Closing Recap

Wednesday, January 05, 2022

Equity Market Recap

·     It was NOT a pretty day on Wall Street as the S&P 500 and Nasdaq added to losses while the Dow turned lower after touching fresh intraday record highs this morning, as minutes from the last U.S. Federal Reserve meeting showed Fed officials may need to raise interest rates sooner than expected and reduce asset holdings quickly. The commentary from the FOMC minutes seemed to take Wall Street by surprise, more hawkish then most expected, giving the impression they are indeed behind the curve to prevent inflation from getting worse. Technology was the biggest drag on the S&P 500 and sent the Nasdaq down as much as 3%, while cyclical sectors, which were “green” earlier in the day, also succumb to the late day market rout. U.S. Treasury 10-year yield’s peak of 1.712% is highest since early April 2021, while shorter term 2-yr rose above 0.81%.

·     Hawkish Fed: Fed commentary from the December FOMC Minutes was overly hawkish, as evident by the reaction in stock, bond, and currency markets, (appeared to take markets by surprise) as the Fed penciled in at least three 25 bps rate hikes this year, amid concern that higher inflation could persist and force a more aggressive response from the Fed, particularly if businesses and consumers begin to expect prices to keep rising rapidly. The earlier end to asset purchases (of March vs. June) opens the door for officials to start raising rates in mid-March.

·     Stock & Sector movers: SGH plunges in semis despite a quarterly beat, in-line guide, and a 2-for-1 split via a share dividend, and CRM ADBE stumble in software on UBS downgrades due to worries of moderating growth after a pandemic-driven pull forward to highlight tech’s third consecutive selloff; NUE, X, CLF metals, food SJM, HSY, MDLZ, ACI, managed care CAH, CI, HCA outperform with today’s rotation; T jumps after Q4, full-year post-paid phone and fiber subscriber adds to lift other telco stocks TMUS, VZ; towers AMT, CCI slide after a JPMorgan downgrade; UUUU, CJ, DNN, URA uranium stocks surge a second day as protests related to a fuel price hike in the OPEC+ nation of Kazakhstan turned violent overnight, leading the Government to resign; Vaccine names MRNA, NVAX, BNTX also pressured again as all have ended red in the first three days of the year; XLF Financials ETF holding “traditional” stocks (banks JPM, BAC, WFC, MS, cards AXP, COF) hits record highs while ARKF holding “disruptive” FinTech names (SQ, COIN, SHOP, PATH, MELI, HOOD) hits lowest since Sept. 2020; ARKK ARKW 52-week lows, ARKG more than 50% off 52-week high within Ark funds.

Economic Data:

·     ADP private payrolls reported at 807K for December, well above the 400K estimate, while the prior month revised to 505K from 534K

·     U.S. IHS Markit December final composite PMI at 57.0 (vs flash 56.9) and December final services PMI at 57.6 (vs flash 57.5)

·     Fed minutes showed: considering elevated inflation pressures and the strengthening labor market, participants judged that the increase in policy accommodation provided by the ongoing pace of net asset purchases was no longer necessary. Participants noted that, given outlooks for the economy, labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated

Commodities

·     Oil prices rise as WTI crude gains $0.86, or 1.12% to settle at $77.85 per barrel (6-week high), pulling back off earlier highs following EIA inventory data which showed a -2.1M barrel drawdown, slightly less than the expected -3.0M barrel draw, though the API reported a -6.4M barrel draw after the close on Tuesday. The EIA said weekly gasoline supplies surged 10.1M barrels (bearish) while distillate stockpiles rose 4.4M barrels 9vs. est. +1.0M barrels). The bearish data points pared some of the energy complex gains. Gold prices rise $10.50 or 0.6% to settle at $1,825.10 an ounce, rising a second straight day as the dollar pulled back ahead of the FOMC minutes (gold prices slipped in futures trading following the hawkish outlook from the Fed).

Currencies & Treasuries

·     Treasury yields edged higher in the afternoon ahead of the Fed minutes of the December meeting, as the 10-year hits highs above 1.71% (its highest since April 2021) after rising the first two-days of the year. A much stronger-than-expected U.S. private payrolls in December did lift yields from their lows, ahead of the nonfarm payroll data Friday. U.S. Treasury 2-year yield hits highest since March 2020 after the release of the December FOMC minutes, up 5 bps at 0.815%, where the Fed commentary concerned markets that they may be behind the curve.

