Closing Recap

Wednesday, May 12, 2021

Equity Market Recap

·     U.S. stocks sink across the board as inflation data rises to its highest levels in 12-years, renewing concerns that the U.S. economy is running to “hot” and may force the Fed’s hand to intervene sooner than they have forecasted. The consumer price index jumped 0.8% last month, the largest gain since June 2009 (CPI rose 0.6% in March). A 10.0% surge in prices of used cars and trucks, the most since the series started in 1953, accounted for over a third of the increase in the CPI last month. Food prices increased 0.4%. The Fed’s Vice Chair Richard Clarida said on Wednesday that the twin surprises of weak jobs growth and stronger inflation in April hadn’t dented the Federal Reserve’s plans…and it will be "some time" before the U.S. economy is healed enough for the U.S. central bank to consider pulling back its crisis levels of support. All eyes on the April Producer Price Index (PPI) tomorrow, which is also expected to show an increase.

·     The CBOE Volatility index (VIX) rises to its highest levels in two-months above the $27 level (more than a 20% pop as of late day). Surging commodity prices (lumber, copper, corn, iron ore, soybeans) and labor shortages have boosted market fears that despite reassurances from the U.S. Federal Reserve, near-term price spikes could translate into longer-term inflation. With today’s decline, the Dow Jones Industrial Average has now posted a decline of more than -1,500 point after hitting record highs on Monday of 35,091 and Dow Transports a 700-point decline from Monday 16,170 record high (after rallying 14 consecutive weeks).

·     Top sector/stock movers: S&P and Nasdaq fall for the third consecutive day after CPI data shows inflation above expectations, lifting treasury yields; energy stands out with OXY, FANG, VLO, HFC, APA among the S&P’s top performers after U.S. gas prices hit their highest levels in 7 years following the Coastal Pipeline hacking last week; Banks JPM, WFC, C also outperform with the rising yields; LITE crashes to its lowest levels in almost a year (5/15) after its quarterly revenue and guidance misses estimates; ARRY plunges to record lows more than 70% off January’s highs and 26% below October’s IPO price after several analysts downgrade the stock following its EPS miss and pulled guidance amid supply-chain challenges; transports dropped on rising oil costs.

·     Ira Sohn Annual conference took place today: 1) David Einhorn pitched TECK, FCX long as a copper play; 2) Glenview’s Robbins pitched SPACs FAII, TBA and FST while also talking up shares of five undervalued management stories DXC, MYGN, BKD, MCK, and WBA; 3) Ram Parameswaran of Octahedron Capital positive on PTON saying its shares may rise by 4x in the next 4 to 5 years; 4) Impactive Capital’s Lauren Taylor Wolfe pitches KBR as a firm in transition to a green economy; 5) BBIO positive mention by Perceptive Advisors managing director in biotech space; 6) D1 Capital’s Dan Sundheim was positive on CVNA as expects in 15 years there’s the potential for about 30% of used car sales will be done online.

Economic Data:

·     Consumer Prices (CPI) April headline numbers hotter at 0.8% (highest number since June 2008) vs. est. 0.2% and core CPI MoM figures at 0.9% (highest since 1981) vs. est. 0.3%. On a YoY basis, CPI headline data rises to 4.2% vs. est. 3.6% and core CPI YoY rises 3.0% vs. est. 2.3%. April CPI energy -0.1%, gasoline -1.4%, new vehicles +0.5%

·     Producer Price Index (PPI) estimates tomorrow also expected to rise as the MoM estimate for April at 0.3% and core PPI MoM est. 0.4% while on a YoY basis, final PPI demand est. 5.9% and PPI YoY core est. 3.7% – follows the March 2021 PPI reading of 4.2% (which was the highest reading since September 2011’s 4.5%)

·     The U.S. government posted a $226 billion budget deficit in April, a drop of $512 billion or 69% from the gap in April 2020, the first full month of COVID-19 lockdowns, as pandemic-related outlays fell and revenues rose sharply. The Treasury Department said that the deficit for the first seven months of fiscal 2021 still hit a new record of $1.932 trillion, a 30% increase from the same period of fiscal 2020.

Commodities

·     Oil prices finish higher, with WTI crude rising $0.80 or 1.23% to settle at $66.08 per barrel but ended off earlier highs of $66.63 as bearish inventory data weighed on sentiment. The average U.S. price of gasoline pierced $3 a gallon for the first time in 6 1/2 years as stations along the East Coast ran low on fuel after the Colonial Pipeline was shut by a cyberattack.

