Closing Recap

Monday, September 27, 2021

Equity Market Recap

·     U.S. stock markets finish lower for the Nasdaq and S&P 500, while the Dow Jones Industrial Average gains were paced by financials, industrials, and energy as investors rotated into industry laggards as the Russell 2000 SmallCap 2000 outperformed. The yield on the benchmark 10-year tops 1.51%, highest levels since late June while the 30-yr surpasses 2%, which pressured high growth tech stocks. Oil prices surge as WTI crude tops $75 per barrel (leading energy stocks to best levels in months) and financials/insurance stocks advance on the Treasury yield pop. Reopen sectors also leading markets higher (casinos, travel, cruise lines, leisure). Lone piece of economic data beat expectations as new orders and shipments of key U.S.-made capital goods increased solidly in August (durable goods up +1.8% vs. est. 0.7%). While the recent S&P 500’s decline felt like a lot, it fell just 4% from its all-time high on Sept. 2 through the end of trading this past Tuesday and hasn’t had a pullback of 5% or more in 224 days, the seventh-longest streak on record. European markets finished higher.

·     Markets await news out of Washington D.C. as Speaker of the House Nancy Pelosi said the House will vote Thursday on the $1T bipartisan infrastructure bill, as she also works to build a consensus on the $3.5T reconciliation bill. Yesterday. Pelosi said the House would vote Monday on the bipartisan bill, but progressive Democrats were threatening to derail the bill unless the larger social safety net and climate policy plan also passed. The infrastructure bill has already been passed by the Senate, so once it gets House approval, it will head to President Biden’s desk.

·     Stock/sector movers: Energy stocks (OXY, COG, FANG, MRO) lead the S&P again with WTI Crude hitting 3-year highs above $75.50/barrel; financials (JPM, BAC, C, FITB) also outperform again as the 10-year Treasury yield tops 1.5% for the first time since June; tech stocks underperform with the rising yields, AMZN slides after Morgan Stanley lowers its price target on labor/wage pressures, GOOGL slips after cutting its commission on app store sales; BBY spikes after Piper raises its price target and says it is quickly becoming one of their top ideas; TSLA touches 7-month highs after reporting its Shanghai factory is expected to produce 300k cars in its 1st 9 months despite the semi shortage as auto sector another area of outperformance today; reopen plays broadly outperform – LYV 52-week high, CCL, SIX, WYNN soar.

·     Note the Chinese government has implemented regulatory crackdowns in the technology industry, leading to weaker retail sales, home prices also showing slowing growth in the region, while this weekend, reports indicated China tightens energy consumption rules across manufacturing industries in an apparent effort to rein in pollution and emissions in the nation. Several key Apple (AAPL) and Tesla (TSLA) suppliers in China have halted production at certain facilities to comply with the energy consumption policies from Beijing.

·     Federal Reserve Bank of Boston President Eric Rosengren will retire from his bank on Sept. 30, the bank said, citing a health condition. Mr. Rosengren’s retirement follows the recent revelation that the central banker actively traded stocks and other investments while also helping to set monetary policy. Late day, Fed’s Kaplan also announced his retirement as of Oct 8 according to Dallas Fed statement citing recent distraction of financial disclosure for his decision. New York Fed Bank President John Williams said Monday that its possible for the Federal Reserve to finish winding down its asset purchases by the middle of next year, but the exact timing has not been decided yet.

Commodities

·     Oil prices rose for a fifth straight day on Monday with WTI crude up +1.47 or 1.99% to settle at $75.45 per barrel, its highest since October 2018 amid supply concerns as demand picks up in parts of the world with the easing of pandemic restrictions. Brent crude rises $1.44 or 1.84% to settle at $79.53, at 3-year highs. Natural gas jumps 11% to settle at $5.706 mln btus as increased demand and shortages in Europe propel nat gas exports. Gold prices little changed as December gold rises $0.30 to $1,752 an ounce, holding steady despite an uptick in U.S. Treasury yields.