·     The U.S. dollar took a breather today despite positive private payroll data (ADP big beat), in a likely bout of profit taking initially ahead of the FOMC Minutes (but the buck did pare losses following the FOMC minutes as prices jumped). The buck had risen more than 2% the last 2-months before Wednesday’s decline, as expectations have grown the Fed will begin to hike interest rates this year (three are currently forecasted). The dollar index dropped over -0.3% to below 96 this morning, but moved back near highs late day around 96.20, while the euro rose 0.4% to $1.1333. Sterling hits high of 1.359 per dollar, highest since Nov 9th

Sector News Breakdown

Consumer

·     Retailers; Wedbush adding DKS to Wedbush’s Best Ideas List (BIL) after a sharp sell-off in shares and our view of a solid outlook and attractive valuation, while removing WSM as believe that WSM’s comp-store sales trends have slowed markedly since the company reported 3Q21 results in mid-November, putting near-term consensus forecasts at risk; Wayfair (W) was downgraded to Neutral at Wedbush noting results in 2021 have been underwhelming noting while there has been plenty of noise associated with the impact of the pandemic, they have repeatedly pointed to "yellow flags" in KPIs that have been trending below pre-pandemic levels, namely in gross and net customer adds, customer acquisition costs and orders per customer

·     Auto sector; SONY said at the CES technology conference it would create a car unit and explore entering the electric-vehicle market/showed off a prototype seven-seat electric sport-utility vehicle with all-wheel drive; NKLA is dropping its $2 bln lawsuit against TSLA in relation to patent violations, both cos agreed to withdraw all claims and counterclaims against each other, joint court filing says; Ford (F) tgt raised from $22 to $26, maintains Buy at Bank America; AMZN and STLA to collaborate to introduce customer-centric connected experiences across millions of vehicles, helping accelerate Stellantis’ software transformation; Ford (F) says Dec electrified sales +121% y/y, U.S. light vehicle sales fell 17.2% to 172,257 and U.S. sales 173,740, -17.1% y/y

·     Consumer Staples; BYND meatless chicken will be added to KFC (YUM) menus nationwide starting Monday; Bank of America downgraded Kellogg (K) to Neutral on their forecast of modest EPS growth in 2022 as the company recovers from supply-chain constraints, rising costs, and consumer demand amid higher prices, downgraded EL to N as it trades above its average premium to the Beauty group, downgraded MO to N, initiated UTZ at N with a $19 PT as its valuation leaves its story and elevated leverage less compelling, and lowered their PTs on Buy-rated FRPT to $125 from $196 and UP-rated BYND to $55 from $70 due to a slowing growth rate in the category, uncertainty of the success and gross margin dilution of a full scale MCD rollout, and peer valuations having pulled back; SMPL Q1 adj EPS 43c vs est. 35c on sales $281.3M vs est. $266.3M, raised FY22 sales growth forecast to 12-14% from 8-10%; Wells double-upgraded EPC to OW from UW with a new $55 PT from $41 as they see a dearth of value in staples and its risk-reward is scarce within the sector; Jefferies raised their MDLZ target to $76 form $72 and named it its top large-cap food pick for 2022 as it provides advantaged growth vs. peers, capital allocation flexibility, and the defensive qualities desired in a core holding and also named NWL as their top HPC pick; PEP introduced Lay’s Layers, a new potato bite snack; Piper sees 2022 potential in recent underperforming deal stocks (COCO, OTLY), MDLZ, HSY due to their pricing power and SOVO, HAIN given their less price-sensitive consumers and also expect UTZ, POST to do well this year while remaining more cautious on TSN, HRL, K, CPB, KHC, GIS as they have likely benefitted from elevated government benefits and BYND on fundamentals

·     Restaurants; Stephens with a handful of changes for the industry as they upgraded CAKE to OW from EW saying it has proven its ability to exceed 2019 unit volumes with the help of a strong off-premise business and for 2022, we believe CAKE is well positioned to retain these sales; DPZ was downgraded to Underweight noting the stock already has had a very strong run, and for 2022 there may be a few headwinds to the business model relative to peers; lastly they downgraded TAST to EW saying it has a tough path in front of it

