Closing Recap

Thursday, September 30, 2021

Equity Market Recap

·     U.S. stocks finish lower amid a sharp sell-off into the close (finished at lows), as the Nasdaq Composite extended its losing streak to 5-days while the S&P 500, Dow Jones Industrial Average, Dow Transports and Smallcap Russell 2000 closed lower as well. For the month, all major averages declined between 2% and 4% with the Nasdaq falling the most (-5.2%) and the S&P posting its worst monthly return since the beginning of the pandemic of March 2020 (-4.6%). Still, the S&P 500 is on pace to record its sixth consecutive quarterly gain and is currently up 1% for the quarter and the Nasdaq is also on pace to notch a quarterly gain.

·     It has been a tough month of headlines for investors, including an uptick in Covid cases, higher inflation fears (rising yields) amid surging energy/natural gas prices, the Federal Reserve signaling that it would start to reduce its bond buying as soon as November and possibly begin to raise interest rates next year, and contagion fears from debt-laden property developer China Evergrande Group. Now add into the equation the debt ceiling extension in question and the coming House vote on a $1 trillion infrastructure bill. As expected, this afternoon, the Senate voted 65-35 to approve temporarily funding the federal government through December 3 and the bill was sent to the House for a vote later today – though a Mid-October default remains on the table for now. Investors will continue to face headwinds in Q4, as the Fed, inflation, supply disruptions, and Covid all factor into market thinking.

·     Stocks/sector movers: Retail sector underperforms as BBBY plunges on a quarterly miss with a cautious outlook, KSS plummets after Bank of America double-downgrades to Underperform, FL drops sharply as B of A initiates at Underperform, DLTR rolls on Piper’s note highlighting near-term headwinds (GPS, HBI, BBWI, ROST, PVH, TPR among biggest losers in the S&P); KMX loses over 10% as the largest decline in the S&P on its quarterly miss, PAYX among top gainers on its beat-and-raise, MKC 52-week lows despite qtrly beat as it lowers FY EPS, operating income forecasts; SPCE spikes after the FAA clears it to fly following its investigation of an off-course flight in July; PRGO soars after settling with Irish authorities to pay EUR 297B (~$343.9M) in a 2018 tax dispute that officials originally called for the company to pay EUR 1.6B (~$1.9B), drawing an upgrade at Jefferies; Semis outperform, stay in the green despite market weakness.

·     Economic data this morning was mixed with GDP in-line with estimates on strong consumer spending, but inflation readings also above views (PCE), while jobless claims disappoint, coming in above expectations. Oil prices rise amid bullish reports that China’s government ordered its state-owned energy companies to stock up on energy supplies for winter, which helped offset bearish news that OPEC may signal plans to further boost production when it meets next week. Natural gas prices jumped 60% this quarter to settle at $5.867 mln btus, while oil prices rose 2.1% for the quarter and 9.5% for the month. Cryptocurrencies surged on the final day of the month/quarter with Bitcoin rising over 7% to above 44K and Ethereum reclaimed 3K.

·     In Asia overnight, China has urged financial institutions to help local governments stabilize the rapidly cooling housing market and ease mortgages for some homebuyers, another signal that authorities are worried about fallout from the debt crisis at China Evergrande Group. The regulators asked banks to refrain from cutting off funding to developers all at once. Meanwhile economic data was mixed as China Manufacturing PMI for Sept reported at 49.6, below the 50.0 estimate and prior 50.1 reading, the first contraction since Feb. 2020. China Non-Manufacturing PMI for Sept at 53.2, above est. 49.8 and prior reading of 47.5 in August.

Economic Data:

·     U.S. Q2 GDP Final +6.6% (in-line) vs. prior estimate which compares with Q1 GDP of 6.3%; GDP Annualized (Q/Q) Q2-T +6.7% vs. est. 6.6%; Q2 PCE price index 6.5% vs. prior +6.5% and core PCE 6.1% (vs. consensus +6.1 pct), and prior 6.1%; U.S. Q2 consumer spending +12.0% vs. prior 11.9% and Durables +11.6% vs. prior +11.3%; Q2 business investment +9.2% vs. prior 9.3%

·     Weekly jobless claims rose to 362K from 351K prior week and above est. 335K; the 4-week moving average rose to 340K from 335,750 prior week; continued claims fell to 2.802M from 2.82M prior and est. 2.8M; U.S. insured unemployment rate fell to 2.0% from 2.1%

