Closing Recap

Tuesday, September 28, 2021

Equity Market Recap

·     Stocks tumbled in a broad-based market sell-off as rising Treasury yields and deepening inflation concerns dampened risk appetite, as stocks close at session lows. With fears of Fed asset tapering shortly and the drama in D.C. regarding the debt ceiling deadline and upcoming infrastructure bill vote, markets were on edge throughout the day as treasury yields hit 4-month highs while the dollar bounced. Interest rate sensitive sectors fell along with growth sectors such as technology as the Nasdaq Comp underperformed. Cryptos slipped with Bitcoin below $42,000 and Ethereum around $2,900. No better overseas as Europe’s Stoxx 600 down -2.1%, while Germany’s Dax down -2.0%; Britain’s FTSE 100 down -0.5%; France’s Cac 40 down -2.1%, Spain’s ibex down -2.0%. Of note, tomorrow and Thursday, is month end and quarter end so keep in mind, window dressing tactics for markets as well (so overnight could be interesting).

·     The Federal borrowing limit clock ticking: Congress needs to reach a deal to raise the federal borrowing limit, or debt ceiling, before the government runs out of money to pay its bills. Treasury Secretary Janet Yellen told Congress said that the Treasury would be unable to pay all the government’s bills if the ceiling isn’t raised by Oct. 18. The ceiling was suspended in 2019 and was reinstated automatically at the beginning of August. JP Morgan Chase CEO Jamie Dimon said the co has begun preparing for potential U.S. credit default as debt limit talks go to wire; says he expects policymakers will address debt limit in time; cautions failure to do so would be ‘potentially catastrophic.

·     The bipartisan infrastructure bill expected to be voted on this week. The bill passed the Senate in a 69-30 vote on Aug. 10 but needs to pass the House of Representatives and get signed by President Joe Biden. House speaker Pelosi said the vote will be this Thursday, but Republicans are against it since Democrats added the debt ceiling passage into the bill along with other items Republicans are against (such as the IRS having access to personal bank accounts). Pelosi also faces pressure from progressive Democrats who say they won’t support the bipartisan infrastructure bill unless the $3.5 trillion package moves ahead as well. The Infrastructure Investment and Jobs Act has an overall price tag of about $1 trillion, with around $550 billion in new public-works spending. The debt ceiling = Congress limits how much money the government can borrow, and once the limit is reached, lawmakers must raise or suspend the ceiling before the Treasury Department can issue more debt.

·     Stocks/sector movers: Markets tumble again, giving up much of last week’s late bounce; the 10-year Treasury yield tops out at 1.567% today, the highest since June 17 hitting interest rate sensitive sectors (utilities and homebuilders); Oilfield service stocks SLB, HAL, BKR among the top gainers in the S&P with other energy names COG, COP, MRO as WTI Crude touches its highest price since October 2018 before rolling to red; RV names another sub-sector that stands out to the upside as THO spikes on a quarterly beat with continued strong demand and record backlogs, boosting; UNFI surges as much as 23% to 2-yr highs on its guidance well above consensus as other grocery names KR, ACI green in a flight to safer asset classes.

Economic Data:

·     Consumer Confidence index 109.3 below consensus 114.5 vs. August revised 115.2 (previous 113.8); the present situation index at 143.4 in Sept vs. Aug revised 148.9 (previous 147.3) and the expectations index 86.6 in Sept vs. Aug revised 92.8 (previous 91.4)

·     Advance Goods Trade Balance for August deficit -$86.4B (vs. est. -$87.3B and previous -$86.4B; Wholesale Inventories (M/M) Aug P: 1.2% vs. est. +0.8% and prior +0.6%); Retail Inventories (M/M) for Aug +0.1% vs. est. +0.5% and prior +0.4%

·     Richmond Fed composite manufacturing index -3 in sept vs +9 in August and the shipments index -1 in sept vs +6 in August

·     July S&P CoreLogic Case-Shiller HPI Composite: -20 was +1.5% M/M vs. +1.6% consensus, +1.8% prior; HPI Composite -20 was +1.5% M/M vs +2.0% prior and HPI Composite: -20 was +19.9% Y/Y vs. +19.7% consensus, +19.1%

Commodities

·     Oil prices fell, snapping their 5-day win streak as WTI crude slipped -$0.16 or 0.21% to settle at $75.29 per barrel, off earlier 3-year highs of $76.67, as investors fled riskier assets with stocks and bonds tumbling. Prices reversed lower late morning as stocks tumbled, after prices had risen on supply constraints and rising demand due to disruptions in the U.S. following Hurricanes Ida and Nicholas recently. Higher prices for coal and natural gas have also triggered some switching to oil consumption, adding to price pressures.

