Mid-Morning Look

Tuesday, August 23, 2022

U.S. stocks rebounding, off to a nice start Tuesday as weaker than expected housing and manufacturing data in the U.S. boost hopes the Fed will go easier on the widely expected September rate hike to slow inflation. The odds are changing by the day based on economic data, with odds of a 75-bps hike next month falling back below 50% after today’s soft reports. Still later this week, Fed Chairman Powell to speak Friday morning at an event in Jackson Hole, where he is expected to remain “hawkish”. The 10-yr yield hit highs around 3.08% before slumping lower in a rotation back into bonds following sharply weaker housing data (New Home Sales for July decreased to 511K from 585K units in June). After moving back near 20-year highs earlier, the U.S. dollar index with a big reversal to downside – down -0.8% to just above the 108.15 level after overnight highs above 109.20 – Euro moves back above parity vs. Buck (hit lows around 0.9927 earlier). Energy stocks along with industrials and materials the early leaders as defensive sectors (healthcare, Utes, staples) slip. Retailers Macy’s and Dick’s Sporting Goods both topped Wall Street expectations for the second quarter. In tech, Twitter shares fall following a whistleblower comment while PANW boosts software names post earnings. Note the S&P 500 came into the day down 3 of last 4 days and Nasdaq down 4 of last 5-trading days with 95% of large cap stocks declined yesterday, the first 90+% day since June, so conditions a bit oversold heading into today. In Europe, stocks were mixed after data showed eurozone business activity contracted in August.

Economic Data

·     New Home Sales for July decreased to 511K from 585K units in June, missing the estimate of 575K; new home supply 10.9 months’ worth at current pace vs June 9.2 months; July median sale price $439,400, +8.2 pct from July 2021 ($406,000)

·     S&P Global August flash composite PMI at 45.0, the lowest since May 2020 and vs 47.7 in July; S&P Global August flash services PMI at 44.1 (vs 47.3 in July) and S&P Global August flash manufacturing PMI at 51.3 vs 52.2 in July

Sector Movers Today

·     Media, Internet; TWTR has major security problems that pose a threat to its own users’ personal information, to company shareholders, to national security, and to democracy, according to an explosive whistleblower disclosure obtained exclusively by CNN and The Washington Post. https://cnn.it/3CmoBJj ; separately, Elon Musk’s lawyers sent a subpoena to Twitter co-founder Jack Dorsey ahead of the trial surrounding the stalled $44 billion takeover of the social media platform, seeking evidence from Dorsey about fake accounts on the site; WBD’s HBO’s “House of the Dragon” drew nearly 10 million viewers in the U.S. during its Sunday night debut; The audience was the largest in HBO’s history for the debut of a new series, the network said; JD JD.com beat top and bottom line expectations in Q2 as revenue rose 5.4% in the April to June quarter, marking the Chinese e-commerce giant’s slowest year-on-year growth on record.

·     Semiconductors: Semiconductor sales outlook is cut by World Semiconductor Trade Statistics w/ growth this year now seen at +13.9% (down from +16.3% previously) while the 2023 increase is forecast at just 4.6%; INTC signed a definitive agreement with Brookfield Infrastructure Partners L.P. to jointly fund Intel’s under-construction semiconductor fabrication facility located in Chandler, Arizona; TSM will soon move 3nm process technology to volume production, but the process is unlikely to generate revenue substantially until at least first-quarter 2023, according to industry sources, Digitimes reported

·     Materials and Miners; aluminum stocks AA, CENX, KALU rally following a strike at its Alcoa’s Mosjøen smelter in Norway began yesterday, August 22, 2022, after a collective agreement between Industri Energi and Norsk Industri was not reached by the agreed-upon deadline; fertilizer stocks MOS, CF, IPI, NTR rise early as Polish chemicals firm Grupa Azoty said it was temporarily halting production at its plants making nitrogen fertilizers, caprolactams and nylon 6 due to an unprecedented rise in natural gas prices; gold miners NEM, GOLD, etc. rebound as gold looks to snap 6-day losing streak, getting a boost on US dollar/Treasury yield sell-off

