Closing Recap

Wednesday, January 12, 2022

Equity Market Recap

·     Inflation was the big story today, with consumer prices hitting the highest level in 40-years, but the data failed to dent any investor optimism, as stocks continued to churn higher with growth names leading along with energy, while defensive lagged along with profit taking in financials ahead of key bank earnings this Friday. Fed Chairman Powell painted the picture of a “soft landing” yesterday in testimony to the Senate Banking Panel saying the Fed can cool inflation without damaging labor market while noted if inflation continues at high levels longer than expected Fed will have to raise rates more over time. Those comments yesterday carried over into today as investors overlooked the CPI reading of +7.0% YoY prices, with surges in nearly every category including food and auto (comes ahead of the December PPI report tomorrow morning). The other big story today was the energy complex as natural gas prices surged more than 14% and oil prices hits 2-month highs as the dollar tumbled to 2-month lows and Treasury yields slipped after hitting 2-year highs this week.

·     Stock & Sector movers: BIIB tumbles to 52-week lows after Medicare coverage of the company’s Alzheimer’s treatment was limited, also hitting shares of LLY due to its own Alzheimer’s drug; TTWO leads the S&P after a BMO upgrade on synergies from their pending ZNGA acquisition; JEF sinks after its revenue missed estimates, dragging GS, MS ahead of Friday morning’s reports from JPM, C, WFC, PNC, BLK, FRC to kick off earnings season; ALLY outperforms other financial names after authorizing $2B in buybacks this year; RKLB climbs after Morgan Stanley initiated at OW and PL surges on a Goldman initiation at Buy while KTOS slides after Goldman downgraded; GRUB jumps after reporting a 14% increase in Q4 orders, and an Evercore upgrade pushes DASH higher but LYFT rolls after being added to its short-term Tactical Underperform list in gig economy names; RRC, SWN, CTRA surge as names leveraged to natural gas outperform in energy sector as Nat gas prices up over 11% at $4.73 mln btus.

Economic Data:

·     Hotter CPI inflation reading: Consumer Price Index (CPI) m/o/m headline reading shows prices rose +0.5% in Dec vs. est. +0.4% and on a y/o/y basis, rises +7.0% (highest since June 1982), in-line with est. +7.0%. the core CPI (ex: food & energy) rose +0.6% m/o/m vs. est. +0.5% and on a y/o/y basis rises 5.5% (highest since Feb 1991) vs. est. +5.4% – recap (inline to slightly hotter data). All types of gas went up 49.6% year over year. Fuel Oil to heat homes up 41% over past 12 months. Cereal and Baking Products up 4.8%. Meats, Poultry, & eggs up 12.5%. Fruits and Vegetables up 5%. Remember average hourly wages are up 4.7% over same time.

·     Fed’s Beige Book repeated the economy expanded at a modest pace into the end of 2021, but many Districts noted growth was constrained by ongoing supply chain disruptions and labor shortages. Wage gains were solid, while some Districts reported additional growth in labor costs due to gains in non-wage benefits.

·     The federal government ran a $21 billion deficit during December, the smallest monthly gap in two years, as the government took in more tax revenue while spending edged higher. Gov’t receipts for the month rose by 41% from a year earlier to $487 billion, not adjusting for calendar differences. The Treasury said federal outlays in December rose by 4% to $508 billion.

Commodities, Currencies & Treasury’s

·     Oil prices continue to climb but surging natural gas prices (up over 13%) grabbed much of the headlines in the energy complex amid the cold front in the Northeast. Oil prices ended higher, with WTI crude up $1.42, or 1.75% to settle at $82.64 per barrel (up about 10% for the year – and about $3 bucks away from 7-year highs it hit in October), while natural gas climbs 13.8% to $4.83 (up 30% YTD so far), set for biggest one-day gains since Nov. 14, 2018, on lower temperatures in the Northeast and forecasts for more frigid temps ahead.

·     The jump in oil prices, hitting two-month highs, came amid tight supply (weekly EIA inventory data bullish with a larger-than-expected draw of -4.55M barrels vs. est. -1.85M – inventory at lowest levels since 2018) and easing concerns about the potential hit to demand from the Omicron coronavirus variant. Cushing inventories also showed a weekly drawdown of -2.468M barrels with gasoline stockpiles rising, but less than expected (+7.96M barrels vs. est. 2.75M)

·     Gold prices rise $8.80 or 0.5% to settle at $1,827.30 an ounce, its 4^th day of gains as the U.S. dollar dropped to two-month lows despite another spike in consumer price inflation, as gains were partially offset by improved appetite for riskier assets.

