Closing Recap

Monday, August 02, 2021

Equity Market Recap

·     U.S. stocks finished the day lower, pulling back off earlier highs on light volumes and news flow as investors await another busy week of earnings with roughly 31% of the S&P 500 reporting this week (after over 35% last week). Stocks finished near their lowest levels of the day following the late day slide. The U.S dollar was mixed while treasury yields touched more than 2-week lows, helping gold prices edge higher. Oil prices tumbled behind weaker China economic data while in the U.S., U.S. manufacturing activity grew at a slower pace in July for the second straight month as raw material shortages persisted. The payments sector getting lots of attention this morning after Square (SQ) announced a $29 billion deal to acquire Australian buy-now, pay- later platform Afterpay.

·     Infrastructure news: Senators were back on Capitol Hill this weekend as a bipartisan group of lawmakers put the finishing touches on a $1T infrastructure package. The Infrastructure Investment and Jobs Act includes $550B in new spending over five years, on top of $450B in previously approved funds. $110B would be allocated for roads and bridges, $66B for rail, $55B for water and wastewater infrastructure and $39B for public transit. There’s also money for ports, high-speed broadband internet, replacing lead water pipes and building a network of electric vehicle charging stations. Senate infrastructure bill raises $51B from taxes over decade.

·     Stock/sector movers: SQ spikes after EPS and acquiring BNPL company AfterPay in an all-stock $29B deal; AFRM joins the rally in the BNPL space, though payment companies (GPN, FIS, FISV among the worst S&P decliners); ON surges after its beat and strong guidance to lead semi stocks – $SMH, Philly Semi Index SOX both touch ATHs, AMD makes a new ATH for the 3rd straight day; Chinese autos LI, NIO, XPEV rise after reporting July deliveries and TSLA touches 3-month highs in a strong EV space, FSLR rises in solar space after Susquehanna upgrade; UAA jumps after being named as a Fresh Pick Baird and LEVI soars as a new Buy at Stifel to lead retail; RL also among top S&P gainers ahead of earnings tomorrow AM (UAA also reports tomorrow AM, COLM reports tonight); XPO gains after completing spinoff of $GXO (note, XPO shares are down to ~$85 from ~$140 due to spinoff as $GXO is trading near $60 with XPO shareholders each receiving 1 share of new company); GE shares initially rise, but go red after completing a 1:8 reverse split.

Economic Data:

·     IHS Markit July final manufacturing PMI at 63.4 (vs flash 63.1) and final June 62.1; Markit U.S. manufacturing sector final output index for July at 59.7, highest since January, vs flash reading 59.5 and final June 58.9; final input prices index for July hits a record at 86.7.

·     U.S. manufacturing continued to grow in July, though the pace slowed for the second straight month. The Institute for Supply Management (ISM) said its index of national factory activity fell to 59.5 last month, the lowest reading since January, from 60.6 in June and below est. 60.9. New Orders to 64.9 from 66.0; Production to 58.4 from 60.8; Employment to 52.9 from 49.9.

·     U.S. Construction Spending for June MoM rose 0.1% vs. est. 0.5%

Commodities, Currencies & Treasury’s

·     Oil prices tumble, with WTI crude hitting lows of $70.55 per barrel before paring losses, settling at $71.26, down -$2.69 or 3.64% as worries over China’s economy resurfaced after a survey showing growth in factory activity slipped sharply.

·     Gold prices edged higher, rising 0.3% to settle at $1,8222.30 an ounce, propped up by a weaker dollar and U.S. bond yields, though an uptick in risk appetite took some shine off the safe-haven metal. Gold has slid about 1% from the two-week peak that it scaled on Thursday. Focus now shifts to July’s U.S. non-farm payroll numbers, due on Friday.

·     Treasury yields tumble, with the benchmark 10-year falling to lows around 1.15% before paring losses, ending around 1.18% down about 6 bps on the day. Bond market telling investors a much different picture than what stock markets are, with more safe-haven buying. The ongoing dovish Federal Reserve comments has also buoyed bond prices higher.

Sector News Breakdown

Consumer

·     Retailers; sector among the best in the S&P as shares of RL, PVH, GPS, UA paced the gains; FL said it is buying two smaller retailers in separate cash deals, with acquisitions of athletic retailer WSS for $750 million and Atmos, a Japan-based streetwear and sneaker shop, for $360 million; LEVI was initiated with a new Buy and $38 tgt at Stifel saying it is benefiting from secular and structural shifts that improve the growth prospects, margins, and return characteristics vs. pre-COVID expectations; CPRI upgraded to Buy at MKM Partners with $75 tgt amid increased conviction in sustainable momentum + luxury re-rating

