Mid-Morning Look

Friday, January 14, 2022

U.S. stocks pressured to start the day, adding to the late day market swoon that saw major averages end at the lows, after a much weaker-than-expected reading on December retail sales and earnings from major banks weighed on sentiment (stocks have since pared losses). The Dow Jones Industrial Average fell over 400 points, and the S&P 500 dropped 0.8% to 4,625, well below its 50-day moving average support if 4,680 that was breached in yesterday’s slide. Banks mixed after JPM, Citi and Wells earnings results while energy continues to be the 2022 leaders, as oil prices resume its upward momentum. Retail sales fell 1.9% in December, compared with expectations for a 0.1% decline, impacting consumer discretionary names. The weak retail sales reading come as a spike in inflationary prices appears to have impacted consumer buying in the key holiday shopping period. Meanwhile, U.S. import prices on a y/o/y basis rose 10.4%, the largest calendar-year increase since 10.6% in 2007 while slipping -0.2% M/o/m and exports fell -1.8% m/o/m. Fed commentary since last weeks FOMC Meeting minutes have been overly hawkish, with several Fed speakers reiterating that rates will need to go higher this year, with many Fed members noting it could be in the range of three to four hikes in 2022. Treasury yields resume upward momentum, with the 10-yr at 1.75% after dipping below 1.7% yesterday while shorter-term 2-yr yields are now at 0.94%, nearly 2-year highs. The dollar rebounds after hitting 2-month lows this week.

Economic Data

·     Retail Sales for December fell -1.9% MoM vs +0.0% consensus and +0.2% prior (and revised from +0.3%), while core Retail Sales fell -2.3% MoM vs. +0.3% consensus and +0.1% prior; as rising inflation appears to have taken a toll on sales; Ex-Auto & Gas, retail sales fell -2.5% M/M vs. +0.2% consensus and -0.1% prior

·     Import prices fell -0.2% MoM vs. +0.3% consensus and +0.7% prior as lower fuel prices more than offset prices for nonfuel imports; on a YoY basis, U.S. import prices rose 10.4%, the largest calendar-year increase since 10.6% in 2007. Export prices fell -1.8% MoM vs. +0.4% estimate, with the price drop the largest since the index fell 3.5% in April 2020.

·     Industrial Output for December fell -0.1% vs. est. +0.3% and down from upwardly revised nov reading of +0.7% (from +0.5%); capacity utilization rate 76.5% vs. est. 77%; Dec manufacturing output -0.3% vs. Nov +0.6%

·     University of Michigan surveys of consumers sentiment prelim for Jan 68.8, below consensus 70.0 and Dec-F 70.6; current conditions index prelim Jan 73.2 vs final Dec 74.2 and surveys of consumers expectations index prelim Jan 65.9 vs Dec-F 68.3

·     Business Inventories for Nov rises +1.3%, in-line with estimates and October reading; Nov business sales +0.7% vs Oct +2.2%

Sector Movers Today

·     Bank movers; JPM Q4 EPS $3.33 vs est. $3.01 on adj rev $30.35B vs est. $30B, recovery of credit losses $1.29B vs est. provision $172.8M, sees FY22 net interest income ~$50B v est. $55.7B; WFC Q4 EPS $1.38 vs est. $1.11 on revenue $20.86B vs est. $18.85B, ROE 12.8% from 6.6% YoY, net interest income -1% YoY but noninterest income +27% due to strong PE and VC business and the sales of its corporate trust and asset management units ; Citi (C) Q4 adj EPS $1.99 vs est. $1.37 on revs $17B vs est. $16.77B; BLK Q4 adj EPS $10.42 above est. $10.15 on revenue $5.11B vs est. $5.16B, net inflow $211.7B, ended the quarter with over $10T AUM; FRC Q4 EPS $2.02 vs est. $1.94 on revs $1.4B vs est. $1.35B

·     Restaurants; DPZ downgraded to equal-weight from overweight at Morgan Stanley and firm upgraded CMG to overweight from equal-weight amid a mixed view on restaurant stocks into 2022; TXRH was upgraded from In Line to Outperform w/ $110 PT at Evercore/ISI as believe there is still significant upside potential to traffic as COVID hopefully dissipates this spring; MCD tgt raised from $275 to $300 at Evercore largely as a result of accelerating sales in international markets and the resulting benefits to FCF growth; Loop Capital said latest DPZ U.S. franchisee checks indicate same-store sales growth came in above expectation in fiscal 4Q; PLAY upgrade from Hold to Buy at Gordon Haskett and downgraded EAT to Hold; Cowen said similar to 3Q our checks suggest a choppy earnings season ahead given COGS & labor pressures remain elevated while sales trends are broadly robust but decelerating from 3Q to 4Q