·     Gold prices end lower, falling -$14.50 or 0.8% to settle at $1,737.50 an ounce, its lowest settlement in about 7-weeks as the dollar climbed alongside Treasury yields on expectations of a sooner-than-expected hike in interest rates by the Federal Reserve after last week’s monetary policy meeting showed the timeline moved up.

Currencies & Treasuries

·     Treasury yields moved to their best levels since mid-June with the 10-year hitting above 1.56% while the 2-year touched its best levels in roughly 18-months (0.3%) as expectations rise for the Fed to act on tapering sooner and rate hikes in 2022. The U.S. Treasury sold $62B in 7-year notes at a yield of 1.332% vs. 1.324% when issued prior as the bid-to-cover (demand) was 2.24 (vs. 2.34 prior auction) with indirect bidders awarded 60.1% and directs 20.9%

·     The U.S. dollar index (DXY) touched its best levels since November of last year (high 93.80) as the U.S. dollar advanced, while the euro extended losses vs. the greenback, hitting fresh 6-week lows below 1.17. The dollar/yen rallied to near three-month highs of 111.64, up from overnight lows of 110.94 on the back of surging Treasury yields, and a severe risk-off backdrop.

Sector News Breakdown

Consumer

·     Retailers; CHWY upgraded to outperform from peer perform at Wolfe Research saying the decline in net new customer additions through 2021 should reverse in 2022 with expectations for strong growth ahead; ETSY reiterated Buy and tgt raised to $245 from $220 at Loop Capital and slightly increasing GMS this quarter and increasing the long-term GMS growth rate based on management’s recent comments on TAM and trends at competitor conferences; Macy’s (M) upgraded from Hold to Buy with $33 tgt at Gordon Haskett; DBGI announces $37.5M-$42.5M for 2022 revenue guidance, an increase of 350% from 2021; PRPL downgraded to Hold from Buy at Craig Hallum in mattress sector as believe near term expectations are too high; PTON shares slid after AMZN said today at a hardware event that it is launching a service called Halo Fitness.

·     Auto sector; Ford (F) unveiled plans to team with South Korean battery maker SK Innovation to spend $11.4B to build an electric F-150 assembly plant and three battery plants in the U.S.; DAN said it expects to top prior 2023 EV sales targets by 40% and is targeting $3B in EV sales by 2030, which would be about 25% of the total revenue mix; TSLA and other EV makers saw profit taking after strong returns on Monday

·     Housing & Building Products; Wedbush said they view CCS, DHI, KBH, LEN, MHO, TPH, and TMHC as undervalued at current levels in the homebuilder sector and are Ahead of consensus for FY22 gross margin growth; homebuilders pressured today following the rising yields with LEN, DHI, TOL, KBH shares lower

·     Consumer Staples; UNFI reported net sales of $6.74B below est. $6.85B, generating adjusted EBITDA of $203mn above est. $173mn and better EPS of $1.18 (est. $0.80) while forecast FY22 adjusted EPS of $3.90-$4.20 (above rest. $3.38) on sales of $27.8B-$28.3B (est. $27.8B); defensive food stocks CPB, CAG, K, SJM saw strength early as investors looked for safe havens

·     Casinos, Gaming, Lodging & Leisure sector; EDR to acquire OpenBet, a leading content, platform, and service provider to the sports betting industry, from SGMS for $1.2 billion in cash and stock; MANU files for potential mixed shelf; size not disclosed; in towables/RV sector, shares of THO active as Q4 profit topped views (EPS $4.12 vs. est. $2.92) on better sales $3.59B and posting YoY sales gains as demand for recreational vehicles remand strong and said FY ended with inventories down 44% on a two-year basis

Energy

·     Energy stock movers; one of the few bright spots early was energy stocks as oil prices held up relatively well initially despite the “risk-off” trade today with stocks, bonds and precious metals all falling; BP said it expects global oil consumption to return to pre-pandemic levels in the third quarter of 2022; TTE said it will buy back $1.5B of its shares in Q4 and trim the upper end of its annual capital spending goal to $13B-$15B in 2022-25 from $13B-$16B previously.

·     Utilities & Solar; utilities fell as interest rate sensitive names dropped with bounce in yields; PEG initiated a 5-7% EPS CAGR over the ‘22-25 timeframe which was in line with investor’s expectations and disclosed at the investor day announced a share buyback; SRE updated its full-year 2021 GAAP EPS guidance range is updated from $7.41-$8.01 to $3.83-$4.43, while also guided to the upper end of the range for its full-year 2021; solar stocks (ENPH, FSLR, SEDG, NOVA) fell as the U.S. Commerce Department is expected to decide this week whether it wants to consider a petition made by an anonymous group of U.S. solar manufacturers about imposing new tariffs on panels imported from Vietnam, Thailand and Malaysia.

