Closing Recap

Tuesday, March 22, 2022

Equity Market Recap

·     Stocks remain on cruise control higher as the S&P 500 reclaimed its 200-day moving average while topping the 4,500 level (first time above level since 2/22 and up more than 350 points off its lows just six days ago) as market goes from despair to froth in less than a week. Major averages top key resistance levels with ease/no pushback the last few days (S&P reclaims 50, 200-day moving averages of 4,424 and 4,472 respectively), while the Nasdaq gains about 1,500 points in 6-days, crossing back above the 14K level (and above the 13,830 50-day MA). Nothing has failed to derail this rally even remotely, which has significantly trimmed YTD market losses by more than half despite rising interest rates (and more aggressive Fed outlook), 3-year high Treasury yields, 40-year high inflation data and uncertainty geopolitically with the situation in Russia/Ukraine. But investors continue to climb the proverbial “wall of worry”, never looking back with markets ripping. Coming into today, Bespoke noted that the S&P 500 has risen 0.33% or more in the last hour of trading for five straight days. Longest streak in over a decade. The market momentum to the upside over the last week, given the recent macro developments has been astounding. The market is pricing in 7-interest rate hikes for this year – which has pushed the 10-year to 3-year highs. Growth stocks again shrug off the surging yields.

·     Stock & sector movers: NKE jumps after posting a beat on the top and bottom lines highlighted by robust DTC growth and a sequential improvement in China sales that were better than expected; Chinese stocks outperform after regulators asked companies to prepare for more audit disclosures in an attempt to appease US regulators; within the space, BABA spikes to recoup nearly all its YTD losses (still down >50% over past year) after boosting its buyback program by $10B while TME also soars after a mixed earnings report; CCL goes green late with broader market rally after being red on a wider than expected loss with lower revenues and underperforms other travel names RCL NCLH UAL DAL; yields rise again with the 10-year approaching 2.4% to its highest levels since May 2019 to boost financials WFC SBNY SIVB among S&P leaders, AIG WRB BRK/A CB PGR 52-week highs in insurance; in FinTech SQ soars after Credit Suisse was positive on teens’ use of Cash App with today’s high more than 75% above Feb. 24’s 52-week low; crypto space rallies with outperformance in Bitcoin, Ethereum as RIOT COIN rally.

Commodities

·     Oil prices dipped, with WTI crude down -$0.36 to settle at $111.76 per barrel, off earlier lows of $109.30, but also off morning highs above $115 as the dollar was flat. Prices jumped over 7% on Monday on expectations the European Union would pursue an embargo on Russian oil, joining other countries. EU foreign ministers have been split on whether to join the U.S. in banning Russian oil. Earlier this month, Brent hit $139 a barrel, the highest since 2008 and WTI crude month highs stand above $130. Natural gas prices climb above $5.007/MMBtu, highest closing price since March 4. Gold prices drop -$8.00 or 0.4% to finish at $1,921.50 an ounce, extending a recent downturn given the surge in Treasury yields and rotation out of havens into risky assets with stocks on track to close near its highest level of the day for the 5^th time in 6-days.

Currencies & Treasuries

·     Another day, another rip fest for Treasury yields across the curve, and another day that stock markets were unphased. The 10-year US Treasury yield moved up 6-bps to 2.38% and is now up from 1.51% at the start of the year and a closing low of 0.52% in August 2020. The move has come in anticipation of and now the follow through action of the FOMC raising interest rates to fight surging inflation, after boosting 25 bps last week and Fed futures showing 7-hikes this year. Note the highest level in the last 10 years for the 10-year is 3.24% in November 2018, and that was when the U.S. inflation rate was 2.2% versus 7.9% today. The 2-yr was up 3.6bps to 2.17%, the 3-yr up 2.5bps at 2.367%, 5-yr up 2.4bps to 2.364%.

·     The U.S. dollar was mixed, slipping vs. most major currencies after a move higher Monday after comments from U.S. Federal Chair Jerome Powell faded and a rise in equities markets help boost risk-on sentiment. Traders are pricing in a 66.1% chance of a 50-basis point hike at the Fed’s May meeting, according to CME’s FedWatch Tool, up from slightly more than 50% a week ago, following Powell comments yesterday, which has rallied the buck. The yen continued its recent weakness as the Bank of Japan renewed its stance on keeping its ultra-loose monetary policy intact, as the yen hit a fresh six-year low of 121 and last weakened 1% vs. the greenback. In cryptocurrencies, Bitcoin rose over 3% to $42,600

