Closing Recap

Tuesday, December 07, 2021

Equity Market Recap

·     Stocks jumped for a second day, as sentiment has quickly improved following last week’s Omicron/rate hike timing fears crushing markets, with investors using the pullback as another buying opportunity with market breadth notably strong along with volume ahead of key inflation data this week. A combination of better-than-expected China trade data overnight and reports that the Omicron variant may be more mild than other variants (in addition to GSK/VIR saying its covid-19 antibody treatment is effective against the full combination of mutations in the new variants) helped boost markets for a second day. Tech was the leader as the Nasdaq Composite rises over 3%, led by semiconductors as the Philly semi-index (SOX) hit a record high around 4,000. Reports out of DC indicating a debt limit deal has been reached, which would last through mid-term elections also lifted sentiment (vote expected later this week). European markets tracked Asia higher as Britain’s FTSE 100 rises 1.55%, hits three-week high; Europe’s Stoxx 600 up 2.44%, best session since Nov; Germany’s DAX up 2.87%, best session in nine months; France’s CAC 40 up 2.84%, best session since Nov 2020 and Spain’s IBEX up 1.38%. After signs of fear last week with stocks falling and the CBOE Volatility index (VIX) hitting year highs of 35.32 on Friday, the “fear” index plunged over -20% today to below 22 – with all fear gone in a matter of days! Market breadth today also firmly positive for markets with advancers outpacing decliners.

·     Stock & Sector movers: cable and telecom names slide as CMCSA issues guidance at is Investor Day and ATUS falls as they see broadband subscribers decreasing 5-10k this year (T, VZ, CHTR also among the worst S&P decliners in sympathy); MDB spikes after its beat on the top and bottom line with accelerating growth and raised guidance to boost other software names; AAPL ATH after Morgan Stanley set a street-high $200 PT; JMIA soars after reporting robust growth from its Black Friday campaign as e-commerce names rise overall; energy another outperforming sector with the rally in oil prices (DVN, FANG, MRO, HES, APA among risers); FinTech names outperform with SQ, PYPL, AFRM, HOOD, SOFI, UPST among those in the space jumping on the day; nearly all 30 components in the Philly Semi Index SOX were green as the index soared to its all-time high; INTC climbed after saying it would take its self-driving unit Mobileye public, AVGO rises ahead of Thursday night’s earnings report and MU higher as Citi’s top pick.

Economic Data:

·     U.S. Q3 non-farm productivity revised to -5.2% from -5.0% and worse than the consensus -4.9%, while Q3 non-farm unit labor costs revised to +9.6% from +8.3%

·     Trade deficit for October narrowed to -$67.1B from -$81.4B in Sept (vs. est. -$66.8B) as Oct goods deficit $83.9B; exports rose +8.1% vs Sept -3.0% and imports +0.9% vs. Sept +0.6%; Oct exports $223.63B vs Sept $206.80B and imports $290.75B vs Sept $288.23B

Commodities

·     Oil prices rise alongside stocks as WTU crude gains $2.56 or 3.68% to settle at $72.05 per barrel, extending its sharp rebound from 15-week-lows last week as investors decide the fears over Covid’s omicron variant were way overdone. Weekly inventory data on tap tonight (API) and tomorrow (EIA). Gold prices remained in a tight range, ending higher by $5.20 or 0.3% to finish the day at $1,784.70 an ounce despite another bounce in stocks, the dollar and Treasury yields ahead of key inflation data due this week (CPI) and the FOMC meeting next week 12/14-12/15 (with investors seeking clarity on the timing of interest rate hikes).

Currencies & Treasuries

·     Treasury yields edged higher as bond markets not exactly giving an “all-clear” signal for markets. Omicron fears recede and investors embrace a ton of risk for a second day as the 10-year yield hit highs around 1.47% (still well off 2-week ago 1.7% level). The concern of the Fed accelerating their asset tapering purchases as well as the possibility of faster interest rate hikes in the face of surging inflation that sunk markets last week is all but forgotten in just a few short days. Note the yield on the 10-year had its biggest weekly drop since June 2020 last week after Federal Reserve Chair Jerome Powell took a more hawkish tone and concerns over the Omicron variant rattled markets. Note the central bank is scheduled to hold its final policy meeting of the year next week. Later in the week, investors will get a look at the November consumer price index (CPI) to gauge inflationary pressures. The U.S. Treasury auctioned $54 billion in 3-year notes at a yield of 1.0%, in-line with when issued as bid-to-cover was 2.43 and indirect bidders awarded 52.17%. The U.S. dollar was mixed to little changed, paring gains late day.