Currencies & Treasuries

·     U.S. Treasury yields extended gains as 10-year yields hit their highest level in three months on solid economic data and signals the Federal Reserve is shifting towards a more hawkish policy. The 10-year Treasury rose as high as 1.516% in morning trading, its first time above 1.5% since June 29 before paring gains. The move comes after the benchmark note’s yield rose almost 9bps last week, the fifth week of gains and the biggest weekly jump since March, as investors reacted to hawkish shifts by major central banks. The 30-year yields rising above 2% for the first time since mid-August as yields rose across the curve. The U.S. dollar ended modestly higher.

·     Two auctions today as the U.S. Treasury sold $60B in 2-year notes at a yield of 0.31% vs. 0.302% when issued prior, with the bid-to-cover (demand) at 2.28 and indirect bidders awarded 45.32% and directs 21.69%. The U.S. Treasury sold $61B in 5-year notes at a yield of 0.99% vs. 0.994% when issued prior, with the bid-to-cover (demand) at 2.37 (prior 2.35) and indirect bidders awarded 54.32% and directs awarded 20.21% of the auction.

Sector News Breakdown

Consumer

·     Auto sector; CNBC reported last week that the global semiconductor chip shortage is expected to cost the auto industry $210B in sales this year, up from the $110B projection made in May 2021 by AlixPartners as forecasts now expect 7.7 million units of production will be lost in calendar 2021; TSLA Shanghai factory is expected to produce 300,000 cars in the first nine months of the year, despite a global semiconductor shortage, Reuters reported (TSLA shares rise for the 10^th time in 11-days on recent upside momentum – best levels since February); GGPI rises after Swedish electric car maker Polestar agrees to go public through merger with GGPI, at a valuation of $20 bln including debt https://bit.ly/3udy8fD ; RIDE downgraded to Sell at Goldman Sachs as current price reflect the competitive and growing market for EVs as continued operational challenges that Lordstown is facing and broader supply chain constraints; in auto connectors, RBC Capital previews 3Q earnings and suggests investors should turn more positive on the group. ADNT is favorite amongst this group, as well as MTOR and remain mid-term positive on APTV

·     Consumer Staples; AMZN’s Whole Foods Market is implementing a grocery delivery fee across the U.S., rolling back a perk the retailer had offered for paying Prime members since it began offering home delivery from the organic grocer; COTY expands beauty tech offerings globally with omni-channel perfect corp. partnership; BYND said it is expanding the availability of Beyond Breakfast Sausage Classic Patties by more than 1,500 WMT stores and Beyond Breakfast Sausage Spicy Patties by more than 1,300 stores; for KDP, Goldman Sachs sees favorable risk-reward heading into KDP’s long-anticipated virtual Investor Day on October 1 and expects it to be a positive catalyst as the market continues to underestimate a few key positives

·     Casinos, Gaming, Lodging & Leisure sector; cruise lines (CCL), theme parks (DIS), casinos (WYNN) among leaders as reopen sectors outperform; in lodging, Bank America downgraded shares of Hyatt (H) and INN to Underperform saying it is purely a relative call as we are moving to a slightly less bullish stance on the Lodging recovery following our Conference amid 1) the delta variant, 2) delayed office reopenings, 3) soft September commentary, 4) some group cancellations, and 5) less favorable leisure seasonality. Firm remains positive on the Lodging sector overall with 10 Buy ratings versus 5 Underperform ratings. Barron’s says HLT and DAL are good places to hide in the travel industry until the sector quiets down; in casinos, Bloomberg reported Macau is tightening travel restrictions to in an attempt to prevent outbreaks ahead of Golden Week starting Oct 1

Energy

·     Energy stock movers; a big day for energy stocks, adding to last week gains as oil prices rose for a fifth straight day with Brent at its highest since October 2018 and heading for $80 amid supply concerns as demand picks up in parts of the world with the easing of pandemic restrictions. Brent has posted three straight weeks of gains and WTUI crude trades to its highest since July, after rising for a fifth straight week last week. Goldman Sachs raised by $10 its forecast for Brent crude at the end of this year to $90 per barrel, as faster fuel demand recovery from the outbreak of the Delta variant of the coronavirus and Hurricane Ida’s hit to U.S. production led to tight global supplies. Shares of E&P (FANG, MRO, PXD), integrated (XOM, CVX, COP) and services (SLB, HAL) saw strong gains, but reached to small and midcap energy names as well.

