Closing Recap

Friday, September 10, 2021

Equity Market Recap

·     Stocks settle lower, accelerating losses in the final hour of trading as the S&P extended its losing streak to 5-days, the longest since the middle of February, though major averages overall still posting only modest losses on the week. The S&P 500 has rallied over 38% without a 5%+ pullback over the last 309 calendar days, while the longest streak without a 5%+ drop for the S&P stands at 593 days from December 18th, 1957, to August 3rd, 1959. Major averages had opened higher initially following reports U.S. President Joe Biden and China President Xi Jinping held a surprise 90-minute phone call late Thursday, the first between the two world leaders in seven months. The optimism was short lived as stocks began to slide, picking up steam throughout the trading day. Another rise in inflation data (August PPI) failed to dent market sentiment as the Fed continues to call price hikes over the last several months “transitory.” The producer price index for final demand rose 0.7% last month, above the 0.6% estimate which followed two straight monthly increases of 1.0%. In the 12 months through August, the PPI accelerated 8.3%, the biggest year-on-year advance since November 2010, after surging 7.8% in July. On a core basis, ex food and energy, PPI prices also edged above economist expectations. Tech space was shaken up following a judge ruling against Apple and its App store (see below). Bitcoin posted a weekly loss of around 12%, sharpest weekly decline since May.

·     Stock/sector movers; AAPL tumbled after a federal judge forced the company to allow developers to send their users to other payment systems in a win for "Fortnite" creator Epic Games and other app makers (shares of RBLX, ATVI, EA, ATVI, SPOT were among names benefitting from the ruling); AFRM spikes to highest levels in almost 7 months after its earnings report and strong FY22 guidance; KR plummets as the worst stock in the S&P despite a beat and raise, weighing on other grocery names ACI, SFM, GO; PLAY jumped after its quarterly beat, while COOK stumbles to its lowest levels since its 1st week of trading in early August after reporting a quarterly loss; CI slides after Bank of America issued a double downgrade to Underperform from Buy, dragging other managed care names HUM, UNH, ANTM, CAH; RUN rallies after Needham initiated coverage with a Buy rating as the leader in the US residential solar market; FSLR also higher after Needham’s initiation at Neutral as solar outperforms.

Economic Data:

·     Inflation readings higher: Producer Price Index (PPI) for August MoM reported at +0.7% vs. est. +0.6% and YoY rose +8.3% (new all-time high) vs. est. +8.2%; on a core basis (ex food & energy) Aug PPI rose +0.6% vs. est. for +0.5% MoM and rose +6.7% vs. est. +6.6% YoY

·     July Wholesale Inventories +0.6% to $722.4B vs. +0.6% consensus, +1.2% in June (revised); total inventories of merchant wholesalers were $722.4B, up 0.6 percent from the revised June level.

Commodities, Currencies & Treasuries

·     Oil prices close higher, with WTI crude up $1.58 or 2.32% to settle at $69.72 per barrel, finishing the week higher by about +0.6%, drawing support on growing signs of supply tightness in the U.S. after Hurricane Ida and while U.S.-China trade hopes gave riskier assets a boost. About three quarters of the U.S. Gulf’s offshore oil production, or about 1.4 million barrels per day, has remained halted since late August. WTI crude prices have now risen 12% since Aug. 20 when they closed at a nearly three-month low of $62.32. Driving the rebound has been strong gasoline demand in the US despite the Delta variant, and OPEC’s decision two weeks ago not to increase output by more than the 400,000-barrel-a-day.

·     Gold prices slide -$7.90 or 0.4% to settle at $1,792.10 an ounce, finishing the week with a loss of roughly 2.3% as the dollar rebounded and treasury yields edged higher. The modest move in the dollar and yields this week occur despite another higher inflation reading this morning with the PPI coming in above views (Fed continues to see price spikes as transitory, which has kept both the buck and yields in check the last few months). The benchmark U.S. 10-year Treasury yield rose on Friday following its biggest two day drop in about three weeks after economic data indicated high inflation could persist for some time. For the week, the yield was up 3 basis points and on pace for its third straight weekly gain, which would mark the longest streak of weekly gains since a seven-week run that ended in mid-March.

Sector News Breakdown

Consumer

·     Retailers; DXLG 5.73M share Spot Secondary priced at $6.10; ZUMZ reported Q2 EPS 94c above est. 79c on revs $268.7M vs est. $180.5M, and said Q3 sales-to-date are +37% YoY though did not provide formal quarterly or FY guidance; AOUT posted Q1 EPS 48c double the est. 24c on revs $60.8M that also topped est. $57.4M, sees Q2 sales up more than 20%, but shares were lower after the company left guidance unchanged from Q1 according to Wedbush; VSTO acquired Foresight Sports for $474M in a deal they say adds about $50M to FY adj EBIDTA and about $100M to net sales; Following Q2 earnings and ahead of the 2H conference season, Citi said their top 5 picks in hardlines are AAP, RH, FND, WOOF, BOOT, remain Buy-rated on AZO, LOW, HD but shift these to a lower tier of Buy, remain N on CHWY, TSCO, ORLY, WSM, and Sell-rated on BBY

