Closing Recap

Friday, August 27, 2021

Equity Market Recap

·     It was another astounding move higher for U.S. stocks on Friday, closing the week at new record highs (52^nd for the S&P 500 this year and 31^st for the Nasdaq) as the S&P tops the 4,500 level in what was an all-out sector market rally on strong breadth (though weaker volumes on last Friday of the summer). The Federal Reserve to the rescue again for major averages as Fed Chair Jerome Powell signaled the U.S. central bank would remain patient in winding down stimulus, sounding more dovish than other Fed members (Kaplan, Bullard, George) the last 24-hours about the need to pullback on their bond/MBS buying. In prepared remarks for a speech to the Jackson Hole economic conference, Powell defended the view of "transitory" inflation and stopped short of signaling the timing for any reduction in the $120 billion asset purchases program beyond "this year" – which was very well received by stock markets. The Fed dominated all the news, with a massive push higher across all S&P sectors. Data earlier showed the Fed’s favored inflation gauge, the PCE index, moderated in July. The index rose 3.6% in the 12 months through July, more than the central bank’s flexible 2% target. Oil prices surge 10% for the week while gold closed back above $1,800 an ounce as Treasury yields and the dollar fell.

·     A massive rally over the past week for the Russell 2000 Smallcap index after the IWM touched its 200-day MA support level last week around $214 (200-day MA has moves up to $215.50). Last Friday the Russell 2,000 ended a streak of 226 consecutive closes above its 200-DMA, the 11th longest streak in its history (Russell 2000 since to its highest level since July 13^th). The Cboe Volatility Index (VIX), Wall Street’s fear gauge, tumbled as much as 14% to lows below 16.30.

·     Sector/Stock movers: all-time highs again for the S&P and Nasdaq after Powell indicated the Fed will be patient in hiking interest rates; PTON slide after its EPS and subscribers miss along with weaker guidance; WDAY spikes after its beat and raise quarter; DELL, VMW both fall despite quarterly beats, while HPQ sheds early losses to trade flattish despite its revenue miss and Morgan Stanley d/g; MRVL slips on weaker Q3 EPS guidance, though SMH semis broadly outperform with the ETF trading at new ATHs; In retail, GPS rises on its beat and raise, while BIG drops on its quarterly miss, and HIBB rolls as its quarterly beat and raise was outweighed by weak comp sales (shares had also entered earnings +16.4% WTD, largely driven by strong DKS earnings); energy names OXY, COG, APA, FANG, MRO leads the S&P ahead of Hurricane Ida hitting the Gulf; GNRC also gains ahead of the hurricane’s anticipated landfall.

Economic Data:

·     Personal Income for July rose +1.1%, topping the +0.2% estimate and above June’s +0.2%; Personal spending rose +0.3%, in-line with consensus and down from June’s +1.1% reading. July real consumer spending -0.1% vs June +0.5%

·     PCE Price Index rose +0.4% MoM, in-line with consensus and +0.5% prior, while on a YoY basis, PCE price index rises 4.2%, slightly higher than the +4.0% rate in June. The Core PCE Price Index showed an in-line reading of up +0.3% (vs. 0.5% prior), while on a YoY basis, core PCE price index increases 3.6%, same rate as in June

·     International Trade in Advance Goods for July fell -6.2% to $86.4B vs. -$90.9B consensus and -$92.1B prior (revised from -$9.12B); the exports of goods for July were $147.6 billion and Imports of goods for July were $233.9 billion, $3.4 billion less than June imports

·     University of Michigan surveys of consumers sentiment final Aug 70.3 vs. est. 70.7 and down from final July 81.2; current conditions index final Aug 78.5 vs prelim 77.9 and final July 84.5; the expectations index final Aug 65.1 vs prelim Aug 65.2 and final July 79.0