Energy

·     Energy news; HES announced two significant discoveries at the Fangtooth-1 and Lau Lau-1 wells on the Stabroek Block offshore Guyana. These discoveries will add to the block’s previously announced gross discovered recoverable resource estimate of approximately 10 billion barrels of oil equivalent; CVX said it is working to end protest over government policies by workers at Tengizchevroil venture in Kazakhstan

·     Energy research: Wells Fargo with several changes: 1) in E&P sector, CHK and SM upgraded to overweight, downgrade MGY, WLL to equal weight in E&P sector saying believe E&P is poised to outperform again, top picks are CTRA, PDCE, DVN, oil exposure EOG, FANG, MRO; 2) in majors, CVX and SU upgraded to Overweight, MUR upgraded to Equal Weight and downgraded BP and OXY to Underweight on upstream oil and gas – said XOM and HES are 2022 top picks as believe 2022 can be another good year for oil & gas equities given the favorable backdrop; 3) in services, LBRT upgraded to Overweight from Equal Weight, maintain Overweight ratings on SLB and GTLS and maintain EW ratings on BKR and HAL and Underweight rating on NOV saying despite the sector continuing to lag the S&P 500, they stick to view the sector can shift to more equal footing with the broader market

·     Utilities; Mizuho downgraded SR to Neutral as they no long see the deep value discount vs peers they saw in September and regulatory developments in their Missouri rate case were more negative than expected to make its current discount fair and NJR to Neutral with few potential upside or downside catalysts in the near-term; UBS lowered Dominion (D) to Neutral as they expect utilities to underperform in 1H22 and are thus narrowing their recommendations to their favorite catalyst-driven names AEP, EXC, OGE, downgraded PNW to Sell due to the challenging AZ regulatory climate, SO to N on increased 2022 regulatory risks, FTS, NRG to N as they see shares being fairly valued now

·     Alternative Energy: KeyBank initiated OW ratings on BE with a $30 PT largely due to their market leading position in the stationary power generation market for fuel cells and PLUG with a $40 PT as it has one of the largest scale businesses compared to its public peers, high revenue growth of more than 50% per annum for the next few years, strong corporate partnerships, and a sizable $3.5B cash position on its balance sheet and Sector Weight ratings on FCEL, BLDP largely due to their smaller absolute revenues and less visibility on near-term revenue growth compared to peers and BLDPRoth upgraded SOL to Buy with a new $10 PT vs. $7.70 despite a mixed Q3 and weak Q4 guide as they expect healthy growth ahead and has been egregiously hit by a short report that misrepresents and misunderstands their business; ENPH downgraded to neutral from Buy with lower tgt of $187 from $297 at Bank America

Financials

·     Bank movers; Daiwa downgraded MS to Neutral and resumed WFC at Outperform; Jefferies expects FY22-23 EPS estimates for trust banks are biased higher following US equity market performance, rising short-term interest rates, and better transaction activity, and raise their ’23 EPS ests. for STT by 2% and NTRS by 0.5%, while holding BK flat; Seaport raised NTRS to Buy, reflecting its sizable asset sensitivity, best-in-class organic growth, and discounted stock price; AMP upgraded to Outperform with a $362 PT from $305 at Evercore after they revised their 2022 EPS estimates to reflect another strong equity market quarter in addition to assuming the Fed will hike short term rates several times beginning in 2022

·     Lending, Finance & Financial Services; TW December avg daily volume $915.9B (+9.8% YoY) with Q4 and full-year ADV both hitting records above $1T; ICE Dec. commodities ADV 2.9M contracts with Q4 ADV +12.9% YoY, financials ADV 1.75M contracts with Q4 ADV +15.2% YoY; Piper upgraded LDI to OW as issues since its February IPO are finally priced in; Morgan Stanley upgraded EFX to OW with a $325 target

·     Insurance; Evercore downgraded LNC to In-Line after its 2021 outperformance brings its near-term setup looking worse than the average stock and PRU to In-Line as fundamental revenues and organic growth will be limited while they pursue growth businesses and shrink capital intensive ones, while upgrading MET to Outperform as it trades at a discount to these prior two, and also issued upgrades to OP on AEL as it executes its transition from a traditional spread-based annuity writer to an insurer that derives a greater portion of its earnings from capital light fee-based businesses and VOYA as they believe greater emphasis on FCF-based valuations could lead to outperformance if management can hold the line on capital return, and downgraded BHF to In-Line because they see relatively limited near-term organic FCF generation; Piper upgraded AEL to OW as its transition provides several potential catalysts and LNC to OW as its incoming CEO freshens its narratives, and downgraded CNO to N as its Covid net benefit is diminishing while distribution remains challenged; Bank of America downgraded GOCO to Underperform

