Closing Recap

Tuesday, March 08, 2022

Equity Market Recap

·     “It was the best of times; it was the worst of time.” Another wild day on Wall Street with 3% swings between highs and lows for major averages becoming the “norm”! U.S. stocks reversed hefty morning losses, finishing mixed after reports that Ukraine is no longer seeking NATO membership as part of their negotiations with Russia. The headlines bounced stocks and pared WTI crude oil gains on the headlines but still climb on the day (along with gold and Treasury yields). It was enough to break the recent downtrend for markets, at least for the time being, with biggest winners being solar and chip stocks, industrials, and financials. Recent winners such as metals, energy and materials saw profit taking, while the biggest declines were in consumer staples, healthcare, and utilities. Sectors/industries with high exposure to consumer spending (Autos, Durables, Retail, FinTech, Tech Hardware, Telecom) have had the weakest performance since the Ukraine invasion, but also saw a rebound today. An absolute wild day overall with stocks finish mixed in a very choppy and whipsaw session.

·     Stock & Sector movers: DKS recoups some of yesterday’s losses after beating quarterly estimates for EPS, revenue, and comp sales with guidance above estimates; alt energy continues push higher amidst higher oil prices as SEDG ENPH SPWR CSIQ RUN lead; ALK hits 52-week lows after raising its estimated Q1 fuel cost and moderated capacity forecast but the stock soars higher as it sees growth vs. pre-pandemic levels in 2H as airlines/cruises get a boost intraday with oil’s reversal lower – DAL UAL JBLU NCLH RCL CCL all sharply higher despite early 52-week lows; CAT outperforms after Jefferies upgraded it to Buy on the thesis that the Ukraine-Russia conflict should drive reinvestment and expanded capacity; Food stocks CAG GIS CPB MKC slide on concerns of rising commodity/grain costs.

Economic Data:

·     U.S. Jan trade deficit -$89.7B (vs. consensus -$87.1B) and vs. Dec deficit -$82.0B (vs. prior -$80.73B); U.S. Jan goods deficit $108.9B, services surplus $19.2B – the trade deficit is the widest monthly trade deficit on record.

·     U.S. Jan wholesale sales +4.0% vs. Dec +0.8% and estimate +0.2%; wholesale inventories unrevised at +0.8%; U.S. Jan stock/sales ratio 1.20 months’ worth vs dec 1.24 months

Commodities

·     Oil prices finish higher, adding to monthly gains, but settled well off the best levels for a second day as WTI crude gains $4.30 or 3.6% to settle at $123.70 per barrel (second day pulling back after touching highs above $130 per barrel, highest since 2008) and Brent gains $4.77 to $127.98 per barrel. CNBC had reported earlier that Hess Oil CEO has called for the IEA to release as much a 240M barrels from various strategic reserves to help balance out the market. Meanwhile late morning, President Biden said the U.S. will ban imports of Russian oil, natural gas, and other energy sources as the West ratchets up pressure on Russian President Vladimir Putin over his invasion of Ukraine. Today’s AAA National average for gas at the pump rises to all-time highs of $4.173 per gallon – takes out the July 2008 record of $4.11

·     Gold prices rise $47.40 or 2.4% to settle at $2,043.30 an ounce, pulling back after hitting highs of $2,078.80 an ounce, extended its blistering rally towards an all-time high (all-time closing peak of stands at $2,072.50 touched in August 2020). Given the uncertainty in Ukraine, investors exited riskier assets for the traditional haven on mounting fears about rising commodity prices. Worries over a palladium supply shortfall due to sanctions on Russia, kept its price near all-time highs (hit $3,440 on Monday and is up 60% YTD), while silver prices also added to recent gains.

·     Soaring oil prices and the Ukraine war have slammed appetite for riskier assets. Russia this afternoon said it will restrict trade in some goods and raw materials from lists that’s yet to be defined, according to an order published on a government website. Says move is part of special economic measures in response to sanctions by U.S. and other countries

Currencies & Treasuries

·     The U.S. dollar was mixed as the Canadian dollar hits weakest since Dec. 22 at 1.2889 to the U.S. Dollar, while the euro rallied from 22-month lows against the buck hit the previous session, lifted by expectations that the euro zone will increase fiscal spending to help offset the economic effects of the Russia-Ukraine conflict. Investors have flocked to safe-haven currencies during the Ukraine crisis, pushing the U.S. dollar to multi-year highs.

