Closing Recap

Thursday, March 31, 2022

Equity Market Recap

·     U.S. stocks close the month with a 2-day losing streak, as stocks tumbled in the final minutes of trading to settle at the lows, posting their worst quarter in 2-years which saw the Nasdaq Composite Index fall into a bear market at one point, more than 20% below its recent high, and the S&P into a correction (was down 12% off highs), before markets staged a massive rebound the last 2-weeks that cut losses by more than half. The Dow Jones Industrial Average and S&P 500 are now just around 4% below their highs. The quarter was marred by a war between Russia and Ukraine, leading to sanctions on Moscow by the U.S. and others that sent commodity prices soaring (oil topped $130 this month, wheat, aluminum, palladium, copper, fertilizers also rise). Markets were also uneasy as the Federal Reserve made an about face on policy, going from super dovish to overly aggressive on interest rate hikes (boosted by 25 bps and expectations for 6-7 hikes in total in 2022) to fight soaring inflation that saw 40-year highs for CPI this quarter. Economic data remains strong reinforcing the ability for the Fed to get aggressive, but how will the impact of soaring commodity, labor costs as well as supply disruption impact the upcoming quarter for U.S. corporations in the coming weeks…on top of rising borrowing costs due to the Fed? Housing stocks were big losers this quarter as mortgage rates hit the highest levels in over 3-years while treasury yields post their biggest quarterly gains since March 1994, seeing a near inversion of the yield curve in recent days in the 2s and 10s. A wild quarter indeed with earnings season about three weeks away and an FOMC meeting in May. Bespoke noted that bearish sentiment has fallen 22.3% points over the past two weeks. That is the largest two-week decline since November 2009. It has been an astounding 2-weeks for stocks to close out the quarter as the Dow has gained 9% from its YTD lows, the S&P 11.5%, Nasdaq 15%, and Russell 200 over 10% all off 2022 intraday lows, paring losses for the quarter across the board.

·     Stock & Sector movers: AMD tumbles after being downgraded at Barclays on concerns over cyclical risk; HPQ DELL slump after being downgraded by Morgan Stanley in tech; WBA rolls despite a quarterly beat after reaffirming its annual outlook that is weaker than consensus; TPX stumbles to 52-week lows after forecasting Q1 sales growth below estimates to weigh on other mattress retailers; RCL CCL NCLH outperforms after the CDC drops its risk advisory for cruise ship travel yesterday; PATH plummets after its weak outlook due to geopolitical uncertainty.

·     Chinese market close out of a rough quarter as equities in Hong Kong and China dropped overnight as PMIs for the nation fell short of expectations. Some major onshore stock China indexes have endured their toughest quarter since the country’s 2015 market crash as the CSI 300 Index lost nearly 15% in the three months to March 31, while the 500-stock Shenzhen Component Index dropped 18% – WSJ

Economic Data:

·     Weekly Jobless Claims rose to 202K from 188K prior week (est. 197K0; the 4-week moving average fell to 208,500 from 212,000 prior week; continued claims fell to 1.307 mln in latest week from 1.342 mln prior; the U.S. insured unemployment Rate fell to 0.9% from 1%

·     Personal income rises +0.5%, in-line with ests and vs. Jan +0.1%, while the personal saving rate was 6.3% vs. Jan 6.1% and Personal Spending rose +0.2%, less than expected of +0.5% and sharply lower than the +2.7% in January; Real consumer spending -0.4% vs Jan +2.1%

·     Inflation data: the Feb overall PCE price index +0.6% vs. Jan +0.5%, while Feb core PCE price index +0.4% vs. Jan 0.5%; on a year-over-year basis, Feb PCE price index +6.4% vs. est. +6% and Jan +6.0% pct, while core PCE y/y rises +5.4% vs. est. +5.5% and above Jan +5.2%

·     Chicago PMI for March reported at 62.9 beating the forecast of 57 and previous 56.3

Commodities

·     Oil prices tumbled, as WTI crude settled at $100.28 per barrel, down -$7.54 or nearly 7% after President Biden confirmed the White House would release a record amount from its Strategic Petroleum Reserve (SPR), while OPEC+ stuck to its existing deal for May output. The record U.S. SPR oil release of 180 million barrels would be the equivalent to two days of global demand and would hit the market over several months as the White House tries to lower fuel prices (but continues to stifle domestic production as the admin restricts pipeline infrastructure). Natural gas prices rose over 50% this quarter to $5.64 mln Btus – for the quarter Natural gas prices rose over 50% to $5.64 mln Btus, while WTI crude gained over 33% for quarter.

·     Gold prices rise $15.00 or 0.8% to settle at $1,954 an ounce, up over 6.9% this quarter; silver prices rose 7.6% for the quarter and copper gained about 6.5% for the quarter. Aluminum prices are on course to surge around 27% this quarter, their biggest gain since 1988, while wheat prices have climbed roughly 33%, headed for the biggest quarterly gain since 2010, as per Reuters.