·     Gold prices slump with June gold down -$13.30 or 0.7% to settle at $1,822.80 an ounce in choppy trading after April’s jump in U.S. consumer prices boosted the dollar and U.S. Treasury yields and reduced appetite defensive/safe-havens. While gold is viewed as a hedge against higher inflation that could follow stimulus measures, higher Treasury yields have weighed on gold, which is down over 3% for the year so far. Spot palladium falls over 3% to $2,848.68/oz (after hitting record highs above $3,000 last week)

Currencies & Treasuries

·     The U.S. dollar was higher vs. major currencies along with a pop in Treasury yields after the higher CPI reading. A perfect storm of supply and demand side factors including monetary and fiscal stimulus boosting consumer spending is leading to increasing costs across various economic segments. The Canadian dollar (CAD/USD) traded to its best levels since May 2015 (1.2063) against the U.S. dollar as oil prices rose and investors bet that the Bank of Canada would be more sensitive to rising inflation than the Federal Reserve (but prices pared back).

·     Treasury yields end higher, with the U.S. 10-year yield climbing above 1.69%, highest since April 13 before paring gains late day following a better 10-year Treasury auction. The U.S Treasury sold $41B in 10-year notes at a yield of 1.684% vs. 1.697% when issued prior, with a bid-to-cover (demand) at 2.45 and indirect bidders awarded 63.38% and directs 17.13%. All eyes again on the Producer Price Index (PPI) results tomorrow morning now.

Sector News Breakdown

Consumer

·     Retailers; GPS said it is resuming its $1B buyback program that was suspended in March 2020 and expects to purchase up to $200M this fiscal year of the $800M remaining; WWW reported in-line Q1 adj EPS 40c on revs $510.7M vs est. $511.8M, guided FY adj EPS $1.95-2.10 (est. $2.08), and sees FY revs $2.24-2.3B (est. $2.24B); RBC downgraded DG to Sector Perform as its growth may slow compared to other retailers as fading stimulus and rising food/gas prices squeezed their existing customer base; HBI was upgraded to Buy with a $25 pt at Stifel and to Equal-Weight at Wells as both are now more confident in the company’s management and strategies; Credit Suisse lifted their estimates on ASO and their price target to $39 from $32 after the company’s strong preliminary Q1 update yesterday; BTIG upped their target on YETI to $100 ahead of tomorrow morning’s earnings report as their Q1 checks throughout the quarter showed continued robust demand with traffic to the company’s website +94% YoY

·     Auto sector; watch impact on auto markets after hotter CPI data: the index for used cars and trucks rose 10.0% in April. This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase – auto stocks F, GM, TSLA, TM, NSANY were active as well as auto retailers AN, SAH; ALV reinstates and declares quarterly dividend; QS tumbles after quarterly results; Hertz (HTZGQ) advanced after approving $6B plan to exit bankruptcy

·     Consumer Staples; GO downgraded to Hold from Buy at Deutsche Bank while cuts tgt to $37 from $43 saying they are incrementally concerned about the company’s near- to medium-term sales outlook, while Hallum cut to Hold with $40 tgt also on Q2 outlook; STKL reported mixed results that missed on the top-line but beat on the bottom-line but better than expected plant-based revenue drove adj. EBITDA of $18.3M; BGS Q1 EPS $0.52 on revs $505.1M, both below consensus of $0.55 and $524.6M with weaker EBITDA $92.9M vs. consensus $96.3M

·     Restaurants; WEN Q1 adj EPS 20c tops the 14c consensus on higher revs of $460.2M vs. est. $444.31M while raises FY21 adjusted EPS view to 72c-74c from 67c-69c and boosts FY21 global systemwide sales growth view to 8%-10% from 6%-8%; PZZA announces repurchase and conversion of all convertible preferred stock owned by Starboard Value; DPZ shares touch record highs after Bill Ackman reveals a ~6% stake in the company

·     Casinos, Lodging, and Gaming sector; MGM resorts returning to full gaming floor occupancy at Las Vegas properties after the Nevada Gaming Control Board approves a waiver allowing 100% occupancy and no social distancing; Bernstein said they see pricing resiliency in MAR and are confident there will not be material pricing weakness on the other side of the crisis as there are clear signs of a solid demand recovery;

·     Leisure and Services; OSW Q1 EPS loss (17c) vs est. (20c) on revs $5.6M (-95% YoY) vs est. $3.8M and said it expects to resume sailing on an additional 31 ships by the end of July and has sufficient liquidity to sustain operations through June 2022 with no significant voyages; in boating, MCFT Q3 results easily top consensus and said sees 2021 adjusted EPS growth up in high 120% range YoY; EDU and TAL slip early after a report that China is working on new rules to clamp down on the tutoring industry. The changes being worked on by China’s Ministry of Education and other regulators are aimed at before-and-after school K-12 tutoring, according to a Reuters report, which cited 3 people familiar.

