Closing Recap

Monday, March 21, 2022

Equity Market Recap

·     U.S. stocks held strong all morning, with the S&P 500 battling the 200-day moving average (MA) resistance level of 4,471 following a 4-day rally, trying to get above/hold that level, but stocks sunk around 12:30 after Fed Chairman Powell said in comments today that the Fed will hike further & faster, if necessary, as his comments appeared more hawkish than when he spoke last Wednesday at the FOMC meeting. Fed funds futures imply traders now see 61% chance Fed raising rates 50 bps in May, up from about 52% before Powell comments. Treasury yields, which were higher to start the day/week already, jumped further across the board behind the Powell comments as the U.S. Treasury 3-year yield climbs around 20 basis points above 2.33% and the 10-yr topped 2.3%. Energy, utilities, materials, and defensive consumer staples were market leaders today, with tech, IT services, financials and discretionary among top decliners. The Ukraine-Russia conflict remains in focus this week, as global leaders continue to pile on sanctions for Russia and peace talks make limited progress. The economic uncertainty has led to price increases in commodities including oil and nickel. Oil prices jumped with yields, while the dollar was mixed while stocks were mixed, finishing well off their highs (and lows).

·     Fed Chairman Powell in comments today said there is an obvious need to move expeditiously to more neutral level and more restrictive levels if needed to restore price stability. He said risk is rising as an extended period of high inflation could push longer-term expectations uncomfortably higher and the Fed needs to move expeditiously to combat that. Powell said action on balance sheet could come as soon as may meeting, but no decision has been made. He also said if they need to raise Fed funds rate by more than 25 bps at a meeting or meetings, they will do so. Powell noted we are headed once again into more covid-related supply disruptions from China and Russia’s invasion of Ukraine may have significant effects on U.S. and world economy. Said actions on interest rates and balance sheet will help bring inflation down near 2% over next 3-yrs.

·     Stock & Sector movers: BA rolls and weighs on the Dow after a 737 crash in China this morning; flight operator CEA, supplier SPR also sliding on the news; BRK.A acquires $Y for $11.6B in cash at a 25.3% premium to Friday’s close and both stocks climb to record highs; PLAN acquired by PE firm Thomas Bravo in a $10.7B deal at $66/share, a premium of ~30% to Friday’s close; NLSN rejects a takeover bid at $25.40/share and shares give up some of last week’s +39.5% gain on news of advanced acquisition talks; Energy best sector again today with crude prices rising over the weekend; OXY DVN FANG EOG MRO among S&P leaders; defense LMT HII RTX, metals AA CENX X, fertilizers MOS CF other recent outperformers continuing recent strength; NKE slips into tonight’s earnings to extend YTD decline to more than 22% as other retailers/discretionary names trade lower today as the rising oil prices fuel consumer spending concerns; homebuilder a casualty of Powell comments about more aggressive rates of Fed needs to.

Commodities

·     Oil prices jumped, as WTI crude gained 7.1% higher at a nearly two-week high of $112.12 a barrel amid growing support for a European Union-wide ban on the purchase of Russian crude oil, while Brent crude gains $7.69 or 7.12% at $115.62 per barrel, such a deal would further hinder Russia’s ability to sell its crude abroad and could create a global supply squeeze.

·     Gold prices finish little changed after earlier gains, rising 20c to settle at $1,929.50 an ounce (off highs of $1,938.60 an ounce), boosted initially on Ukraine headline fears, but prices fell ass Treasury yields spiked midday on hawkish Fed Chairman Powell comments. Last week, gold shed more than 3% on hopes for progress in the talks and a U.S. interest rate hike. Nickel fell by the daily limit for a fourth straight session on the LME as prices continue to nosedive after spiking earlier this month in an unprecedented short squeeze. Aluminum prices jumped after Australia bans alumina exports to Russia.

Currencies & Treasuries

·     The U.S. dollar was little changed against the majority of its G10 peers, with the euro flattish as focus remains on the ongoing war in Ukraine and rising energy prices. Treasury yields a different story, massive spikes across the curve, but biggest movers in the short end. The U.S. 10-year yield rises above 2.3% to its highest since May 2019 and remains inverted against the 5 and 7-yr yields, which is pressuring banks; the 2-yr yield tops 2% this morning, rising over 12-bps to 2.13%; the 7-yr remains above 10-yr yield at 2.35% last, up almost 15bps, the 5-yr yield pops over 19 bps to 2.33% and 3-yr up 20-bps to 2.339% all on the Fed Chairman Powell comments. The 2 Year US Treasury Yield is up 86 basis points over the past three weeks alone!

