Closing Recap

Wednesday, April 01, 2020

Equity Market Recap

·     U.S. stocks tumbled on Monday as global stocks add to YTD losses after President Trump warned last night that the U.S. faces a "very, very painful two weeks," and that the death toll in the U.S. could rise to 240,000 (currently around 4,000 deaths and total cases nearing 200K) as the coronavirus pandemic continues to wreak havoc on global stock markets. Energy stocks tumble further as oil prices edge lower following inventory data that reminded markets just how oversupplied the industry is, while President Trump is set to meet Friday with the heads of some of the largest U.S. oil companies to discuss government measures to help the industry weather an unprecedented oil crash. Nonfarm private sector in the U.S. lost 27,000 jobs through March 12, according to a report from ADP (ahead of the nonfarm payroll report Friday which is expected to show -100K jobs lost), while jobless claims data tomorrow is expected to be gloomy after 3.3M people filed for unemployment last week. Today’s declines followed the worst first quarter on record for the Dow yesterday, down 23.2%, while the S&P 500 retreated 20% and the NASDAQ 14.2%. Investors returned to haven investing, driving the dollar higher against the euro (but down vs. the yen) and sending the 10-year Treasury yield down below the 0.6% level.

·     Normally perceived defensive sectors such as REITs and utilities led broader market losses, with REITs hurt amid store closures, loss of jobs and widespread economic hardship seen crimping revenue that the companies would ordinarily get as April rent comes due. Transportation stocks extend losses as travel restrictions remain in place globally, taking a massive toll on the energy complex which is fighting for its existence these days with WTI crude falling by the day to 18-year lows (after posting a 66% decline in the first quarter and 54% drop in March alone). Consumer Staples were one of the few bright spots in an overall somber day that saw financials plunge on declining Treasury yields (many analysts slashing estimates), retails and restaurants fall further as store closures limit any possible revenue.

·     In an interesting stat today, the S&P 500 ended the first quarter of 2020 with a decline of exactly 20%. In the history of the index since 1928, it was just the 9th quarter that has seen a drop of 20%, and it was the first since Q4 2008 when the S&P fell 22.56%. Since WW2, it was just the 5th quarterly drop of 20% or more. Notably, in the six months and twelve months following the prior four quarterly drops of 20%+ since 1945, the S&P was higher every time. Over the next year, the index was higher by 10% or more every time

Coronavirus update

·     New York statewide coronavirus cases increases to 83,712, up from 75,795 from a day earlier while statewide coronavirus deaths increases to 1,941, up from 1,550 a day earlier. Italy death toll from coronavirus outbreak rises by 727 to 13,155 and total number of confirmed cases of coronavirus in Italy rises to 110,574 from 105,792 on Tuesday. U.S. CDC reports its count of 186,101 cases of new coronavirus as of previous day at 4 pm et vs previous report of 163,539 cases on March 31.

Commodities

·     Oil fell, though finished off the lows, down 17c to $20.31, following very bearish inventory data for the week as the EIA said weekly crude inventories rose 13.83M (biggest build since October 2016) vs. est. up 3.3M, and gasoline rose 7.54M barrels vs. est. build 1.2M while overnight the API reported U.S. crude supplies rose by 10.5M barrels for the week. The demand situation gets worse by the day in the energy complex with travel becoming non-existent in attempts to curb the outbreak of the coronavirus pandemic. Gold futures fall for a 4^th straight day, down -$5.20 or 0.3% to settle at $1,591.40 an ounce, pulling back on the stronger dollar, but held up relatively well as investors sought safe haven investments with U.S. equities under pressure.

Currencies

·     The U.S. dollar traded near highs late afternoon (dollar index up 0.65%), gaining more than 1% vs. the euro which stands near session lows approaching the 1.09 level, while the buck surges further vs. the Canadian dollar above 1.42 (1.3%) as oil prices sink, weighing on the Canadian economy. The dollar fell to 2-week lows against the Japanese yen as investors flee for safe haven assets (gold and Treasury prices also higher today). Treasury prices end higher, but off its best levels as the yield on the 10-year Treasury fell to lows of down to 0.577% before paring losses to around 0.64% (down 3 bps) as markets remain concerned after President Trump said in a press briefing that the US faces a "very, very painful two weeks.