Currencies & Treasuries

·     Treasury yields post best quarter since 1994, as the 10-year yield jumped to highs above 2.5% this week (down around 2.32% today), after ending 2021 at 1.51% (ended ’21 with 60 bps rise), while the 2-year also around 2.30% after surging over 150bps this quarter (settled at 0.75% end of 2021). Surging inflation and its tightening impact on equities pushed yields higher across the curve as markets await the rising interest rate environment from the Fed in 2022.

·     The U.S. dollar edged higher by 0.5% vs. most currencies after a brief losing streak, as a lack of progress in peace talks between Russia and Ukraine boosted demand for the safe-haven currency. Hopes of a ceasefire earlier in the week faded after peace talks between Ukraine and Russia went nowhere, but peace talks are expected to resume Friday. The dollar rose around 1.6% for the month of March and up about 2.8% for quarter. Cryptocurrency prices have rebounded in March, with bitcoin rising around 13% but down today below $46K.

Sector News Breakdown

Consumer

·     Retailers; KSS sends letter to shareholders to reject activist Macellum’s proposal ahead of annual meeting; FIVE upgraded from Neutral to Buy at Citi and up tgt to $205 after mgmt laid out their long-term financial targets through F25 at its investor day, which call for an industry-leading sales growth CAGR of 19% from F22-25; TPX slides after saying it expects revenue growth of approximately 15% from last year, below the 21% growth analysts expecting to about $1.3 billion; attributed the weaker growth to recent geopolitical events, falling consumer confidence, and outbreaks of new variants of Covid-19; PVH downgrade from Overweight to Equal weight at Morgan Stanley and cut tgt to $89 from $122 saying new, higher tax rate impairs cash flow generation, and see limited catalysts; BBY shares fall sharply after Morgan Stanley downgraded of HPQ, DELL citing caution near-term as PC demand data points are deteriorating

·     Auto sector; TSLA extended the suspension of production at its Shanghai factory by at least another day, sources told Bloomberg. The suspension at the Gigafactory in Shanghai started Monday amid a broad phased lockdown in the region. The break in production is expected to run through at least Friday.

·     Housing & Building Products; Dow component HD trades 52-week lows today and down over 26% YTD; for homebuilders (LEN, KBH, MTH, DHI), Barclays noted “while valuations are now objectively cheap, valuations almost never trough unless interest rates peak and strength is likely to continue to be discounted until a clearer picture emerges on the path of interest rates; US mortgage rates soar to 4.67% in latest week, highest since late 2018

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines CCL, RCL, NCLH along with other travel names bounce as oil prices drop; MSGM downgraded to Hold from Buy and cut tgt to $5 from $12 at Canaccord as reported Q4 results that reflected some progress with NASCAR:21 Ignition game sales, but total revenue of $8.2M missed consensus of $13.7M

Energy

·     Energy stock movers; Crude oil prices slid 5% after reports the Biden administration is weighing a plan to release around 180M barrels of oil from the Strategic Petroleum Reserve (SPR), in what be the largest release from stockpile since it was created in 1975. Meanwhile, OPEC agreed to already-planned oil-production increase by 432,000 b/d in May; in solar, SPWR and FSLR were active after SPWR CEO said in discussions with first solar on residential panels

·     E&P and Majors; Mizuho raised price tgts on several oil companies and upgrade APA from Neutral to Buy with $56 PT – said raise targets for E&Ps by 35% on average, re-emphasizing bullish view on the E&Ps and energy broadly relative to the broader market. In oil services, BKR upgraded to OW (tgt to $43 from $28), LBRT downgraded to EW at Wells Fargo, while maintain Overweight on SLB and GTLSEW on HAL and Underweight rating on NOV; Cowen raised tgt on SLB to $48 from $42 but lowering estimates to reflect supply chain challenges and impacts from Russia; HESM 8.9M share Secondary priced at $29.50 in pipelines

Financials

·     General movers; banks broadly lower with shares of BAC, WFC falling for a 4^th straight day as yields tumble and yield curves flatten; in REITs, CXW and GEO rise after reports earlier the Biden administration plans to lift so-called Title 42 authority by May 23; in insurance; TIG downgrade from Outperform to In Line w/ $5.50 PT (from $6.50) at Evercore/ISI and cut estimates to reflect lower favorable reserve releases following our reserve review showing that other liability could be under pressure over the next few years

·     Bitcoin, FinTech & Payments; FinTech closing out the a rough quarter, with shares of PYPL down -37% YTD, SQ down -14% YTD; yesterday, Bloomberg news reported that AAPL is making a more direct push into Financial Services, which could be seen as increased risk for card issuing/core processing, digital wallet competitors, and FinTech partners; Wedbush was positive on the sector today saying March 2022’s eCommerce survey bodes well for the Networks (V, MA) as well as for both monetization plays, Outperform rated PYPL and Neutral rated SQ; Bitcoin leveraged names pressured as crypto prices slip on the final day of trading with Bitcoin back to $46,500