·     Auto sector; monthly Chinese auto updates released as 1) LI delivered 8,589 Li ONEs in July 2021, up 11.4% M/M and 251.3% Y/Y; YTD, total deliveries are 38,743, bringing cumulative deliveries of Li ONE to 72,340 since its market debut; 2) NIO said it delivered 7,931 vehicles in July 2021, down 1.8% M/M, up a strong 124.5% Y/Y; YTD, cumulative deliveries of the ES8, ES6 and EC6 reached 125,528 vehicles; XPEV said 8,040 smart EVs delivered in July, a 228% increase y/y and a 22% jump from June; has delivered 38,778 vehicles year-to-date, a 388% increase year-over-year; in other news, RMBL delivers 100% year-over-year revenue growth and 131% gross profit growth in the second quarter 2021 as total vehicle unit sales was 5,711, a 55% increase from 3,694 YoY; in earnings, RACE revenue and earnings rose in Q2 and it lifted part of its guidance for the year, expecting annual revenue of around EUR4.3B and adjusted Ebitda of between EUR1.45B-1.50B and raised its full-year guidance for industrial free cashflow

·     Restaurants; BLMN was upgraded to Buy from Hold at Deutsche Bank saying they reported pretty outstanding results on Friday but the market reaction was muted; PZZA tgt raised to $135 from $125 at Oppenheimer saying while shares are up 35% year-to-date (vs S&P’s +17%) work suggests PZZA’s investment case remains in early innings

·     Casinos, Gaming, Lodging & Leisure sector; in cruise lines, CCL completed its first U.S. voyage since the pandemic prompted an extended pause in operations; in casinos, Bank America noted Strip RevPAR for June was -14% vs. 2019 vs. May’s -32%. Q2 Strip RevPAR improved to -29% vs. 2019, +38pts Q/Q; Macau GGR in July was 8.4B MOP up +528% Y/Y, down -66% from 2019 levels and up +29% M/M vs. consensus of +547% Y/Y; +32% M/M. Recent COVID outbreak in Nanjing has spread to 13+ other cities will likely impact the important Aug. mass market season

Energy

·     Energy stocks were among the top decliners in the S&P as oil prices tumbled as worries over China’s economy resurfaced after a survey showing growth in factory activity slipped sharply in the world’s second-largest oil consumer, with concerns compounded by higher crude output from OPEC producers. China’s factory activity growth slipped sharply in July as demand contracted for the first time in more than a year, a survey showed on Monday.

·     E&P and Majors; AXAS received a notice of delisting from Nasdaq; Evercore started coverage on MGY with an Outperform rating and $18 price target; Barclays cut their target on SU to $39 from $46 primarily due to an updated FX rate forecast that is weaker and higher than expected refining costs

·     Refiners: SUN buys eight terminal locations from NuStar in $250M deal; Goldman downgraded LBRT to Neutral with a $13 target and says HAL provides a stronger and safer opportunity for investors to gain exposure to similar near-term cyclical tailwinds on a risk-adjusted basis

·     Utilities & Solar; Susquehanna upgraded FSLR to Positive with a $120 target following management’s positive commentaries on module demand and pricing on its 2Q call and ASPs for new bookings appear to be stabilizing, and Roth also reiterated their Buy rating and $120 target despite the company’s Q2 miss and soft guidance as there are potential political tailwinds from the budget reconciliation bill, infrastructure bill that includes tax credits, and a recently passed Senate bill banning purchasing products from Xinjiang; RKT announces it is launching into the solar energy industry

Financials

·     FinTech & Payments; SQ announced a $29 billion deal to acquire Australian buy-now, pay- later platform Afterpay; SQ also Q2 adj EPS $0.34 vs. est. $0.30; Q2 revs of $4.68B missed the $5.05B est. and was down from $5.06B in Q1; Q2 gross payment volume of $42.8B, up from $33.1B in Q1 and $22.8B in Q2 2020; Cash App reached 40M monthly transacting active customers in June; ex: Bitcoin, total net revenue was $1.96B vs. $1.55B in Q1 and up 87% Y/Y (reports follows its $29B deal acquisition of Australia’s Afterpay); shares of AFRM moved higher in reactions to the M&A deal; GPN Q2 adj EPS $2.04 vs. est. $1.90; Q2 revs $2.14B vs. est. #1.86B; raises year EPS view to $8.07-$8.20 from prior $7.87-$8.07 (est. $8.05)

·     Consumer Finance; Mizuho said following the first batch of 2Q payments earnings, they update models for V, MA, PYPL, FISV, ADP, and WEX and also raising PTs for MA ($450 from $435), ADP ($230 from $220), and WEX ($235 from $225) on better-than-expected results and outlooks.

