Closing Recap

Thursday, June 03, 2021

Equity Market Recap

·     U.S. stocks drop on the day following bullish economic data as it raised expectations of increasing inflationary measures, as major averages pull back after nearing all-time highs this week. Weekly jobless claims last week totaled 385,000 last week, better than consensus 390,000 and the first time below 400,000 since the second week of March 2020. Additionally, ADP private payroll data showed a net gain of 978,000 jobs in May, spurred by 440,000 net additions in leisure and hospitality as the vaccine rollout continues and economies reopen with fewer restrictions. This was the highest reading since last June, topping the estimated 650,000 gain and improving from April’s 742,000. Now, all eyes are turned to tomorrow’s nonfarm payrolls report to see if the labor market can sustain its momentum. Economists are expecting 671,000 jobs created in May, though expectations might be tempered after April’s +266,000 missed estimates of almost 1M jobs, the widest miss since 1998, and was coupled with downward revisions. Despite the optimistic employment data, markets stumbled out of the gate as the positive readings bring renewed inflation fears and questions of how long loose monetary policy will last. To this point, Dallas Fed president Robert Kaplan said he would like the Fed to take its foot a little off the gas pedal sooner rather than later and it is critical to start discussing adjusting asset purchases. Precious metals fell on the day and the 10-year yield rose with the dollar in response.

·     Stocks did receive a boost late in the morning, however, after the Washington Post reported that President Biden offered a 15% tax floor instead of a corporate tax hike in his latest effort to secure an infrastructure bill with congressional Republicans. The Nasdaq continued its recent trend of being inversely correlated with bond yields, as the index underperformed and suffered its lowest close in almost 2 weeks. Reddit “meme” stocks took centerstage again today and AMC was again at the forefront of the craze. The stock topped $70 in after-hours trading last night but hit lows almost 40% down from yesterday’s close after its 2nd offering in 3 days. Retail investors again flexed their muscle, though, and the stock neared the $70 level in the afternoon after completing its offering, a rebound of more than 80% from the day’s lowest price. Elsewhere, auto stocks led the S&P and touching several multi-year/new record highs after positive May sales.

Economic Data:

·     ADP Employment change reported at 978k (above est. 650k downwardly revised 654K

·     Weekly jobless claims fell to 385,000 in latest wee vs. est. 390K and down from 405K the prior week; the 4-week moving average fell to 428,000 from 458,500 prior week; continued claims rose to 3.771M vs. 3.615M estimate; the U.S. insured unemployment rate rose to 2.7%

·     U.S. nonfarm productivity rebounded solidly in Q1, as the hourly output per worker increased at an unrevised 5.4% annualized rate last quarter, mostly in-line with the 5.5% est. Productivity fell at a 3.8% rate in the fourth quarter, down from an unrevised 4.1% rate. Hours worked increased at a 3.0% rate last quarter, revised slightly up from the 2.9% pace estimated last month.

·     Unit labor costs – the price of labor per single unit of output – increased at a 1.7% rate, up from the expected decline of (-0.4%). Unit labor costs surged at a 14.0% rate in the fourth quarter. They rose at a 4.1% pace from a year ago, instead of at a 1.6% rate as previously reported.

·     The ISM non-manufacturing activity index rebounded to 64 last month, the highest reading in the series’ history, from 62.7 in April and above the estimate of 63.0. Measure of backlog orders soared to a reading of 61.1 from 55.7 in April. Prices paid by services industries shot up to 80.6, the highest reading since September 2005, from 76.8 in April.

Commodities

·     Oil prices were little changed, with WTI Crude falling 2 cents, or .03%, to settle at $68.81/bbl, after the EIA reported crude inventories fell 5.08M barrels, though gasoline and diesel inventories rose by 5.2M. Gold prices slid $36.60, or 1.9% to settle at $1,873.30/oz (its lowest level in more than two-weeks), as bond yields rose with the Dollar and precious metals fall following bullish employment data.

Sector News Breakdown

Consumer

·     Retailers; EXPR said it may offer and sell up to 15 million shares of its common stock from time to time through an "at-the-market" or ATM equity offering program (followed earnings this morning); PVH reported a broad-based beat on guidance-topping revenue and better GMs and Opex (gross margin surpassing the Street’s forecast by 270 bps); BKE reports May net sales up 75.4% to $89.7M from net sales of $51.2M for the prior year 4-week fiscal month ended May 30, 2020; CONN posts Q1 EPS of $1.55, blowing past estimates of 30c after having posted a loss of $1.89 a year earlier, boosted by a 19.4% jump in same-store sales; LESL raises its guidance for the FY21 to $1.28B-1.30B from prior $1.25B-$1.27B on better EPS and Ebitda; NFT sales have declined nearly 90% from their May 3 peak. Just $19.4 million of NFT sales went through this past week compared to $170 million in early May, Business Insider reported (names that have been linked to NFTs include FNKO, TKAT https://bit.ly/34JGFLu