Energy

·     Energy stock movers; oil stocks (FANG, COP, MRO, etc.) edging higher again in supply concerns as the biggest U.S. pipeline (Colonial) remained closed following a cyberattack at the end of last week. Filling stations across the east coast have begun reporting gas shortages since Colonial Pipeline was hacked on Friday. The pipeline delivers around 45% of all refined fuels along the eastern U.S. coast between Texas and New York, said it continues to make progress in restoring its network to full capacity. Gas prices in the U.S. hit the highest levels in seven years on Tuesday. the American automobile association said average pump prices hit $2.99 cents a gallon across the united states this week, the highest since late 2014.

·     Inventory data: the American Petroleum Institute (API) showed a draw of 2.53M barrels of oil for the week ended May 7, showed a build of 5.64M barrels, distillate inventories show a draw of 872K barrels and Cushing inventories show a draw of 1.21M barrels. The EIA said weekly crude inventories fell a smaller -0.4M barrels vs. -2.8M consensus and vs. -8.0M last week, while gasoline rose +0.4M vs. -0.6M consensus

·     Utilities & Solar; ARRY shares tumble after EPS of 19c missed estimates and revs slide 44% to $245.93M from $437.7M a year ago, driven by a reduction in the amount of ITC safe harbor related shipments (beat ests of $240.8M) while warns that continuing increase in steel and freight costs will impact margins in the Q2 and subsequent qtrs if prices do not normalize; AWK downgraded to Hold from Buy following a strong run-up in the share price at Argus

Financials

·     Investment bank/bank movers; HLI Q4 adj EPS $1.51 vs. est. $1.14 on revs $501M (+65%) vs. est. $370.3M, and raised its quarterly dividend by 30% to $0.43; Piper upgraded CSTR to OW as they are encouraged they have a path to above-peer profitability following recent management meetings; monthly Assets Under Management (AUM) data out today: APAM AUM $168.9B in April vs $162.9B in March, BEN preliminary AUM $1.529T vs $1.498T at end of March, IVZ preliminary AUM $1.459T, +3.9% from March; VRTS AUM $176.2B from $168.9B at end of March; LAZ April AUM $274.4B vs $264.85B in March; TROW preliminary assets under management of $1.59T as of April 30 rises 4.9% from $1.52T at the end of March.

·     Insurance; AJG said it expects to finance its $3.57B acquisition of certain WLTW assets with a combination of long-term debt, short-term borrowings, free cash, and common equity; LMND posted a Q1 EPS loss of (81c) that was worse than the expected (78c) loss on revs $23.5M vs est. $21.9M, and issued guidance for Q2 of revs $26-27M (est. $26.24M) and adj EBITDA loss of ($43M)-($40M) and for the full-year of revs $117-120M (est. $115.56M); SLQT reported Q3 EPS $0.22 vs. est. $0.24 on revs $266.9M vs. est. $261.1M, guided FY revs $920-940M (est. $934.9M), and sees FY adj EBITDA $225-235M (est. $237.4M); Credit Suisse maintained SLF as their Top Pick among Canadian life insurers, raised their pt on GWO to C$37 and lowered their MFC pt to C$27 and remains optimistic on the group after reporting relatively in-line Q1 results; THG increased their share repurchase authorization by $400M to $1.3B

·     Consumer Lending; LPRO Q1 EPS 10c vs. est. 14c on revs $44M vs. est. $40.9M and reaffirmed previously issued 2021 guidance for revs $184-234M and adj EBITDA $125-168M; UPST Q1 adj EPS 22c and revs $121 topped estimates of 15c on $116.06M, sees Q2 revs $150M-$160M above est. $117.13M and adjusted EBITDA $23M-$27M, and raised full-year revs guidance to about $600M (est. $503.1M) from previous $500M