·     Utilities & Solar; solar stocks were higher early (FSLR, RUN, NOVA); Guggenheim said the next few months look challenging from a trade policy and legislative standpoint, but we see opportunities in residential solar and US-based manufacturers (pointing to those three names); a report out of Electrek said Democratic senators are lobbying for legislation to boost domestic solar production and reduce US dependency on China for solar panels with tax credits; GEVO said it received a U.S. patent for a process to upgrade ethanol and bio-based alcohols into bio-based diesel and jet-fuel products; PLUG rises after Citigroup maintains Buy rating and $35 price target after visiting Plug’s facilities and management and coming away impressed with the company’s plans to expand its capabilities

Financials

·     Bank movers; XLF, KBE, KRE all outperform as financials saw investor interest as the U.S. 10-year Treasury yield topped the 1.51% level and the 30-year above 2%, highest levels since the end of June following the “hawkish” comments from the FOMC last week when they pushed up their timeline for interest rate hikes; saw shares of JPM, AXP, GS outperform in the Dow while regional banks, insurance and brokers also moved to the upside; BX to sell Cosmopolitan hotel, casino in two-step deal for $5.65B; WFC clipped on headlines the U.S. says civil fraud action seeks civil penalties, accuses Wells Fargo of fraudulently overcharging hundreds of commercial customers who used its forex services.

·     Bitcoin, Finance, FinTech & Payments; for AFRM, Stephens noted shares rose over 10% last week on Walmart’s announcement that it’s replacing its layaway program with installment financing by Affirm…but the firm said they think expectations of GMV and revenue impact are overdone; WU upgraded to a Buy from Neutral at Citigroup with an unchanged $27 price target (~34% upside) saying recent price action (WU -13% in 3 months vs. S&P 500 +4%) and current ~4.6% dividend yield implies an attractive ~9x FY22 P/E and co is surprised WU stock was not up following the announced Business Solutions segment divestiture; SI initiated at Overweight with a $158 PT at Morgan Stanley saying they see a 3:1 bull:bear skew, but recognize that SI has the widest risk-reward of any bank we cover as its growth is tied directly to the health and growth of the cryptocurrency industry.

Healthcare

·     Pharma movers; MRK announced that the Phase 3 KEYNOTE-394 trial investigating KEYTRUDA, Merck’s anti-PD-1 therapy, in Asian patients with advanced hepatocellular carcinoma previously treated with sorafenib met its primary endpoint of overall survival; ASLN falls after the company reports topline data in its Phase 1 study of ASLAN004 for the treatment of moderate-to-severe atopic dermatitis; PFE announces start of Phase 2/3 EPIC-PEP study for the prevention of COVID-19 infection; BMY said the U.S. FDA has accepted supplemental Biologics License Applications (sBLA) for two combinations of its blockbuster cancer drug Opdivo (nivolumab) for review.

