Market Review: January 21, 2020

Darwin SarazaDaily Market Report

Closing Recap

Tuesday, January 21, 2020

Index

Up/Down

%

Last

DJ Industrials

-151.25

0.52%

29,196

S&P 500

-8.76

0.26%

3,320

Nasdaq

-18.14

0.19%

9,370

Russell 2000

-13.77

0.81%

1,685


 

Equity Market Recap

·     U.S. equities pulled back overnight from record highs as worries about the fallout from a deadly virus outbreak in China and a gloomy growth outlook from the IMF weighed on market sentiment, ahead of a busy week of corporate earnings. China officials confirmed the new coronavirus outbreak killed six and that it could spread between humans, renewing fears of a global pandemic (such as SARS, which killed nearly 800 people in 2002-03). Stocks managed to erase those losses my midday as the greatest unloved bull market of all-time continued with stocks making new highs…before CNN reported “The US Centers for Disease Control and Prevention is expected to announce this afternoon that the first case of Wuhan coronavirus has been reported in the United States, in Washington State (later confirmed by the CDC).” That took a little wind out of the sails in stocks which resumed modest selling pressure. In addition to the virus news in the U.S., shares of Boeing dropped to 52-week lows following a CNBC report that Boeing doesn’t expect regulators to sign off on 737 Max until June or July, months later than the manufacturer previously expected (that took the Dow Jones Industrials to fresh daily lows). Stock sectors such as airlines (AAL, DAL), cruise lines (RCL, CCL) and gaming stocks (WYNN, MLCO) were hit the hardest along with China based ADRs, especially ahead of the week long holiday in China. Back to the economy, a top IMF official said that a slowdown in global growth appears to have bottomed out but there is no rebound in sight. The IMF trimmed its global growth forecasts for 2020 and 2021. The U.S. dollar was down slightly, along with weakness in oil and gold while Treasury prices edge higher as yield dropped. No major economic data today to shake up markets nor Fed speakers ahead of the busy week of earnings.

 

Commodities

·     Oil prices fell as WTI crude dipped 20c to settle at $58.34 per barrel, while Brent slid 61c to $64.59 per barrel as commodity prices were weak across the board on fears the coronavirus will have an impact on the country’s economy. Gold prices edged lower, falling -$2.40 to settle at $1,557.90 an ounce, failing to rally with the modest dip in the dollar, as concern of a viral outbreak in China that may cut demand for the precious metal ahead of it New Year celebrations this weekend weighed. Note the Chinese tend to buy more gold for the holiday celebration. 

 

Currencies & Treasuries

·     The U.S. dollar bounced off earlier lows, with the dollar index (DXY) down slightly on the day above the 97.50 level, flattish vs. euro (below the 1.11 level) and slipped against the Japanese yen below the 110 level. No major economic data or Fed speakers to shake up currency markets on the day. The buck has recovered off December lows of around 96.25 since the China-U.S. trade deal signing. Treasury prices rise to afternoon highs as yields dropped after the U.S. CDC announced the first case of the "Wuhan" coronavirus in the U.S. The 10-year yield fell over 5 bps to lows below 1.77% while the 2-year declined 2 bps to 1.52%.

 

 

Macro

Up/Down

Last

WTI Crude

-0.20

58.34

Brent

-0.61

64.59

Gold

-2.40

1,557.90

EUR/USD

-0.0002

1.1093

JPY/USD

-0.37

109.82

10-Year Note

-0.052

1.769%

 

 

Sector News Breakdown

Consumer

·     Retailers; LB was upgraded to overweight at KeyBanc saying valuation is attractive given the potential for a spin-off or sale of Victoria’s Secret/says the sale of the VS unit could fetch about $4-$6 per share, which would help LB’s Bath & Body Works with debt paydown; VFC said to explore strategic alternatives for the occupational portion of its work segment; COST upgraded to outperform at Oppenheimer and raise tgt to $335 from $300 saying recent underperformance offers an entry point as valuation is more attractive now; in hardline retail, DLTR, BIG and HOME downgraded at KeyBanc considering competitive pressure and EPS risks as believe Hardlines investors need to be increasingly selective (said continue to recommend DG while see TPX, PRPL and AAN as compelling stocks with company-specific drivers; TSCO was upgraded at Morgan Stanley while Wedbush was cautious as see more downside risk than upside risk

·     Consumer Staples and Restaurants; WW shares slumped as over the weekend was reported that competitor Noom signed up 55K on New Year’s Day to lose weight w their smartphone app; Stifel said are more constructive on shares of CL (raise TP $72 to $77) anticipating accelerating sales growth to result in modest multiple expansion and maintain Buy rating on shares of EL (raise TP $200); QSR upgraded to buy at Deutsche Bank as view it as a long-term winner within the industry that has provided investors with a credible plan for (at least) another decade’s worth of global unit and system sales growth; SBUX said it is exploring meat alternatives for its breakfast

