Closing Recap

Monday, October 04, 2021

Equity Market Recap

·     It was a rough start to the week for U.S. stocks (the 4^th straight Monday the Nasdaq has seen sharp declines) paced by declines in tech amid rising inflation fears, while commodity related sectors such as energy and defensive utilities and staples (somewhat) bounce. After posting its first monthly declines since the beginning of the year in September, investors were hopeful for a recovery to start a historically weak October but came up short today. Between rising inflation concerns, a somewhat hawkish turn on rates/asset purchase tapering from the Fed at its recent meeting, bickering in D.C. on the infrastructure bill and debt ceiling, ongoing China tensions, weaker economic data, and fear ahead of Q4 results kicking off next week, “bears” have been given the ammo they were looking for as major averages pullback near key or below key technicals levels. The Fed’s Bullard said today “we are going to have more inflation than we are used to for some time and high inflation may not dissipate back to the Fed’s 2% goal, while concerned that inflation risks are to the upside” (not exactly “transitory” the Fed has been preaching the last few months). The technology rout continued, especially in large mega-cap Internet players, with FB tumbling on whistleblower claims the company put itself ahead of user’s best interest, AMZN falls for a 6^th straight day, longest streak since Aug 2019 and off 15% from all-time highs, while GOOGL, SNAP, TWTR and AAPL decline.

·     Markets still focused on the infrastructure proposal out of Washington, which was trimmed to $1 trillion while proposed tax hikes have been whittled down too. This week, Democrats will also parse a separate $3.5 trillion bill that addresses climate, healthcare, and childcare, potentially halving that as well. Regarding the debt ceiling, President Joe Biden said he cannot guarantee the government won’t breach its $28.4 trillion debt limit unless Republicans join Democrats in voting to raise it, as the United States faces the risk of a historic default in just two weeks.

·     Also in D.C., top U.S. trade negotiator Katherine Tai pledged to begin unwinding some tariffs imposed by former President Donald Trump on goods from China while pressing Beijing in "frank" talks in coming days over its failure to keep promises made in the Trump trade deal and end harmful industrial policies. Tai said Washington would keep all options open to push China to stop pouring billions of dollars of state subsidies into its semiconductor, steel, and other industries that Washington says harm U.S. companies.

·     Top Sector/stock movers: Auto sector outperforms as TSLA tops $800 for the first time since February after Q3 production and deliveries topped estimates, GM rises as hedge fund Engine No. 1 disclosed a stake in the company, Ford jumped after reporting September sales +34% vs Aug.; FB plummets after 60 Minutes aired an interview with a whistleblower yesterday; social media names weak in general (TWTR, SNAP, ETSY); Separately, FB’s main social media site, popular photo-sharing platform Instagram and messaging app WhatsApp, were down for tens of thousands of users, along with other online social outlets; energy outperforms again with DVN HAL NOV among S&P leaders as WTI Crude hits its highest price since November 2014; China ETF hits lowest level since May 2020, BABA touches its lowest since January 2019 as Chinese names extend recent slides (PDD BIDU JD all lower).

Commodities

·     Oil futures jumped, as WTI crude rises $1.74 or 2.29% to settle at $77.62 per barrel, its highest settlement since Nov 2014, after reports that OPEC+ will stick to its current oil output plan and will raise the monthly overall production by 400,000 barrels per day in November. Meanwhile, natural gas futures jumped 6% to a fresh seven-year high on forecasts power generators will burn more of the fuel this week than previously expected and as record global gas prices keep demand for more U.S. liquefied natural gas exports strong. Gas prices around the world have soared for several days as low stockpiles in Europe and increasing demand in Asia cause the two regions to compete for spare LNG cargoes.

·     Gold prices rise $9.20 or 0.5% to settle at $1,767.60 an ounce, rising to a more than one-week high as a weaker U.S. dollar and risk off sentiment in the equity market lifted demand for the safe-haven metal. Markets also positioning ahead of Friday’s non-farm payroll report. The U.S. dollar index (DXY) slipped vs. rivals, making gold less expensive for other currency holders.

Currencies & Treasuries

·     Treasury yields edge higher but trade in a tight range with the benchmark 10-yr up a few bps around 1.49% (up from 1.464% Friday) ahead of the September nonfarm jobs report due Friday. Investors are looking for indications of how fast the Fed needs to tighten monetary policy as inflation remains a concern and growth pops up on the radar. Fiscal debate in Washington also drawing attention as lawmakers delay key spending decisions. The U.S. dollar slips to a 1-week low against the Japanese yen, while the Canadian dollar gained vs. the buck amid a surge in WTI crude prices to a near seven-year high.