·     Auto sector; Toyota (TM) cut its production forecasts for September and October, blaming shortages of chips and other parts as suppliers; said it will produce 70,000 fewer vehicles than previously planned this month, and 330,000 fewer vehicles next month; Wells Fargo lowers 2021 and 2022 earnings estimate on U.S. auto suppliers, flagging worsening impact from semiconductor shortage, while reiterate overweight on Ford and BWA

·     Consumer Staples & Restaurants; in grocers, KR reported a beat on the top and bottom line ($0.80 on sales $31.7B vs. est. $0.64 and $30.68B) and raises FY21 adjusted EPS view $3.25-$3.35 from $2.95-$3.10 (est. $3.06) while sees FY comp store sales down (-1.5% to -1%); PLAY EPS of $1.07 exceeded consensus by $0.49 driven by stronger comps and margins, while comp store sales decelerated QTD, they remain positive (+1.3% vs. ’19) despite the recent COVID spike; FIZZ Q1 EPS $0.58 vs consensus $0.51 and revenue $311.7M vs consensus $299.2M.

·     Casinos, Gaming, Lodging & Leisure sector; UBER Eats, DASH and GrubHub are suing New York City, or NYC, over its new law that permanently caps the number of commissions their apps can charge restaurants to utilize their services, the WSJ reported; VICI 100M share Secondary priced at $29.50; HST was upgraded to Buy at Argus as expect traditional hotel companies to outperform pure-play vacation rental companies in the near term.

Energy

·     Energy stock movers; not much in way of stock news in the energy sector today outside of some OPEC headlines from Reuters saying that the oil producing countries will likely revise lower its 2022 oil demand growth forecast on Monday. Baker Hughes (BKR) said U.S. drillers add oil and natural gas rigs for fifth week in six, as the total rig count rose 6 to 503, with oil rigs up 7 to 401 and gas rigs down 1 to 101. In solar, RUN rallies after Needham initiated coverage with a Buy rating as the leader in the US residential solar market; FSLR also higher after Needham’s initiation at Neutral as solar outperforms SPWR, SEDG

Financials

·     Bank movers; BAC announced senior leadership changes to position the company for long-term success, while continuing to deliver for clients, communities and shareholders; in insurance; CNO was upgraded to Overweight at Piper with $27 tgt primarily based on belief the rise of the delta variant (& emergence of mu variant) is likely to drive a greater than anticipated level of claims tailwinds for the next couple quarters at least and well telegraphed commentary around capital deployment.

·     FinTech & Payments; AFRM surges as quarterly results benefits from SHOP Pay Installments as GMV growth sequentially accelerated, up 106% y/y (178% ex. Peloton) vs. 83% y/y in FQ3/21, while new active merchants increased over 400% y/y (provided an initial FY 2022 guidance that was ahead of the Street (~$12.75B GMV at the high-end vs. Street ~$12B); Visa (V) said its U.S. spending momentum index falls in Aug; reading indicates pause in recovery.

Healthcare

·     Pharma movers; ENDP rises after agreeing to pay $50 mln to resolve lawsuits by New York state and its Suffolk and Nassau counties related to the sale and marketing of opioids/ENDP said the settlement includes no admission of wrongdoing by co or its subsidiaries; NVAX shares extend yesterday losses (fell -3%) as mgmt now expects to complete filings for emergency authorization with regulatory agencies by end of 2021 (had previously guided to FDA submission to hopefully early Q4); MRSN shares slide after reported updated data for its ovarian cancer therapy.

·     Biotech movers; APLS shares tumbled and price tgt lowered by several analysts after announced mixed topline results from its two Ph3 trials in geographic atrophy, with one trial failing to meet its primary endpoint. The phase III DERBY and OAKS trials evaluating pegcetacoplan in Geographic Atrophy (GA) showed lesion growth reduction vs. sham was met in both treatment arms in OAKS but was not met in DERBY. A prespecified pooled analysis of both trials showed the drug hit stat sig lesion reductions in both treatment arms. APLS plans to submit an NDA in 1H22. ISEE shares surged on the news as Wedbush noted the Phase 3 results announced by APLS represent a best-case scenario for ISEE shares. Note ISEE’s late-stage trial for its experimental drug targeting GA had shown positive data last year while results from a second late-stage are expected in H2 2022; EDIT upgraded to Outperform at Oppenheimer and raise our PT to $80 from $42 ahead of initial clinical data from BRILLIANCE based on our favorable view of this sentinel readout in addition to overall pipeline progress.

·     Healthcare services and equipment; CI was downgraded to underperform from buy at Bank America on a less clear growth outlook and lower visibility on its earnings trajectory and lowered its target price to $225 from $240 saying that Cigna’s business mix has the slowest end-market growth of any (managed care organization) they cover; ISRG shares slumped after CFO said a conference that Q2 profitability an ‘anomaly’ given lower costs and guidance did not contemplate higher supply costs or impact of covid in U.S. – says now seeing them both.