·     Biotech movers; XLRN is in advanced discussions to be acquired by a large pharmaceutical company for about $180 a share in cash, according to people familiar with the matter, Bloomberg reported late Friday https://bloom.bg/3ANfEVx ; SNDX and INCY announce global collaboration to develop and commercialize axatilimab for chronic graft-versus-host disease and other fibrotic diseases; Syndax to receive $152 million in cash ($117 million upfront plus a $35 million equity investment, with potential for $450 million in additional milestone payments); BHVN Verdiperstat did not statistically differentiate from placebo on the prespecified primary efficacy measure, nor on the key secondary efficacy measures; ITCI announces results from its lumateperone monotherapy Phase 3 clinical trial (ITI-007-404) in bipolar depression

·     MedTech Equipment; SPNE said late Friday it expects its total revenue for q3 of 2021 to grow in mid-single digit range; said it is unable to confirm its prior revenue guidance for q4 and full-year 2021 at this time (BTIG notes SPNE is the first spine company to suspend FY21 guidance in full); MedTech space in general among top decliners in the S&P 500 (BIO, IDXX, IQV, CRL, MTD)

·     Healthcare Services: ICLR upgraded to Overweight, while TLIS and ZY downgraded to Underweight at JPMorgan saying heading into 3Q earnings, they wanted to highlight three names they are more or less constructive on relative to the rest of the group; TVTY announces $100 million share repurchase authorization

Industrials & Materials

·     Aerospace & Defense; LMT and the F-35 Joint Program Office (JPO) have agreed on an F-35 production rebaseline as Lockheed is scheduled to deliver 133-139 aircraft in 2021, 151-153 aircraft in 2022 and 156 aircraft beginning in 2023 and for the foreseeable future; RCAT subsidiary receives five-year contract with NASA, sending shares higher; POWW boosted Q2 rev view to $55M from $51M and topping consensus of $52.6M citing continued momentum

·     Metals & Materials; KRA enters a merger agreement under which DL Chemical will acquire the chemical company for 5446.50 per share in cash, in a deal valued at ~$2.5 billion, a 12% premium to Friday’s closing price https://bit.ly/3udr7LI ; Keybanc reduced 3Q estimates on several paper & packaging companies (SLGN, BLL, GPK, WRK) ahead of earnings season owing to rampant cost inflation and supply chain problems, which have led to numerous negative pre-announcements and guidance reductions; ASH warns FY 2021 adjusted EBITDA could come in as much as $10M below the low end of previous guidance of $570M-$590M, saying continued challenges in shipping, logistics and packaging are inhibiting its ability to meet strong overall customer demand; SMG with Positive Barron’s article as a play on the cannabis sector

Technology, Media & Telecom

·     Internet; GOOGL is slashing the amount it keeps from sales on its cloud marketplace as pressure mounts on app stores; The Google Cloud Platform is cutting its percentage revenue share to 3% from 20% – CNBC reported over the weekend; high beta large cap tech saw profit taking today as Treasury yields inched higher, with pullbacks in social media names (SNAP, TWTR) after jumping last week (SNAP was at all-time highs)

·     Semiconductors; the semi chip industry closed not far off record all-time highs on Friday (closed at 3,453, off all-time best for the SOX 3,484.19) before slipping, but the disruption to the global supply chain may worsen after China tightens energy consumption rules across manufacturing industries in an apparent effort to rein in pollution and emissions in the nation. Supply chain issues continue to plague several industries (auto has been affected greatly).

·     Hardware, Software movers; NATI upgraded to Buy from Neutral and up tgt to $48 from $45 at Goldman Sachs as expects outperformance in 2022 (-6% YTD vs. peer KEYS +35%) as the company has a strong backlog and sizable software revenue mix, with the ability to drive EPS growth and margin expansion from growing semiconductor demand; BOX upgraded to Market Outperform from Market Perform at JMP Securities as believe Box’s leadership has transformed many aspects of the company to optimize for shareholder value and the company is executing significantly better than just two years ago

·     Media & Telecom movers; ATUS downgraded at both Raymond James and Credit Suisse today following recent management commentary detailing broadband adds pressure; VZIO a positive mention in Barron’s this weekend saying stock buyers should consider newly public Vizio, which completed upfront advertising negotiations with more than $100 million in commitments, up fourfold from last year; GCI announces opportunistic debt refinancing while saying for Q3 the company continues to expect its overall revenue to be down slightly year-over-year and continues to expect growth year-over-year on a same store basis