Sector News Breakdown

Consumer

·     Retailers; Wayfair (W) downgraded to Hold from Buy at Gordon Haskett following a review of Q3 data sets, a read-through from the firm’s new macro survey and worrying signals in the home furnishings sector in general on demand and supply chain constraints; TSCO downgraded to Neutral from Buy at Bank America as expect 2022 same-store sales growth to decelerate to 3% following 2021E growth of 13.4% and 202E of 23.1%, with EPS growth decelerating accordingly (but notes l-t, view as a high-quality retailer with a long runway for additional store growth); for firearms (RGR, SWNI, VSTO) U.S. unadjusted criminal background checks fell 9.2% in September from a year ago, according to data from the FBI’s National Instant Criminal Background Check System (NICS). Unadjusted checks decreased to 2.63 million from 2.89 million in September 2020 and declined 3.3% from 2.72 million in August.

·     Auto sector; TSLA said it produced 237,823 vehicles and delivered 241,300 in Q3 (est. around 233K); model S/X production was 8,941 and deliveries were 9,275. Model 3/Y production was 228,882 and deliveries were 232,025; Electric vehicle maker Rivian Automotive (RIVN) has filed the S-1 for its initial public offering (IPO); Ford (F) said September total U.S. sales 156,614, -17.7% YoY while its electrified vehicle sales hit 9,150 in september, up 91.6% over last year; VNE said QCOM and SSW Partners reached a definite agreement to buy it for $37.00 per share in an all-cash transaction, representing a total equity value for Veoneer of $4.5 billion; Chipmaker Wolfspeed Inc to supply silicon carbide power devices for GMs future electric vehicle programs.

·     Housing & Building Products; ZG tgt cut to $145 from $155 at RBC Capital and lowering Q3, Q4, and ‘22E estimates after conducting an analysis of Zillow-owned homes for sale in Phoenix which points to Zillow likely missing iBuying expectations in the quarter; in building products, JELD lowers FY21 revenue view to 10%-12% from 12%-14% and sees FY21 adj EBITDA $470M-$490M, down from $510M-$535M prior.

·     Consumer Staples; NUS guides Q3 revs between $637M-$642M, well below the $721M estimate saying the delta variant created unexpected disruptions in many of their markets; Cowen initiated SKIN with an Outperform rating and $32 target as a category leader with a highly effective facial treatment underpinned by proprietary technology; Into earnings, RBC says just delivering on consensus and keeping FY guidance intact will be enough to satisfy investors given the headwinds affecting the sector, and their top ideas into the print are PG, COTY, OTLY, HSY, MO while STZ, OTLY, EPC, KDP, MDLZ, MO are their top picks over the next 12 months, and they are cautious on BGS, REYN, CL, COOK into this quarter’s print.

·     Casinos, Gaming, Lodging & Leisure sector; IMAX said it garnered $30 million in global box office receipts over the weekend to mark its strongest October weekend ever and its biggest weekend tally since December of 2019; AMC said sets new post-reopening records for global attendance, admission revenues and food & beverage sales for a single weekend; BALY announces $350 million share repurchase authorization; casinos with Macau exposure were weak (MLCO, WYNN, LVS) as the first two days of the Golden Week holiday saw just 3,122 visitors, which is significantly lower than the 22,116 who arrived for the same period last year and is less than 1% of the 2019 traffic level, according to Inside Asian Gaming.

Energy

·     Energy stock movers; oil prices rise early after reports OPEC+ agrees to stick to existing oil output policy; Credit Suisse raises their 4Q21 US natural gas price forecast to $5.75/MMBtu (from $3.50/MMBtu) as the near-term set-up around winter storage inventories and increasingly tight global demand fundamentals have proven more bullish than we had anticipated

·     E&P and Majors; AMPY shares plummet after California beaches in northern Orange County were closed and wetlands contaminated by a huge oil spill caused by a broken pipeline off the coast; XEC and MRO positive mentions in Barron’s saying a surge in the price of natural gas-along with other fuel sources, like coal and propane-is forcing countries to reduce factory production, and could drive heating and electricity prices sky-high this winter; ESTE rises after saying it will buy some privately held assets in the Midland Basin from two sellers for about $73.2M

·     Utilities & Solar; SJI upgraded to Overweight, and IDA downgraded to Underweight in utilities at Wells Fargo saying over the past three months, the valuation premium on high quality small-cap IDA has expanded and, similarly, the discount on SJI has grown; for DUK, several analysts positive on the introduction of a Bipartisan Clean Energy Legislation bill.