Commodities, Currencies and Treasury’s

·     Oil prices rose on Friday, with WTI crude +$1.32 or 1.96% to settle at $68.74 per barrel, recovering all last weeks’ 9% declines as markets remain worried about supply disruptions as energy companies began shutting production in the Gulf of Mexico ahead of a possible hurricane forecast to hit on the weekend. As of Friday, U.S. Gulf of Mexico oil output cut by 59% ahead of tropical storm Ida and U.S. Gulf of Mexico natural gas production cut by 49% by tropical storm

·     Gold prices among the biggest beneficiaries of the dovish Powell comments, rising $24.30 or 1,4% to settle at $1,819.50 an ounce, closing out the week with a 2% advance. Prices were helped today by the pullback in the dollar and treasury yields as Fed Chair Powell didn’t provide a near-term tine line for tapering of asset purchases. Gold prices rise for the 8^th time in the last 10-weeks and its highest settlement since Monday August 2^nd.

·     The dollar index (DXY) fell as Powell was again overly dovish on rates and asset purchase tapering timeline, weighing on the buck. The dollar began to retreat just before Powell spoke after James Bullard, president of the St. Louis Fed, repeated his view that the U.S. central bank should start reducing its asset purchases soon and end the program by next year’s first quarter.

·     Treasury yields, which had been inching higher ahead of the Fed event today, tumbled (10-yr 5 bps off the highs to finish the week around 1.31%) after Fed headlines today signaled no major changes in policy in the next few months.

Fed Comments

·     Federal Reserve Chair Jerome Powell, in prepared text at the Jackson Hole Fed event, affirmed an ongoing U.S. economic recovery and explained why there is no rush to tighten monetary policy. He also said why he regards a spike in inflation as temporary and offered no signal on when the central bank plans to cut its asset purchases beyond saying it could be "this year." The best of all worlds for stock markets that want the Fed asset buying and low-rate environment to continue. Powell indicated the Fed will remain cautious in any eventual decision to raise interest rates, saying he wants to avoid chasing "transitory" inflation and potentially discouraging job growth in the process. Regarding the decision on when to begin reducing its $120 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities, Powell said he agreed with many of his colleagues that if job growth continues it "could be appropriate sometime this year."

·     St. Louis Federal Reserve Bank President James Bullard said on Friday that he would like the central bank to start reducing its asset purchases soon and finish winding down those purchases by the first quarter of next year. Bullard said during an interview that the asset purchases are not helping the economy that much and could be causing harm. He said starting the taper soon will give the Fed more options next year if inflation stays high for longer than anticipated.

Sector News Breakdown

Consumer

·     Retailers; GPS reported 2Q adj. EPS of $0.70, beating consensus estimates of $0.47 as sales increased 5% vs 2019 and comps increased 13% vs 2019 and digital comprised 33% of 2Q sales – mgmt raised its F21 operating margin guidance to 7.5% (vs 6% prior), and now expects adj. EPS of $2.10-2.25 (up from $1.60-$1.75); PTON slides as posts larger-than-expected quarterly loss and guides 1Q revs about $800Mm vs est. $1B, while warned its near-term profitability would suffer due to a decision to slash the price of its exercise bike (by 20% to $1,495), and higher commodity and marketing costs. Also said the DoJ and Department of Homeland Security had subpoenaed co for documents and other info related to reports of injuries associated with its products (analysts were still generally positive); HIBB posted Q2 EPS and sales beat and raises year EPS and comp store sales outlook, but shares slide after weaker Q2 comp store sales which fell (-6.4%)

·     Discount retailer weakness continues; BIG shares decline following EPS and comps miss (Q2 EPS $1.09 vs. est. $1.13; Q2 revs $1.46B vs. est. $1.48B) and Q2 comp store sales fell (-13.2%) vs. est. decline (-11.4% with weak guidance for Q3 (follows declines in shares of dollar stores DG, DLTR Thursday on lower forecasts); OLLI tumbles after the discount retailer’s Q2 adj EPS and revenue missed estimates as total net sales fall 21% to ~$416M from a year earlier while Q2 comp store sales down (-28.0%) from prior year; FIVE was downgraded at Morgan Stanley as it is trading near their updated $230 PT following the stock’s +28% YTD rally (including +25% since mid-July).