Sector News Breakdown

Consumer

·     Retailers; in auto retailers, AZO beats on top line with comps 13.5% (above views) and gross margins inline, while EPS handily beat but no guidance offered; DBI posts Q3 profit of $80.2M, or $1.04 per share, compared to a loss of $40.6M or $0.56 YoY saying strength in its top 50 brands drove Q3 gross margin of 36.7%, up from 25.4% in 2020; ROST downgraded to MP from OP at Cowen and lowers price target to $109 from $131 warning profit expectations are too high

·     Auto sector; EV sector rebounds after recent pullback with KNDI, FSR, BLNK, CHPT rising; Digital used vehicle changes at JPMorgan as they downgraded both VRM and SFT to neutral from Overweight, remain Neutral on CVNA, and upgrade KMX to Overweight from neutral citing 1) Labor/capacity constraints take longer than expected to ease; which 2) makes scalability difficult for smaller on-line peers like SFT/VRM; which 3) delays brand building/equity and eventual re-rating potential; NSANY said they expect global supply chain constraints and the sector-wide semiconductor shortage to continue until at least the middle of 2022, putting pressure on production

·     Restaurants &Consumer Staples; STZ is planning to build a new brewery in southeastern Mexico costing about $1.3B, a replacement for the Mexicali brewery which got scraped in 2020, the WSJ reported; SBUX upgraded to Buy from Neutral at MKM Partners and raise tgt to $130 from $114; QSR upgraded to Outperform from in-line at Evercore/ISI and raising price target to $75 from $72 and modestly increasing Tim Horton’s Canada comp store sales growth estimates to above consensus levels in 4Q21; UTZ reports October retail growth of 8.7% Y/Y and 9.7% on a two-year CAGR basis versus the same period in 2019, as measured by IRI MULO-C; defensive staples such as CL, CLX, PG were weaker as stocks focused on growth stocks

·     Casinos, Gaming, Lodging & Leisure sector; GLPI and The Cordish Companies announce strategic relationship as GLPI to acquire the real estate assets of Three Cordish Casino Properties for $1.81 Billion; for cruise lines, Bank America maintains more cautious stance on cruise with Neutral ratings on CCL and NCLH and Underperform rating on RCL as near-term softness continues with price declines in 1H22; Bernstein notes for casinos, Macau GGR for the first week of December was up 14% w/w (ADR MOP 260mm vs. 228mm). Visitation into Macau held up well as the latest available weekly visitation (arrival and departure) (Nov 25-Dec 1) was 58,000 daily; rebound again in betting names WYNN, DKNG, PENN

Energy

·     E&P and Majors; JPMorgan sees 2022 conditions as ripe for another year of upstream outperformance as oversupply abates with a new $80/barrel long-term Brent price seen as necessary to balance the global oil market and they upgraded MUR to OW while downgrading CNX, MGY to Neutral, and they also resume coverage on CTRA at Neutral with a $28 PT as it screens well but weakening natural gas fundamentals and their expectations of coming negative revisions keeps them waiting for a better entry point

·     Equipment & Services; Morgan Stanley upgraded PTEN to OW and downgraded HP to UW while seeing upside to sector-wide valuations from their view of higher oil prices since trading in E&P stocks is still highly correlated with prices despite companies not responding to crude price changes as they once did; Barclays said the near-term fundamentals for TS look bright given the tight US market leading to improved pricing and an international market set to recover in 2H22; ENB reaffirmed view for FY21 adj EBITDA C$13.9-14.3B, sees FY22 adj EBITDA C$15-15.6B vs est. C$15.5B, avg annual DCF/share growth 5-7% through 2024, raised its quarterly dividend by 3% to C$0.86, and set plans for C$1.5B in buybacks

·     Pipelines: KMI sets FY22 guidance for EPS $1.09 vs est. $1.02, adj EBITDA $7.2B vs est. $7.05B, DCF $2.07, annualized $1.11 div/share, and up to $750M for repurchases, though Barclays and Wolfe were cautious due to higher capex projections of $1.3B from $800M in FY21

·     Refiners: Credit Suisse upgraded CVI to Neutral as their bear thesis has largely played out with shares now trading below their prior $20 PT, though their new $21 target implies ~30% upside given higher fertilizer pricing and lower RIN prices driving positive earnings revisions for 2022; the EPA proposed reducing the amount of ethanol and other biofuels that must be blended into gasoline this year and retroactively lowered last year’s target — a win for refiners who warned that raising the requirement would lift prices at the pump (PSX, HFC, MPC shares active)