Financials

·     Bank movers; Reuters reported some of the world’s top commodity trading houses are being told by brokers and exchanges to deposit hundreds of millions of dollars in extra funds to cover their exposure to soaring gas prices – Glencore, Gunvor, Trafigura, and Vitol are among the commodity merchants facing margin calls on their financial positions in natural gas markets

·     Insurance; SLF agrees to acquire oral health care company DentaQuest, the largest provider of Medicaid dental benefits in the U.S., for US$2.475B. Sun Life says DentaQuest, which has more than 33M members in 36 states and 2,400 employees; in research, JPMorgan downgraded AON to Neutral, ALL named a top pick and remain negative on RNR in P&C sector saying their long-term fundamental outlook for the P&C sector is upbeat, but our views on stocks are tempered. Longer term, we are most constructive on brokers and personal lines insurers. Our long-term stance on commercial lines firms is positive as well, while we remain negative on reinsurers.

·     Bitcoin news; crypto assets looking at add to strong gains last week as Bitcoin rises around $49K midday as sentiment improves after dropping two-weeks ago on China crackdown on Bitcoin; MARA said Bitcoin production increases 91% in quarter-over-quarter to 1,252.4 as marathon secures a $100 million revolving line of credit with Silvergate Bank (SI)

·     REITs; ACC boosted its 2021 FFO view to $2.04-$2.12 vs. its prior guidance of $1.93-$2.07 (above est. $2.03) due to a successful completion of the Fall 2021 lease-up and robust occupancy and rental revenue growth; DOC announced plans to acquire a 1.5msf MOB portfolio for $764M at a 4.9% going-in cash cap rate, substantially exceeding the high end of the range of management’s full-year investment guidance of $400M-$600M; HIW has sold two non-core office buildings in Richmond and Memphis for $119.7M.

Healthcare

·     Vaccine news: MRK extends gains after rallied more than 8% on Friday after promising results from its antiviral Covid pill with Ridgeback Biotherapeutics (shares of vaccine makers such as MRNA and NVAX ended the day sharply lower); BNTX CEO said a new formulation is likely to be needed by the middle of next year to protect against the virus as it mutates, the Financial Times reported; said mutations will emerge that can evade the body’s immune defenses; the Public Health Agency of Canada says that the rates of heart inflammation rarely linked to messenger-RNA-based COVID-19 vaccines are higher following the administration of MRNA vaccine compared to that from PFE; DVAX said it executed an agreement with the U.S. Department of Defense (DOD) for ~$22M over two and a half years to develop a recombinant plague vaccine adjuvanted with CpG 1018

·     Pharma movers; AZN said the FDA granted its cancer treatment Enhertu a breakthrough-therapy designation for the treatment of adult patients with unresectable or metastatic HER2-positive breast cancer; ADVM reports positive follow-up results from its early-stage trial of ADVM-022, its investigational one-time gene therapy injection, in treating wet age-related macular degeneration; TEVA said it has temporarily halted drug production at its Irvine plant in California to address issues raised by the U.S. FDA after a recent inspection (Teva did not specify what issues were raised by the FDA); HRTX said it has filed for U.S. FDA approval of the expanded use of its Zynrelef local anesthetic for postoperative pain.

·     Biotech movers; XENE shares surge after announcing positive data from mid-stage trial of its therapy, XEN110, to treat focal epilepsy; ALNY upgraded to Buy at UBS with $215 tgt saying it offers a proven platform technology with multiple marketed products in early stages of growth and a strong pipeline of clinical stage assets; BIIB and SAGE announce consistent clinically meaningful data for zuranolone across the LANDSCAPE and NEST clinical development programs presented at ECNP; SURF announces new randomized phase 2 clinical study evaluating srf388 in patients with first-line hepatocellular carcinoma in clinical collaboration with Roche