·     Bitcoin news; Bitcoin extends declines after touching best levels since early May around $42,400 this weekend, falling over 3% to around $39,200 while Bitcoin cash ($BCH) rises 3% at $560, and Ethereum ($ETHE) pulling off highs but still up over 6% around $2,575; MARA one of the largest enterprise Bitcoin mining companies in North America, has entered into a contract with Bitmain to purchase an additional 30,000 Antminer S19j Pro (100 TH/s) miners for $120.7 million

·     Financial services; NWS agreed to buy INFOs Oil Price Information Service, an energy and renewables information-services company, and related assets for $1.15 billion in cash

Healthcare

·     Pharma movers; ALKS said the FDA grants fast track designation to the company’s immunotherapy candidate, nemvaleukin alfa, for the treatment of mucosal melanoma; GSK turnaround could be accelerated, according to Barron’s saying there is an opportunity for Glaxo to break out of its slump as it is spinning off the consumer-healthcare joint venture it created with PFE in 2019. Glaxo has signaled those plans for years, but there’s something new now, namely the involvement of activist hedge fund Elliott Management; CYTK announces that it has opened enrollment for a late-stage trial of reldesemtiv in patients with amyotrophic lateral sclerosis (ALS); TGTX reported 2Q revenues of $1.5M (vs. $3.6M cons), with total revenues since the February approval of $2.3M.

·     Biotech movers; IMVT shares fall as Roivant Sciences makes strategic investment of $20M in Immunovant, taking its stake to 63.8% from 57.5% – but CEO noted the two co’s explored a range of possible transactions over the past few months, but decided to just raise stake; AUTL with partnership with MRNA, granting Moderna an exclusive license to develop and commercialize mRNA therapeutics incorporating Autolus’ proprietary binders for up to four immuno-oncology targets; VXRT rises after FDA clears IND for oral COVID-19 vaccine tablet; XCUR rises after entering an exclusive agreement with Ipsen to research, develop, and commercialize novel Spherical Nucleic Acids as potential investigational treatments for Huntington’s disease

·     Healthcare Services; TDOC downgraded to Hold from Buy at Argus amid continued operating losses. The company is showing strong revenue growth, but its costs for marketing, sales, and technology are rising faster than revenue; EHC upgraded to Strong Buy at Raymond James while raising price target to $107 (+$12) following 2Q21 results that topped expectations and included the announcement that management has confirmed that it will pursue a full or partial separation of the home health & hospice (HHH) business

Industrials & Materials

·     Industrial & Machinery; GE completed its one for 8 reverse stock split on Friday as shares trade above $100 per share; PH reached an agreement to buy British engineer Meggitt for 6.3 billion pounds ($8.8 billion) in cash to boost its aerospace operations; ATCX is a cheap way to play infrastructure spending, according to Barron’s saying U.S. lawmakers appear to be on the cusp of passing a massive and long-awaited infrastructure-investment bill, totaling some $1 trillion. The legislation should be a boost to businesses like VMC and MLM, which make concrete and asphalt; CAT, TEX, which make construction equipment; and URI, which rents the machinery; GWW downgraded at Raymond James while firm upgraded LKQ to Outperform

·     Transports; for airlines (LUV, DAL, UAL), TSA officers screened 2,238,462 people at airport security checkpoints yesterday, Sunday, August 1. It was the highest checkpoint volume since the start of the pandemic; ARCB reports better-than-expected Q2 profit and revenue, helped by higher tonnage and pricing and says it is benefiting from increased demand for expedited freight and household goods moving services; XPO gains after completing spinoff of GXO (note, XPO shares are down to ~$85 from ~$140 due to spinoff as GXO is trading near $60 with XPO shareholders each receiving 1 share of new company)

Technology, Media & Telecom

·     Semiconductors; Philly semi index (SOX) rises to record highs, topping the 3,400 level, amid ongoing earnings momentum (ON) and technical buying momentum (AMD); ON better results and guidance as Q2 EPS $0.63 tops est. $0.49; Q2 revs $1.67B vs. est. $1.62B; guides Q3 EPS $0.68-$0.80 above the $0.51 est. and sees Q2 revs $1.66B-$1.76B vs. est. $1.61B; Q2 GAAP gross margin of 38.3% increased 310 basis points quarter-over-quarter and 750 basis points year-over-year; shares now up over 8%; SLAB announces intention to commence a modified Dutch auction tender offer to purchase up to $1.0B of its common stock; QCOM dips after Bloomberg report Google’s new Pixel phones will rely on an in-house main chip to replace Qualcomm’s.

·     Media & Telecom movers; SIRI said intends to offer $750 million of senior notes due 2026 and $1.25 billion of senior notes due 2031; DLPN rises after announcing a partnership to create large-scale, consumer-facing NFT marketplaces for sports and entertainment brands; USM and TDS downgraded to Underweight from Neutral at JPMorgan and establish a Dec. 2022 price target of $36 for USM (prior 2021 PT of $35) and $23 for TDS (prior 2021 PT of $27) as see increasing competition in wireless as national carriers fight for share and target rural markets