·     Auto sector; TSLA shares slipped in the afternoon on reports vehicle orders in China fell by nearly half in May compared to April, according to internal data, as the electric car pioneer grappled with public outcry and government criticism over its handling of consumer complaints, according to a report in the information; TSLA has recalled more than 700 units of its model 3 electric car that were imported into China, CNBC reported, citing the central government’s market regulator; GM said it expects first half results to be "significantly better" than prior guidance and that the company is "optimistic" about full year; Ford (F) said May total U.S. sales 161,725 vehicles, up 4.1% and their electrified vehicle (EV) sales grew 184% in May

·     Consumer Staples; SJM reported Q4 adj EPS $1.89 vs est. $1.64 on revs $1.92B vs est. $1.88B and sees FY22 adj EPS $8.70-9.10 vs est. $8.59 and net sales declining -3% to -2%, and fiscal sales rising approximately 2% YoY excluding the impact of divestitures of Crisco and New Balance; SPTN posted in-line Q1 EPS 56c on revs $2.66B slightly below est. $2.7B and reaffirmed FY21 view of adj EPS $1.65-1.80 on revs $8.8-9B; Post-Covid, Wells sees the Health and Personal Care category becoming much more fragmented with negative reads for CL, CLX, EPC, and KMB specifically ceding share to small players, though PG was the clear contrarian positive and their only Overweight in core HPC with lackluster YTD performance; Citi said the building blocks are firmly in place for BYND to become a story of strong sales growth and greater profitability over time as the concept of plant-based meat hits multiple relevant trends

·     Casinos, Gaming, Lodging & Leisure sector; movie theatre chain AMC shares fell after rising six of the last seven trading days (up 357% during that stretch), as the company launched its second share issue in three days by agreeing to sell up to 11.55M shares from time-to-time in an ATM offering, while warning investors they might lose money. Tuesday, AMC sold 8.5M shares to Mudrick Capital, which quickly dumped those shares for a profit; LYV tgt raised from $96 to $105, at Guggenheim saying they see a multi-year virtuous cycle emerging by very strong supply dynamics and a healthy consumer with a significant pent-up demand for live experiences

Energy

·     E&P and Majors; Barclays upgraded OXY to Overweight from EW with a price target of $33 from $28, saying oil and inventory trends suggest a macro recovery is on track and OPEC+ continues to show willingness to support a tight oil market, OVV to OW from UW with a price target of $33 from $21 citing the company’s accelerated debt reduction, lower well costs, and enhanced free cash flow outlook, EOG to OW with a price target of $100 from $74, and downgraded APA to EW and CLR to UW; TELL finalized a liquefied-natural-gas sales-and-purchase agreement with Vitol Inc. for three million tons per annum on a free-on-board basis at Driftwood LNG for a 10-year period, valued at about $12B in revenue over the 10 years at current prices.

·     Pipelines: ENLC raised its FY21 guidance, citing a supportive commodity price environment and a ramp up of producer activity, now guiding net income to $125M-$165M from $45M-$105M, adjusted EBITDA $1.02B-$1.06B from $940M-$1B, free cash flow after distributions to $335M-$365M from $275M-$325M, and increased its planned capex range to $165M-$195M from $140M-$180M to accommodate higher volumes in the Permian Basin.

·     Utilities; PJM Interconnection, the largest U.S. power grid operator who serves more than 65 million people, will get $50/MW-day for the year starting June 2022 according to yesterday’s auction results. This price was well below the estimates of $85, was the lowest price since the auction held in post-recession 2009 and 2010, and down from $140/MW-day in its last auction in 2018. Credit Suisse lowered their price target on VST to $23 from $26 and slashed their 2022-23 EBITDA estimates, and shares fell along with EXC and NRG following the disappointing results.

·     Power generation/Solar: WPRT 18.2M share secondary prices at $5.50; Guggenheim expects distributed solar installations to continue growing robustly and initiated coverage on solar inverter companies SEDG (Buy, $314 tgt) and ENPH (Neutral), residential solar developers RUN (Buy, $56 tgt) and NOVA (Buy, $51 tgt), and GNRC (Buy, $420 tgt) as their Best Idea; PLUG and Renault (RNLSY) announced the launch of their “Hyvia” JV, which is expected to be the first-to-market with turnkey hydrogen mobility solutions and will operated across 4 sites in France.