·     Healthcare Services and MedTech Equipment; OSUR said it received a $109 million contract from the U.S. Department of Defense to build additional manufacturing capacity for Covid-19 rapid tests; OPGN said it received a clearance from the FDA to market Acuitas AMR Gene Panel, its diagnostic tool for detecting antibiotic-resistant bacterial infections; CVS, WBA shares active as the first trial of the opioid epidemic is set to begin on Monday, as the Ohio counties of Lake and Trumbull allege that oversight failures at pharmacies run by the companies have led to excessive use of opioids; OWLT shares fall after received warning letter from FDA for smart sock

Industrials & Materials

·     Industrial & Machinery; group mixed as investors rotate out of technology and into materials, industrials and other commodity plays; Industrial sector “axe” Steve Tusa of JPMorgan upgraded shares of JBT to Neutral as believe the Aerotech segment has bottomed, with a multi-year recovery from well below peak levels, combined with renewed strength in Foodtech orders/backlog while downgraded MMM to Neutral after slight underperformance as we see little progress around (1) liability management/ring fence or (2) business execution, with limited visibility from a strategic/investor communications perspective on either; ROP reached a definitive agreement to divest its TransCore business to Singapore Technologies Engineering for $2.68 billion in cash (upgraded at Raymond James to strong buy based off the transaction)

·     Transports; in rails, CNI said it will hold a special shareholder meeting on March 22, 2022, amid a proxy contest with shareholder TCI Fund Management Ltd. TCI, which called for the shareholder meeting, owns about 5% of Canadian National; NSC added to Deutsche Bank catalyst call buy; UNP upgraded to Overweight from Equal Weight at Barclays and up tgt to $260 from $240; in airlines, the IATA (DAL, UAL, LUV) said it forecasts $11.6 bln losses for airline industry in 2022 and revises up estimated losses for 2021 to $51.8B and for 2020 to $137.7B while sees airlines in North America returning to profit in 2022; TGP agreed to be acquired by private equity firm Stonepeak for $17 per common unit, or $6.2 billion, including consolidated and proportionate joint venture net debt and $1.5 billion in common unit equity value

·     Metals & Materials; a standout sector to the upside given further rotation into commodity linked stocks recently; NUE and X are among stocks to play steel industry revival according to Barron’s saying the steel industry is enjoying unprecedented prosperity, as steel prices have nearly quadrupled in the past year to $1,900 a ton. Yet steel stocks sport some of the market’s lowest valuations; in chemicals, DD upgraded to Overweight at JPMorgan as believe that the stock has overdriven to the downside, now reflecting myriad risks including raw materials, and the deferred cycle in auto/electronics, the opposite of what happened in December

Technology, Media & Telecom

·     Internet; AKAM downgraded from Overweight to Sector Weight at KeyBanc following the Company’s announced acquisition of GuardiCore as believe thesis that AKAM would utilize its significant FCF position to return capital to shareholders is unlikely; WISH downgraded to underperform from perform at Oppenheimer, saying the company is facing a perfect storm of negative challenges heading into the fourth quarter and believe online marketplaces including ETSY, FTCH, and AMZN stand to benefit the most heading into the holiday shopping season, while WISH remains the most vulnerable; FB shares a top story today after a former product manager on the civic misinformation team, Frances Haugen, on Sunday accused the co of repeatedly prioritizing profit over clamping down on hate speech and misinformation. Haugen revealed her identity as the whistleblower who provided the documents that underpinned a Wall Street Journal investigation and a Senate hearing on Instagram’s harm to teen girls; U.S.-listed Chinese stocks slip (BABA, BIDU) after the Hang Seng China Enterprises Index slid to a five-year low on Monday amid concerns about Beijing’s regulatory crackdowns and elevated valuations

·     Semiconductors: IIVI downgraded to Underweight from Equal Weight at Barclays and cut tgt to $56 from $65; the SIA published its monthly WSTS report, as total industry sales increased by 31.2% on a YoY basis in August, after increasing by 31.4% YoY in June, memory rose 46.5% YoY while non-memory rose 25% YoY and total semiconductor MoM sales were somewhat better than typical seasonality, up 9.2% versus the historical August average of 7.7% MoM.

·     Hardware & Software movers; GWRE downgraded to Neutral from Buy at Bank America with $125 tgt and lowered price tgt to $125 from $132; PERI raises FY21 revenue view to $430M-$445M from $415M-$430M and raises FY21 adjusted revenue view to $52M-$53M from $50M-$51M; TTD downgraded to Neutral at Vertical Group; PLTR was awarded a contract from the NIH to continue providing a secure cloud-based data enclave to centralize data on COVID-19 for collaborative clinical research