breather for the energy sector as E&P, majors, and equipment names modestly lower after leading in the S&P the last few sessions on rising oil prices amid supply concerns and increased demand due to hurricane impacts. Up next, OPEC+ meeting where expectations are for them to stick to an existing deal to add 400,000 barrels per day (bpd) to its output for November when it meets next week, despite oil hitting a three-year high above $80 a barrel and pressure from consumers for more supply. OPEC+, which has held regular meetings, agreed in September to continue with its existing plans for an October output rise. The OPEC+ Joint Technical Committee meets on Wednesday to review findings to ministers.

·     E&P and Majors; APA shares slumped after the company said it has plugged and abandoned the Keskesi South-1 well offshore Suriname after encountering non-commercial quantities of hydrocarbons; in research, PXD raised to top pick in E&P, upgrade CLR and MRO to Buy at Citigroup and refresh rank with a focus on incremental cash return and thus our top picks are PXD, DVN, EOG, FANG, PDCE and OVV saying natural gas and LNG prices are spiking around the world, and this is happening during the shoulder season suggesting upside could continue if winter weather is colder than normal; OXY upgrade from In Line to Outperform at Evercore; EQT 5.93M share Spot Secondary priced at $20.00

·     Utilities & Solar; Citigroup upgraded shares of TECK and ARCH to Buy after its global commodity team upgraded met coal price forecasts: 2H21 to $325/t (from $145/t), 2022 to $225/t (from $150/t). This equates to ~$165m of incremental revenue and EBITDA per seaborne ton sold over the next 18 months.

Financials

·     Bank movers; OpCo downgraded MS to Perform from Outperform purely on valuation as their forward estimates are unchanged but their valuation model shows just 7% upside, and they say bank stocks still only trade at a 61% relative P/E based on 2022E consensus even after its recent outperformance, and stocks on their recommended list include BAC, C, GS, JEF, USBRBC upgraded UBS to Outperform with a new CHF19 target due to its discounted valuation, several catalysts, and a strategic position that should deliver high returns, earnings growth and attractive capital distributions; SF said it agreed to buy institutional fixed-income broker-dealer Vining Sparks for an undisclosed amount; Wedbush remains positive on bank stocks ahead of Q3 earnings given tremendous earnings leverage with so much excess liquidity sitting on bank balance sheet and line utilization rates at near record low levels, with compelling valuations that are not fully reflecting potential earnings upside, and they see regional banks CMA, FITB, ZION, RF and mid-cap banks SI, CFR, SBNY as the biggest beneficiaries from reduced excess liquidity

·     Bitcoin, FinTech & Payments; Guggenheim kept their Buy rating and $375 PT on PYPL given growing conviction in Venmo’s monetization opportunity after a conference call with a small business operator who accepts Venmo; JPMorgan was cautious on HOOD due to Apptopia data that shows app downloads and daily usage declining considerably vs peers in 3Q21 despite US equities hitting record highs in each of the past 4 months, and they also say the upcoming post-IPO unlocking of shares could potentially further pressure share price, though it might be a positive for institutional investors as less sophisticated investors will have less ability to move the stock beyond fundamentals; AFRM said it is planning to debut a debit card and allow customers to buy and sell crypto directly from savings accounts they have with the company; SOFI announced its intention for a private offering $750M of convertible senior notes due 2026; Ripple is launching a $250 million fund to explore new use cases for NFTs on the XRP Ledger

·     Consumer Finance; JMP downgraded RM to Market Perform due to valuation as its +291% run over the past 52 weeks and +111% YTD was the best performer under their coverage and has pushed shares to trade at a historical premium that is pricing in a subprime lending recovery; NAVI agreed to transfer the loan servicing for U.S. Department of Education-owned student loan accounts to MMS through a contract novation, subject to the department’s approval

·     REITs; Mizuho upgraded ESS to Buy on inflecting and accelerating growth, sentiment upside, and a relative valuation discount as a delayed West Coast re-opening and lagging YTD performance provides a relatively attractive entry point, and also raised their price targets and estimates on residential REITs (AIRC, AVB, CPT, ER, MAA, UDR, INVH)

Healthcare

·     Pharma movers; LLY upgraded to Buy from Neutral at Citigroup and raise tgt to $265 from $210; NVS said its drug Cosentyx delivered via the autoinjector UnoReady pen benefited patients with moderate to severe plaque psoriasis in an international phase 3b trial; FOLD said the U.S. FDA has accepted for review cipaglucosidase alfa and migalastat, two components that make up AT-GAA, FOLD’S experimental therapy for the treatment of Pompe disease; Separately, FOLD says its gene therapy business will be acquired by ARYA Sciences Acquisition Corp IV; for MIRM, the FDA approves livmarli (maralixibat) as the first and only approved medication for the treatment of cholestatic pruritus in patients with Alagille syndrome one year of age and older; in healthcare services, EVH shares jumped after Bloomberg reported WBA was in discussions to acquire the healthcare delivery and payment company https://bit.ly/3kTgtqt

