Closing Recap

Thursday, August 19, 2021

Equity Market Recap

·     Major averages finish mixed on Thursday as strength in a handful of large cap giants help keep the major averages afloat (while underlying market internals remain weak – breadth again negative). The SmallCap Russell 2000 falls for a 6^th straight session, dropping below key technical levels in another rout (brining its MTD return -4.3%). Investors snapped up shares of technology, health care and staples stocks, while cyclical stocks such as energy (oil prices slide a 6^th day), financials (Treasury yields remain depressed) and materials (copper, iron ore prices plunge overnight) were the biggest drags on the S&P 500. It has been a turbulent week for stocks, plunging on Wednesday after minutes from the FOMC July policy meeting minutes renewed concerns the Federal Reserve could begin to rein in its massive monetary stimulus. Other fears remain on the rising coronavirus cases (Delta variant) and its impact on the global economic recovery (seeing lots of reopen names such as lodging, travel, casinos fall today). Commodity markets offered signs of caution as oil and copper prices retreated on the slowing growth fears as well. The S&P 500 has rallied 18% in 2021, keeping stock valuations at historically high levels…but underlying market data shows weakness as Bespoke noted that the S&P 500 is up 5.9% over the last 3 months, but the ‘average’ stock in the index is down 0.65%.

·     Stock/sector movers: NVDA rises after quarterly beat with stronger guidance; HOOD sinks to its lowest level since its 1st week of trading after its Q2 loss and seeing lower trading activity in the current quarter; retailers lead the way higher as Macy’s surged after crushing its earnings estimates while reinstating its dividend and authorizing buybacks, KSS jumps after its EPS doubles consensus and FY guidance comes in strong, BJ up on its Q2 beat, TPR slips despite beat with reinstated dividend and buyback program; BBWI soars to lead the S&P and VSCO slumps on weak guidance; AMZN also announced plans for several large retail/department stores, possibly providing an overhang for other, traditional retailers; CSCO, EL both gain after their quarterly results, RRGB plummets more than 20% at today’s lows on quarterly loss and EBITDA miss; auto sector weak as TM said it will slash global production for September by 40% from its previous plan due to the ongoing chip shortage, weighing on other auto names/suppliers; ILMN was the worst S&P performer after closing their GRAIL acquisition last night despite the regulatory review still ongoing; commodity names tumble on lower oil and metals weakness (FCX, AA, X, FANG)

·     Smallcaps pressured again with the Russell 2000 index falling for a 6th straight day, dropping below its 200-day moving average support of 2,152, its first break below the 200-day since last September. Economic data better as U.S. weekly jobless claims hit 17-month lows while unemployment rolls shrink. Auto sector slides as Toyota and Ford announce they will halt production due to semiconductor shortages.

·     Goldman Sachs lowered its Q3 GDP forecast to 5.5% from 8.5% saying the impact of the Delta variant on growth and inflation is proving to be somewhat larger than they expected. Firm has lowered their Q3 GDP forecast reflecting hits to both consumer spending and production. Spending on dining, travel, and some other services is likely to decline in August, though they expect the drop to be modest and brief. Production is still suffering from supply chain disruptions, especially in the auto industry, and this is likely to mean less inventory rebuild in Q3.

Economic Data:

·     Weekly jobless claims fell to 348,000 in the latest week, below the est. 363,000 (prior week revised to 377K from 375K); continuing claims fell to 2.820M from 2.899M prior; the 4-week moving average fell to 377,750 from 396,750 prior week and the U.S. insured unemployment rate unchanged at 2.1%

Commodities, Currencies and Treasuries

·     Oil prices fall again, as WTI crude slides -$1.77 or 2.7% to settle at $63.69 per barrel, its 6th straight day of declines (longest losing streak since February) but bouncing off its lowest level since late May ($62.63 per barrel). Concern about weakened travel demand as COVID-19 cases rise, a stronger dollar on expectations that the Fed backs off its stimulus and slowing global growth concerns with China and U.S. data showing signs of weakness weighed on prices.

·     Gold prices were little changed on the day, slipping -$1.30 to settle at $1,783.10 an ounce (down for a 3^rd straight day) despite the U.S. dollar index (DXY) hitting its best level since November of last year (93.52), weighing on commodity prices throughout the day (copper, oil). The euro fell as low as $1.1665 against the dollar for the first time since Nov. 4, while sterling fell 0.7%.

·     Bitcoin prices resume upward momentum, reclaiming the 200-day moving average of $45,500, with crypto assets rising today, though saw a big jump in prices late day, topping the $46K level for Bitcoin and Ethereum moving further past the $3K level.