Sector News Breakdown

Consumer

·     Retailers; Dow component NKE reports tonight after the close with clear concerns on supply chain issues as well as China shutdowns are well known; GES announces new $175 mln accelerated share repurchase plan, says final settlement expected to occur by end of Q3 2022; FIVE added as short-term Buy idea at Deutsche Bank heading into its 3/30 4Q release and Investor Day in light of the stock’s ~20% YTD pullback with a positive 2:1 risk/reward skew over the coming year; JOAN downgraded to Neutral from Buy at Guggenheim saying visibility into the return of year-over-year net sales and adjusted EBITDA growth during 2022 has been hampered; KSS said in a PR that it acknowledges receipt of “multiple preliminary indications of interest”

·     Auto sector; GM announced after market close on Friday that it is acquiring Softbank’s stake in Cruise for a total of $2.1B and agreeing to make a separate $1.35B investment in the AV unit instead of SoftBank – combined, the move will increase GM’s stake in Cruise to about 80%; auto space has been hit hard on rising material and commodity costs in recent weeks, while EV names have been mixed given the rising gas prices, making them more attractive

·     Housing & Building Products; in research, FBHS, IBP were both downgraded to Hold from Buy at Jefferies saying with tough pandemic comps, geopolitical tensions, & rate hikes slowing GDP growth, they are more cautious on R&R activity, particularly bigger ticket & discretionary categories. Meanwhile, the firm upgraded AWI to Buy from Hold saying it is well insulated & poised to outperform given its US-centric operations, non-res exposure (~95%), and demonstrated pricing power; they added MLM to Franchise Picks List and said remain positive on the LT housing outlook but see 20-30% downside to trough multiples and OC, AZEK, EXP, and SUM are the most dislocated.

·     Consumer Staples & Restaurants; Credit Suisse said HSY, KO, ADM, BG are best-positioned if inflation spikes persist; TXRH approved a $300M stock buyback after Friday’s close; Barron’s said WEN stock is a buy after falling nearly 7% YTD as it is shielded from the fallout of Russia’s invasion of Ukraine with more than 93% of its business is domestic and it offered same-store sales guidance that forecasts a significant acceleration from historical levels; Barron’s picks stocks to buy to combat rising food costs – EAT, BLMN, SBUX, HSY, TWNK, DE, AGCO, BG, KR, and ACI and says food inflation could be persistent, which could lead to other problems including social unrest

·     Casinos, Gaming, Lodging & Leisure sector; weakness early in leisure/travel space amid rebound in oil prices as cruise, online travel, etc. slide; RBC Capital said it maintains OP on LYFT on likely rising tide from reopening but modestly lower our LYFT PT to $50 from $53 given potentially rising incentive costs and lower UBER to $50 from $65 on an equalizing market share landscape in the U.S. and less margin upside potential; in leisure, MANU was upgraded to Buy at Deutsche Bank saying valuation of 13.1X sits at the lower end of the sports and live events comparable group, which the firm thinks is not justified; online travel, hotels, leisure active as Hong Kong said it would remove flight bans and reduce quarantine requirements as the gov’t dials back some COVID restrictions

Energy

·     Energy stock movers; the big three oil service companies HAL, SLB, and BKR announced this weekend they are pulling operations out of Russia in response to U.S. sanctions over the invasion of Ukraine; oil rises as European Union governments will consider whether to impose an oil embargo on Russia over its invasion of Ukraine as they gather this week with U.S. President Joe Biden for a series of summits designed to harden the West’s response to Moscow – Reuters; commodity risk-on trade back on, as energy stocks among top gainers in the S&P given the rebound in oil prices after falling 4% last week (OXY, MRO, HES, DVN, APA among leaders)

·     Pipelines: KMI and ENB have asked the Federal Energy Regulatory Commission not to apply a tough new climate standard to pipeline and liquefied natural gas projects already under review; TRGP files for potential mixed shelf offering; size not disclosed

Financials

·     Bank movers; GS said it conducts its first over the counter crypto options trade; in research, Wells Fargo upgraded ASB to overweight in Midcap banks saying shares are well positioned relative to the group, new tgt $28 and CBSH upgraded to equal weight as believe a 250% TBC is a premium to the group, think its sustainable given the unique insider ownership as well as the lower beta. Overall, for the sector, continue to believe 2022 will be a good year and the recent pullback is an attractive entry point, top picks are SBNY, BPOP

·     Insurance; one big deal in space as Berkshire Hathaway Inc. (BRK) agreed to buy insurer Alleghany Corp. (Y) for about $11.6 billion in cash; Berkshire said it will pay $848.02 a share for Alleghany, a 25.3% premium to Friday’s closing price of $676.75 https://bit.ly/3tt3RLa

·     Bitcoin, FinTech & Payments; COIN shares slipped after named a new short by Jim Chanos of Kynikos Holdings after the bell on CNBC; SI was initiated Buy and $200 tgt at Bank America saying unlike most traditional banks with $10-$30bn in assets stuck between industry consolidation and fintech disruption, mgmt saw the future and pivoted into a digital-currency-focused bank and settlement network; Bitcoin prices in general slipped

Healthcare

·     Pharma movers; VALN tumbles after announcing that its lead program for ADAIR did not meet primary endpoint in attention deficit hyperactivity disorder (ADHD); in cannabis, CRON announced that the Board of Directors has appointed Mike Gorenstein as Chairman, President, and Chief Executive Officer, effective March 21, 2022, in connection with Kurt Schmidt’s retirement; ALNA shares plunged post-market after the drugmaker decided to terminate the development of its treatment reloxaliase; MRNS slides after biz update and posts Q4 rev of ~$1.5M vs Street view of $3.4M, and adj loss of 77c; TEVA reaches agreement with Rhode Island to settle opioid-related claims to pay Rhode Island $21 mln over 13-years