·     Chicago PMI for Sept reported at 64.7, below the consensus forecast 65 and prior 66.8

Commodities

·     Oil prices finish higher as WTI crude oil futures settle at $75.03 per barrel up $0.20 cents, 0.27%, but finished well the highs of $76.07 after headlines that OPEC+ was considering options for releasing more oil to the market at next week’s meeting, Reuters reported citing four OPEC+ sources. Prior to those headlines, oil had been edging higher after rising above $75 a barrel this week but dipped to $74 in the morning (lows $73.14) with bearish factors such as rising U.S. crude inventories and a strong dollar weighing on sentiment, offsetting an expected supply deficit in coming months due to Hurricane disruptions which had sent oil to multi-month highs. There were also reports that China was prepared to buy more oil and other energy supplies to meet growing demand which helped buoy prices.

·     Gold futures rebounded after plunging Wednesday amid a surging dollar, with December gold rising $34.10, or 2%, to settle at $1,757 an ounce. For the month, gold prices saw losses of about -3.4% and declined -0.8% for the quarter. Bargain hunters snapped up shares of gold and gold miners after the recent tumble on rising treasury yields, and a stronger dollar amid a more hawkish Fed outlook last week. Supporting gold was haven buying amid fears over a Chinese real estate crash and slowdown, and if that toxic debt can spread virally.

·     Treasury yields were little changed with the 10-year at 1.53% after jumping over the last week to their highest levels since the summer. The U.S. dollar took a breather after touching 1-year highs on Wednesday, with the euro falling below the 1.16 level. The dollar has perked up amid rising expectations the Fed will soon begin its asset tapering in the next month or so and after moving up its timeframe for interest rate hikes to 2022.

Sector News Breakdown

Consumer

·     Retailers; Online shoppers will be buying less this holiday season, but spending more as holiday e-commerce could rise 7% during November and December to reach a record $1.2 trillion globally, according to a Salesforce forecast released yesterday. While the actual amount of dollars spent is seen rising, shoppers will likely be purchasing fewer items. That’s because inflation will make gifts as much as 20% more expensive compared to last year, according to Salesforce. The quantity of orders, meanwhile, is expected to fall 2% worldwide; KSS double downgraded to Underperform with $48 tgt at Bank America saying reduced receipts from supply chain issues could hinder Kohl’s sales recovery and offset both progress its making on women’s and the benefit of Sephora (see the biggest risk to consensus in 1H22 and our F22 estimate is 10% below consensus); FL reinstated Underperform at Bank America with $48 tgt citing earnings risk from supply issues at NKE and other suppliers, as well as waning stimulus dollars.

·     Auto sector; in auto retail, KMX shares slip as Q2 EPS $1.72 misses the $1.90 estimate while Q2 revs $8.0B tops consensus of $6.9B and qtrly combined retail and wholesale used vehicle unit sales were 419,895, an increase of 19.9%; ABG upgraded to buy from Hold at Truist with $250 tgt following yesterday’s announcement of the planned acquisition of the 8th largest dealership group in the U.S.; Wedbush said they have confidence that GM at its upcoming analyst day next week will further detail the EV roadmap, financial goals, and give investors more comfort in the EV vision despite the current chip shortage; WKHS announces the departure of CFO Steve Schrader and appoints Greg Ackerson, the company’s corporate controller, as interim CFO; NKLA in pact with OPAL Fuels to develop and construct hydrogen fueling stations; RIDE is in talks to sell the northeast Ohio assembly plant it acquired from GM to Taiwan contract manufacturer Foxconn, Bloomberg reported; BMWYY raises FY21 guidance for profit margin to 9.5-10.5% from 7-9%, financial services ROE to 20-23% from 17-20%, and sees FCF in auto segment ~EUR 6.5B as the continued positive pricing effects for new and pre-owned vehicles will overcompensate for the negative sales volumes effects of the chip shortage

·     Housing & Building Products; home furnishing stocks under pressure, led by BBBY after the company posted a wide Q1 EPS and sales miss (Q2 adj EPS $0.04/$1.985B vs. est. $0.52/$2.06B) saying following solid growth in June, they saw unexpected, external disruptive forces towards end of quarter that impacted our outcome and that August traffic slowed significantly and, therefore, sales did not materialize as we had anticipated; shares now down -12% on miss (shares of WSM, and HomeGoods owner TJX active)