·     Utilities & Solar; Mizuho downgraded OGE to Neutral on valuation and after removing any contribution from their ET stake as it fully exiting its ET position by the end of 2022 to complete its transition to a pureplay regulated utility; FLNC is a new Outperform with a $44 target at Baird due to optimism on the growth prospects of the grid-level energy storage market and the company’s continued market leadership; GEVO signs a supply agreement for renewable fuels with Kolmar Americas, a subsidiary of Kolmar Group AG valued at about $2.8B over 8-years

Financials

·     Bank movers; another sector benefitting from the “risk-on” trading day, also helped by a bounce in Treasury yields; FinTech & Payments rebound across the board for some of the hardest hit names over the last month, with bounces in shares of GPN, AFRM, SQ, UPST, PYPL in broad market rebound; MQ expanded its partnership with Klarna into 13 new European markets

·     Consumer Finance; MA announced its realigned its international operations leadership to be in line with their strategic priorities; AXP expanded its partnership with Nova Credit and separately said it has not seen the Omicron variant affect consumer holiday spending; ADS acquired the NFL’s credit card portfolio and will launch a new points card; Truist raised their 2021-22 EPS estimates on PRG after yesterday’s modified Dutch auction tender offer was fully executed vs their estimates for just 75% utilization

·     Bitcoin news; SI 3.3M share Spot Secondary priced at $145.00; Cryptocurrencies continued their rebound with Bitcoin recapturing the $51K level (20% above Sat’s lows) and Ethereum topping $4400 again (25% above Sat’s lows), lifting related names such as COIN, MARA, RIOT, MSTR, BTBT; Lake Street initiated BNXAF (Banxa) with a Buy rating and $6 PT as the one-stop-shop software platform for crypto exchanges which helps facilitate users moving between fiat and crypto, and offers investors a "picks and shovels" way to play the space without being tied to a single crypto’s price action or a specific exchange’s market share

·     REITs; KeyBanc raised ests on apartment REIT 2021, 2022, and 2023 (AVB, ESS, UDR) saying core FFO estimates to reflect 3Q21 operating results and subsequent investing and financing activities. We are increasing our 2021 estimates by 1%, on average; increasing our 2022 FFO estimates by 3%, on average; and increasing our 2023 FFO estimates by 3%, on average; Stifel initiated CPT and ESS with Buy ratings and a Hold on EQR

Healthcare

·     Pharma movers; GSK and VIR said their Covid-19 antibody treatment was effective against all mutations of the new Omicron coronavirus variant; MRK slides after saying it would pause enrollment in Phase III clinical studies evaluating oral islatravir for pre-exposure prophylaxis in people at high risk of HIV-1 infection (shares downgraded to Neutral at Guggenheim and removed $98 price target saying does not see a path forward for islatravir in HIV); ACAD  reported positive top-line results from the Phase 3 LAVENDER trial of trofinetide in Rett syndrome, a rare neurodevelopmental disorder (several analysts raise tgt on news); TEVA loses appeals court bid to invalidate CORT patent

·     Biotech movers; ABUS said it has identified several molecules that inhibit a novel coronavirus enzyme and has worldwide exclusive license for them; IDYA reports clinical data from phase 2 expansion dose of darovasertib and crizotinib synthetic lethal combination in heavily pre-treated metastatic uveal melanoma; IONS collaborates with AZN to develop/commercialize eplontersen, Ionis’ investigational antisense medicine for the treatment of transthyretin amyloidosis; Alvotech Holdings, which is working on a biosimilar to AbbVie’s Humira, agrees to go public in a merger with blank-check company Oaktree Acquisition (OACB); NVAX rises early as Reuters reported its COVID-19 vaccine could be approved very soon, citing EMA chief

·     Healthcare Services; HQY tumbles after lowered guidance for FY22 due in part to disappointing Service and Interchange revenue results as service revs declined 1.7% y/y to $103M in F3Q22 below est. $105M reflecting a decline in COBRA fees due to the expiration of the federal subsidy and full employment conditions in the marketplace; BHG introduced 2022 rev guidance of $6.3B-$6.5B ahead of its investor day and reaffirmed the 2021 guidance it provided in Q3 earnings; MDXG said it sees FY adj net sales $253M to $258M, vs. est. $253.7M; CHWY expands into pet insurance, partners with TRUP as partnership to offer an exclusive suite of pet health insurance and wellness plans to more than 20 mln chewy customers

Industrials & Materials

·     Transports; AAL said Doug Parker will retire as Chief Executive Officer on March 31, 2022 (CNBC said was not unexpected); the Baltic Exchange’s dry bulk index extended gains for a ninth straight session, tracking firm rates across all its vessel segments. The overall index advanced 117 points, or 3.6%, to 3,352, touching its highest level since Nov. 1^st as the Capesize index rose 284 points, or 6%, to 4,983, its highest since Oct. 26.