·     Broadline/Hardline Retail: JPMorgan upgraded ORLY to OW and added ULTA to its Focus List as a growth idea after its pullback as it favors names with high visibility to positive comps in Q1 (such as these two and DRVN, GPC) or where sentiment has washed out against upside and valuation (such as ASO), remove TGT from its Focus List given near-term concerns on SSS forecasts, remain UW on Wayfair (W), WSM, TCS despite steep pullbacks as key risks are still in the earlier stages of playing out, and in staples, they downgraded BJ to UW given mounting headwinds and their balanced ratings distribution while maintaining WMT at Neutral and COST at OW; ODP received a proposal from a second party to acquire its consumer business and it will now delay its public company separation to evaluate the potential sale

·     Software movers; SAP announces EUR 1B share repurchase program; said targets FY22 non-IFRS cloud revenue at constant currencies between EUR11.55B and EUR11.85B, 5% ahead of consensus; posted 4Q operating profit of EUR2.47B, around 2% ahead of consensus and revs of EUR7.98B above consensus EUR7.75B; MTTR, SAIL removed from Best ideas list at Wedbush; CHKP upgrade from Market Perform to Outperform at Raymond James as recent channel checks suggest strong near-term demand in both emerging subscription-based technology and net new customer growth (i.e. not just renewals)

Stock GAINERS

·     FANG +3%; strength continues in the energy complex (among top S&P gainers include BKR, DVN, OXY, COP), with estimates rising for several Wall Street firms as oil prices – just today, Truist increased our 2022 oil price deck by ~10% and our 2023 deck by ~8% and raise price tgts on several – APA, MRO

·     LVS +12%; along with gains in MLCO, WYNN, MGM after Macau’s government announced that the number of new casino operators allowed to function in the gambling hub would be limited to six with an operating period of up to 10 years

·     MOS +3%; BMO upgraded MOS and KPLUY to Outperform on concerns Belarusian potash is about to become stressed that would lead to investors bidding up the share prices of potash producers

·     ODP +7%; said it received a proposal from a second party to acquire its consumer business and it will now delay its public company separation to evaluate the potential sale

·     SAP +1%; announces EUR 1B share repurchase program; said targets FY22 non-IFRS cloud revenue at constant currencies between EUR11.55B and EUR11.85B, 5% ahead of consensus

Stock LAGGARDS

·     DIS -2%; downgraded from Buy to Neutral at Guggenheim and cut tgt to $165 from $205 reflecting updated view of the pace of profit growth at the company’s direct-to-consumer and parks businesses, which is now below consensus through fiscal 2024

·     GRWG -5%; extends downward momentum after lowering guidance for the year yesterday, promoting negative analyst actions this morning – downgrades

·     JPM -5%; reported Q4r results that included a beat on investment banking revenue, a miss on fixed-income and trading revenue, and higher expenses

·     MRNA -5%; along with weakness in vaccine makers PFE, BNTX, JNJ, NVAX after MRNA CEO said the pandemic could start moving into an endemic phase in 2022, but it depends on decisions made across the world, and countries will need to stay vigilant as Omicron spreads

·     PTON -2%; to be replaced in the Nasdaq 100 index by ODFL

·     SAM -6%; after cuts FY21 EPS view to ($1.00) to $1.00 from $2.00-$6.00 as now ests shipment growth for the Company’s products and gross margins will be below guidance primarily a result of more aggressive wholesaler inventory reduction than expected, primarily affecting Truly

·     SHW -2%; cuts EPS view yet again on labor headwinds, raw material availability; said demand trends strong but expects issues to persist through Q1

·     SPG -2%; mall related REITS seeing weakness early on the softer December retail sales print (KIM, MAC), as well as retail department stores (M, KSS, DDS, JWN)

·     SWAV -3%; after CSI issued a press release stating that the company is developing an intravascular lithotripsy (IVL) device for coronary and peripheral artery disease