·     Housing & Building Products; HD avoids trouble in Mexico after a top trade union suspends its threat to launch a strike at stores across the nation over labor demands; LL was downgraded to Underweight at Morgan Stanley with a price target of $5, down from $9 as thinks it will be hard to repeat the strong performance of 2019 given tough comparisons, slower growth and the consumer decelerating; OC was upgraded at Zelman to buy from hold; JELD was upgraded to overweight at Wells Fargo as the U.S. Door industry’s pricing structure appears to be improving

·     Casino & Leisure movers; casino stocks (WYNN, LVS, MLCO, MGM) fall as the World Health Organization is considering declaring an international public health emergency over the coronavirus in China ahead of week-long Lunar holiday; LVS was downgraded to equal-weight at Morgan Stanley as favor regional US stocks (BYD, ERI, PENN) as outsized US sports betting growth isn’t priced in/expect Macau to inflect but prefer cheaper HK stocks and are concerned about mass mkt forecasts

·     Auto sector; UBER agreed to sell its Indian food delivery unit to local rival Zomato, a deal that will give it a 9.99% stake in the latter (worth around $300M) and ~$35M in cash for reimbursement by Zomato of goods and services tax 9pushing shares higher); TSLA shares jumped again, helped after New Street Research raises its price target to $800 from $530

·     Education services; TAL shares slide as reports revenue rose 47.2% Y/Y in Q3 mainly driven by an increase in total Student Enrollments of normal priced long-term course while EPS missed, and Q4 rev outlook trails estimates; EDU was downgraded at CLSA despite 2QFY20 results beat revenue estimates by 2%, and massively beat OP and NP expectations (as notes stock up over 111% over the last 12-months)

 

Energy

·     Energy stocks; oil-field services company HAL swung to a Q4 loss as it booked impairments and other charges as well as lower revenue (but adjusted EPS topped estimates) – recorded impairments and other charges of $2.2B while revs fell to $5.19B from $5.94B YoY; SLB was downgraded at Cowen as find SLB s strategic repositioning and guidance set up for 2020 creating downward revision risk

·     E&P sector; WPX, EQT, and EOG upgraded at SunTrust and CDEV downgraded while making tgt changes as revised model/growth & sustained FCF as well as leverage, shareholder returns & valuation and believe 2020 will be a "show-me" story; in coal sector, stocks were pressured across the board (ARCH, BTU, HCC, ARLP)

 

Financials

·     Bank movers; regional banks out with earnings as SBNY EPS of $2.78 beat by 8c with Q4 NIM 2.71% vs. 2.89% YoY and in-line expenses/CRE loan balances declined while C&I grew; CMA Q4 EPS of $1.85 beat by 11c and beat on provisions but guidance worse across NII, fees, expenses; BK was upgraded to buy at both Citi and Credit Suisse following underperformance since earnings, saying weakness overdone given less than 5% decline in estimates on higher expenses; UBS shares weigh on European banks as missed its key targets for 2019, as cut its mid-term guidance (now targets a return on Common Equity Tier 1 capital of between 12% and 15% and a cost-income ratio of 75%-78% through 2022); MS was downgraded at Citigroup and BAC downgraded by Atlantic Equities; USB downgraded to underperform at Credit Suisse

·     Insurance; AXS reported modest operating income for the fourth quarter on a preliminary basis, citing a pretax loss for catastrophes and other weather-related events of $140M net of estimated reinsurance recoveries and reinstatement premiums; Citigroup initiated on U.S. P&C with a neutral sector view, yet a preference for P&C over Life (Buy ratings on ALL, AON, MMC, PGR, and WLTW and Neutral ratings on AIG, CB, HIG, RE, RNR, and TRV)

·     Consumer finance and lending; Morgan Stanley downgraded WEI and YRD to underweight despite discounted valuation levels as likely earnings decline in 2020 with business model uncertainty due to materializing P2P disruption risks will probably lead to further derating

 

Healthcare

·     Pharma movers; AZN and MRK said the FDA accepted and granted priority review to a supplemental new-drug application for Lynparza in a form of prostate cancer; AZN said that two of its medicines were granted orphan drug status by the FDA for the treatment of a common type of liver cancer (Imfinzi and Tremelimumab); ARWR shares side after Leerink initiated with an underperform and $32 tgt (Street low) as safety profile and regulatory path for lead asset ARO-AAT remains uncertain