·     After rising 7-consecutive days to start the year, Treasury yields have since pulled back off 2-year highs despite another jump in inflation prices this morning (CPI hitting highest in 40-years); the benchmark 10-year hits lows of 1.71% today after rising above 1.8% recently, while the 2-yr yield (most leveraged to rate hikes) was steady at 0.9%. The U.S. Treasury sold $36B in 10-year notes at a yield of 1.723% vs. 1.72% prior to auction with a bid-to-cover at 2.51.

·     The U.S. dollar fell to a two-month low despite the “hotter” CPI data, with the dollar index (DXY) dropping over -0.6% to below the 95 level and the euro hitting 2-month highs as well above 1.144; the Canadian dollar extends gains, touches an 8-week high at 1.2526 to the buck as currencies that tend to benefit from rising oil prices outperform; the pound rose 0.4% against the dollar, hitting its highest level since Nov. 4 at $1.3695 overnight.

Sector News Breakdown

Consumer

·     Retailers; CROX tgt raised to $246 and calls it a top idea for 2022 and see it as one of the most impressive consumer growth stories for several years to come as raises estimates for Q4 from $1.42 to $2.01 on the strength of the Crocs brand throughout the Holiday; AEO and LULU tgt cut at Cowen after companies provided guidance at ICR retail conference this week

·     Auto sector; HYZN tumbles after saying it has received a subpoena from U.S. SEC for production of documents and info related to allegations made by short seller Blue Orca Capital in Sept 2021; for online used car dealers CVNA, CARS, Barron’s noted GM is launching a new app for used car purchases, putting it into competition with other technology-heavy used car dealers

·     Restaurants; Truist Increasing PTs for SHAK (BUY) to $102, from $100, and PLAY (BUY) to $60, from $56, and Decreasing PTs for CBRL (HOLD) to $136, from $148 and LOCO (HOLD) to $16, from $17 saying came away from ICR’s 2022 conference more confident in our positive view for restaurant stocks

Energy

·     Energy stock movers; oil prices rising to pandemic start levels after a round of bullish weekly inventory data, helping boost a handful of energy stocks to 52-week highs XOM, DVN, HAL, APA, EOG; in research, KeyBanc raised tgt on APA to $37 from $33, and EOG to $108 from $102 in oil & gas saying key ideas for 2022 include APA, DEN, EOG, MGY, SM, and TALO, as these names are generally E&Ps with low-cost oil assets that can maintain healthy balance sheets, generate strong FCF with modest production growth, and offer upside through oil price leverage; shares of names leveraged to natural gas outperform in energy sector with Nat gas prices surging (RRC, SWN)

·     Utilities & Solar; The Biden administration is considering lowering the 2022 ethanol blending mandate below the proposed 15 billion gallons amid backlash from the refining lobby and unions arguing the nation’s shrinking ethanol industry can no longer support the target, according to Reuters; SOL was upgraded to strong buy saying despite a mixed Q3 and weak Q4 guide, the analyst expects healthy growth ahead

Financials

·     Bank movers; big week of earnings coming up with WFC, C, PNC, JPM results expected Friday morning; Citigroup announced that it intends to exit the consumer, small business, and middle market banking operations of Citibanamex, which would advance Citi’s strategic goals to invest in businesses aligned with Citi’s core strengths; JEF mixed results as Q4 EPS $1.36 beats est. $1.34 but Q1 revs of $1.81B misses est. $1.9B; raises quarterly dividend to 30c per share; raises share repurchase plan to $250M; WFC upgraded to Overweight from Neutral at Piper Sandler; SI upgraded to Outperform from Market Perform at Keefe Bruyette

·     Asset managers; BEN reported preliminary month-end assets under management of $1.5781T at December 31, 2021, compared to $1.5468T at November 30, 2021; IVZ reports preliminary AUM $1.61T as of December 31, 2021, an increase of 2.4% versus previous month-end; AB preliminary assets under management increased to $779 bln during December 2021 from $759 bln at end of November; APAM assets under management as of December 31, 2021, totaled $174.8B; TROW prelim AUM of $1.69T as of Dec.31, 2021 compared to $1.63T as of Nov.30, 2021; November marked a 2.4% drop in AUM.