Industrials & Materials

·     Industrial & Machinery; Goldman Sachs downgraded CFX to neutral as see less potential for the stock to re-rate given we are deeper into the cycle, while the firm upgraded ALLE to Buy calling it a late cycle, non-residential manufacturer that is exposed to a favorable thematic backdrop and raised RXN to Buy as they focus on tailwinds to RXN’s WM segment, which they view as a best-in class business; HON said sees Q3 Sales (organic growth) $8.5B-8.8B vs. consensus of $8.73B, up 7-11%; Segment margin 20.3-20.6%; Adjusted EPS $1.97-2.02, up 26-29%; vs. consensus $2.01; CAT acquired U.S.-based carbon capture technology company Enhanced Energy Group, Inc.

·     Transports; ECHO to be acquired by private equity firm The Jordan Company L.P. in a deal valued at $1.3 billion as shareholders will receive $48.25 in cash for each Echo share they own, representing a 54.1% premium to Thursday’s closing price of $31.32 https://on.mktw.net/3l95vfy ; shares of logistics names outperformed in reaction (WERN, XPO, EXPD).

·     Metals & Materials; sector in general strong early, led by FCX, CLF, X, NUE as a phone call between Biden and China’s Xi boosts market sentiment; Credit Suisse downgraded copper stocks FCX and FM to Underperform on the basis that copper prices will revert to more historical levels in 2022 as expects benefits from massive global stimulus to fade and inflation concerns to ease as supply bottlenecks gradually resolve; in lithium space, ALB reaffirming its full-year 2021 guidance and introducing new full-year 2022 outlook and 2026 long-term financial targets; CCJ shares topping $25, up roughly 16% this week as uranium stocks outperform.

·     In the ag space, corn prices fell as the U.S. government boosted its forecast for the country’s corn harvest on Friday saying U.S. corn production will reach 14.996 billion bushels, based on an average yield of 176.3 bushels per acre, according to World Agricultural Supply and Demand Estimates (WASDE). In August, USDA forecast corn production of 14.750 billion bushels.

Technology, Media & Telecom

·     Video games/Internet; AAPL slipped late morning after a U.S. judge issues a ruling in "Fortnite" creator Epic Games’ antitrust lawsuit against Apple’s App Store, labeling AAPL’s conduct in enforcing anti-steering restrictions as anticompetitive. Judge Rogers said that Apple was not a monopolist and “success is not illegal.” Rogers ordered an injunction that said that Apple will no longer be allowed to prohibit developers from providing links or other communications that direct users away from Apple in-app purchasing, of which it takes 15% to 30% of gross sales (shares of video game related names jumped on the AAPL ruling loss – RBLX, ATVI, EA, ZNGA – shares of music streaming co SPOT and MTCH also rallied – co’s that been vocal vs. AAPL rules on in-app payments); NTES and TCEHY recover after the South China Morning Post originally reported that China would halt approvals for new online games, though an updated version of the story said that Chinese regulators have temporarily slowed their approvals of new games.

·     Software movers; TTWO slips early as Rockstar Games delayed the releases of the new-gen versions of Grand Theft Auto V and Grand Theft Auto Online. Originally scheduled to launch on November 11, the two enhanced versions of GTA will now be released on PlayStation 5 and Xbox Series X/S in March 2022; ZS strong Q4 results with revenue, billings, and profitability all ahead of Street estimates which included billings grew 70%+ for the third straight quarter, RPO grew an impressive 98% to $1.6B, and guides year revs $940M-$950M vs. est. $902M; SUMO shares slip after Piper and BTIG both downgraded shares post earnings, as 2Q billings growth of 29% was ahead of Street at 26%, aided by upside from its large customer and analysts note int’l was strong but NA continues to see uneven performance; MCFE 20M share Secondary priced at $22.50

·     Hardware, Components & Services; TDC provided a number of key metrics and targets for its Cloud business, including that it expects to reach $1B+ in Cloud ARR by 2025 and disclosed that its cloud net expansion rates have exceeded 130% the "past several quarters; VMEO and DLB said to bring premier quality video experience to millions of Apple.

·     Media & Telecom movers; Tower companies AMT, CCI, EQIX all downgraded to Perform from Outperform at Oppenheimer saying we are in the early innings on over $1T being spent on 5G and Cloud buildouts, a spending tsunami rivaled only by the advent of the Internet and first Dot.com bubble. But, these stocks are priced at the high end of their historical range and are bond-like proxies at ~3.5–4% AFFO yields. Separately, Morgan Stanley raised its price tgts on AMT to $316 from $270, SBAC to $405 from $337 and CCI to $213 from $204 as sees high visibility on strong domestic tower organic growth for 2022 given the "record" 5G leasing cycle; BMBL 18M share Secondary priced at $54.00; CNBC reported midday that AMZN is in talks to acquire the rights for the NFL’s "Sunday Ticket" package and is seen as the likely front-runner (follows stories yesterday that DISESPN was interested in Sunday ticket) https://cnb.cx/3k38TJz