·     Biotech movers; MRNA rises after Bloomberg reported the FDA is leaning toward authorizing half-dose booster shots of MRNA’s COVID-19 vaccine; BGNE reports 13.2% stake in LPTX – reported purchase of 2.54M shares at $2.85 per share from the most recent offering; FBIO rises after AZN’s newly acquired Alexion unit to buy Caelum Biosciences Inc, company founded by FBIO about $150M and up to $350M in potential milestone payments (FBIO gets about 43% from transaction); BIIB tgt cut to $326 from $341 at RBC Capital and lower 2H ests based on slow Aduhelm uptake, and continues to believe consensus numbers are overly optimistic; NCNA shares rise as the FDA granted Fast Track designation to its Acelarin, currently being evaluated in a late-stage study for the first-line treatment of patients with advanced biliary tract cancer; GOVX enters license agreement with PNP Therapeutics to acquire the exclusive rights to develop and commercialize Gedeptin, a treatment of solid cancer tumors; EDIT announces positive initial clinical data from ongoing phase 1/2 brilliance clinical trial of edit-101 for lca10 – said no serious adverse events or dose-limiting toxicities observed to date

Industrials & Materials

·     Aerospace & Defense; BA, SPR and EADSY all upgraded to outperform by Bernstein on travel finally heading to inflection point (Boeing and Sprit rises on an increased traffic and capacity forecast as well as raised delivery outlooks). Says there is more upside if Airbus delivers on its 2023-25 production guidance. Boeing has more company-specific issues as it works to raise 737MAX rates, return to 787 deliveries, and address program issues in defense; LMT downgraded from Outperform to Market Perform with $375 pt at Cowen saying short of a rotation into big cap defense, its relative upside looks capped by pared F-35 delivery plans; LDOS awarded DARPA contract with $19.3M ceiling value; KTOS receives approximate $50M, single award, sole source high performance jet drone system related IDIQ contract

·     Industrials, Metals & Materials; silver prices and stocks (CDE, AG, PAAS, SVM) punished today following the sharp decline in silver prices – silver futures collapse below $22/oz. to their lowest since July 2020, attributed to trouble with China, a slowing economy, and a stalemate in Congress; NGLOY upgraded to Outperform and raises PT to 3450p at RBC Capital saying with the shares having pulled back and PGM prices stabilizing, Anglo’s diversified and growth-heavy portfolio of assets returns to their Outperform list; WOR reported Q1 EPS beat $2.46 vs. est. $1.90 while sales were in-line with consensus at $1.1B; GNRC shares tumbled after the company offered downside guidance for full-year revenues and a three-year outlook below analyst expectations (sees full-year revenues of $3.7B, slightly below $3.72B analyst consensus estimate) and also forecasts FY 2024 net sales at $5.5B at the midpoint vs. $5.7B consensus

·     Materials & Chemicals; SHW forecasted adjusted Q3 EPS missed the average analyst estimate (guiding lower for the 2^nd time in less than a month), but shares rebounded early; SQM upgraded to Neutral from Underperform at Bank America citing much higher lithium and potash price assumptions as well has strong lithium volume given the faster ramp-up of new capacity and solid demand (raised tgt to $67)

Technology, Media & Telecom

·     Internet; NFLX surges following the viral success of a South Korean show, Squid Game, less than two-weeks after its release; outside of NFLX, large cap growth tech names such as GOOGL, SNAP, TWTR were lower as stocks failed to hold early gains

·     Semiconductors; MU shares slump after better Q4 results, but weaker Q1 guidance – reported an in-line Q4 of $8.3B/$2.42, and guided to a weaker NovQ revenue to $7.65B, down 8% q/q, with GM a bright spot down only ~90bps q/q to 47.0% and up ~1,600 bps y/y (noted the weaker NovQ is potentially impacted by PC build constraints with component shortages and inventory tight); ASML estimated revenue would hit 24-30 billion euros ($28 billion-35 billion) in 2025 with gross margins up to 55%, which is up from its previous forecast of a 15–24-billion-euro range in the same year, at gross margins of at least 50%; NXPI downgraded to market perform from outperform; QCOM prevailed on appeal in an antitrust case over chip patents according to Bloomberg, fending off a potential class of 250 million users.

·     Software movers; WDAY announces expanded use of its applications across GOOGL’s global workforce; LSPD shares fell early after Spruce Point Capital Management Issues "Strong Sell" opinion with 60% – 80% long-term downside risk; CHKP and Alkira collaborate to bring security to cloud workloads

·     Storage, Hardware & Components; JBL reports Q4 revenue of $7.4B, up from $7.3B but missing the $7.67B estimate and guides Q1 revs between $8B-$8.6B compared to $8.25B estimate (EPS beat views); at JPMorgan, they upgraded CDW to Neutral and downgraded HPQ to Neutral from Overweight and cut tgt to $30 from $35 saying while overall IT spending is tracking solidly this year and next, they expect initial tailwinds that have been more favorable for (consumer) PCs and peripheral investments, to moderate; PSTG hosted a virtual Financial Analyst Day on Sep 28, 2021 as senior management provided a dive deeper into product, sales, and financials

·     Telecom, IT Services & Consulting; AKAM agreed to buy Guardicore, a Tel Aviv, Israel, provider of micro-segmentation technology that blocks the spread of malware within an enterprise, for about $600 million; in cable, Wells Fargo said the messaged weaker Broadband adds are more than baked in the recent stock pullbacks for attractive entry points at CHTR. Meanwhile for ATUS, with its stock collapse, the valuation looks compelling and for CABO, they expect a modest uptick as they are more immune to secular weakness.