Closing Recap

Thursday, April 02, 2020

Equity Market Recap

·     U.S. stocks dropped then popped late morning, before following the similar pattern in the afternoon (and into the close) in what was another volatile session on Wall Street which saw a massive spike in oil prices, a record number of weekly jobless claims and rising coronavirus cases and deaths ahead of tomorrow’s monthly nonfarm payroll report. U.S. equities jumped late morning, led by the energy sector following a tweet from President Trump saying “Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!”. That comment sent oil prices surging before ending the day higher by 25% and gave some much needed relied for the energy complex. The news in the oil patch helped offset the shockingly bad (but not terribly surprising) weekly jobless claims report which soared to new record highs, as 6.648M people filed for unemployment, a steep spike from last week upwardly revised 3.3M people. Treasury prices were little changed most of the day, while the dollar rallied along with gold.

Economic Data

·     Weekly jobless claims soared to new record highs, as 6.648M people filed for unemployment, a steep spike from last week upwardly revised 3.3M people (which had been a record at that point) as the shutdown from the COVID-19 impacts the economy; continuing claims rose to 3.029M from 1.784M last week, but below the est. 4.882M; U.S. insured unemployment rate rose to 2.1% from 1.2% the prior week

·     Trade Deficit narrowed by 12% to (-$39.9B) in February from (-$45.5B) in prior month, but was in-line with consensus as imports fell 2.5% in Feb. to $247.48b from $253.79b in January and exports fell 0.4% in Feb. to $207.54b from $208.31b in January

·     Factory Goods Orders for February were unchanged compared to est. up 0.2% while Factory orders for Jan. unrevised at -0.5%; new orders ex-trans fell 0.9% in Feb. after falling 0.4% the prior month and new orders ex-defense for Feb. fell 0.6% after rising 1.1% in Jan; capital goods non-defense ex aircraft new orders for Feb. fell 0.9% after rising 1% in January

Commodities

·     Oil prices were extremely volatile, with WTI crude rising $5.01 or 24.67% to settle at $25.32 per barrel, but well off earlier highs of $27.30. Prices jumped overnight on reports that China may be buying an additional 100 million barrels over the course of the year as well as hopes that a price war resolution can be reached between Saudi Arabia and Russia with President Trump trying to mediate. Oil spiked further late morning by over 35% after Trump, who had been working the phones over the past two days after oil prices plunged to a near 20-year low, said on Twitter that he expected Saudi Arabia and Russia to cut output possibly by as much as 15 million barrels. Immediately following Trump’s tweet, Saudi Arabia came out to say it had called an “urgent meeting” of the OPEC+ alliance that includes Russia and some other unnamed nations to discuss a “fair agreement,” signaling it would only cut output if others do so. Gold prices jumped $46.30 or 2.9% to $1,637.70 an ounce, snapping its 4-day losing streak, getting a boost on the spike in jobless claims to over 6M individuals as well as positioning into safe havens amid the ongoing coronavirus impact on the economy while ignoring the strength in the dollar on the day.

Currencies & Treasuries

·     The U.S. dollar edged higher with the dollar index moving back above the 100 level, off recent low of 98.27 last Friday, but still off its recent 3-year highs around the 103 level, despite the overly negative jobless claims report today. The euro tumbled over 1% to around the 108.50 level (now down -2.6% this week off highs around 1.115 Monday) while the buck bounced back against the Japanese yen as investors moved back into stocks after yesterday’s market slide. U.S. Treasury prices were little changed despite increased volatility in stock markets again, as the yield on the benchmark 10-year inched higher to around 0.60% ahead of tomorrow’s nonfarm payroll report which is expected to show a drop of -100K jobs. 

Sector News Breakdown

Consumer

·     Retailers; PVH reported a 7c EPS beat for Q4 while suspends its cash dividend and stock repurchase plan and said all China stores have reopened, but stores are operating with shorter hours, and about 95% of franchisee stores are also open; BBBY shares active after an SEC filing showed Legion Partners Asset Mgmt reports 5.41% stake in the company based on belief that such securities, were "undervalued"; Wayfair (W) was downgraded to sell at Loop Capital as believe the stock doesn’t fully reflect the company’s slowing growth despite the stock already -47% YTD in a market -23%