Economic Data

·     Jobs data came in better than expected as ADP said private payroll data showed a loss of -27K jobs in March, better than the expected decline of -150K jobs which comes ahead of this week’s nonfarm payroll report on Friday (estimate for -100K loss nonfarm and -123K private)

·     ISM Manufacturing for March reported at 49.1 which is above the 44.5 estimate but down from 50.1 last month; Production fell to 47.7 vs 50.3 last month while new orders fell to 42.2 vs 49.8 MoM (the lowest level March 2009) and employment fell to 43.8 vs 46.9; prices paid markedly fell to 37.4 vs 45.9 last month

·     Construction spending fell (-1.3%) vs. estimate for rise of 0.6% for Feb, below prior month of 1.8%; Private construction fell 1.2% in Feb and Private residential construction fell 0.6%

Sector News Breakdown

Consumer

·     Consumer Staples; LW shares slide after Q3 adjusted EPS missed estimates (77c vs. est. 93c) and has withdrawn its financial outlook for fiscal year 2020 for net sales growth and for Adjusted EBITDA including unconsolidated joint ventures; grocer KR shares rose after saying comp sales surged about 30% in March as consumers cleared off shelves in preparation for a lockdown due to the coronavirus pandemic, and the grocer said it had borrowed $1 billion to boost its liquidity.

·     Restaurants; several research analysts upping ratings in beaten up casual dining stocks; PZZA was upgraded to buy at MKM Partners while also taking numbers down on neutral rated DPZ and YUM as like the performance ahead of the downturn along with their focus on the operations side of the business; SunTrust upgraded LOCO and DENN to hold ratings from sell as liquidity positions appear strong under their coverage, with PLAY and TAST at the greatest risk (did say that base case that casual dining comp sales will be down ~80%, fast casual down ~40-60% and fast food down -20-40% through May, with a slow recovery thereafter)

·     Leisure sector; casinos weak (WYNN, LVS, MLCO, MGM) following softer Macau gaming data (not unexpected due to casino closures) as gambling revenue in Macau plunged 79.7% in March hit by lack of visitors after the world’s biggest casino hub ratcheted up curbs to battle the coronavirus pandemic (figure was in-liner with ests for 80% declines); BYD was upgraded to positive at Susquehanna as firm sees a buying opportunity off the steep share price decline and thinks Boyd’s exposure to regional markets will help it recover.

·     Auto sector; FCAU said Q1 U.S. auto sales were down (-10.4%), below the est. for down (-9.9%) as strong momentum in Jan/Feb was more than offset by negative economic impact of coronavirus in March; GM said it delivered 618,335 vehicles in 1Q, down about 7% compared to a year ago, vs. analyst estimate for down 6.2%

·     Retailers; Macy’s (M) shares weak after being removed from the S&P 500 index and will join the S&P SmallCap 600 and Otis Worldwide Corp. and Carrier Global Corp. will join the S&P 500 (Otis replacing Raytheon which is being acquired by UTX and Carrier replacing Macy’s); another brutal beating for apparel retail as CPRI, PVH, TPR among hardest hit while hardlines such as WMT, TGT and warehouses like COST hold up well; gun retailers AOBC, RGR, VSTO, SPWH have been stable with monthly NICS checks data showing March Adjusted NICS Checks Increase +80.3%, Handguns totaled 1,392,677 or +91.5%, two-year +84.6% vs. +10.5% in February Long guns totaled 758,073 or +74.0%, two-year to +54.5% vs. -5.7% in February

Energy

·     Inventory data very bearish with massive weekly builds in crude stockpiles: the EIA said weekly crude inventories rose 13.83M vs. est. up 3.3M, gasoline rose 7.54M barrels vs. est. build 1.2M and distillates fell -2.19M barrels vs. est. build 1M barrels. Overnight the API reported U.S. crude supplies rose by 10.5M barrels for the week ended March 27, showed gasoline stockpiles up by 6.1M barrels, while distillate inventories declined by nearly -4.5M barrels.