Sector News Breakdown

Consumer

·     Retailers: NKE beat on the top and bottom line, while reporting progress on supply chain congestion and better than feared trends in key growth region Greater China (to -8% YoY from -24% in F2Q), while North America & Europe were at/above expectations; JILL Q4 EPS $0.15 vs est. ($0.03) and revenue $145.2M vs. est. $142M; EBITDA $15.2M vs consensus $12.3M; for FTCH, Bank America with deep-dive into the 6 most attractive opportunities ahead which will make 2022 a transformational year for FTCH and its P&L: 1) FPS, 2) New Guards Group, 3 Fulfilment By Farfetch, 4) Farfetch Media Solutions, 5) take-rate increase, and 6) Beauty

·     Auto sector: TSLA comes into the day with a 5-day win streak, longest since November as plans to deliver the first-ever Model Y sedan made in its $4.4B Berlin factory which is ultimately slated to produce around 500,000 vehicles a year; for GM, Morgan Stanley cutting EV/AV valuation by nearly ½, taking ICE valuation to well above zero. Target to $50 from $55 previously and reiterate EW for Ford (F) cut ests, raising ICE valuation to $40bn. Target unchanged at $13; HTZ announces proposed private offerings in the aggregate amount of $1.15 billion medium term rental car asset backed notes

·     Consumer Staples: in tobacco, MO upgraded to Buy from Neutral at Goldman Sachs and raise tgt to $57 from $48 as sees a better relative risk/reward for the tobacco company relative to PM, which was downgraded to Neutral. Views Altria as an attractive investment in the current risk-off environment as investors become increasingly concerned about stagflation; in staples, PG upgraded to Buy from Hold and raise tgt to $175 from $165 at Truist while KDP downgraded to Hold from Buy with $40 tgt saying thesis is straightforward saying when the coffee systems segment puts up an uneven performance, investors value the stock as a hybrid vs. beverage stocks; FAT reports Q4 EPS ($1.16) vs consensus ($0.29) and revenue $74.2M vs consensus $57.5M and prior year $6.5M as system-wide sales growth +308% y/y

·     Casinos, Gaming, Lodging & Leisure sector; in casinos, WYNN tgt cut to $73 from $81 at UBS, LVS tgt cut to $47 from $53, and MGM to $46 from $48 and lowering Macau gross gaming revenue (GGR) estimates by -28% to -15% in ’22E-’23E, with mass reaching 90% of pre-Covid levels and VIP at 25% of pre-pandemic levels by 2023E; in cruise lines, CCL Q1 adj net loss (-$1.88B) vs. est. loss (-1.39B), said ended Q1 with $7.2B of liquidity, with in-line revs of $2.26B

Energy

·     E&P, Services and Majors; Goldman upgraded SLB to Conviction Buy from Buy and downgraded BKR to Buy from Conviction Buy; Citi said direct air capture could add $8.40 to OXY share price over the next 10 years and they await more detail at the company’s analyst day this week

·     Refiners: Credit Suisse upped their target on PBF to $20.75 from $16.50 and raised their 2022-23 EPS estimates after the company’s earnings call provided updates on its Chalmette RD project

·     Utilities & Solar; Citi initiated Buy ratings on AES with a $27 PT as they believe its California power assets will have extended lives, its renewable development business will gain share, its FLNC stock is undervalued, and higher power prices will support more favorable contract rolls and DUK with a $120 PT on its attractive position with the ongoing electric fleet decarbonization driving incremental capital spending opportunities, a favorable regulatory backdrop, and potential accretive LDC sale near-term and are Neutral on PEG with a $69 PT as geopolitics could result in a negative outcome for its nuclear power assets leaves them cautious despite attractive regulated EPS growth and longer-term upside from offshore wind

Financials

·     Bank movers; after a few days of lagging broader markets given the inversion of the yield curve for 10’s vs. 3, 5, 7-yr yields, group saw some early strength in large cap and regional banks; group was top leader in the S&P 500 index along with insurance names – WFC, C, BAC, SBNY; AIG, WRB, BRK among insurance names hitting 52-week highs

·     Bitcoin, FinTech & Payments; for AFRM, Credit Suisse said Affirm’s February securitization data continue to show relatively strong performance on Affirm’s Z securitizations (used for longer-term 0% APR loans which are for very good credit quality customers) with negligible delinquency and loss; SQ Mizuho positive- raise PT to $190 from $180 and reiterate Buy saying survey of more than 200 parents with teenage kids found that Cash App is rapidly emerging as a leading financial app for teenagers; shares of MARA, RIOT, COIN, MSTR jumped along with Bitcoin rebound

·     Services, Lending, Consumer Finance; UPST downgraded to Underperform at Wedbush and cut tgt to $75 from $110 based on weakening delinquency trends on recent 2021 vintage securitizations that appear to be deteriorating at a faster pace than its 2018, 2019, and 2020 vintages; HOOD launched its zero-fee cash card allowing users to get rewarded for investing and spending

