Mid-Morning Look

Monday, September 26, 2022

U.S. stocks attempt to rebound after overnight losses, and two weeks of straight selling pressure, but as Treasury yields (between 10–15-year highs) and the dollar (20-year highs) remain elevated, stocks fail to break meaningfully higher. The S&P 500 fell by -4.65% last week in what was another very volatile week for global financial markets. Sentiment has weakened on the growing realization that many parts of the global economy, including the United States, are heading for a recession – while at the same time, central bankers are continuing to tighten monetary policy to squash inflation. The Federal Reserve raised rates by another 75 basis points last week (its 3^rd straight 75-bps hike) with calls for more aggressive hikes this year, while the BoE’s base rate rose by 50 basis points, and the Riksbank raised its benchmark by 100 basis points. The yield curve pushed higher, with 10-year hitting more than decade highs and the 2-yr 15-year highs. The British Pound fell to a lifetime low vs. the dollar overnight, falling as much as 4.7% vs. the dollar to $1.0327 after falling 3.5% last Friday, lowest level in over 35-years after UK tax plan news. With talk that the Bank of England may intervene to stem further losses the Pound recovered back above the $1.09 level. Oil prices hit nine-month lows on Monday, driven down by an expected decline in fuel demand as rising interest rates raise the likelihood of global recession, with further price pressure coming from a surging U.S. dollar – but too has rebounded. Macro dominating broader stock markets with currencies, Treasury yields and commodity prices all trading like “meme” stocks with massive volatility and uncertainty as the Fed has done a 180 on its view of inflation y/y.

Sector Movers Today

·     Retailers; AMZN Announces Prime Early Access Sale, a new two-day global shopping event exclusive to Prime members on Oct 11-12^th; LESL will replace GCP in the S&P SmallCap 600 effective prior to the opening of trading on Wednesday, September 28; PLNT upgraded to Strong Buy at Raymond James reflecting its highly resilient business model and value gym positioning; FTCH initiated Sell rating and $6 tgt at Citigroup; Jefferies said DG, COST best positioned, see markdowns and estimates risk to other specialty apparel and footwear; DLTR named Michael Creedon as its new COO, coming to the job from AAP, where he served in several roles; PRPL announces formation of special committee to evaluate unsolicited takeover proposal from Coliseum Capital Management; PTON’s Dara Treseder, who has been Peloton’s chief marketing officer since 2020, is leaving the Co, the New York Times reported

·     Energy stock movers: S&P MidCap 400 constituent EQT will replace DRE in the S&P 500, and S&P SmallCap 600 constituent EXLS will replace EQT in the S&P MidCap 400; APA trades at half the valuation of its peers but it could become hard to ignore given its bets in Suriname as well as a contract to sell LNG to European and Asian buyers, according to Barron’s; in research, HP upgraded to Equal Weight at Morgan Stanley and downgraded NEX to Equal Weight and CLB to Underweight saying the North American cycle is maturing, and cash generation/returns are taking primacy over EBITDA revisions. Service companies adopting payout models will be rewarded, in their view

·     Casinos, Gaming, Lodging & Leisure sector: Macao casino operators WYNN, MLCO, LVS, others move higher after local government and China announce plans to resume group tours for mainland China residents to visit Macao (Citi raised tgts on several names); Dan Niles of Satori Fund noted on CNBC he has been buying online gaming names DKNG, PENN; AMC slips after hires Citigroup to distribute up to 425 mln units of AMC Preferred Equity Units or (APE)

·     Auto sector: Ford (F) mentioned positively in Barron’s saying even after its warning of parts shortages sent its shares tumbling this week, the stock is still worth owning, arguing the automaker stuck with its earlier full-year operating forecast; in Chinese EV space, LI now expects to deliver approximately 25,500 vehicles for Q3, revised from the previous vehicle delivery outlook of between 27K-29K; watch other Chinese auto EV makers NIO, XPEV on headlines; LYFT downgraded to Neutral from Buy at UBS and cut tgt to $16 from $50

Stock GAINERS

·     ATCO +4%; after the SPAC Poseidon said they have increased their bid price to acquire all shares not controlled by majority shareholders to $15.50 per share in cash from $14.45 per share

·     CHGG +7%; upgraded to Buy with $28 tgt at Needham saying Fall 2022 enrollment expectations suggest the company is positioned well to report upside to conservative expectations

·     GNRC +5%; PWR, MTZ and other industrials move higher early on headlines of increased Hurricane impact along Southeast – needs for power demand

·     LESL +12%; will replace GCP in the S&P SmallCap 600 effective prior to the opening of trading on Wednesday, September 28

·     LVTX +92%; after giving exclusive worldwide license for experimental cancer drug to SGEN as LVTX to get upfront payment of $50M, with potential for up to $650M in milestone plus royalties

·     MCW +11%; will replace EXLS in the S&P SmallCap 600 effective prior to the opening of trading on Monday, October 3

·     MLCO +31%; Macao casino operators WYNN, MLCO, LVS, others move higher after local government and China announce plans to resume group tours for mainland China residents to visit Macao (Citi raised tgts on several names)

·     PLNT +5%; upgraded to Strong Buy at Raymond James reflecting its highly resilient business model and value gym positioning

Stock LAGGARDS

·     BKR -3%; weakness in oil prices early, along with rotation into beaten up growth stocks (technology), pushes oil names lower early

·     LITM -24%; after announces offering of 10M shares

·     PLD -2%; REIT stocks among early S&P laggards – DRE, KIM, VNO

·     TROX ; lowered Q3 adjusted EBITDA to be $240-$255 million compared to the previously guided range of $275-$295 million due to softer than anticipated TiO2 sales volumes and increasing energy costs in Europe

·     TRV -2%; weakness in insurance related stocks (AIG, WRB, RNR, CB) as Hurricane Ian approaching the Florida area