·     Biotech movers; MRNA signed an agreement with the Swiss Federal Government to supply seven million doses of Moderna’s COVID-19 booster vaccine; TVTX submits new drug application for sparsentan for treatment of IGA nephropathy – expects to receive notice regarding acceptance of NDA as well as timeline for NDA review, from FDA in May 2022; PRVB said the FDA accepts BLA resubmission for Teplizumab for the delay of clinical type 1 diabetes in at-risk individuals (PDUFA 08/17/22); IMGN downgraded at RBC Capital following the company’s presentation of the results of its SORAYA ovarian cancer trial for mirvetuximab soravtansine (mirvetuximab) monotherapy

·     Healthcare Services; EHTH downgraded to Neutral from Buy at Citigroup and slash tgt to $15 from $37 saying they view the e-Broker space as uninvestable with too many dollars chasing too few MA shoppers, exacerbated by an acute focus on member quality at the carriers, combined with increased advertising scrutiny at CMS

Industrials & Materials

·     Aerospace & Defense; Dow component BA tumbled after a Boeing 737 passenger plane (not the 737 Max which had been subject of scrutiny prior for crashes) operated by China Eastern Airlines Corp. carrying more than 130 people has crashed in southern China state media reported.; shares of Boeing parts suppliers such as SPR declined on the news; KBR won a five-year $640M Ground Systems and Mission Operations-3 contract to support more than 10 NASA exploration missions; defense stocks GD rise as Ukraine defied a Russian demand that its forces lay down arms before dawn on Mon in Mariupol, where civilians have been trapped in a city under siege

·     Transports; for airlines, AAL, DAL, UAL, yesterday’s 2.367 million TSA throughput was the 2nd highest since the pandemic began. Back to Feb ’20 numbers; overall transports held up well despite the spike in oil prices; FDX shares partially rebounded early after tumbling late last week on earnings miss; CP trains were halted Sunday morning, stalling global shipments of key manufactured goods and commodities such as fertilizers, after an impasse in contract negotiations between the company and its conductors and engineers.

·     Metals & Mining: shares of aluminum producers AA, CENX jumped initially amid rising aluminum prices after Australia said it would ban exports of alumina and aluminum ores to Russia in response to Moscow’s invasion of Ukraine; AA tgt raised to $95 from $68 at Argus saying they view Alcoa as a well-run company with a strong track record in its industry; in steel sector, Goldman Sachs raising 2022 steel forecasts as global disruptions support domestic prices

·     Chemicals; HUN was downgraded at KeyBanc following three consecutive quarterly beats and the stock’s outperformance, and noting elevated exposure to EMEA (27% of sales and 40% of HUN’s MDI capacity), including Russia/Ukraine ($150M / 1.6%); APD was upgraded to Overweight at JPMorgan as think that Air Products shares offer a reasonable risk/reward balance at the current price given recent share price movements; CF and MOS advance in fertilizer space

·     Paper & Materials: AMCR said it is suspending new projects and investments in Russia; in paper sector, Jefferies notes RISI reported a $60 / ton price increase went through for containerboard, driven primarily on inflation rather than S/D with lead times normalizing. The price increase will help IP and WRK restore margins, but expect to see some leakage, given the inflation. Pricing momentum in boxboard continued with the full Jan / Feb increases realized, and GPK and WRK have set $50-60 increases for SBS and CRB for April

Technology, Media & Telecom

·     Software movers; PLAN agreed to be acquired by private-equity firm Thoma Bravo for $66 a share, or $10.7 billion, confirming a report overnight by the WSJ https://on.wsj.com/3KZiiMD ; SAP announced that its CFO would resign and Luka Mucic will continue in his role until into next year; CHKP downgraded to Underweight from Neutral with $130 tgt at Piper saying increased growth expectations and margin degradation on anticipated increased hiring may leave shares lagging the broader security and infrastructure group; PANW should benefit from increased cybersecurity needs according to Barron’s this weekend

·     Hardware, Components & Services; BB upgraded from Underperform to Sector Perform w/ $7 PT at RBC Capital saying following the normalization in BlackBerry’s share price back to levels which they believe are more aligned with fundamentals, they are upgrading; AVPT downgraded to Neutral at Goldman Sachs as believe its 4Q revenue miss, lower FY22 guidance, lack of expected profitability, and recent CFO turnover represent headwinds for stock performance ahead

·     Internet, Media & Telecom movers; NLSN said Sunday it wouldn’t proceed with a bid that would have valued the company at $25.40 a share without naming members of the consortium behind the bid; in advertising, IPG was upgraded to Buy from Hold at Argus saying they have a favorable view of IPG’s strong market position and note that many of its agencies have earned ‘best in class designations in their respective disciplines in 2021; Shanghai Disney Resort has announced that it will close on Monday until further notice, citing China’s recent wave of COVID-19 infections; PDD posted a mixed Q4 report as adjusted earnings beat views, though revenue came in below analyst expectations