·     Restaurants & Consumer Staples; OLPX 73.7M share IPO priced at $21.00; LNDC slides after Q1 top/bottom line miss as Q1 adj EPS loss (-$0.23) vs. est. loss (-$0.12); Q1 revs $128.8M vs. est. $129.2M; MKC Q3 EPS $0.80 tops est. $0.72 as sales rose 8% to $1.55B vs. est. $1.54B but mixed guidance as lowers year EPS view but raises lower end of sales range for year to +12%-13%, from prior +11%-13%; STZ named as its top beverage sector pick into the end of the year pointing to healthy depletions, minimal seltzer exposure and margin upside in making the bull call; SBUX downgraded to Neutral from Overweight at Atlantic Equities saying with shares already reflecting a healthy 60%+ premium to the market, we prefer to take a step back; in tobacco, MO, PM slip early after the companies have been ordered by the International Trade Commission to halt the import and sales of their IQOS heated tobacco device

Energy

·     E&P and Majors; Citi downgraded APA to Hold from Buy and cut its target to $23 from $27 given limited near-term upside from Suriname and inferior FCF yield and incremental cash return prospects vs peers; Wolfe upgraded COG to Outperform after saying 2H21 NGL realization estimates need to move higher after meeting with several producers and after the XEC merger was approved yesterday and is set to close tomorrow; Bernstein raised their price target on TOT by 6% to €51 and their EPS estimates for 2021 by 1% and 2022 by 2%, and also lifted their price target on 2021 top pick LNG to $116 (19% upside)

·     Utilities & Solar; JKS shares rise after a company unit gets clearance from listing committee to proceed with proposed IPO in China; BWEN received over $12 million in new tower orders from multiple wind turbine customers and said including new orders, it has sold ~25% of its full-year 2022 optimal tower production capacity; Vertical Research upgraded PEG to Buy

Financials

·     Bank movers; ABCB downgraded to EW at Stephens as valuation has returned to its 10-year median after running +107% over the last 11.5 months (vs +73% for Nasdaq Bank Index) and they see risk to the downside for consensus estimates on lower NII/mortgage banking estimates; in insurance; RBC lowered their estimates on HIG, KNSL, RLI that incorporates higher catastrophe loss assumptions mainly from Hurricane Ida; WLTW got a bump after Dow Jones reported Starboard and Elliot have taken stakes in the company; MS, IBKR face federal probe as the FBI, SEC look into handling of funds traced to Venezuelan oil conglomerate

·     Consumer Finance; BAC aggregated credit and debit card data for the 7-days ending Sept. 25 increased +16.7% YoY and +19.8% over a 2-yr period; INTU reaffirmed its Q1 and FY EPS and revenue outlook during its analyst day today

·     Financial Services; PAYX Q1 adj EPS 89c vs est. 80c on revs $1.08B vs est. $1.04B and raised FY outlook for revenue growth to +8% from +7% and adj operating margin to 38-39% from 38%; UBS upgraded FDS to Neutral on the company’s higher sustainable growth rate from its multi-year investments, favorable end market environment, and potential further upside with the new CFO possibly bringing incremental financial rigor, though they are only N following outperformance; Raymond James upgraded BKI to Outperform with an $83 target as they believe EPS is poised to return to double-digit growth in 2022 and downside from lower mortgage origination activity is relatively modest; Seaport initiated NAVI at Neutral and says shares are fairly valued at $22-24

·     Bitcoin news; Prices of Bitcoin, Ethereum, Litecoin and other cryptocurrencies rebound on the day from their weekly selloff beginning Sunday night; BTBT to sell approx. 13.5M shares in private offering at $5.93/share; Bitcoin moved back near$44K while Ethereum edged above $3K mid-morning.

·     REITs; China Evergrande Group (3333.HK) missed paying bond interest due on Wednesday, two bondholders said, its second unpaid offshore debt obligation in a week, although the cash-strapped company made a partial payment to some of its onshore investors, Reuters; Truist downgraded HTA to Hold since it is approaching their $31 price target and upgraded SBRA to Buy based on a positive inflection in occupancy and rent coverage, confidence in continued support for skilled nursing and senior housing operators, and attractive valuation; Mizuho sees a good entry point in EPRT after its 12% selloff this month after meeting with management

Healthcare

·     Pharma movers; MRK confirmed prior press reports this week as it acquired XLRN for $180 per share in cash for an approximate total equity value of $11.5 billion; PRGO soars after settling with Irish authorities to pay EUR 297B (~$343.9M) in a 2018 tax dispute that officials originally called for the company to pay EUR 1.6B (~$1.9B), drawing an upgrade at Jefferies; ALZN rises after the FDA has agreed to Alzamend’s plan to conduct a combined Phase 1 and 2 clinical trial for AL002.