Healthcare

·     Pharma movers; AMLX falls as an advisory committee of the U.S. FDA voted against the approval of AMX0035, an investigational therapy for amyotrophic lateral sclerosis; SURF to get a $30 million milestone payment from GSK after first patient dosed in a trial testing experimental treatment for solid tumors; ORGS announces $14.8M Private Placement; AKBA said the FDA issued a CRL for vadadustat as a treatment for anemia due to CKD concluding the NDA did not support a favorable benefit-risk assessment for potential use in dialysis and non-dialysis patients

·     Biotech movers; IFRX falls after saying its experimental therapy did not show statistically significant reduction in 28-day all-cause mortality among COVID-19 patients in Phase 3 of a mid-to-late stage study; CLVS said it Rubraca treatment showed a benefit for some ovarian cancer patients and reached its primary endpoints in a Phase 3 trial; NVAX said it has submitted a request for an expanded authorization for its COVID-19 vaccine in the EU for adolescents aged 12 to 17; BNTX has authorized to repurchase up to $1.5B ADRs over the next two years

·     MedTech Equipment; MASI shares slide as guides prelim Q1 product revs $285M-$315M saying shortages of critical components in combination with other supply chain issues, including freight carrier delays, have led to lower-than-expected sales in the first quarter; backs year rev view of $1.35B, but is below est. $1.49B. Stifel said the underperformance appears largely due to two factors: electronic/non-electronic component shortages and transportation delays

·     Healthcare Services; WBA posted a top and bottom line beat as EPS $1.59 beats $1.37 estimate on sales $33.7B vs. est. $33.2B, but only reaffirmed year outlook despite the beat (and fell short of consensus); Wells Fargo cautious on hospitals (THC, HCA, UHS) saying a survey of 25 finance executives about expectations of operating environment post covid, neg read though for the group as 60% expect margins to be lower than pre-covid and 84% expect higher labor costs as a % of revenue

Industrials & Materials

·     Transports; overall index traded in tandem with broader markets as airlines were among early leaders UAL on falling oil prices and rising hopes of increased demand given lower Covid cases; shares of less-than-truckload (LTL) companies SAIA, ODFL added as a Catalyst Call Buy ahead of 1Q reporting season as believe the spike in fuel in early March has potential to boost LTL company margins in 1Q; HUBG was downgraded at Stephens

·     Metals & Materials; RKDA shares fall after Q4 sales fell to $2.2M from $7.1M a year earlier and its net loss widened to $9.3M from $8.9M, hurt by impairment charges and higher costs; CCJ upgraded to Outperform at BMO Capital in uranium sector as think Cameco’s advantageous geographical production base and its position as the largest and most liquid uranium stock means there should be further upside to its stock price; in agriculture, MOS, NTR, AGCO, DE shares popped midday after crop report showed U.S. Farmers to plant less corn than soy first for the first time since ’18; lithium producers LAC, LTHM, ALB rise a second day after a report yesterday that President Biden could invoke a law to encourage domestic production of minerals needed to make electric-vehicle batteries.

Technology, Media & Telecom

·     Semiconductors; AMD was downgraded to equal- weight from overweight at Barclays, saying they see corrections across several end markets and move to the sidelines until they have better clarity; Bloomberg reported overnight that AAPL is considering sourcing memory chips for its iPhones from China, following a production disruption out of Japan earlier this year, saying it is testing NAND flash memory chips from Yangtze Memory Technologies; INTC said it is buying Israel-based developer and optimization software company Granulate Cloud Solutions Ltd. for an undisclosed sum; AVGO commencement of private offering of senior notes

·     Software movers; PATH tumbles as reported strong FQ4 results with ARR growth accelerating to 59.4% y/y and record net new ARR of $106.9M growing 72.2% y/y, but guidance fell well below consensus with full-year ARR of $1.200-1.210 billion (29.7-30.8% y/y) vs. consensus $1.264 billion (40.0% y/y); VIPS announces $1 billion share repurchase program; WB announces $500M share repurchase program; Unity (U) tgt to $145 from $154 and ests adjusted at BTIG following checks related to Unity Ads and non-gaming Create opportunities; KC announces stock buyback

·     Hardware, Components & Services; in PC sector, recall yesterday TSM CEO was quoted as saying demand for smartphones, PCs starting to slow; today Morgan Stanley upgraded CDW to Overweight on the back of attractive valuation and a diversified IT portfolio, but the firm downgraded DELL to equal weight and HPQ to underweight and cut tgt saying as they are more cautious in the near-term as PC demand data points are deteriorating; FLEX said still sees FY adj EPS $1.85-$1.90 vs. est. $1.89; still sees FY rev $25.4B-$25.8B vs. est. $25.65B and reaffirms Q4

·     Internet, Media & Telecom movers; IQ said it was identified by the U.S. SEC under the Holding Foreign Companies Accountable Act of the United States (the "HFCAA") on March 30, 2022; cable and media names were among top decliners in TMT, with CMCSA, CHTR, DISCA, DIS down