Mid-Morning Look

Monday, January 24, 2022

A brutal start to the trading week after stocks posted their biggest weekly loss since October 2020 last Friday, as the S&P now in correction territory (defined as 10% from highs), while the Dow falls for a 7th day, the Nasdaq on track for its 5^th straight day of losses of more than 1% (falls as much as 3% today), and Russell 2000 index falls 20% from its record closing high on Nov 8, on course to confirm bear market. Combination of geopolitical concerns (Russia/China) as well as rising interest rates/hawkish Fed comments has pummeled stocks over the last few weeks into this week’s FOMC meeting – continues into today. Concern also ahead of big earnings week for tech and weaker economic data. The warnings over Ukraine are coming in loud after the U.S. State Department ordered diplomats’ family members to leave the country this weekend. Meanwhile, the UK upped the urgency level even more on Saturday when it accused Russia of hatching a plot to install a pro-Russian leader in Ukraine once it invades with Markit PMI coming in well below prior and consensus estimates. Fear in the market for the first time in a while as the CBOE Volatility index (VIX) rises as much as 28% to above 37, highest since January 2021. Another market tantrum ahead of expected rate hikes from the Fed – with expectations for four rate hikes in 2022 to fight off inflation, with the first hike expected in March (FOMC meets this week with comments released Wednesday). Note the Nasdaq has fallen 1%+ on 5 trading days in a row just 7 other times (since 1970) – coming into today, the Nasdaq had plunged -2.6% 1/18, -1.15% 1/19, -1.3% on 1/20, and -2.7% on 1/21 (also had fell -2.5% on 1/13. Nasdaq Comp came into the day down -12% MTD, Russell 2000 -11.4%, S&P -7.7% and Dow -5.7 MTD (before the selling pressure in futures). Crypto assets also a big market talking point with Bitcoin crashing below $33,000 (down around 9%) and Ethereum below -$2,200 (down 15%) – as both more than 50% off November highs.

Economic Data

·     Markit Manufacturing PMI Flash Actual 55 vs. est. 56.7 and prior 57.7; Markit Composite PMI Flash Actual 50.8 (lowest since July 2020) vs. previous 57.0 and Markit Services PMI Flash Actual 50.9 below est. 55.4 and prior 57.6

Sector Movers Today

·     Consumer Staples; one of few areas holding up well with broader market meltdown; the Financial Times reported this weekend that Nelson Peltz’s activist hedge fund Trian Fund Management has built a stake in Unilever (UL), adding pressure on CEO Jope after a failed bid to buy GlaxoSmithKline Plc’s consumer-health unit; RBC with EPS preview as expect KMB to be negatively impacted by high cost inflation in the quarter, although we see signs of an improvement with pulp coming down sequentially with pulp capacity (later in the year). See potential downside at MO with soft scanner data reflecting the impact of higher gas prices and consumer trade down. See potential topline upside at MDLZ with cost pressures likely limiting profit upside. Have a negative bias into CL’s print with elevated commodity inflation likely to weigh on 2022 guidance, particularly in the first half of the year

·     E&P and Majors; Energy stocks fall, tracking crude prices which took a hit from a stronger dollar and investor concerns over a quicker-than-expected U.S. rate hike later this week; HAL Q4 adjusted EPS $0.36 vs. est. $0.34; Q4 revs $4.3B vs. est. $4.09B; Q4 FCF $478M; raises qtrly dividend to 12c from 4.5c; Stifel raised their target on SLB to $44 from $38 after it delivered results modestly better than expected; in refiners: RBC raised their Q4 EPS estimates on PSX, VLO, PBF on macro tailwinds and lowered them on PARR, HFC DK on company-specific headwinds and slightly lowered estimates on MPC as a slower pace of buybacks

·     Media & Telecom movers; CMCSA and CHTR both upgraded to outperform from sector perform at RBC Capital saying Wall Street’s negativity over the competitive threats to cable operators across broadband has become too punitive – Following a strong multi-year run, cable stocks like ATUS, CHTR, and CMCSA are now down between 19-50% since August as sentiment has quickly turned negative driven by a slowdown in broadband subscriber growth and competition fears; in media, FOXA upgraded from Neutral to Buy w/ $50 PT from $42 at UBS saying within traditional Media, believe Fox is better positioned given sports betting optionality, measured DTC spend and leadership within the legacy (albeit declining) Pay TV bundle with its sports & news focus.

Stock GAINERS

·     CMCSA and CHTR both upgraded to outperform from sector perform at RBC Capital saying Wall Street’s negativity over the competitive threats to cable operators across broadband has become too punitive

·     EXTN +46%; after Canada-based Enerflex Ltd signs deal to buy EXTN for about $735 mln, or an enterprise value of $1.5 bln

·     FOX +3%; upgraded from Neutral to Buy w/ $50 PT from $42 at UBS saying within traditional Media, believe Fox is better positioned given sports betting optionality

·     KR +2%; ongoing rotation into consumer staples, defensive assets

·     KSS +33%; after the WSJ reported over the weekend that activist hedge fund Starboard Value was behind a group that made a $9 billion bid for Kohl’s that values the retailer at $64 a share (M, JWN move higher in sympathy – Macy’s has faced calls to separate its e-commerce business from brick-and-mortar stores) https://on.wsj.com/32nSFV8

Stock LAGGARDS

·     CCL 6%; Bank America maintains more cautious stance on cruise, saying in last monthly pricing survey, began to see minor pricing weakness in 2H22 (down about -1% vs Nov)

·     COIN -13%; another bloodbath for the crypto sector with Bitcoin falling more than 50% from November all-time highs above $69K and Ethereum dropping below $2,200 – many names leveraged to the price of Bitcoin tumble at/near 52-week lows: COIN, SI, MSTR, MARA, RIOT

·     FCX -5%; broad selling in metals and mining stocks, slowing economy and rising rates impacting

·     GS -4%; leading banks lower initially, extending last week’s earnings-related earnings, as investors rotate out of banks and into move defensive sectors

·     NFLX -9%; adding to Friday 20% sell-off post subscriber miss for quarter

·     OPK -20%; after saying along with partner PFE the FDA issued a Complete Response Letter (CRL) for the Biologics License Application for Somatrogon

·     SNAP -8%; downgraded to Neutral at Wedbush and cuts tgt to $36 from $56 saying seen little evidence of progress against IDFA since SNAP reported 3Q earnings, with our checks indicating continued headwinds across digital advertising

·     VKTX -8%; as the FDA has placed clinical hold on its Phase 1b trial of VK0214 in patients with X-linked adrenoleukodystrophy (X-ALD)

·     YNDX -9%; looking at 7th straight down day on Russia/US tensions