·     Treasury yields remain depressed (10-yr 1.24%) despite the minutes of the Fed’s July meeting showed officials largely expect to reduce their monthly bond buying later this year, but consensus on other key issues appeared elusive, including the timing of the start of the taper and whether inflation, joblessness or the coronavirus pose a bigger risk to economic recovery.

Sector News Breakdown

Consumer

·     Department stores; Macy’s (M) shares rise after Q2 EPS $1.29 tops the $0.14 estimate on better revs of $5.65B vs. est. $4.98B and raises year EPS view to $3.41-$3.75 from $1.71-$2.12 (est. $2.24) and boosts FY21 revenue view to $23.55B-$23.95B from $21.73B-$22.23B while also reinstates quarterly dividend at 15c, authorizes $500M share repurchase – Q2 gross margin 40.6% vs. 23.6% YoY; KSS Q2 EPS $2.48 vs. est. $1.21 as Q2 sales rise 31.4% to $4.44B vs. est. $4.02B; sees year EPS $5.80-$6.00 well above est. $4.40; now plans to repurchase $500 mln to $700 mln of shares in 2021; FY net sales is now expected to increase in low-twenties percentage range; sees FY operating margin 7.4%-7.6%, up from prior 5.7%-6.1%; AMZN said it plans to open several large physical retail locations in the U.S. that will operate akin to department stores

·     Retail Apparel & Accessories: TPR Q4 EPS $0.74 vs. est. $0.68 on better revs $1.62B vs. est. $1.56B; sees FY22 EPS $3.30-$3.35 above est. $3.18 and revs also above views at $6.4B vs. est. $6.08B – announces reinstatement of dividend and share repurchase programs with a plan to return over $750 mln to shareholders in fiscal 2022; BBWI beat estimates in its first earnings report as a standalone public entity, while forecast net sales to increase up to 45% from 2019 levels in Q3, boosted by strong demand for body care and home fragrances; VSCO forecast profit below estimates for the third quarter (guides 3Q EPS $0.60-0.70 vs est. $0.93)

·     Auto sector; TM said it will slash global production for September by 40% from its previous plan, becoming the last major automaker to cut output due to a global chip crunch, but reiterated its global production target of 9.3 million vehicles for the year ending in March, as well as its plan to sell 8.7 million cars in the period; Ford (F) will halt production at U.S. truck plant on Aug. 23 for 1 week over chip shortage, will temporarily shutter its Kansas City assembly plant that builds its best-selling F-150 pickup truck due to a semiconductor-related part shortage as a result of the COVID-19 pandemic in Malaysia; auto suppliers (LEA, VNE, BWA, MGA, VC) were also active after the two major auto co’s said they will halt production due to semiconductor shortages

·     Consumer Staples; EL Q4 net sales rose 62% to $3.94B, topping the $3.75B estimate saying strong online sales, increased demand in China, and investments in its skincare products helped, while guided year net sales 13%-16% vs. est. up 14% at $18.29B; OTLY upgraded to Outperform from Sector Perform at RBC Capital with no change to $28 target saying the stock’s recent sell-off creates an attractive buying opportunity; food suppliers active after PFGC posts Q4 EPS mostly in-line with ests on better revs of $9.3B vs. est. $8.43B and said total case volume grew 55.8%; up 44.7% after adjusting for the extra week; SPTN earnings beat as continued momentum in the retail division drove gross margins higher and offset continued declines in the military segment – total sales declined 3.6% to $2.11B, but was slightly above consensus estimate of $2.07B

·     Restaurants: RRGB tumbles after mixed results – Raymond James noted store margins (burdened with advertising) of 11.8% were below their 14.3% estimate and 13.8% in 2Q19 driven by higher than expected labor – this after co posted 2Q adj EPS loss ($0.22) vs est. $0.00 – 2Q EBITDA of $20.4m was below RAJA $26.8m estimate as well

·     Casinos, Gaming, Lodging & Leisure sector; LVS shares drop below its pre-Covid pandemic lows (which stood around) around $37.50, while casinos generally pressured again as (WYNN, MGM, CZR decline) as the group remains pressured by rising Delta variant cases; online gambling related plays (DKNG, PENN also weak); Loop Capital said based on the latest monthly GGR/AGR data releases in five of the 12 states where DKNG is currently live (IN, IA, MI, NJ and PA, which released July numbers earlier today), they estimate 3Q revs are tracking well ahead of consensus; DASH 11.4M share Block Trade priced at $182.95

Energy, Industrials & Materials

·     Energy stock movers: energy stocks among the biggest decliners in the S&P 500 as WTI crude prices fell for a sixth day as investors remain worried about the outlook for fuel demand as COVID-19 cases surge worldwide just as more supply reaches the market from large global producers, including the United States; weakness was across the board.