·     Biotech movers; several stocks rising amid the new virus outbreak in China, boosting sentiment for biotech names leveraged to drugs for infectious diseases (NVAX, NLNK, INO); GILD was downgraded at Guggenheim in broad sector call saying heading into 2020, KRYS, AVRO and ORTX are their top picks; EPZM active as the U.S. FDA is expected to decide whether to approve co’s drug tazemetostat to treat epithelioid sarcoma, a rare, slow growing type of cancer, by Jan. 23; BGNE said the Phase 3 trial of tislelizumab in combination with two chemotherapy regimens for the first-line treatment of squamous non-small cell lung cancer met its primary endpoint at the planned interim analysis; AMGN was upgraded to outperform at Evercore/ISI

·     Medical equipment and devices; ARAY upgraded to buy at BTIG after the company announced a long-term revenue outlook that calls for 8-12% revenue CAGR for FY21-23, driven in large part by expected Chinese revenue; LH and DGX tgts were raised at UBS

·     Healthcare services and providers; FMS was upgraded to buy at Jefferies as believe the market is not giving credit for its homecare strategy and they see a favorable risk/reward on ROIC; OMI shares jump after Baird upgraded to outperform and raise tgt to $9; TDOC rose after tgt hike at RBC earlier to $110 from $100 saying the InTouch acquisition strengthens our confidence in TDOC’s ability to sustain 20-30% organic revenue growth longer, better balances its strategy (provider vs. payer/consumer) and further distances it from peers as the virtual health leader

 

Industrials & Materials

·     Transports; airline stocks pressured (DAL, UAL, LUV) as the confirmed cases of the coronavirus in China now exceed 200, as it will likely have big impact on the airline industry, especially in China as it comes during the Chinese New Year (Chinese airlines ZNH, CEA fell); DAL was upgraded to buy with a target price of $76 at Argus as view Delta as a well-managed airline with a strong balance sheet and cash flow, industry-leading execution, and stable operating earnings; in tanker stocks (DSX, NMM, SBLK), dry bulk shipping rates fall again as the Baltic Dry Index fell 5.49% to 689 points in London (Capesize rates were down 8.99% and Panamax rates were off 5.78% to drive the BDI lower); JBHT was upgraded to outperform and $130 tgt at Raymond James on view that JBHT has seen “peak pain” across a number of metrics including EPS declines, ICS losses, intermodal volume optics

·     Metals & Materials; in steel sector, Jefferies moves U.S. steel sector view from positive to neutral as believe the steel pricing upcycle is nearing peak and the demand environment remains tepid; containerboard stock (WRK, IP, GEF, PKG) shares weak after industry journal Pulp & Paper Week published U.S. domestic kraftliner prices for January, which were down $10/ton; BHP maintains its full-year production guidance for iron ore and thermal coal, even as the latter is affected by the Australian bushfires; RS was downgraded at Cowen on balanced risk/reward; VALE shares fell as Brazil prosecutors file charges (crimes including homicide) for last year’s deadly dam collapse

 

Technology, Media & Telecom

·     Internet; Chinese ADRs BIDU, BABA, WB, BILI, VIPS among Chinese ADRs pressured due to virus breakout concerns; FB tgt raised to $270 at Morgan Stanley as remain bullish as the runway for online ad growth is long/expanding, Instagram Stories/Core FB can drive 23%+ ’20 ad rev growth and see ~$5bn of emerging ad products for ’21 and beyond; TCOM was downgraded to market perform at Bernstein, sending shares tumbling

·     Semiconductors; Citigroup positive on semi-equipment names LRCX, MKSI as raising their global WFE spend model to $47B/$55B (Street $45B/$50B) from $45B/$51B to reflect recent TSMC capex hike and media reports that Samsung will double memory equipment spend after a sharp decline last year (raise tgt on both); LRCX ests and tgt raised to $325 at Needham to reflect the improving WFE in 2020 and our updated outlook into 2021; INTC was upgraded to hold at Jefferies saying share loss, a transistor transition disaster, changing of the mgmt guard, and a CEO bonus that inflects with the stock in the low $60s tell us the table is set for change at INTC

·     Media & Telecom movers; LGF was downgraded to EW at Wells Fargo after cutting estimates at Starz; LBTYA downgraded to hold at Jefferies saying operational headwinds force them to cut estimates yet again as in LBTY’s levered equity model, profits in organic decline put the allocation of VOD deal proceeds for cash return in question; AVYA upgraded to buy at Goldman Sachs and raise tgt to $18 as believe the economics of the announced RingCentral deal are likely to drive Avaya’s revenue and profitability above consensus expectations

·     Software , Hardware & Component news; TEL was upgraded to overweight at JPMorgan on the stabilization of the automotive end-market (44% of revenue), recent positive data points in industrial, strong incremental margins, and leverage to vehicle electrification; MSFT touched record all-time highs; RNG upgraded to buy at Goldman Sachs and raising our 12-month price target to $230 from $189 as we see continued runway for outperformance driven by secular growth from UCaaS adoption, enterprise traction

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Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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