·     Biotech movers; FOLD upgraded to Overweight at JPMorgan saying the biotechnology company can unlock significant value with its Galafold and AT-GAA products; TRVN reports data from 30 patients enrolled in its proof-of-concept study testing its experimental therapy, TRV027, in hospitalized COVID-19 patients; INCY and partner LLY report detailed results from two late-stage studies testing their drug, Olumiant, for the treatment of adults with severe alopecia areata; VIR provided an update that it had binding agreements for the sale of more than 420K doses of Sotrovimab, which constitutes the most meaningful commercial update that the company has provided since garnering the EUA; REGN COV meets primary endpoint in Phase 2/3 trial in patients hospitalized with COVID-19.

·     MedTech and Healthcare Services; ANGO shares jump after the company raised its full-year forecast to a range of $310M to $315M from a previous forecast of $305M to $310M after a Q1 beat; Cowen noted CMS released its 2022 Medicare Advantage Landscape file highlighting a 10.5% yty drop in 2022 premiums which could erroneously spark margin concerns (UNH, ANTM, CI, HUM, MOH). More importantly excluding subsidized EGWP and duals plans retail MA premiums will increase 0.8% yty; supporting a view of conservatism when coupled with the rich underlying MA funding environment for 2022

Industrials & Materials

·     Aerospace & Defense; SPCE was cleared to fly by the FAA following an investigation after the Unity 22 flight went slightly off-course in July. The FAA approved corrective actions that include updated calculations to expand the airspace for future flights and ensuring real-time mission notifications are sent to air traffic control. In Transports, Bank America noted in its cred card spending data that spending on airfare has improved to -21% over a 2-year period, up from the low of -37% 2-year growth in the first week of September.

·     Metals, Materials & Chemicals; China hiked its annual rare earth output quotas on Thursday by 20% year on year to their highest levels on record, as it seeks to increase supply for manufacturers, Reuters noted. A statement from the Ministry of Industry and Information Technology said the 2021 rare earth mining output had been set at 168,000 tonnes, up from 140,000 last year (shares of MP, AREC among rare earth names); ALB agreed to buy lithium converter Guangxi Tianyuan New Energy Materials Co. for about $200 million, saying it would expand its lithium production capabilities and add conversion capacity in China; MEOH tgt raised to $60 at BMO as valuation disconnect continues to correct and high FCF generation de-risks G3; SCHN guided prelim Q4 EPS $1.75-$1.83 above estimates of $1.57

Technology, Media & Telecom

·     Internet; NFLX adds to recent gains, and trades at year highs following the viral success of a South Korean show, Squid Game, less than two-weeks after its release; BABA ests cut at Citi and Bernstein to reflect our latest expectations for Q2 reporting and beyond, incorporating weaker near-term GMV and customer management revenue growth; in auto eCommerce (CVNA, SFT, VRM), Truist said they expect 3Q ASP to outperform, along with better-than-expected unit sales (vs cons) for CVNA and VRM and inline/better volumes for SFT, based on our analysis of data

·     Software movers; SNOW upgraded to Buy from Neutral with $353 tgt at BTIG after conducting a number of field checks over the last few weeks as they think SNOW is sitting in front of a huge opportunity in a rapidly growing data analytics software market; in video games (ATVI, EA, TTWO), KeyBanc did a dive into the current valuation cycle, which suggests we’re near multiyear low valuations with more transitory concerns than the last time we saw these levels and believe the group represents an attractive risk/reward; Piper raised ests on TWLO after SDK analysis suggests the number of iOS applications using Segment has tripled to 23K from 8K pre-acquisition; PLTR may lose a lucrative contract for ICE’s tool that targets unauthorized workers, according to a government document, Business Insider reported

·     Media & Telecom movers; FOXA upgraded to Buy from neutral with $48 tgt at Rosenblatt saying the acceleration of sports-betting consolidation and media company alliances highlights a growing urgency to secure walled garden scale amid a crowded sports gaming market