·     Retailers; Macy’s (M) Q2 EPS and sales top consensus ($1.00/$5.6B vs. est. $0.85/$5.49B) on weaker margins 38.9% vs. 40.6% y/y but inventory $4.61B, +7.3% y/y vs. est. $4.72B (Hedgeye notes inventories ended the quarter up only 7.3% — tight relative to what they’ve seeing out of the rest of apparel retail) lowers year outlook to $4.00-$4.20 vs prior $4.53-$4.95 and lower sales; DKS said Q2 comp sales fell (-5.1%) vs. est. drop (-6.46%) while Q2 profit and sales top views and raises 2022 adj EPS view to $10-$12 per share, from previous $9.15-$11.70

Stock GAINERS

·     AA +4%; aluminum stocks AA, CENX, KALU rally following a strike at its Alcoa’s Mosjøen smelter in Norway began yesterday, August 22, 2022

·     AERI +34%; ALC to acquire AERI for $770M at $15.25 per share; deal is a premium of 37% to Aerie’s last closing price of $11.15 a share on Monday https://on.mktw.net/3Kcqha2

·     APA +6%; announced it has discovered oil offshore Suriname at Baja-1 in Block 53, as Baja marks sixth oil discovery in offshore Suriname, and the first on Block 53

·     CANO +7%; after investor Own Creek Asset Management, which owns 8.69 million shares, or a 3.75% stake, urged the company to pursue strategic alternatives, including a possible sale https://bit.ly/3wnnZPO

·     DKS +3%; said Q2 comp sales fell (-5.1%) vs. est. drop (-6.46%) while Q2 profit and sales top views and raises 2022 adj EPS view to $10-$12 per share, from previous $9.15-$11.70

·     M +5%; Q2 EPS and sales top consensus ($1.00/$5.6B vs. est. $0.85/$5.49B) on weaker margins 38.9% vs. 40.6% y/y but inventory $4.61B, +7.3% y/y vs. est. $4.72B; lowers year outlook to $4.00-$4.20 vs prior $4.53-$4.95 and lower sales

·     MOS +3%; fertilizer stocks MOS, CF, IPI, NTR rise early as Polish chemicals firm Grupa Azoty said it was temporarily halting production at its plants making nitrogen fertilizers, caprolactams and nylon 6 due to an unprecedented rise in natural gas prices

·     PANW +10%; Internet security stocks gained after PANW posted a Q4 adj EPS and rev beat, announced a 3-for-1 stock split and guided Q1 profit/sales above consensus

Stock LAGGARDS

·     DLO -14%; falls following quarterly results and guidance

·     FHTX -25%; after the FDA places full clinical hold on Phase 1 study of FHD-286, months after trial was put on a partial hold due to one death

·     MDT -3%; reported Q1 EPS $1.13 vs. est. $1.12; Q1 revs -8% y/y to $7.4B vs. est. $7.22B; but warned gross margin impacted by strong dollar and inflation; expect continued impact in quarters ahead

·     TWTR -3%; whistleblower complaint from its former security chief Peiter Zatko says Twitter has major security problems that pose a threat to users’ personal info, shareholders, national security & democracy; the disclosure alleges one or more employees may be working for foreign intel

·     XPEV -4%; Q2 net loss of 2.70 bln yuan ($394.28 million) vs. 1.19 bln yuan a year earlier, delivered 34,422 vehicles in Q2 vs. 34,561 in Q1 and sees Q3 deliveries 29K-31K (below Q2 deliveries)

·     ZM -11%; reported FQ2 below consensus and lowered FY23 revenue growth guidance to 7% Y/Y from 10-11% Y/Y due to FX headwinds ($35M) and broader macro slowdown ($115M)