Traders Market Weekly: Consumers Along for The Ride

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    Dow 34,566.17 -171.89 -0.49%
    S&P 500 4,401.67 -16.97 -0.38%
    Nasdaq 13,790.92 -0.24 -0.00%
    GlobalDow 4,178.22 -63.85 -1.51%
    Gold 1,873.50 31.40 1.70%
    Oil 95.01 1.91 2.05%


    HAPPY Valentines Day 2022 to all


    MMM 3M’s drop-off in mask sales adds to lingering supply chain issues that have battered the company (157.06 -2.48)

    Already facing supply chain issues across many of its business lines, Dow component 3M (MMM) is now contending with another significant headwind: namely, sharply declining mask sales. As the highly-contagious Omicron variant spread in late 2021, sales of MMM’s N95 masks reaccelerated, providing a boost to its better-than-expected 4Q21 report. For context, CFO Monish Patolawala commented during the earnings conference call that MMM’s respirator business came in $40 mln better than anticipated. Since that earnings call on January 25, however, new virus cases have plunged and many states, businesses, and schools are dropping their mask mandates.

    Due to the volatility and uncertainty surrounding the supply chain and COVID-29 situations, MMM refrained from providing FY22 guidance when it reported 4Q21 results. Now, it appears that MMM has better visibility, but its outlook is a bit tepid with the company guiding for FY22 EPS of $10.15-$10.65 on revenue growth of just 1-4%. The midpoint of both of these guidance ranges are essentially inline with expectations, so the news could be worse. In fact, considering that eroding demand for masks created a $0.45/share hit to MMM’s FY22 EPS guidance, the forecast paints a more positive picture for its other businesses.

    However, the company’s update isn’t going over very well with investors, likely for the following reasons:

    The speed and the severity of the drop-off in respirator sales may be catching some people off-guard. Less than a month ago, MMM reported that strengthening respirator sales played a key role in its Q4 outperformance.

    There’s a sense that the company is continually putting out fires, preventing it from generating stronger results. Prior to this mask issue, MMM dealt with falling sales in its Consumer segment due to the work-from-home shift. Rewinding a bit further, COVID-19 wreaked havoc on its Transportation & Electronics segment as auto OEMs idled plants to slow the spread of the virus.

    Today, COVID-19 is still impacting the Transportation & Electronics segment, but in a different way. Specifically, chip shortages and logistical bottlenecks are causing auto OEMs to cut production, rippling through to MMM.

    MMM is also dealing with raw material inflation, adding more pressure onto its margins. In Q4, its operating margin slid by 240 bps yr/yr to 18.8%.

    Meanwhile, in the background, MMM’s ever-present legal troubles continue to hang over the company. A majority of the litigation against the company stems from environmental claims due to its use of PFAS chemicals. According to a Bloomberg report, settlements for PFAS-related cases alone may total over $20 bln.

    It doesn’t come as a surprise that mask sales are on the decline, although seeing the exact financial impact of the drop-off makes the situation hit home for investors. In isolation, the decrease in mask sales isn’t overly alarming since it’s been anticipated for a while. However, it adds to an already mixed picture for MMM as it contends with supply chain disruptions, inflation, and litigation troubles.

    via Briefing


    XLE Sector Briefing: Energy (68.27 -2.14)

    Key factors driving today’s performance include:

    Pullback in the best performing sector of the quarter despite a higher price of oil. WTI crude is up $0.33, or 0.4%, at $93.43/bbl after setting a fresh high for the year at $94.94/bbl. The energy sector has narrowed its Q1 gain to 22.7%.

    Losses in all components of the sector with several names backtracking from 52-week highs.