·     Steady climb throughout the day for Treasury yields, paring recent losses ahead of the FOMC meeting next week and as investors digest headline after headline coming out of Europe related to the Russian invasion of Ukraine, now on its 13^th day. The U.S. Treasury sold $48B in 3-year notes at a yield of 1.775% vs. 1.763% prior as the bid-to-cover (demand) was at 2.39 vs. 2.45 prior auction) and indirect bidders awarded 55.1% (below prior auction 68.5%) and directs 18.6% (vs. prior 11.2%). The 10yr yield rose over 10 bps to 1.85% and 2-yr over 6 bps to 1.61%.

Sector News Breakdown

Consumer

·     Retailers; DKS Q4 adj EPS $3.64 vs est. $3.43 on sales $3.35B vs est. $3.31B, same-store sales +5.9% vs est. +4.4%, sees FY23 adj EPS $11.70-13.10 vs est. $11.31, same-store sales -4%-flat vs est. -3.3%; KSS said Goldman Sachs has engaged with over 20 financial sponsors this year regarding potential strategic alternatives and was separately initiated at Neutral with a $60 PT at Bank of America; WOOF Q4 adj EPS 28c vs est. 25c on revs $1.51B vs est. $1.49B, sees FY22 adj EPS $0.97-1 vs est. $0.89 on sales $6.15-6.25B vs est. $5.79B; CLAR posted a Q4 beat with adj EPS 45c vs est. 36c on revs $118.2M vs est. $105.8M and sees FY22 sales rising about 25% to $470M vs est. $450.8M; TDUP reported a Q4 EPS loss of (18c) vs est. (17c) on revenue $72.9M vs est. $70M, active buyers +36% YoY to 1.7M and orders +69% to 1.7M, sees Q1 revenue $70-72M below est. $76.7M and FY22 revenue $333M vs est. $334.6M; BNED Q3 EPS (71c) vs est. (19c) on sales $402.8M vs est. $433.8M, retail segment gross comp sales +8.4% as the quarter was negatively impacted by several partners only offering virtual classes during the Omicron spike, and they still see positive adj EBITDA in FY22 but now see FY23 below pre-pandemic levels vs prior view of approaching those levels; DLTR trades to record highs after agreeing with activist investor to revamp its board

·     Retail research: Cowen lowered their estimates and PTs on NKE ($144 from $192), ADDYYand PUMSY as their contacts across the supply chain see stress in commodity inflation; Following the FL disclosure of receiving significantly less NKE product, Wedbush sees opportunity in ADDYY, VFC (Timberland), DECK (UGG), PUMSY, and CROX; Stifel initiated RVLV at Buy with a $51 target as they expect multiple years of 20+% revenue growth with expanding margins due to proven customer growth, standout return characteristics, and financial capacity to self-fund growth

·     Auto sector; EV stocks a focus as the price of Nickel jumped over 60% this morning (extending recent spikes – before sliding late), with Morgan Stanley noting that represents around a $1,000 increase in the input cost of an average EV in the U.S. as it remains a key component to making batteries 9also notes the surge in palladium costs also a material for autos); TSLA sells 56,515 China-made vehicles in February, local deliveries up ~20% sequentially; Auto supplier MGA downgraded to Market Perform from Outperform at BMO Capital and cut tgt to $63 from $89 saying lower industry vehicle production in Western Europe, rising oil and gas prices, commodity headwinds, and a potential supply disruption of neon and palladium are all headwinds amid the Ukraine/Russia war (note auto parts sector down 22% going back to the 22nd of Feb (2 days prior to invasion)

·     Consumer Staples & Restaurants; more Russian sanction impacts as EL will close all stores in Russia and stop shipping products (says Russia accounts for 2.7% of revs); PG has reportedly discontinued all new capital investments in Russia and is suspending all media, advertising, and promotional activity; PVH has temporarily closed it stores and paused all commercial activities in Russia and Belarus as of March 7^th (says ~2% of the total new revs in 2021 was Russia, Belarus, and Ukraine from 8K); food stocks CPB, CAG, GIS, HSY, KHC weakness as commodity/grain related costs surging for companies, impacting margins/sales; MCD temp closes Russia stores