·     FinTech & Payments; PYPL downgraded to Hold from Buy at Jefferies and cut tgt to $200 from $255 saying with valuation still ~5x above pre-COVID averages, there is little room for expansion, especially with a muted growth outlook, and rising competition; FISV also downgraded to Hold at Jefferies saying having outperformed over LTM, and now carrying the highest multiple of the legacy names, they see limited upside to current FY22/23 estimates; in Buy Now Pay later (BNPL) space, Piper said AFRM downloads indicate strong 4Q21 GMV; Jefferies also said see a clean setup for V and highlight SQ as a top pick in 2022

·     Consumer Finance; ALLY announces up to $2.0 billion share repurchase authorization and dividend on common stock; declares dividends on Series B and Series C preferred stock raises by 20%; RDFN announced an agreement to acquire Bay Equity Home Loans, a full-service mortgage lender based in San Francisco

Healthcare

·     Biotech movers: a dreadful day for biotech across the board behind BIIB weakness, as the XBI moves to lowest since June 2020 and approaching the 100 level (well below 50-day MA higher above 116) – shares if CRSP, EDIT, NTLA among hardest hit; BIIB tumbles after the U.S. government limited Medicare coverage of the company’s Aduhelm Alzheimer’s disease treatment and similar drugs to patients enrolled in clinical trials (weighs on Alzheimer drug makers such as LLY) – several analysts lower tgt on BIIB based on news; OCGN rises after saying a booster dose of company’s COVID-19 vaccine candidate, Covaxin, generates robust neutralizing antibody responses against both Omicron and Delta variants, as per a study

·     MedTech Equipment; DGX said it expects its Q4 results to reflect higher-than-expected demand for Covid-19 testing services, while base testing volumes remained steady – guided Q4 revs $2.74B, down 9% from 2020, but above ests $2.56B while total base testing volumes, excluding Covid-19 testing, increased 10% compared YoY; IRTC was upgraded to Buy with $170 tgt at BTIG following the publication of updated reimbursement rates for the Houston, TX, jurisdiction by Novitas Solutions (Private), a Medicare Administrative Contractor (MAC); ILMN upgraded at Barclay’s after recent guidance; ISRG guided Q4 revs about $1.55B vs. est. $1.51B and said prelim 2021 revs rose 31% YoY to $5.71B, above est. $5.68B; ABT received clearance from U.S. FDA for EnSite x ep system with EnSite omnipolar technology; PHG falls after guides Q4 revs about EU4.9B, below estimate EU5.22B and said group restructuring, acquisition-related and other charges in Q4 are expected to amount to EU420M, which is EU315M above prior guided charges

Industrials & Materials

·     Aerospace & Defense; RKLB was initiated at Overweight and $17 tgt at Morgan Stanley (Bull case $40 and Bear case $6) saying the space race is back and points to RKLB’s proven track record of launching more than 100 satellites into orbit; KTOS downgrade from Buy to Neutral at Goldman Sachs saying prior growth thesis has not played out, with multiple individual program drivers proving moving targets; PL was initiated with a Buy rating and $11 price Target at Goldman Sachs where the opportunity to sell data analytics into many industries is massive (also notes shares are down 50% over the last one month with no fundamental change)

·     Transports; for rails (CSX, UNP, NSC), Stifel said here was only one week in the entire quarter in which the six public Class I rails reported positive year-over-year aggregate carload growth; in airline preview, Jefferies says DAL top picks, while expect their covered airlines will exit 4Q with revs down 22% vs. the 2019 base, with capacity down 17%; RYAAY and LUV both downgraded at Wolfe research saying LUV is out of favor as much as we can recall, relative to the group, in the 14 years we’ve been covering the stock.

·     Chemicals: FMC upgraded to Buy at Citigroup, a key Ag play, as its company-specific issues seem to be behind them and said top three picks are LIN, OLN and CF, while like Intermediate chemicals (CE, HUN, EMN) as there is limited capacity being added and these companies have pricing power; in coatings, SHW, PPG, and AXTA estimates lowered at RBC Capital due to ongoing supply chain headwinds and cost pressures (raw materials, freight, labor, and other Covid-related cost), partially offset by strong demand and customer backlogs; HUN rises after activist Starboard said it’s nominating four directors to board

·     Metals & Mining; strength in steel again to start but fade; TECK is facing a looming strike at its Highland Valley copper mine in British Columbia; says the United Steelworkers, which represents more than 1,000 workers at the massive open-pit mine has received a strike notice which could begin Sunday; in lithium, Cowen upgraded LAC to Outperform and tgt to $40 from $30 and update several lithium & rare earths names (raise tgt price on LYC, MP) saying the rapid pace of EV adoption continues to underpin robust demand growth that supply is struggling to keep up with; FLMN and Desert Peak Minerals agree to merge in all-stock deal that values combined enterprise at $1.9 bln; Jefferies said while shares of AA have appreciated significantly of late, they continue to see further upside to shares; NUE picked a site on the Ohio River in West Virginia for a roughly $2.7B sheet mill that will have the capacity to produce 3 million tons of steel a year.