·     Metals & Materials; broad weakness in the sector as steel (X, NUE), aluminum (AA, CENX), copper (FCX) and iron ore names (CLF, VALE) tumbled after iron ore and copper prices sank to a four-month low (down over 3%) as worries over Chinese steel production, global growth risks and the prospect of reduced U.S. stimulus roiled metals market. This week’s drop for iron ore accelerated, with futures sliding as much as 12% to the lowest since December in Singapore on expectations that output, and consumption will weaken over the rest of the year.

Financials

·     Bank & Broker movers; recent IPO HOOD posted larger Q2 loss and record revs, but warned that the crypto-driven surge it saw in second quarter revenue may not last and said sees 3q seasonal headwinds, lower trading activity across industry, resulting in lower revenue, sending shares lower initially; the XLF dropped as yields remain weak and markets seeing further rotation out of 1H winners (energy, materials, and financials)

·     Services, Insurance; ALL announced estimated catastrophe losses for the month of July of $227 million or $179 million, after-tax. Catastrophe losses in July comprised 18 events at an estimated cost of $211 million plus unfavorable prior period reserve estimates; FISV shares active late afternoon after Bloomberg reported Valueact is said to build $1.2 billion position in Fiserv saying to see clover’s value growing to $185B by 2024

·     Bitcoin, FinTech & Payments; Bitcoin prices resume upward momentum, reclaiming the 200-day moving average of $45,500, with crypto assets rising today; COIN announced that it is launching a crypto exchange business in Japan. Coinbase Japan will team up with MUFG as a payment partner, which allows users to deposit money through MUFG Quick Deposit to purchase crypto

Healthcare

·     Biotech movers; ILMN shares tumble after closing its $7.1B acquisition of cancer detection test maker Grail Inc. despite challenges posed by the U.S. FTC and the EU antitrust regulators (said will hold as separate holding co during the EC’s review). EU antitrust regulators expressed disappointment at the decision and warned that gun-jumping could lead to hefty fines; CHRS and Junshi Biosciences announced positive interim results from phase III trials on its non-small cell lung cancer treatment Toripalimab

·     MedTech Equipment; Mizuho boosted its price tgt and 2021E estimates on DGX and LH, mainly reflecting the recent strong uptick of COVID-19 PCR testing due to the surge of COVID cases (reiterate Buys on DGX and LH, and raise PTs to $166 from $158 and to $332 from $318 respectively); Goldman Sachs with EPS preview on MDT saying they expect in line Q1 numbers but expects Q2 guidance below the street and annual guidance to be reiterated at best

Technology, Media & Telecom

·     Semiconductors; NVDA reported a strong JulQ and guided to OctQ rev/EPS of $6.8B/~$1.10. JulQ data center was up 35% y/y with strong hyperscale demand, and gaming up 85% y/y with Ampere RTX 30XX series traction, as well as gaming with Nintendo Switch. NVDA guided OctQ at $6.8B, above consensus and BETTER than concerns of a significant Crypto top-line slowdown, with q/q growth in all segments as demand continues to exceed supply; AMAT with earnings tonight in the semiconductor equipment sector

·     Software and Service movers; INOV to be acquired by equity consortium led by Nordic Capital including Insight Partners for $7.3 billion, with holders to receive $41 per share https://bit.ly/37Wg7bl ; SMAR upgraded to Buy at Jefferies and raise tgt to $85 from $65 given its positioning as a low cost, high value work collaboration solution that should thrive in a WFA environment; BILI fell despite beating top and bottom-line estimates for the second quarter and providing guidance that fell in line with consensus.

·     Hardware & Components; SNPS reported a stronger than expected fiscal Q3 and provided upside guidance relative to consensus for Q4 (Q3 revs improved 3% sequentially and 10% YoY) as guidance was raised across all key financial metrics; CSCO reported 4QFY21 results that exceeded Street expectations, with more positives (healthy order growth, subscription strength, services) than negatives (gross margin pressure, DC decline, mixed application trends) and posted strong order growth (+31% YoY), with all of its customer segments growing >20% YoY; KEYS better quarter and guidance as Q3 EPS $1.54 vs. est. $1.44; Q3 revs $1.25B vs. est. $1.22B; sees Q4 EPS $1.59-$1.65 vs. est. $1.59; sees Q4 revs $1.25B-$1.27B vs. est. $1.26B