Mid-Morning Look

Tuesday, June 28, 2022

U.S. stocks fading after an initial rebound overnight, with banking/financials leading the S&P higher along with energy and utilities again, while technology, comm services and consumer discretionary turn lower. News that China unexpectedly slashed quarantine times for international travelers, to just one week, suggests Beijing is easing COVID zero policies and helped market sentiment. The nationwide relaxation of pandemic restrictions led investors to buy Chinese stocks as well as names and sectors that could benefit including casinos, travel, leisure, and energy amid hopes of a revival in global growth. Stocks slid after weaker economic data as Consumer sentiment in June falls to lowest levels since February 2021 and in manufacturing, Richmond Fed report plunges to -19, the weakest since May 2020. Volumes are expected to soften even further into the 3-day holiday weekend. Treasury yields steady with the 10-year at 3.2%. Markets continue to weigh whether the economy can withstand large interest rate hikes by the U.S. central bank to stamp out inflation. Heading into the last few days of the month, quarter and 1H of 2022, the S&P 500 and Nasdaq are set to post losses in June and are on course to log two straight quarterly declines for the first time since 2015 (down -18% and -26% YTD respectively). Dow component Nike (NKE) slips after a weaker Q1 forecast.

Economic Data

·     Consumer sentiment in June falls to lowest levels since February 2021; 98.7 vs. 101.0 expected and 103.2 prior (revised from 106.4) while the present Situation Index to 147.1 from 147.4 in April (revised from 149.6) and expectations Index to 66.4 from 73.7, weakest since 2013

·     International Trade in Advance Goods for May falls -$104.31B vs. -$102.0B expected and -$106.7B prior (revised from -$105.94B); U.S. Advance may retail inventories excluding autos +0.8% and U.S. Advance may wholesale inventories +2.0%

·     U.S. S&P Case/Shiller home price index climbed 2.3% to 312.6 for the May 20-city index after increasing 3.1% to 305.6 in April. This was yet another fresh record peak, extending the string of new highs from March 2019

·     Richmond Fed composite manufacturing index -19 in June (worse than expected) while manufacturing shipments index -29 in June and services revenues index -7 in June

Sector Movers Today

·     Bank movers: among early leaders as the country’s biggest lenders unveiled dividend hikes and some share buybacks in the wake of the Federal Reserve’s annual bank stress tests last week. Among moves: MS increased its quarterly dividend by 11%, to 77.5c while authorizing a $20B share buyback, GS boosted its payout by 25%, to $2.50 per share, WFC said it plays to 20% hike, to 30c, CFG raises share repurchase authorization to $1B – will consider dividend increase for Q3, TFC said planned boost in div to 52c from 48c. Deutsche Bank lowered EPS estimates and price targets across interest rate sensitive coverage of trust banks and online brokers, while downgrading STT to Hold from Buy; JEF reported a top and bottom line miss

·     Semiconductors; MCHP upgraded to Buy from Hold at Stifel and up tgt to $75 noting the stock is down 31% from its peak on January 4, which creates a favorable risk/return level; Loop Capital lowered estimates for TER on weaker outlooks in mobility, memory noting global Smartphone shipments are declining and memory companies are curtailing their CAPEX – but remain positive on the rest of their operations; VLDR signs multi-year deal to supply its lidar sensors to mobile robotics company Boston Dynamics; TSM plans to raise prices for most of its manufacturing processes by about 6% starting in January 2023, despite concerns raised recently about a potentially disappointing second half of 2022 for several end market – Digitimes reported; IIVI planned purchase of COHR finally receives China antitrust approval

·     Housing & Building Products; in building products, JELD was downgraded to Equal Weight from Overweight at Wells Fargo and lower earnings estimates across the group from the ongoing pressured outlooks while they like the pricing momentum seen intra-quarter in the roofing industry with +HSD% increases for July & August—OC and BECN should relatively outperform; Wayfair (W) maintained Sell rating at Loop Capital and cut price target from $70 to $40 given outlook for a continuously tightening Fed and the end of the Covid-related demand pull-forward

·     Transports; in airlines M&A saga, JBLU sweetened its offer for SAVE with a ‘ticking fee’ and higher reverse termination fee, trying to sway Spirit’s shareholders from taking ULCC’s offer; with the move, they bump their offer to $34.15 from $33.50 per share; in transports, Credit Suisse initiates coverage with Outperform ratings on 13 companies UNP ($255 tgt), CSX ($35), NSC ($267), UPS ($225), FDX ($314), KNX ($70), SNDR ($32 TP), WERN ($51), SAIA ($234), XPO ($65), TFII ($103), ARCB ($102) and GXO ($65) and Neutrals on CNI, CP, JBHT, ODFL and an Underperform rating on one company CHRW noting the average stock in coverage has fallen in excess of 20%, with many now trading at steep valuation discounts to the broader market.

Stock GAINERS

·     CRNT +22%; after receiving $235M takeout offer from AVNW which owns more than 5% of shares already, offered $2.80 a share in cash for the shares https://bit.ly/3byoIG2

·     KZR +77%; as reported positive results in its lupus nephritis drug trial; said zetomipzomib, “continues to demonstrate a favorable safety and tolerability profile for administration over the 6-month treatment period”

·     OXY +6%; after Berkshire Hathaway continues to add to its stake in the oil company, buying 794,000 shares this past Thursday, lifting its stake to 16.4% of the big U.S. energy company, according to a filing late Monday

·     SAVE +2%; as JBLU sweetened its offer for the discount airline with a ‘ticking fee’ and higher reverse termination fee, trying to sway Spirit’s shareholders from taking ULCC’s offer; with the move, they bump their offer to $34.15 from $33.50 per share

·     TCOM +13%; reports first-quarter results that beat expectations and benefits from reduced quarantine time news in China

·     WYNN +6%; casino stocks with a presence in Macau rise after China reduced quarantine times for inbound travelers by half, raising hopes of increased traffic to the gambling hub (MLCO, WYNN, MGM, LVS rise)

Stock LAGGARDS

·     EBAY -1%; downgraded to Neutral from Buy at UBS and cut tgt to $48 from $60 warning that eBay’s 2022 GMV is set to decline about 17% y/y, which is below the guided decline of 14%-16% and the Street at 15%

·     LLY -1%; along with MRK after each hit 52-wek high on Monday

·     NKE -3%; beat Q4 revenue & EPS, though missed margins and guided down as N.A. sales missed, EMEA beat healthily, and China was slightly better than feared (the GM miss was first since COVID began), and authorized a new four-year, $18 bln program

·     SAM -3%; downgraded to Sell from Neutral at Goldman Sachs and cut tgt to $318 from $380 as is incrementally more negative and more positive on TAP which they upgraded and STZ;

·     SNX -1%; reported Q2 EPS $2.72 on revs $15.27B, topping the $2.65 and $15.25B estimate while guides Q3 revenue $14.5B-$15.5B, as mid-point below estimates $15.4B and year EPS mid-point of est. range also below views