·     Bitcoin news; HUT mined 276 BTC in December and it now holds 5,518 Bitcoin in reserve; Cowen initiated IREN at Outperform with a $31 PT due to seeing a multi-year pathway for hash rate growth that is not priced in and SDIG at OP with a $22 PT given its vertical integration differentiation, industry power cost leadership, and appealing hash rate growth pathway; B Riley cut its PT on SDIG to $43 from $63 while keeping its Buy rating

·     REITs; DLR downgraded to Hold at Deutsche; KIM upgraded to Buy at Argus based on their projections of better than peer-average growth; ARE 7M share Spot Secondary priced at $210.00

Healthcare

·     Biotech and Pharma: in research, Bank America upgraded PFE to Buy from Neutral, downgraded AMGN to Neutral from Buy, and downgraded REGN to Underperform from Neutral (cut tgt to $575 from $675); PFE and BNTX sign new global collaboration agreement to develop first MRNA-based shingles vaccine as clinical trials are expected to start in second half of 2022/BNTX will receive $225M upfront and PFE will receive an upfront payment of $25M from BioNTech for its proprietary antigen sequences identified by Pfizer; LGVN announces launch of Phase 2a Lomecel-B trial for Alzheimer’s Disease; EWTX said it had positive results from a study of EDG-5506 in adults with Becker muscular dystrophy; ITCI 9.52M share Secondary priced at $42.00; ANNX tumbled after reported interim data from its ongoing, open-label Phase 2 clinical trial of ANX005 in patients with Huntington’s disease who completed the 24-week treatment period.

·     MedTech Equipment; INSP preannounced impressive Q4 results after the close, with sales of $78.0-$78.4M (+70% YOY) topping consensus by $12.4M and new center adds also reached record levels in the quarter, with 81 sites activated vs. guidance of 52-56; OSUR said it expects to deliver total rev in fiscal q4 at low end of Co’s guidance range of about $60M vs. est. $62.6M while also commences review of strategic alternatives and announces CEO transition; KeyBanc raised estimates for DGX and LH with the release of stronger than expected COVID-19 testing data in recent weeks associated with the "Omicron" variant; for QDEL, ABT, STAT News reported that a new study raises significant doubts about whether at-home rapid antigen tests can detect the Omicron variant before infected people can transmit the virus to others https://bit.ly/3JCGIf4

·     Healthcare Services; drug distributors ABC, CAH and MCK along with JNJ said Nevada has agreed to back a proposed nationwide settlement worth up to $26 billion resolving lawsuits against them over the deadly U.S. opioid epidemic, the state’s attorney general said; for GDRXJefferies said as a whole, web traffic, app downloads, active app user data trends seems to be softening through YE21, which has made them slightly cautious heading into ’22; CTLT appointed company veteran Alessandro Maselli as its next CEO effective July 1, when he succeeds current CEO John Chiminski, who will then assume the position of executive chairman; GOCO downgraded to Underperform (from Buy) at Bank America citing concerns over the insurer’s profitability

Industrials & Materials

·     Aerospace & Defense; NOC downgraded to Hold at Jefferies citing decelerating growth in the 3.4% CAGR range from 2022-2023 vs 3.9% in 2021 with limited oppty for upside and expected margin pressure in ’22 due to mix; ALGT announces an agreement with BA to purchase 50 new Boeing 737 MAX aircraft as part of the airline’s ongoing efforts to modernize and expand its fleet.

·     Materials and Metals; KeyBanc noted Fastmarkets RISI will publish January U.S. old, corrugated container (OCC) prices on Thursday and they expect prices to fall by another ~$15/ton following a cumulative $27/ton decline in November/December as domestic supply and demand continue to normalize following last year’s unusual levels and as export demand remains weak (shares of WRK, PKG, IP leveraged to data); gold miners benefit from jump in gold prices as the dollar slipped; industrial metals among early market leaders (X, FCX, NUE); uranium stocks higher today UUUU, CJ, DNN, URA as protests related to a fuel price hike in the OPEC+ nation of Kazakhstan turned violent overnight, leading the Government to resign