·     Energy stock headlines; BP warned that Q1 results would be hit by weak demand stemming from the coronavirus and low commodity pricing as estimates a $1 billion noncash impairment charge; APA said it now expects to deliver an annualized G&A and LOE cost reduction in excess of $300M, up from an original target of $150M; PUMP said it is experiencing severe, negative pricing impacts on oil well fracking services; natural gas leveraged named outperformed broader energy with strength in RRC, EQT, SWN early; WLL filed for Chapter 11 bankruptcy protection (notes shares had traded over $150 per share back in 2015) as oil prices plummet; Reuters reported CPE has hired advisers to restructure its more than $3 billion in debt after a plunge in energy prices soured its acquisition of Carrizo Oil just four months ago

·     In research; oil drillers RIG both downgraded to neutral from buy at BTIG despite most offshore drillers extending their runways and increasing liquidity over the last few years/says key to the offshore drilling turnaround story was a recovery in offshore drilling activity; MRO was downgraded to hold at Argus as believe that dramatically lower crude oil prices and demand impacts will lead to greater oil supply imbalances and a sharp deceleration in drilling activity

·     Utilities & Solar; utilities were among top sector decliners in the S&P, down over 5% early as not even defensive sectors immune to mkt pullback; UBS a handful of changes in the sector as they upgraded ATO and SWX to buy ratings but downgraded CNP saying post the recent market sell off related to the COVID-19, guided $800MM of equity issuance in ‘20 represents ~9% of CNP’s market cap and remains a near term overhang and equity needs could be upsized if ENBL were to cut its distribution

Financials

·     Bank movers; shares of large cap banks (BAC, C, JPM, WFC) remain weak as Treasury yields slip with investors ditching equities to seek safe haven assets such as bonds and as the spread between short- and long-term interest rates shrinks, banks earn less from loans and investments; KBW Inc. today slashed 2020 EPS estimates for the median big banks by 58%, and by 50% for 2021, after accounting for the firm’s expectations for a U.S. recession, along with rising unemployment, low interest rates and an increase in loan losses; several UK banks announced suspension of their dividends, following the behest of the Bank of England last week; USB was upgraded to outperform at Oppenheimer as believe that the ~40% declines YTD discount something far worse than a few quarters of weak earnings and thus would buy the dip

·     Insurance; HIG was upgraded to overweight at Wells Fargo saying with lower investment risk relative to their P&C peers and a good reserve position, they are buyers; in mortgage insurance; MTG was upgraded to buy from underperform with $9 tgt at Bank America which implies a 42% upside potential, while cuts RDN price target to $16 from $29 and maintains Buy rating and trims ESNT price target to $32 from $60 and keeps Buy rating

·     REITs; a lot of stress in the REIT sector today with the first of the month rolling around and fears many companies can’t or won’t be able to pay monthly bills due to forced store closures as well as fears in apartment REITs with people losing their jobs; Morgan Stanley downgraded ESS today saying rent growth is highly correlated to job growth, with an R^2 of 73%, and their economists forecast job growth declining YoY to -8.5% in 2Q20 and -4.3% in 4Q20; Morgan also cut UDR rating saying secular growth story remains, but a negative job growth shock leads to near-term underperformance; mall REITs have been hit hard (SPG, SKT, MAC, TCO) and office building REITs also pressured (SLG, ARE, EQC, CLI, VNO); mortgage REITS slide after AGNC said that tangible net book value per share was about $12.35-$13.25, below some analysts’ estimates, though leverage and liquidity levels have returned to recent norms

Healthcare

·     Pharma movers; MNK rises after receiving approval from Therapeutic Products Directorate of Health Canada to conduct a clinical study, in collaboration with Novoteris LLC, evaluating inhaled nitric oxide therapy for treatment of COVID-19 patients; IFRX rises after saying dosing is underway in a randomized clinical trial in Netherlands evaluating its experimental drug, IFX-1, in patients with severe COVID-19-induced pneumonia

·     Biotech movers; INCY was upgraded to overweight at Morgan Stanley and raise tgt to $90 as now include tafasitamab in our base case, and see several pipeline catalysts over the next 6-12 months that could drive shares higher; NVAX rises after enters deal with Emergent BioSolutions Inc. to produce its seasonal influenza vaccine, NanoFlu; RARE announced it reached a strategic partnership and non-exclusive worldwide license agreement with Daiichi Sankyo ($200M upfront) for Ultragenyx’s AAV-based gene therapy manufacturing technologies.