·     Metals & Materials; in paper sector (IP, WRK, PKG), Truist said they are incrementally more cautious on containerboard and maintain our HOLD ratings on IP, PKG, and WRK following second straight month of price declines in every region as Fastmarkets RISI reported an average OCC price decline of $15-20/ton in December following a $10/ton decline in November.

·     Industrials and Aerospace; AVAV tumbles after reporting mixed Q2 results with EPS beating but revs of $122M missing the $130.8m estimate and lower guidance (halved its adjusted EPS guidance range to $1.23-$1.37 from $2.50-$2.70, and dropped its revenue outlook to $440M-$460M from $560M-$580M prior); BA said PE firm 777 Partners placed an order for 30 more 737 MAX jets, valued at $3.7 billion at list prices, that would nearly double the private-equity firm’s order book for the popular aircraft; GNRC a notable underperformer in strong market, down -2.4% and down for the 7th time in last 8-sessions to lowest levels since June, moving firmly further below its 200-day MA above $386 (shares still up 57% YTD

Technology, Media & Telecom

·     Internet; A service outage with some Amazon.com’s Amazon Web Services (AWS) is causing problems for many websites and online services on Tuesday. The AWS status page shows issues with multiple services, including the AWS Management Console, the AWS Support Center, the AWS Elastic Compute Cloud, Amazon Connect (the company’s call-center offering), and Amazon (ticker: AMZN) Dynamo DB, the company’s database software service; risk on for social media with FB, SNAP, ETSY, TWTR, PINS rising; MIME agreed be acquired by private equity firm Permira in a deal that values the email-security software company at about $5.8B, as Permira will pay $80.00, 6.7% above Monday’s closing price of $75.00. The deal https://bit.ly/3DqtE8k; BMBL was upgraded to Overweight with $55 tgt at JPMorgan, saying left mgmt meetings with greater confidence in Bumble’s app trajectory and longer term positioning within the dating/relationship ecosystem; JMIA said gross merchandise value hit $150M, up 30%, and orders reached 4.3 mln, up 39%, year-over-year, in its biggest Black Friday festival between Nov. 5 and Nov. 30

·     Semiconductors; INTC said it would be taking public its Mobileye self-driving-car unit. The IPO of Mobileye in the U.S. is planned for the middle of next year. The move, first reported by The Wall Street Journal, could value Mobileye at more than $50 billion; AVGO price tgt raised to $620 from $580 at Credit Suisse and to $650 from $640 at Susquehanna ahead of earnings later this week, anticipating a beat-and-raise quarter with constructive end demand for Networking; Loop Capital said they remain bullish on HDDs as well as STX saying things are getting “more-better” for them; Citigroup conducted channel checks throughout the supply chain for semiconductors, saying in 25 years of covering semis, they have not seen business conditions this strong since 1999-2000 as many companies are completely booked for 2022 – firms top pick remains MU (reit Buy and $120 tgt) followed by NXPI and ON

·     Software movers; MDB among top gainers in tech today, with analysts boosting tgts after the software company reported very strong F3Q results, as Atlas revenue accelerated slightly to 84% Y/Y growth, and now represents 58% of total revenue while also raised FY22 guidance again; COUP shares dip on mixed results as company reported solid a 3QF22, but there was a notable deceleration in organic growth and F4Q billings guidance was below consensus; PLTR and German chip chemical supplier Merck KGaA form JV to solve chip industry supply chain problems

·     Hardware, Components & Services; AAPL extends recent gains, trading to new all-time highs as investors pour money into the tech giant ahead of holiday season; in equipment, COMM was upgraded to Buy at Jefferies and raise tgt to $15 as think there’s potential for lots of its previously-lost EBITDA to come back into the model over the next 1-2 years; JNPR also upgraded to buy at Jefferies with raised $42 tgt as believe the narrative is becoming clear – 14.0x our 2023 EPS estimates is too cheap for a company sitting in front of very compelling industry tailwinds

·     Media & Telecom movers; cable stocks slid led by weakness in CMCSA after speaking at UBS tech conference: said EBITDA will be in 7-8% range in Q4, FCF to be in low double digits and expects to have around 1.3 million net broadband additions for the year (shares of CHTR dipped in sympathy); ATUS later also talked down subs saying broadband subscribers might be down 5k-10k in 2021; VIAC and Seoul-based CJ ENM, the distributor of Oscar winning movie "Parasite", have signed a content partnership agreement, the companies said on Tuesday