Mid-Morning Look

Friday, June 17, 2022

U.S. stocks open higher on this quadruple with options expiration day but slip off best levels (around 3,700 for the S&P), as momentum on the week remains to the downside following several central banks raising interest rates (including the FOMC by 75-bps) in attempts to slow surging inflation. The S&P 500 comes into Friday at 18-month lows with all eleven sectors down 15% from 52-week highs as consumer discretionary/communication service sectors down the most, over -33%. The Dow closed below 30,000 on Thursday, also at 18-month lows (though still not in bear market territory). U.S. equities remain on track for another big weekly decline – through Thursday, ~$2T in market capitalization had been erased from the S&P. The Nasdaq down over -34% coming into the day, below its all-time highs of 16,212.22 on Nov 22, 2021. Individual stock news has been quiet with earnings season over, the Fed just out of their blackout period after this week’s FOMC meeting (few comments today from Bullard, Kashkari, George so far) and little general news as macro developments remain key market drivers. Treasury yields have pulled back from decade highs earlier this week, with the 10-year at 3.26%, more than 20-bps off weekly highs. The U.S. dollar index (DXY) at highs after sliding yesterday, up 300 bps vs. Japanese yen, Euro dips -0.85% to 1.0455 and British Pound down -1.3% below 1.22. Oil prices adding to weekly declines, seeing a sharp pullback down over 4%.

Economic Data

·     U.S. May Industrial Output rose +0.2%, below consensus of +0.4% and April +1.4%; May mining output +1.3% vs. April +1.1% and utilities output +1.0% vs. April +5.5%; Capacity utilization rate rose to 79.0% from 78.9% in April but below consensus 79.2%. May motor vehicle assembly rate rose to 10.72 mln units/year from April 10.51 mln units/year

Sector Movers Today

·     Housing & Building Products; Homebuilders MDC and MTH downgraded to Underweight from Equal Weight at Wells Fargo and downgrade TOL to Equal Weight from Overweight saying given that fundamental housing data is likely to incrementally get worse from here and continue to feed negative investor sentiment, we try to estimate how much lower the stocks can go based on perceived risk; also, DFH downgraded to Underperform at Bank America as see a tougher backdrop relative to other builders with high exposure to entry level homebuyers, and DFH has higher financial leverage than peers; in building products, Bank America downgraded OC to Underperform and lower tgt to $80 from $119 while upgrade AZEK to Buy following analyst day

·     Retailers; AEO and URBN downgraded to Neutral at B Riley on promo risk and slowdown; expect ANF to continue to trend towards industry margin levels – and lower our AEO PT from $22 to $13 and URBN from $35 to $23. Believe AEO is at risk of seeing continued margin pressure throughout the year as higher promos could continue and for URBN, believe UO will be a detractor for the year and turn negative; Cowen says remain positive for LULU and DECK cautious HBI, ROST, PVH and SKX and tgt changes for FIGS $10 (Prior $11) FL $29 (Prior $35) HBI $10 (Prior $11) VFC $53 (Prior $57) YETI $64 (Prior $71) saying recent data surrounding monthly Retail Sales, Clothing/Footwear and broader ecommerce is now showing significant deceleration in unit sales as inflation builds

·     Bitcoin, FinTech & Payments; as astounding end of week for crypto assets, with Bitcoin prices volatile again (rode 10-day losing streak), with more cautious headlines in space as the WSJ reported that crypto Hedge fund Three Arrows Capital considers asset sales, bailout after suffering heavy losses from a broad market selloff in digital assets. Also reports today that Babel Finance said redemptions and withdrawals from co’s products will be temporarily suspended, resumption of normal service be notified separately (follows Celsius freeze the other day)

·     Metals & Materials; GLNCY said it made more money trading oil, metals, & other commodities in six months than it had expected to make all year; said its trading division expects to post half-year Ebit of more than $3.2 billion, at the top end of the company’s full-year guidance; in steel sector, United Steel (X) issues Q2 guidance as sees 2q adj EBITDA about $1.6B vs. est. $1.34B and guides Q2 EPS $3.83-$3.88, consensus $3.20 Q2 EPS $3.83-$3.88 above consensus $3.20; Citigroup downgraded DOW, WLK, OLN and CF to Neutral from Buy noting YTD commodity chemicals outperformed S&P 500 until last week by >30%, but we think that’s about to end.

·     Media & Internet; BABA rises after Reuters reported China’s central bank has accepted Ant Group’s application to set up a financial holding company, a key step in finishing a year-long revamp of Jack Ma’s fintech business (BABA is an affiliate of Ant Group) https://bit.ly/3N2kfsp ; JD rises on news the co is working on an on-demand food-delivery service that will pit it against offerings from Meituan and Alibaba, JD Retail CEO Xin Lijun tells Bloomberg TV; SNAP said it is testing a new subscription service called Snapchat+ that would give subscribers access to exclusive and pre-release features

Stock GAINERS

·     BABA +2%; after Reuters reported China’s central bank has accepted Ant Group’s application to set up a financial holding company, a key step in finishing a year-long revamp of Jack Ma’s fintech business (BABA is an affiliate of Ant Group) https://bit.ly/3N2kfsp

·     CNC +1%; raises its annual profit forecast to between $5.55 and $5.70, up from prior guidance of $5.40 to $5.55 and announces %3B share buyback plan

·     JD +4%; on news the co is working on an on-demand food-delivery service that will pit it against offerings from Meituan and Alibaba, JD Retail CEO Xin Lijun tells Bloomberg TV

·     REV +90%; after Reuters reported Indian conglomerate Reliance Industries is considering buying out Revlon in the United States https://reut.rs/3xBtbPS

·     X +4%; issues Q2 guidance as sees 2q adj EBITDA about $1.6B vs. est. $1.34B and guides Q2 EPS $3.83-$3.88, consensus $3.20 Q2 EPS $3.83-$3.88 above consensus $3.20

Stock LAGGARDS

·     ADBE -3%; posts Q2 beat but conservative guidance as 2Q adj EPS $3.35 vs est. $3.31 on revs $4.39B vs est. $4.35B; guides 3Q adj EPS $3.33 vs est. $3.40 and revs $4.43B vs est. $4.51B; guides FY adj EPS $13.50 vs est. $13.66 – Q2 Digital Media ARR exceeded guidance

·     ADXN -36%; announced it would end its lead program, Phase 2b/3 study for experimental therapy dipraglurant in dyskinesia associated with Parkinson’s disease (PD-LID)

·     COP -4%; among leading decliners in the S&P energy complex following a reversal lower in oil prices today and this week – DVN slip

·     KR -4%; adds to yesterday losses after earnings/margin results