·     Industrial & Machinery; Barclays said they see agricultural and heavy machinery maker DE to benefit from rising demand for autonomous machinery; in research, EMR was upgraded to Outperform from Sector Perform at RBC Capital saying based on Investment Framework, it is the right time in cycle to own this mid-tier quality Hybrid, while the firm downgraded MMM to Underperform from Sector Perform as the company faces mounting operating and legal challenges in 2022 and downgraded EPAC as expect the shares to lag given ongoing oil & gas headwinds (30% of revenues) and the new CEO’s sweeping business review; GNRC positive mention at Oppenheimer saying they favorably consider the significant pullback in shares in the context of logistics/ cost pressures interplay with current sentiment/rotation drivers

·     Transports; for railroads, Citigroup raised UNP tgt from $245 to $287 betting that yields will be good and the unwinding of congestion will be great for them, while also upping tgt for NSC and CSX as well – the firm lowers 4Q estimates for them, but say generally expect results to be in line with consensus; ALGT downgraded to Market Perform from Strong Buy at Raymond James due to mounting risks on the horizon, despite its variable utilization model that is well-suited for the choppy recovery; FDX said it plans to add 2,000 GM BrightDrop electric vans over the next few years, which is on top of a commitment to buy 500 announced last year

Technology, Media & Telecom

·     Internet; BABA rises a day after Charlie Munger’s other firm doubled down on an investment in Alibaba for the second consecutive quarter as his Daily Journal disclosed in an SEC filing it ended 2021 with 602,060 ADR’s, buying a net 300,000 ADRs; PINS was upgraded to Overweight at Piper saying the recent sell-off provides investors an opportunity noting while shares have traded to ~$35 from peak ~$90, the opportunity is largely unchanged and shares appear de-risked.

·     Semiconductors; INTC was upgraded to Outperform at Northland with $62 tgt saying they expect INTC to leverage its SiP capability and optimize its fab resources producing die that is best built on older technology; OIIM announced Dec quarter results due to short-term supply chain challenges at one of its wafer suppliers (likely COVID-related) as 4Q21E sales are now expected at $24.0mn (vs. prior midpoint of $26.0mn).

·     Software movers; UBS downgraded shares of ADBE to Neutral from Buy and cut tgt to $575 from $635 saying they worry that more "front-office/marketing" tech spend was pulled forward in 2020/2021 than most investors think, pressuring Adobe’s growth rate in 2022; CRM also downgraded at UBS to Neutral and cut tgt to $265 from $315 saying it seems likely that Salesforce’s organic growth will moderate in 2022; PLTR said it plans to expand to South Korea, as it collaborates with Hyundai Heavy Industries Group to build a data platform, including shipbuilding and offshore engineering; SGH falls on mixed results as Q1 topped views but Q2 net sales $415-455Mm vs est. $426Mm, adj gr margin 24-26% vs est. 24.3%

·     Hardware, Components & Services; ROKU shares fell as Atlantic Equities initiated with an Underweight recommendation and a $136 tgt saying growth in the U.S. has been slowing and do not expect the largest TV OEMs to outsource to Roku; GRMN upgraded to Buy from Hold at Deutsche Bank and raise tgt to $160 from $148 saying increased conviction in its business environment for CY22, and recent pull-back in shares make the risk-reward attractive; IBM is looking to sell its Watson Health unit again, attempting to sell the division for more than $1 billion, according to Axios.

·     Media & Telecom movers; AT said added approximately 270,000 fiber subscribers for Q4, delivered total postpaid net adds of 1.3M, including about 880,000 postpaid phones and ended 2021 with approximately 73.8M total global HBO max and HBO subscribers; for VIAC, said Yellowstone’s finale saw 9.3 million Total Viewers on Paramount Network, up +81% vs. S3 finale (5.2 million). 10.3 million including CMT; in tower sector, AMT was downgraded to Underweight from Neutral at JPMorgan on limited domestic growth and likely equity raise and CCI downgraded to Neutral from OW as shares have met our fair value; unlikely multiple expansion to macro tower valuation given limited growth upside and small cell/fiber business faces an extended period of slow growth; NLSN downgrade from Equal-weight to Underweight at Morgan Stanley w/ $19 PT (was $25) as believe competitive alternatives are gaining more traction, the shift away from pay TV continues to accelerate, valuation vs Ad Agency peers is actually in line on a 2Y basis despite the added risks and negative industry dynamics