Technology, Media & Telecom

·     Internet; SHOP upgraded from Market Perform to Outperform at William Blair saying with the recent sell-off in the SaaS space, Shopify’s valuation has come down to a more reasonable level and that the stock is still not inexpensive by any means; SQSP was initiated with a Buy rating and price Target of $42 at Berenberg as maintain Buy ratings on GDDY and WIX as well; AMZN is a best idea for 2022 at Stifel, which touts the strong long-term growth potential for e-commerce, even after the pandemic; GRUB jumps after reporting a 14% increase in Q4 orders, and an Evercore upgrade pushes DASH higher but LYFT rolls after being added to its short-term Tactical Underperform list in gig economy names; BABA rises for the 5th time in 6-days, with shares up over 15% to start the year after a dreadful 2021 as U.S. listed Chinese stocks rise

·     Semiconductors; After their recent pullbacks, Wells upgraded AMBA to OW as one of the purest ways in the chip sector to play the AI/ML computer vision at the edge and the growing L2+ ADAS/AV functions in the automotive market and WOLF as one of the purest ways in the chip sector to play the accelerating market transition to pure battery electric automotive power trains; Barclays raised their price targets on AMD, AMAT, AVGO, CRUS, INTC, KLAC, LRCX, TXN, NXPI and lowered them on ADI, SKWSMorgan Stanley raised their estimates on VECO with a new $38 PT from $34 after the company filed an 8-K yesterday with a 2022 outlook ahead of the Street estimate; Into earnings, Cowen likes ASML and AMATsaid COHU seems interesting in small-caps as its mix shift should help gross margins, and also like TER and MKSI long-term; INTC shares slip late day on a report that MSFT hires key Apple engineer to design own server chips

·     Software movers; SNOW upgraded to Overweight from Equal Weight at Barclays but trim tgt to $367 from $393 while also lowering their price targets on PLAN, APPN, BIGC, CDAY, BASE, COUP, DDOG, DOCN, ESTC, INTU, LSPDand PAYC; CFRA lowered its price targets on CRM and PTC but maintained their Strong Buy rating on both; PI had its price target raised by several analysts after its prelim Q4 revenues came in ahead of its guidance and estimates Monday afternoon; CRM holiday sales surpassed $1 trillion, ADBE reported US consumers spent a record $204.5B online this holiday season, an 8.6% increase from last year; TTWO was upgraded to Outperform at BMO with an unchanged $180 PT due to their pending ZNGA acquisition; Credit Suisse believes software will prove resilient again through the current rotation into value due to sustainable robust rev growth and high operating leverage and listed MSFT, CRM, SPLK as their top ideas with PATH their top high-growth idea, ZI its top idea for GARP investors, and VMW their top idea for value; Cowen said the Customer Data Platform is one of the fastest growing tech sub-sectors that is materially inflecting and sees BRZE and TWLO as the best investment vehicles to play this secular trend; Morgan Stanley’s CIO survey once again indicates growth and intact fundamental demand trends for MSFT with gaining share in Public Cloud, polling ahead of #2 AWS (AMZN) by 22% points as the most preferred hybrid cloud vendor today; OpCo added ASAN to their top picks for 2022 on expectations it will continue to successfully move upmarket with larger organizations where there’s significant room for expansion

·     Media & Telecom movers; DISH and DirecTV are in fresh talks to merge after years of on-again, off-again wrangling, and multiple clampdowns from federal antitrust officials, The NY Post has learned. https://bit.ly/3ffC1Kd ; CCOI downgraded from Equal Weight to Underweight at Wells Fargo and lowers tgt to $65 from $75 prior as think the relative risk/reward for CCOI remains unattractive in 2022 as the highest-multiple name in our telco services coverage

·        Hardware; According to Canalys, AAPL shipped an estimated 7.8 million Macs in the fourth-quarter, up 9% over the prior quarter. It had 8.5% of the total PC market, up from 7.9% in the fourth-quarter of 2020; for the full year, Apple shipped an estimated 29 million units, up 28.3%, compared to the broader PC market, which saw a 15% rise in 2021, totaling 341 million units.