·     Consumer Staples; MO shares active after the FTC sued to unwind its $12.8B investment in Juul Labs Inc., claiming it violated antitrust laws (the 2018 deal gave cigarette-maker Altria a roughly 35% stake in vaping company Juul); STZ shares were a notable decliner early in the beverage industry, falling more than 12% at one point ahead of earnings tomorrow; BYND upgraded to neutral at Davidson who said the stock’s recent slump already reflected the hit from the Covid-19 outbreak and other risks in the company’s efforts to expand its plant-based meats businesses; protein stocks active as SAFM said 15 workers tested positive for COVID-19 and said to run plants supplying grocery stores on some Saturday’s

·     Restaurants; LK shares plunged as much as 85% before paring losses after saying its board informed about fabricated transactions as committee to oversee probe on audit issues/said probe indicates fabricated sales about RMB2.2B (SBUX shares bounced in sympathy); TACO withdraws FY2020 guidance and increased its cash position by drawing down $50M under its revolving credit facility; Raymond James upgraded DRI to Strong Buy and CHUY to Outperform, as well as highlighting OP rated (BLMN), each as stocks where liquidity concerns seem overdone and continue to recommend Strong Buy-rated TXRH to investors looking for a best-in-class operator with a strong balance sheet; EAT suspends share repurchases and dividend, said Q3 owned comp sales fell (-5.9%) and withdraws guidance; Jim Chanos in CNBC interview said he remains short DNKN, QSR and WEN, concerned about franchisors because of landlord risk on top of customer traffic risk from Covid-19

·     Casino & Leisure movers; in cruise lines, CCL priced 62.5M share secondary at $8 per share, 9% lower than the share closing price on Wednesday as size of offering was decreased to $500 million from the earlier stated $1.25B; boating stocks BC, MBUU were both downgraded at BMO Capital to market perform from outperform as think will be constricted owing to a decline in assets prices and employment caused by the coronavirus

·     Auto movers; KMX reported record earnings helped by strong demand for used vehicles prior to the pandemic but said consumer demand has worsened in March as the coronavirus pandemic intensifies; Ford (F) Q1 deliveries down 12.3%, vs. est. down 16.1% – figures exclude heavy trucks; Jim Chanos of Kynikos said he remains short all gig-economy stocks (LYFT, UBER)

Energy

·     Energy stocks roared higher Thursday morning (taking broader market higher) as oil prices jumped as much as 35% after President Donald Trump tweeted that he expects Saudi Arabia and Russia to cut oil production by about 10 million barrels, and "maybe substantially more.” Trump also confirmed reports that he would meet Friday with oil industry executives. Natural gas prices slide over 3% to fresh 25-year-lows as pandemic reduces demand. Also helping oil, reports overnight that China may be buying an additional 100 million barrels over the course of the year.

·     Ahead of tomorrow’s energy meeting with Trump, Reuters reported, citing a senior administration official: Trump is set to meet with leaders of U.S. oil companies on Friday. He will discuss domestic production cuts but will not ask the executives to agree on a coordinated drop in supplies, said the official, who spoke on condition of anonymity. The official said the United States cannot orchestrate a mandated cut in domestic production. U.S. companies had already cut production in response to the market and as storage space filled up, he said. The government was considering suspending royalty payments on oil production to help domestic suppliers.

·     E&P sector; APA and TOT report discovery at Sapakara West-1 well drilled offshore Suriname on Block 58; says well was drilled using Noble Sam Croft with Apache as operator holding a 50% working interest and Total holding a 50% working interest

·     Oil majors; RDSA, TOT and EQNR seek to raise $12B through bond sales, as slumping oil prices and collapsing demand threaten to damage cash flows for months – Shell is selling $3.75B of bonds, Total is offering debt worth $3.3B, and Equinor has sold $5B notes; XOM was downgraded to hold at Argus as believe that sharply lower crude oil prices, demand destruction from COVID-19, and the recent credit downgraded by S&P, will lead to a downturn in revenue and earnings and rising interest costs

·     Oil equipment movers; BOOM reduces its workforce by 264 positions, 97 of which were temporary workers, primarily to address sharply lower activity levels in the Company’s core oil and gas end market; FTI says plans 30% reduction in 2020 capital expenditures to $300M and continues to exhibit solid financial strength and liquidity and that has cash and cash equivalents of $5.2 billion at the end of 2019

·     Utilities & Solar; CNP cuts quarterly dividend by 48%, to cut capex spending by $300M as targets expense reduction of $40M; AES was upgraded to outperform at RBC Capital as believe that AES’s weakness year-to-date is unwarranted given its strong cash flows and limited exposure to COVID-19/balance sheet continues to improve; Citigroup transfer coverage on space as they are buy rated on PCG, EIX, DTE (upgraded), and NRG, and Neutral on AEP, CMS, ED, ES, ETR (downgraded), and PPL – are positive on gas prices, midstream, and RNG