Financials

·     Bank movers; The Federal Reserve said late Wednesday it plans to wind down pandemic corporate credit facility, says corporate credit portfolio sales to be gradual and orderly, sales to minimize adverse impact on ETF, corporate bond market. In insurance; ALL downgraded to Neutral at Citigroup and closing our ALL over PGR pair trade citing limited upside to our revised $142 PT/lack of near-term positive catalysts, a diminishing net auto frequency benefit and higher claims costs ahead due to inflation/CATs; AON agrees to sell U.S. retirement business as it works to get antitrust approval for Willis Towers deal

·     REITs; Mizuho upgraded shares of AVB, AIRC, DEI, FRT, and O all to Buy from Neutral in REIT sector, downgraded LTC to underperform and makes several est. and tgt changes while upgrading the Office, Malls and Triple Net sectors, while downgrading Healthcare and Industrial; at BTIG, maintained buys on AVB and EQR while raising tgts from $206 to $251 on AVB and from to $78 to $85 for EQR saying valuation assumes a 28% relative premium for Apartment REITs over REITs overall and that AVB and EQR are valued at 15% and 10% premiums to the sector.

Healthcare

·     Pharma movers; in cannabis, TLRY upgraded to Overweight from Neutral (reassumes coverage) at Cantor with a price target of $22, down from $30.25 due to sectoral derating and reduced EBITDA estimates, after assuming coverage of the name following the merger with Aphria; VBLT added a second main goal, following discussion with FDA, in its late stage trial of a biologic, VB111, in patients with platinum resistant ovarian cancer

·     MedTech Equipment; MDT said it is stopping the distribution and sale of the Medtronic HVAD System and has begun to notify physicians to cease new implants of the HVAD System and transition to an alternative means of durable mechanical circulatory support.

Industrials & Materials

·     Aerospace & Defense; BA cautious at Baird saying their May checks sets up 2Q21 deliveries shortfall of ~20% vs. Street (estimating BA delivered ~15 total; deliveries in May which combined with April’s 17 deliveries makes the current); SPCE announced a new contract to fly Kellie Gerardi, a researcher for the International Institute for Astronautical Sciences on a dedicated research flight; LDOS was awarded a contract in next phase of U.S. special operations command’s armed overwatch aircraft prototype program;

·     Industrial & Machinery; GE reiterated Buy rating and $17 PT (upside case: $21) at UBS with increasing confidence in above consensus FCF over the next ~24 months; heavy duty trucks move (CMI, PCAR, ALSN) after North American Class 8 truck orders rose to 23,600 vehicles in May year over year, according to FTR preliminary data. Month on month, it was the lowest in nine months and the biggest monthly drop since Nov. 30, 2018

·     Transports; airlines with some updated: DAL said it expects a full restoration of domestic leisure travel in June, up from 60% in March/it expects to generate pretax profit in the second half of the year and sees a pretax loss of $1B- $1.2B for the June quarter, compared with its prior guidance of $1B-$1.5B; AAL said it generated cash in May for the first time since the pandemic/said the 7-day moving average of net bookings was about 90% the level in the same period in 2019/said it expects the strength in bookings to continue through the end of Q2 into Q3/still sees Q2 system capacity to be down 20% to 25% and for revenue to be down about 40% from Q2 2019

Technology, Media & Telecom

·     Internet; TWTR unveils long-awaited subscription service: "Twitter Blue" as service launches now in Canada and Australia, and will come to the U.S. later this year at $2.99/month. The Canadian version launches at C$3.49/month, and Australia’s at A$4.49/month

·     Software movers; SPLK posts a larger-than-expected Q1 adjusted loss of (91c) compared to estimate of (70c) while revs of $502.1M topped the $491M estimate driven by customers shifting to the cloud (guides Q2 revs $550M-$570M vs. est. $557.9M); AI posted slightly better Q1 results (smaller loss and better revs) and guidance also above views, but outlook failed to reassure analysts about its growth prospects; ESTC posted significant upside to leading indicators (revenue, billings), and initial FY22 guidance well ahead of the street, sending shares higher; FEYE announced that it will sell its Products business for ~ $1.2B in cash to Symphony Technology Group; TTWO was upgraded to Buy at Jefferies with raised $231 tgt; SMAR reported a strong Q1, with upside to revenue and billings

·     Components & Services; CIEN rises as Q2 beats as revs fell 7% YoY but topped consensus by about $5M and adjusted EPS of $0.62 was $0.14 ahead of estimates on better margins of 49.2%, topping the 46.3% consensus; SMTC upgrade from Neutral to Buy at Roth after reported a solid beat and raise on continued strength in Signal Integrity (39% of sales, Data Center, PON and 5G) and record sales in LoRa and Proximity Sensors (~30%+ of the mix).

·     Media movers; MDP accepted a revised proposal of GTN to acquire Local Media Group for ~$2.825B in cash vs. previous offer of $2.7B; MDP holders to receive $16.99 per share in cash, revised from the previously $14.51 per share in cash, and 1-for-1 equity share https://on.mktw.net/3ifktAS ; CNSL downgraded to Sell at Citigroup largely on valuation and also open a 90-day negative catalyst watch; GCI resumed Sell and $3.80 target price at Citigroup