·     Medical equipment and devices; SWAV was downgraded to underperform at Oppenheimer as expectations on the incremental utility of IVL are misplaced and recent field checks continue to paint a tough picture for a number of companies in the space; ISRG cut to underperform as well at Oppenheimer with $365 tgt saying rapid proliferation in benign cases is driven more by aggressive marketing rather than true clinical utility; BSX was upgraded to buy at Goldman Sachs while downgraded VAR (to neutral) and SYK (to sell) saying major supply (hospital constraints) and demand (patient risk aversion) headwinds will likely peak during 2Q20, followed by modest but persistent impacts from recession and demand side headwinds

·     Healthcare services and providers; ABC was upgraded to outperform at JPMorgan calling it an essential pure-play in pharmaceutical distribution, as believe it represents the cleanest way to play the improving fundamental backdrop in the space; DGX said that while January and February results were consistent with full year guidance, the last two weeks of March saw volume declines in excess of 40%, despite increased virus testing (tracking at 30k tests/day)

Industrials & Materials

·     Transports; Dow Transports slide as much as over 4%, led by 10% declines in airlines while truckers are down the least early (JBHT, CHRW, EXPD); CHRW was upgraded to buy at UBS saying although truckload freight activity has been strong in March, they anticipate a significant decline in 2Q driven by the decline in broader economic activity due to COVID-19 but say expect CHRW’s defensive model to perform well); in rails, KSU was downgraded at UBS as believe rail volumes are likely to fall sharply in 2Q due to the impact of COVID-19 and as a result we believe it makes sense to reduce exposure to names more levered to industrial/energy end markets; Stifel downgraded airlines AAL, JBLU and MESA to hold while upgraded HA to hold

·     Metals & Materials; BMO Capital upgraded shares of RIO and VALE to outperform saying focus should be on cos with better balance sheets and lowest risk of operational disruptions, while downgraded Antofagasta and Anglo American to market perform

Technology, Media & Telecom

·     Semiconductors; INTC was upgraded at Barclay’s with raised tgt to $58 saying near-term strength in both the Data Center and increased work from home trends should supersede ongoing challenges; CREE was upgraded to neutral at Piper as feel the worst of the company’s end-market sentiment has been built into the current price

·     Software movers; CRM was removed from Best Idea List at Wedbush saying checks with industry sources point to a pause in digital transformation initiatives, as companies delay spending decisions in an uncertain economic environment; video game names seeing increased volatility the last few weeks with people stuck home due to social distancing requirements (ATVI, EA, TTWO)

·     Telecom sector; AT downgraded to neutral at JPMorgan and cuts tgt to $35 from $38 saying its media and communications unit will take a hit as social distancing increases to prevent coronavirus spread and potential for weakness in small-and-medium customer base rises; Goldman Sachs with a bevy of changes as they add VZ to the Conviction List citing stable/growing EPS and FCF an attractive dividend yield (4.5%) and a strong balance sheet, downgraded Intelsat (I) to sell with 50c tgt calling it the most levered company in coverage while also facing persistent pressures to revenue and EBITDA and negative FCF; firm also downgraded CTL to sell as sees the company’s EBITDA declining 4% annually in 2020-2021 owing to intensifying pressures in its Business segment, removed both ATUS and CMCSA from its conviction buy list w $42 tgt –

·     Media movers; IHRT was downgraded to reduce at JPMorgan with $8 tgt from $21 as see economic headwinds from COVID-19 creating a challenged operating environment for the company – exacerbated by its debt load; GCI said it is suspending its quarterly dividend, in an effort to preserve liquidity during the disruption caused by the COVID-19 pandemic and is looking to cut expenses by an additional $100M-$125M through job cuts and furloughs; MSG said its board of directors had approved the spinoff of its sports and entertainment businesses which is expected to be completed in mid-April & said construction of MSG Sphere suspended in Vegas; MTCH said it expects Q1 results to be around the low-end of the prior guide, with sequential revenue growth in Q2 challenging but still likely up YoY

·     Hardware & Component news; XRX said it has ended its unsolicited bid to acquire HPQ, including the withdrawal of its tender offer and ending its proxy fight to replace HP’s board saying the economic impact of COVID-19 has made a deal untenable in the current environment; CIEN added to focus list at JPMorgan as expects spending on network infrastructure will be “resilient” given 5G investments, as well as “the spurt in bandwidth needs”; BB reported mixed 4Q results, with revenue/EPS of $291mn/9c vs. consensus’$295mn/4c with Bofa saying the core IoT segment sales disappointed at $127mn vs. their $155mn estimate, and the Licensing revenues once again drove the strength at $108mn vs. consensus’ $84mn