Financials

·     Bank movers; sector has been an outperformer amid rising Treasury yields the last week (comes into today with yields up 5-straight days) after hawkish FOMC outlook last week; Morgan Stanley downgraded WFC to EW as they are delaying their base case asset cap removal from 3Q22 to 4Q23 following new OCC consent order, recent Powell comments that the cap "will stay in place until the firm has comprehensively fixed its problems," and a tougher expense outlook, though they say rate hikes provide a partial offset; Berenberg downgraded MS to Hold as they see the stock fairly valued after re-rating to 14x 2022E earnings, doubling its dividend and increasing its buyback since their upgrade in April; Into Q3 earnings, JPMorgan says this is an ideal time to be overweight regional banks as the rate, credit, and growth outlooks are poised to improve with the stocks also trading at a very cheap valuation vs pre-pandemic, and they prefer to pay up for loan growth leaders (FRC, SIVB, SBNY, MCB, PNGP are top picks, HBAN, BKU, FHN included in their small hope trade basket), and separately said yesterday’s selloff in WFC was overdone as the issue had been disclosed for years and was settled for a small amount, though political risk remains; The Wall Street Journal reported bank mergers are on pace to hit their highest level since the financial crisis with more than $54B in deals already announced this year.

·     Bitcoin, FinTech & Payments; overall crypto currencies down with broader market “risk-off” trade as Bitcoin held above $40K but ethereum dropped below $3k; COIN initiated at Outperform with a $300 target (~29% upside) at JMP who sees the company maintaining its leading position in the broader crypto economy for years to come and is in the early innings of its growth cycle as they build a business beyond a crypto trading exchange.

·     Services, Consumer Finance; MA introduces Mastercard Installments, a Buy Now, Pay Later program available for both in-store and online purchases, in the U.S., Australia, and the U.K. in the latest payment processor move into the BNPL space (follows PYPL buying Japan’s Paidy and SQ buying Afterpay); Mizuho believes INTU’s Investor Day on Thursday will be a key catalyst for shares; FDS reported Q4 adj EPS $2.88 vs est. $2.74 on revs $411.9M vs est. $404.9M, organic rev +6.7% vs est. +4.96%, and FY22 view is above consensus with adj EPS range $12-12.30 vs est. $11.95 and revenue view $1.71-1.72B vs est. $1.67B; INFO posted Q3 adj EPS 85c vs est., 83c on revs $1.18B vs est. $1.17B, raised FY21 adj EPS view tgt $3.18-3.20 from $3.15-3.17, and lowered FY21 rev outlook to $4.61-4.63B from $4.635-4.67; CURO raises 2023 revenue, earnings outlook; Q3 revenue guided below consensus.

·     REITs; MGP downgraded to EW from OW in triple-net REITs at KeyBanc and updating estimates for several net lease & gaming REITs in coverage (EPR, GLPI, GTY, MGP, NTST, STOR, VICI) universe primarily to account for 2Q21 earnings; MITT upgraded to Market Outperform at JMP Securities saying with the complete exit from pre-COVID-19 commercial investments now complete, MITT is a pure-play residential credit investment strategy, which is the sector of the market we remain the most bullish on with best peers including CIM, EFC, MFA, and RWT; Truist self-storage monthly survey => September 2021, showed net rents increased +26.8% (+23.5% street rates, promotions -3.3%), which is which is lower than the prior 3 months’ average of +43.1% net rents as easier comps burn off; Loop said MGM’s $5.65B purchase of The Cosmopolitan from BX has positive read-throughs for gaming REITs VICI and GLPI as they expect them to re-rate higher as the cap rate in the deal is the lowest on record for a casino real estate transaction, and for CZR who is expected to sell one of its Las Vegas Strip assets next year as this deal has a relatively rich trailing EBITDA multiple; CONE shares spiked after Reuters reported the company is exploring strategic alternatives that include a potential sale of the company.

Healthcare

·     Pharma movers; PFE and BNTX announced they have submitted data to the U.S. FDA from the Phase 2/3 trial of their COVID-19 vaccine in children 5 to <12 years of age; MRK is in advanced discussions to acquire XLRN with the deal potentially being announced this week if talks do not break down, the WSJ reported. https://on.wsj.com/3F7QtzV ; LLY lowered the list price of Insulin Lispro Injection in the U.S. by 40%, with effect from Jan. 01, 2022; ALT declines after the company released results from its 12-week phase 1 clinical trial for pemvidutide, formerly known as ALT-801 for weight loss; in cannabis, ACB 4Q revenue was above expectations with a stronger performance from the Consumer business; TEVA reached an agreement with the Attorney General (AG) of Louisiana that settles the state’s opioid-related claims