·     Consumer Finance; INTU lowers its Q3 adj EPS view to $6.00-$6.05 from $6.75-$6.85 (est. $6.73) and revs to $4.165-4.17B from $4.605-4.655B (est. $4.59B) for the quarter to reflect shift for filing deadline extension, though it expects to exceed full-year 2021 guidance; OPEN reported in-line Q1 EPS loss (48c) on revs $747.3M that bested est. $620.2M, adj EBITDA loss ($2.14M) narrower than est. ($30.8M) loss, and Wedbush raised their price target to $33 as they say the company’s revenue and guidance sets it up to reach its 2023 revenue targets a full year early

·     Services; MGI and Coinme Partner to expand access to Bitcoin-First-of-its-kind partnership makes it fast and easy to buy and sell bitcoin with cash through participating MoneyGram retail locations; HCKT Q1 EPS 27c vs. est. 25c on revs $63.4M vs. est. $62.17M, sees Q2 EPS 28c-30c (est. 25c) on Q2 revenue $64.5M-$66.5M (est. $64.09M)

Healthcare

·     Pharma & Biotech movers; NVAX downgraded to Neutral at JPMorgan saying among the several disappointing updates from the recent earnings print / call, the most troubling to us is the clear challenge the company still faces in manufacturing its vaccine candidate at large scale; INO said its covid-19 vaccine candidate induces broad immunity against major viral variants; NERV announced positive results from an open-label extension of a phase 3 trial of its schizophrenia candidate roluperidone; CRIS shares jump after announcing updated data from its ongoing open-label, single arm, Phase 1/2 study of CA-4948 in patients with acute myeloid leukemia (AML)

·     MedTech Equipment; NEOG announces a 2 for 1 stock split at close of biz on May 26; Mizuho raised price tgts on DGX to $158 from $149 and LH to $310 from $267 based on a strong 1Q:21. More importantly, our newly raised estimates do not include upside potential from federally funded COVID-19 screening programs for K-12 students; EYS rises after saying it had positive results in its two-year Early Feasibility Study of the Orion Visual Cortical Prosthesis

·     Healthcare Services; Mizuho updated estimates post recent earnings and increasing price targets for CVS and WBA to $98 (from $82) and to $55 (from $47) respectively as continue to expect CVS and WBA to be key players in the distribution of a vaccine

Industrials & Materials

·     Aerospace & Defense; BA got a bump late morning after FAA administrator Dickson says he has "absolute confidence" in safety of Boeing 737 Max and that is performing better or as well as any other plane right now; TDG upgrade from Hold to Buy w/ $667 pt at Vertical saying positive signs in the bookings – While aerospace sales were similar to last quarter, TransDigm did see a significant sequential pick up in bookings; PFE said funds drone-delivery service zipline for vaccine effort (drone makers were active – EH, UAVS)

Technology, Media & Telecom

·     Internet; WIX reported strong 1Q results with revenue well ahead of expectations and collections and FCF both ahead as well, however, 2Q guidance at the mid-point was below consensus, and FY guidance, while raised for revenue and collections was mixed; CURI slides after disappointing Q1 results as EPS larger at ($0.39) vs est. ($0.20) on revs $9.9Mm also below est. $10.6Mm, subs +28% to about 16Mm

·     Semiconductors; chip names slip (INTC, AMD, NVDA, QCOM) after Taiwan’s health minister warns the island could move to a high alert level following its report of largest daily rise in domestic COVID-19 cases on Wednesday (Taiwan an integral part of the global semiconductor supply chain); the Philly semi index (SOX) dropped over 4% to below 2,850

·     Software movers; video gamer EA delivered a strong finish to FY21, with Apex Legends reporting a record quarter and sequential growth throughout the year and FY22 guide was better than expected; NLOK upgraded to Buy from Underperform with $30 tgt at Bank America saying the company demonstrated improvements on multiple fronts such as better growth; BIGC posted a high-quality beat as ARR further accelerated, remaining above 40% for the second consecutive quarter, with Subscription revenue benefiting from strength in enterprise growth; SSTI reported top and bottom line beat and lifted `21 rev guidance

·     Hardware, Components & Services; DT reports Q4 revs of $197M above the $191.8M estimate while forecasts Q1 revenue to stand in the range of $202M-$204M vs. vs. est. of $197M while Q4 subscription revenue, representing 93% of total revenue stands at $183M; in opticals, LITE shares tumble after Q3 revs of $419.5M missed the $433.5M estimate (EPS in-line), while guidance for the upcoming quarter well below views at $360M-$400M vs. est. $408.9M

·     Telecom & Media movers; FUBO surges after printed a beat & raise Q1, with revenue, subs, and ARPU well above the Street, driven by improvement in retention rates, product (personalization and content discoverability), engagement, and the addition of ESPN content.