·     Auto sector; Morgan Stanley downgraded auto retailer AAP to Equal-Weight as its defensive category, stable top-line growth, and significant margin upside make a bullish case, but slowing top-line momentum and risk to margin trajectory balance the risk/reward and they also downgraded AZO to EW despite being its top pick in DIY auto and strong defensive positioning with market share gains as they see these advantages currently being priced into the stock; Truist initiated CARS at Buy with an $18 PT as the leading auto marketplace with attractive valuation at ~7x forward EBITDA; DA Davidson initiated BLNK at Neutral with a $31 target.

·     Consumer Staples & Restaurants; PLAY upgraded to Buy from Hold at Truist and up tgt to $54 saying given accelerating sales trends at restaurants, as well as Main Event, since May, they believe PLAY’s sales recovery is intact, despite the spike in COVID cases.

·     Casinos, Gaming, Lodging & Leisure sector; in theme parks, KeyBanc said daily attendance trends for the week of 8/16 to 8/22 (using 2019 as a baseline) saw decelerating trends from last week. However, note that trends for SIX continued to outperform SEAS; GAMB received a temporary supplier license by the Arizona Department of Gaming to provide marketing services for licensed operators in the state.; casino stocks extend recent move higher on reopen hopes, positive vaccine news again this week with WYNN, LVS, PENN, CZR higher; DIS ESPN is seeking to license its brand to major sports-betting companies for at least $3 billion over several years and has held talks with DKNG and CZR, WSJ reports https://on.wsj.com/2Wzws3q

Energy

·     Energy stock movers; energy stocks outperformed (APA, COP, HES, MRO, FANG, EOG, PXD) behind a jump in oil prices on worries about supply disruptions as energy companies began shutting production in the Gulf of Mexico ahead of a possible hurricane forecast to hit on the weekend. Oil and gas producers have shut more than 1.2 million barrels a day of U.S. Gulf of Mexico output as Tropical Storm Ida moves toward Louisiana. Gulf of Mexico offshore wells account for 17% of U.S. crude oil production and 5% of dry natural gas production. Over 45% of total U.S. refining capacity lies along the Gulf Coast.

·     E&P and Majors; Several companies idling production ahead of storm: PSX is preparing to idle production at its 255,600 barrel-per-day (bpd) Alliance, Louisiana refinery on Friday by slowing throughput ahead of Tropical Storm Ida; BP, BHP, CVX and RDSA were among companies that removed workers from offshore facilities; the weekly Baker Hughes (BKR) U.S. gas rig count unchanged at 97, oil rig count was up 5 to 410 and overall total rig count 508

·     Utilities & Solar; TSLA filed an application with the Texas Public Utility Commission to sell electricity in the state; in coal sector, CNX downgraded to Market Perform at BMO Capital and see better risk/reward across our coverage following the July/August sell-off; utility sector (XLU ) saw modest gains, benefitting from a pullback in Treasury yields post Powell comments, helping boost interest in higher dividend paying sectors.

Financials

·     Bank movers; Weaker treasury yields following the Powell comments at the Jackson Hole Fed event failed to dent financials which traded near 52-week highs this week (XLF); in Bitcoin, FinTech & Payments; after weakness most of the week, Bitcoin and other crypto assets (Litecoin, Ethereum) rebounded on Friday, with Bitcoin up over 2.5% topping the $48K level, boosting shares of Bitcoin miners and investors; ZION approved an additional $200M share buyback for Q3 making the total Q3 buyback $325M shares

·     Consumer Finance; AFRM shares slipped initially, down in sympathy with PTON weakness as the company handles the credit and lending for PTON; Barclay’s said its United States arm will buy a $3.8 billion credit card portfolio co-branded with clothing retailer GPS as the British bank continues a strategy of partnering with big brands to grow in the U.S.