    Notable movers:

    APA (APA 32.14, -2.00, -5.9%): weakest performer in the sector, falling to a three-week low.
    Marathon Oil (MRO 21.13, -1.08, -4.9%): backpedaling from its best level since October 2018.
    Occidental Petroleum (OXY 41.15, -1.83, -4.3%): slipping from a two-year high.
    Pioneer Natural Resources (PXD 221.63, -9.26, -4.0%): returning to its opening level from Thursday.
    Devon Energy (DVN 51.99, -2.12, -3.9%): surrendering Friday’s gain.
    Diamondback Energy (FANG 130.42, -5.15, -3.8%): slipping from its best level since October 2018.
    Halliburton (HAL 32.31, -1.21, -3.6%): slipping from its best level since November 2018.
    Schlumberger (SLB 39.20, -1.42, -3.5%): surrendering Friday’s gain.
    Phillips 66 (PSX 89.94, -3.29, -3.5%): slipping from its best level since June.
    EOG Resources (EOG 112.82, -3.93, -3.3%): slipping from its best level since October 2018.
    Exxon Mobil (XOM 77.80, -2.41, -3.0%): falling to its lowest level in nearly two weeks.
    ConocoPhillips (COP 90.88, -2.64, -2.8%): falling to a one-week low.
    Chevron (CVX 135.59, -3.22, -2.3%): surrendering Friday’s gain.
    HollyFrontier (HFC 37.94, -0.68, -1.8%): best performer in the sector, trading in the upper half of Friday’s range.


    JRD Aerojet Rocketdyne trades lower as deal with Lockheed Martin gets terminated (36.98 -2.04)

    Aerojet Rocketdyne (AJRD 36.98, -2.04, -5.2%) is trading lower on news that its deal to be acquired by Lockheed Martin (LMT) has been terminated. AJRD makes rocket propulsion systems and hypersonic engines for space, defense, civil, and commercial applications while Lockheed Martin is a major defense customer. Given the companies’ seeming compatibility, the deal made sense to us when it was announced in December 2020.

    First off, the deal’s termination does not come as a big surprise. Last month, the FTC filed a lawsuit to stop the deal, citing anti-competitive concerns. We can see why the FTC had reservations. Lockheed Martin is AJRD’s largest customer at 34% of sales, but LMT rival Raytheon (RTX), which is a major supplier of missiles to the Department of Defense, is also a key customer at 17% of sales.
    Raytheon has been vocal about its opposition to the deal, understandably. Solid fuel rocket motors are clearly a vital component for the US missile industry. The deal would have given LMT a big advantage, as there would be concerns that LMT would favor its own needs over those of its competitors. There are not a lot of alternative rocket makers.
    When the FTC announced the lawsuit last month, we figured there was a less than 50% chance that the deal would go through. LMT could have fought the lawsuit, but that would have taken a lot of time and resources without guarantee of success.
    Going forward, this cancellation certainly lowers the likelihood that AJRD could get acquired and almost certainly eliminates the possibility of a defense company buying it. We could see a non-defense company acquiring it, such as a propulsion-related company in the aerospace supply chain. But AJRD sounds confident that it can stand on its own, saying today that it is confident in its future performance and noting that it has an impressive backlog that is more than 3x the size of its annual sales.
    Bottom line, when the deal was announced in late 2020, we had reservations about its potential to go through, and when the FTC filed its lawsuit last month, we felt the deal was on life support. That explains why shares of AJRD are not down more today; the stock had already taken a hit upon the filing of the lawsuit.

    We note that this is the second major deal to fall apart in as many weeks. Last week, NVIDIA (NVDA) backed out of its deal to acquire SoftBank’s Arm Holdings owing to significant regulatory challenges. These terminations are a reminder that not all deals close successfully, especially ones in which the target company is a key supplier to the acquiring company’s rivals. We are sure that the rivals were very vocal to the US government in both deals, and those concerns gained traction.

    via Briefing


    S&P Futures vs Fair Value: +55.0

    10 yr Note: 2.034%
    USD/JPY: 115.59 +0.06
    EUR/USD: 1.1353 +0.0046
    Europe: FTSE: +0.7% DAX: +1.4% CAC: +1.2%
    Asia: Hang Seng: -0.8% Shanghai: +0.5% Nikkei: -0.8%
    Gold (1855.60 -13.80) Silver (23.43 -0.42) Crude (92.67 -2.79)


    The global equity markets are mostly higher. Markets caught a bid upon the report that some Russian troops were pulled back from the Ukraine border. The effort afforded the market a relief rally that took form right around the European open. S&P Futures are up about 56 points to trade around the 4450 area. This is just off the high of 4457.00. The low was set about midway through the Asian session at 4381.75.