·     Biotech movers; BIIB and ESALY initiated a rolling submission to the U.S. FDA of a Biologics License Application for lecanemab, the company’s investigational anti-amyloid beta protofibril antibody, for the treatment of early Alzheimer’s disease; PBYI upgraded to Buy from Neutral at Citigroup with an $11 tgt noting shares have slid ~40% since early June absent a material change to our thesis; ZIOP announces strategic reduction in workforce and extension in cash runway; ARWR said it earned a $10 million milestone payment from Janssen Pharmaceuticals, Inc., after Janssen dosed the fifth patient in a Phase 1 clinical study of ARO-JNJ1, an investigational RNAi therapeutic candidate which utilizes Arrowhead’s proprietary Targeted RNAi Molecule

·     Healthcare Services &MedTech Equipment; bloodbath in MedTech stocks continued for a second day (among worst performers in the S&P 500), as investors locking in gains in one of the best sectors of the year, with shares of TMO, IQV, TECH, A, MTD among worst performers; MDT received CE Mark approval for its radial artery access portfolio, which includes the Rist 079 Radial Access Guide Catheter and Rist Radial Access Selective Catheter.

Industrials & Materials

·     Aerospace & Defense, Industrial & Machinery; Jefferies initiated RDW at Buy with a $15 target as its diversified portfolio of space components are well-positioned to capture emerging trends around a growing number of small sat launches and expansion into deep space exploration with a valuation that is attractive for a high-growth company; KeyBanc lowered their estimates and price targets on ATI (to $23 from $27) and HWM ($37 from $38) as slowing order trends amid rising Covid cases and U.S.-China tensions impacts 2H21-2022 expectations, though they remain OW for aggressive 2022-25 growth aspirations; BA shares nosedived in the afternoon after Reuters reported commerce chief Raimondo says Chinese government blocking Chinese airlines from buying tens of billions of dollars in Boeing airplanes

·     Metals & Materials; in gold mining, AEM and Kirkland Lake Gold Ltd. (KL) entered into an agreement to combine in a merger of equals, as Kirkland Lake Gold shareholders will receive 0.7935 of an Agnico Eagle common share for each Kirkland Lake Gold common share held; UBS updated containerboard forecasts (IP, PKG, WRK) and reiterate our cautious view saying even on higher than expected 2021 demand, they estimate capacity additions will result in a 200bp y/y decline in 2022 utilization rates to 93%; OI said it sees Q3 EPS at the high end or slightly above previous guidance of $0.47-$0.52, which would come in above $0.49 analyst consensus estimate.

·     Chemicals; HUN rises after as Starboard Value disclosed a 8.4% activist stake in Huntsman, which represents over 18.6M shares in a 13D filing last night; in fertilizer/potash chemicals, MOS, CF, NTR shares active after Bloomberg reports, according to CRU, the Chinese National Development and Reform Commission has allegedly ordered Chinese State-Owned Urea Enterprises to ‘immediately halt exports’ of fertilizer (nitrogen and phosphate); Bloomberg also reported ruined Brazil harvest sparks food inflation everywhere

Technology, Media & Telecom

·     Semiconductors; sector pressured as growth related sectors slide amid the recent uptick in treasury yields (note the Philly semi index – SOX – came into the day about 1% off its all-time highs); AMD CEO said demand for semiconductors hasn’t cooled off and tight supply of the crucial electronic components will likely persist into the first half of 2022; MCHP was downgraded at Wells Fargo based on the fruition of our PT and also continue to encourage investors to own shares of cos w/ secular growth stories or idiosyncratic catalysts, as opposed to companies that are mostly dependent on the semi cycle; MU earnings tonight

·     Hardware, Components & Services; Digitimes reported LCD panel prices will likely continue trending downward until the end of the first quarter or the beginning of the second quarter in 2022, according to industry sources in China; SNX posted a decline in Q3 revenue for its legacy SYNNEX Corp. business, the last earnings period before its merger with Tech Data Corp. while Q3 EPS topped views (sales $5.21B below $5.31B YoY and below est. $5.32b); LOGI downgraded to Underweight from Equal Weight at Morgan Stanley with a price target of $82, down from $119 saying its data shows cyclical tailwinds fading and difficult YoY growth comparisons approaching

·     Media & Telecom movers; DIS tgt cut to $203 from $216 at Wells Fargo citing concerns over the pace of subscriber growth at the company’s streaming-video business; GOGO rises after saying it now expects revenue growth at a CAGR of ~15% from 2020 to 2025 vs. a prior target of at least 10% and targets annual adj EBITDA margin rising from 40% in 2021 to 45% in 2025 vs. prior view 35%-40%; SIRI was upgraded to Equal Weight from Underweight at Barclays; DIS announces ‘Hey Disney’ voice aide based on AMZN’s Alexa technology

·     Software movers; OKTA upgraded from Equal-weight to Overweight at Morgan Stanley w/$315 pt saying after slower topline over the past year, an improving demand environment and more buy-in with developers should drive stronger growth and upside in estimates going forward.