·     Casinos, Gaming, Lodging & Leisure sector; BKNG warns that travel bookings have deteriorated because of the war saying over the last week through March 6th ‘rooms were down about 10% vs. 2019 (note shares down over 23% over the last 12-trading days (coming into today); in towables (THO, WGO, CWH), Raymond James noted North America RV retail (excluding park models) totaled 24,444 units in January, down 24% y/y and marking the eighth consecutive double-digit monthly drop -but North America shipments in January, as per RVIA, totaled 53,290 units, up 16% y/y and thus implying another substantial inventory build

Energy

·     Energy stock movers; oil prices on the rise again after reports the Biden administration to ban Russian oil without participation of Europe allies, which will include Russian oil, LNG and coal; Goldman Sachs discussed the impact to oil markets from the war in Ukraine; as a result, the bank increased its base-case 2022 oil price forecast to $135 from $98 and sees upside to $175; NINE surges as reported Q4 revenue beat and a lower-than-expected loss; reports smaller Q4 loss and revenue of $105.1 mln beats estimates of $95.8M; SHEL said that it intends to withdraw from Russian oil and gas in a phased manner in response to the Russian invasion of Ukraine, including immediately halting all spot market purchases of Russian crude; oil service stocks SLB, BKR, HAL outperform the rest of the energy complex for a second day; CVX and XOM rally for an 8th straight day to record highs.

·     E&P and Majors; a massive run for the energy complex amid the supply disruption fears the Ukraine/Russia has created for natural gas, coal, oil, and gasoline. Bank America this morning downgraded shares of OXY, COP, EOG, FANG, NOG and OVV to neutral while upgraded SWN and said compelling value keeps XOM, HES, APA, SU as top ideas with outsize opportunity for buy backs countering inevitable commodity volatility; CPE upgraded to Buy at Truist saying continues to turn the right operational and financial knobs to position itself for a solid upcoming shareholder return plan; FANG upgrade to Outperform at Scotia

·     Refiners: Bank America with several changes in group as they upgraded HFC and PBF to Buy and DK to Neutral while VLO added to the US 1 list saying they see U.S. refiners are overlooked as net beneficiaries of a structurally higher natural gas costs ex US – a critical input to the margin necessary for int’l refiners to clear higher costs and already showing up in extraordinary heating oil cracks

·     Utilities & Solar; solar companies climb along with Electric vehicles as oil prices extend their rally, with oil prices surging after formal U.S. sanctions against Russian oil exports fuels supply concerns; shares of JKS, FSLR, SEDG, RUN, ENPH, CSIQ, big advances as well as renewables, having gained as the rally in crude prices makes alternative more attractive

Financials

·     Bank movers: financials rallied with the broader market and as Treasury yields popped to highs after recent weakness (10-yr up more than 10bps); in Consumer Finance; Visa Inc. (V) and Mastercard Inc. (MA) are preparing to increase the fees that many large merchants pay when they accept consumers’ credit cards, the WSJ reported. The fee increases, delayed during the past two years because of the pandemic, are scheduled to kick in next month; Fintech saw a rebound as well, but it was the big banks that saw follow through upside action

Healthcare

·     Pharma movers; VYGR said NVS will be allowed to use its RNA-driven technology for development of gene therapies where VYGR will receive $54M upfront and is entitled to receive up to $37.5M in exercise fees for options for three initial targets along with milestones; BNTX and REGN expand strategic collaboration to advance clinical development of FixVac and Libtayo® (cemiplimab) combination in NSCLC; BBIO announced an agreement with Sentynl Therapeutics to sell its global rights for Nulibry (Fosdenopterin), one of the two licensed products of the company.