Healthcare

·     Pharma movers; vaccine names edge lower, led by MRNA, BNTX, NVAX; TEVA names MRNA Chief Medical Officer Tal Zaks to board; APLT downgraded to sell from neutral at Goldman Sachs due to increased regulatory and financing risks; SAVA shares tumbled after QTRX said they did not interpret test results or prepare data charts presented by Cassava at AAIC in July 2021 or otherwise (follows recent weakness in SAVA after recent allegations of manipulating its Alzheimer’s drug trial data); RHHBY company Genentech has decided to voluntarily withdraw the U.S. accelerated approval for Tecentriq (atezolizumab) in combination with chemotherapy to treat certain people with breast cancer.

Industrials & Materials

·     Metals & Materials; Raymond James adjusted 3Q lumber price assumptions and estimates for WY and PCH saying after a quarter of unprecedented volatility in the lumber markets, recent pricing trends seem to be indicating stabilization after a record-shattering 74% collapse from $1,500+/mbf in late May to sub-$400/mbf lumber in late August; KRA announces a general price increase of 10%-15% across its CTO Refinery products and derivatives effective September 15

Technology, Media & Telecom

·     Internet; EBAY tgt raised to $85 from $79 at Piper saying after selling non-core assets, management attention is now focused on high-value buyers and they see several benefits to the strategy; YY shares slide after company reportedly says it has not received a formal takeover offer https://bit.ly/3BcAmhm ; BABA and other U.S. listed Chinese stock volatile again after reports China is seeking to tighten oversight of the algorithms technology companies use to drive their business, issuing far-reaching draft rules in its latest crackdown on its internet sector.

·     Semiconductors; sector edged back near all time highs for the Philly semi index (SOX) rose over 1.6% by midday, not far off its all-time highs of 3,451 as investors prep for rising semi chip prices (yesterday, TSM plans to increase the prices of its most advanced chips by roughly 10%, while less advanced chips used by customers like auto makers will cost about 20% more); NVDA is set to begin seeking EU antitrust approval for Arm deal next month https://bit.ly/3sQ2aFo ; MRVL posts mixed results (EPS beat/revs miss) and provided F3Q22 revenue guidance that was modestly above the Street’s estimates due to supply constraints, while EPS was below views; WDC files mixed securities shelf

·     Software movers; WDAY reported strong F2Q results, beating on both the top and bottom line as strength in large enterprise helped drive results and FY22 subscription revenue guidance was raised well above the F2Q beat; VMW posted 2Q upside to consensus revenue, billings, margins, and cash flow estimates, but the mix of revenues, with more license and less subscription and SaaS disappointing Wall Street (also guided Q3 outlook below ests); BILL an upside standout as reported Q4 revenue rose 86% to $78.3M, above est. of $62.1M, with transaction volume increasing 14% q/q, prompting analysts to raise price targets; DOMO quarter revenue reaching $62.8M, 3% above consensus as Billings growth accelerated slightly, up 26% Y/Y and on a trailing-twelve-month basis/RPO growth strong at 24% Y/Y; MPLN announces $250M buyback program

·     Hardware, Components & Services; DELL Q2 results were solid, with revenue and EPS eclipsing consensus by 2% and 10% respectively and the company issued a bullish revenue outlook, driven by good demand visibility and increasing prices; HPQ missed Q3 revenue estimates due to persistent supply constraints, including parts shortage as posted Q3 revenue of $15.3B missing the $115.9B estimate and Q3 revenue from segment including PCs was $10.4B, flat y/y; AAPL agreed to loosen App Store restrictions on small developers, striking a deal in a class-action lawsuit as the it awaits a ruling by the same judge in a separate App Store dispute brought by the developer behind "Fortnite"

·     Media & Telecom movers; DIS tgt cut to $200 from $213 at Deutsche Bank saying Parks attendance "shows a softening, which we attribute to the resurgence in COVID cases. This has caused us to revisit our Theme Parks outlook, which now reflects a more gradual recovery in F2022 than we previously forecasted; MANU confirmed that the club has reached agreement with Juventus for the transfer of Cristiano Ronaldo, subject to agreement of personal terms