Healthcare

·     Pharma movers; in cannabis, CRON upgraded to Equal weight from Underweight and trim tgt to $5 at Barclay’s and the firm downgraded CGC to Underweight from Equal Weight and cut tgt to $6 from $9; ALGS discontinues development of its antisense oligonucleotide drug candidate alg-020572 in subjects with chronic hepatitis b and pivots internal strategic emphasis to its small molecule portfolio; large cap pharma names underperformed with PFE, LLY, ABBV failing to rally as investors rotated out of defensive healthcare

·     Biotech movers: MRNA announced that it is expanding its mRNA pipeline with two new development programs. This announcement reflects the company’s commitment to expanding its portfolio by building on Moderna’s experience with Spikevax, its COVID-19 vaccine; ORIC downgraded by two analysts (Citi and Opco) following discontinuation of ORIC-101

Industrials & Materials

·     Industrial, Aerospace & Defense; HLIO was upgraded to Buy at Stifel citing opportunities for growth, margin, and capital deployment at the maker of hydraulics and electronics products after a meeting with the company’s executives

·     Transports: CP announced that it has reached agreement with the Teamsters Canada Rail Conference (TCRC) Train and Engine Negotiating Committee to enter binding arbitration and will immediately begin working with customers to resume normal train operations; rail volumes were down 1.7% vs. down 2.6% YoY in the prior week. Amongst the public class I rails, all rails were down YoY, except for UNPup 1.8% YoY; RAIL reported higher quarterly revenue and raised its delivery outlook for 2022.

·     Specialty Chemicals: ECL upgraded to Buy from neutral while lower tgt to $196 from $210, SHW upgraded to Buy from Neutral while lower tgt to $296 from $325, and upgraded UNVR to Buy from Underperform at Bank America, but the firm downgraded shares of FMC, LYB and VNTR to Underperform in the chemicals sector as persistent raw material inflation and a shift in interest rate policy has driven a rerating in specialty chemical equities; SON boosted its base Q1 earnings to $1.70-$1.80, from $1.25-$1.35 and expects operating results to be significantly better than previously expected due to strong price/cost recovery

·     Fertilizers, MOS reports January-February Potash sales $604M vs. $295M y/y and reports sales volume 1.05M tons vs. 1.24M tons y/y; in research, Citigroup rank order is NTR, CF and MOS (Neutral) and among Ag chemicals prefer CTVA over FMC. Firm maintains bullish stance on Ag, which we started last year. The Russia-Ukraine conflict has caused fertilizer prices to spike on supply concerns in already tight NPK markets. Urea prices are up ~24% YTD, DAP is up ~33% and Potash is up ~14%. We are raising base-case estimates on fertilizer names on extended high-price environment and stress-test our models for bull/bear scenarios. Grain markets are also tight and high prices should continue to support demand for fertilizers

·     Metals & Mining: PKX said it will invest $4 billion in a new lithium mining project in Argentina, as the company seeks to tap into soaring demand for the key rechargeable battery metal. Posco expects to initially produce 25,000 tonnes of lithium hydroxide; gold miners (AUY, NEM, AEM) were falling back with gold prices and rotation out of haven assets for riskier stocks

Technology, Media & Telecom

·     Semiconductors: NVDA hosted its 2022 Analyst Day on Tuesday, in conjunction with the company’s GTC conference and unveiled a new data center GPU chip; Citigroup cut tgts on SWKS to $152 and QRVO to $142 and lowering Mar/Jun-Q estimates below Street on continued China smartphone weakness according to February CAICT monthly data. Moreover, our supply chain discussions indicate Chinese smartphone makers Oppo/Vivo, with high 70% market share in Russia, are cutting orders on lower demand and currency devaluation. World Semiconductor Trade Statistics shows global semiconductor market sales at $556B in 2021 – an increase of 26.2% from 2020 but said Worldwide semiconductor market is expected to increase by only 10.4% in 2022 which corresponds to sales of $613.5B.

·     Software movers: high growth software names outperformed in broad rally in tech – SNOW, CRM, CRWD, MDB, TWLO, etc.; OKTA said it has found no evidence of continuing malicious activity after hackers circulated images they said were of the company’s internal system; MANH upgraded to Outperform at Raymond James as believe the company’s product innovation and cloud monetization opportunity is much larger than investors appreciate.

·     Internet, Media & Telecom movers; BABA increased its share repurchase program to $25 billion from $15 billion; BZFD said it expects reported revenue to grow by about 30% in the current quarter and sees Q1 adj loss before Ebit between $15M-$20M; FSLY tgt lowered to $16 and reit Underperform at Bofa as believe the secular pressure on CDN growth may continue to pressure Fastly in the foreseeable future, until the security or edge cloud businesses reach sufficient scale; NOK said that it has extended its partnership with TMUS Polska to include the upgrade of the operator’s existing radio network infrastructure and rollout of 5G services across Poland; YEXT announced a $100M buyback