·     MedTech; shares of ISRG tumble as MedTech the latest sector feeling pain on rising energy/commodity prices on view it could impact fewer elective procedures- sectors/industries with high exposure to consumer spending (Autos, Durables, Retail, Travel, Tech Hardware, Telecom) have had the weakest performance of late

Industrials & Materials

·     Aerospace & Defense; Jefferies raised tgts on defense stocks: BAH ($100 from $90), CACI ($335 from $275), GD ($275 from $260), LDOS ($130 from $110), LHX ($320 from $295), LMT ($505 from $375), NOC ($500 from $380), PSN ($44 from $40), SAIC ($115 from $105) saying the Russia-Ukraine conflict has improved defense sentiment, driving Prime multiples up 34% and IT up 13% since Jan 31 and think this momentum is here to stay; BA delivered twenty 737 Max jets last month plus two wide-body freighters as its total jet shipments lagged January’s tally by 10

·     Industrial & Machinery; CAT upgraded to Buy from Hold at Jefferies and raise tgt to $260 from $215 saying the Russia-Ukraine conflict has fundamentally altered global commodity markets and is likely to drive a decade of reinvestment; FAST upgraded at Wells Fargo and raise tgt to $58 saying the move from 37x next 12-month earnings to the 29x today has been sudden and believe sentiment has reached a near-term trough

·     Transports; sector had been among hardest hit last few days on surging oil and gasoline prices, making it more expensive to operate – but as oil pared gains on Ukraine headlines, airlines were among biggest beneficiaries, jumping across the board DAL ; ALK raised its expected Q1 fuel costs as the sharp rise in prices along with public health and economic crises have led to a moderated capacity forecast with 1H capacity now expected to be down 3-5% before returning to 100% of pre-Covid capacity in the summer followed by growth in 2H, and further said it will consider accelerating retirement of its Airbus (EADSY) jets in favor of BA 737 MAX aircraft if high fuel prices persist; Citi believes there is still upside in rails as they continue to sit in an advantageous position relative to other transports given commodity exposures, pricing power and cost control with CSX their top pick

·     Metals & Materials; seeing pullback early in some of the recent market winners in the metals, steels, energy, potash space with MOS, AA, CENX, CLF sliding on profit taking; chemicals SHW, PPG and AXTA lower after Jefferies said the spike in energy and raw-material costs will compress margins more severely than initially anticipated (firm lowered tgt and ests); SMG lowers FY22 adj. EPS view to at least $8.00 from $8.50-$8.90 saying the revised Hawthorne sales outlook means it is unlikely to reach the low end of its guidance for non-GAAP adjusted EPS; precious metal gold/silver miners jump with higher prices AUY, GOLD, AEM, PAAS, NEM (pare gains)

Technology, Media & Telecom

·     Software movers; GOOGL confirmed a late day report yesterday by theinformation, saying it will acquire cybersecurity firm MNDT in a $5.4B deal, which values the company at $23.00; also in cybersecurity, OKTA upgraded from Neutral to Buy at Mizuho noting it has been a material underperformer and has declined 42% over the last six months (vs. the IGV down 26%). While profitability remains an issue, OKTA’s organic growth continues to be strong, and Auth0 growth has been both robust and better than expected

·     Hardware, Components & Services; AAPL unveiled new product updates at its virtual product launch that included a new version of its low-cost iPhone SE that includes 5G connectivity as the $429 price point is a slight increase from the previous iPhone SE model, priced at $399 and starts shipping March 18 – also said its Apple TV+ product would begin showing Major League Baseball games on Friday nights; DELL was upgraded to Outperform at Evercore/ISI with $60 tgt saying the current valuation post Q4 print pullback creates an attractive entry point for long-term investors given the conservative FY23 guide, share gains, de-leverage potential; DM EPS of -$0.92 misses by $0.11 while revs of $112.4M (+582.5% Y/Y) beats by $9.21M.

·     Semi’s, Internet, Media & Telecom movers; FB tgt lowered to $240 from $301 at Piper saying advertising headwinds are likely to continue for the next several months and also notes impression headwinds include 1) slowing DAU growth, 2) re-opening, and 3) engagement mix shift to Reels; DISH upgraded from Neutral to Buy with $44 tgt at UBS given an attractive risk/reward bounded by spectrum value on the downside and optionality of the next-gen, cloud-based, 5G wireless network on the upside; STX shares stumbled after speaking at Morgan Stanley tech conference saying the qtr ‘going to be at the lower end of the ranges’