    In Asia, China rose 0.5% while Japan slid 0.8%. The Shanghai’s strength came on the back of a CNY100 billion liquidity injection into the banking system by the PBOC. Although the borrowing rate was left unchanged, the move helped the state’s medium-term lending facility. In Japan, the Nikkei struggled to find stability after fourth quarter GDP failed to meet expectations. The preliminary print showed growth of 5.4% year over year, but this fell below the forecast of 5.8%.

    In Europe, the major bourses are higher. The news of potential for de-escalation of tensions between Russia and Ukraine lifted sentiment. Automakers are enjoying a rally with the likes of Volkswagen, Porsche and BMW up 2-3%. Glencore is up nearly 3% after the commodity trading giant posted its fiscal year results.


    S&P 500 futures 1.7% above fair value; Nasdaq 100 futures 2.1% above fair value; DJIA futures 1.5% above fair value
    Key factors driving the futures market:
    Reports that Russia says it has started pulling back some troops from Ukraine border
    Short-covering activity

    Intel (INTC) buying Tower Semi (TSEM) for $5.4 bln, or $53.00 per share, in cash
    Marriott (MAR) tops Q4 earnings estimate by wide margin, speaking to pickup in travel interest
    WTI crude prices down 3.4% to $92.24/bbl, but natural gas prices +3.7% to $4.35/mmbtu
    Bank of Japan Governor Kuroda says easy monetary policy still warranted; PBOC injects $100 bln yuan into financial system

    10-yr note yield +3 bps to 2.03%; 2-yr note yield -1 bp to 1.58%


    Research calls of note:

    Upgrades: CPA, TKR, DTE, GEF, SPWR
    Downgrades: GPS, NI, OSK, PEP, WEB, UBS


    Thankful that some Russian troops from the “exercise” have been decreased
    and prayers that NO war occurs — as it’s a non-civilized approach to solving problems
    One day just like Star Trek, I’m hopeful we’ll move to type “1” civilization
    Markets are ROARING & OIL is down 4% … Hope inflation + supply-chain can be tamed in days ahead


    and two for TUESDAY featuring one of best jams of the 1980s
    and there are certain some BADMAN characters out there – lol


    When asked about his perspective on the United States in a May 2013 interview, Jaz Coleman explained:

    It’s different from 30 years ago. There’s no rebellion left. Everyone is just a passive zombie. Food supply has something to do with it – it’s dumbed down everyone to obese, lethargic corpses … People are worn down … It’s a fragmented society. People have access now to amazing amounts of information, but their attention spans are getting shorter, their focus is gone. Instant gratification. Instant knowledge orgasm! I think that a lot of the great thinkers couldn’t achieve what they did through a computer.[51]

    Laughing Lines – Jaz Coleman Interview



    Dow 34,988.44 422.27 1.22%
    S&P 500 4,471.01 69.34 1.58%
    Nasdaq 14,139.76 348.84 2.53%
    GlobalDow 4,218.19 39.42 0.94%
    Gold 1,854.80 -14.60 -0.78%
    Oil 91.98 -3.48 -3.65%

    If peace abounds, markets will return SKYHIGH


    Early Europe

    STOXX Europe 600: UNCH
    Germany’s DAX: -0.1%
    U.K.’s FTSE 100: -0.4%
    France’s CAC 40: -0.1%
    Italy’s FTSE MIB: -0.5%
    Spain’s IBEX 35: -0.2%


    Clearly in response to Biden

    Major European indices trade near their flat lines. German Chancellor Scholz said that admitting Ukraine into NATO is not on the agenda, and reports indicated that the promise, which should be welcomed by Russia, will be put into writing. U.K.’s CPI increased at its fastest yr/yr rate in 30 years, inviting speculation about more rate hikes from the Bank of England. Bank of France Governor Villeroy de Galhau said that the ECB’s asset purchases could end in Q3.

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