·     MLPs; sector absolutely slammed on oil prices as Credit Suisse today downgraded DCP, PAA, PAGP, and TRGP to Neutral from Outperform and ALTM, ENLC and NGL to Underperform from Neutral while upgraded MMP and MPLX to Outperform as lower TPs for most of our names to reflect slower growth and higher costs of capital

Financials

·     Insurance; KBW Inc. upgraded RE to Outperform and TRV to market perform while downgraded shares of WLTW to market perform after adjusting estimates for Property and Casualty companies to reflect lower reinvestment rates, accelerating commercial and reinsurance rate increases, reduced economic activity, underwriting exposure to coronavirus-related claims and reduced share repurchases

·     Consumer finance and lending; WU was double upgraded to buy from underperform at Bank America as think the pullback in shares is overdone as believe pressures will prove to be relatively transitory, as physical agent locations will re-open

Healthcare

·     Pharma movers; BMY was upgraded to overweight at Morgan Stanley on valuation and pipeline optionality, and maintain OW ratings on LLY and MRK while downgraded ELAN amid concern sales downside could mute the company’s margin expansion story, and cut BHC due to the company’s Vision Care and Dermatology (approx. 40% of company sales) exposure to a recession, slower de-leveraging, and less transaction optionality; MRK phase 3 Keynote-177 trial evaluating first-line treatment of Keytruda in patients with microsatellite instability-high or mismatch repair deficient unresectable or metastatic colorectal cancer met one of its dual primary endpoints of progression-free survival

·     Medical equipment and devices; BSX sees Q1 revenue flat to up slightly which compares to estimate for a 7.9% increase; says is reducing work week schedules and cutting discretionary spending; NVRO guides Q1 rev $86.4M-$86.9M below est. $96.6M and withdraws year guidance saying it cannot predict extent or duration of impact of covid-19 virus on its financial and operating results; CRY cuts Q1 revenue guidance to $65M from prior view $67M-$69M and with draws guidance for the year; BMRA rises after signing two deals with Mount Sinai’s Icahn School of Medicine in NY to license technologies related to a lab version serological test for COVID-19

·     Healthcare services and providers; Dow component WBA reported Q2 EPS and sales above views though share slipped as U.S. retail pharmacy comp sales rose 2.7% vs. est. 3.1% and warned that strong sales have slowed and are now declining; AXGN withdrew its 2020 financial guidance and said it expects restrictions on travel and hospital access caused by the evolving pandemic to negatively affect its financial results.

Industrials & Materials

·     Industrial & Machinery; JPMorgan lowered NA Class 8 builds forecast to 162K units in 2020 (down 53% YoY) and 211K units in 2021 (up 30%) and revising NA Class 5-7 builds forecast to 187K units in 2020 (down 34% YoY) and 230K units in 2021 (up 23%) as PCAR, CMI, NAV and ALSN have announced shutdowns of manufacturing facilities due to supply chain disruptions and weakening demand (did upgrade PCAR to overweight despite being cautious on group); JCI and LII were both upgraded to neutral from sell at UBS saying the Covid-19 weakness could pull forward an expected slowdown in the HVAC market into 2020 as both commercial & residential construction are likely to face more pronounced declines in the first half of the year

·     Aerospace & Defense; BA shares bounce initially after its CEO announces a voluntary layoff plan for employees in response to the coronavirus pandemic which allows employees to leave with a pay and benefits package, confirming an earlier Reuters report – but shares plunged late day to lows below $120 with the broader market pullback; TDG shares jumped after saying it reduced its workforce by up to 15% due to disruption in industry and withdrew its guidance

Technology, Media & Telecom

·     Internet; SNAP said video calling on its site shot up more than 50% in late March compared with late February as the coronavirus pandemic spreads; AMZN plans to roll out temperature checks and face masks for staff at all its U.S. and European warehouses plus Whole Foods stores by early next week after reported virus cases among warehouse staff and faced several demonstrations; WUBA shares jumped after received $55 ADS offer for the company from Ocean Link; GRUB shares fell midday after Jim Chanos on CNBC segment that if they don’t make money in 1H20 – they may never make money and called it one of his favorite shorts

·     Semiconductors; Davidson downgraded AMAT, AEIS, ACLS, FORM, LRCX, MKSI all to neutral from buy in semiconductor equipment space saying there are a number of Covid-19 driven near-term and midterm issues that need to be resolved before, we believe, it is safe for short term investors to buy this group

·     Software movers; ATVI was upgraded to buy at MKM Partners and raise tgt to $72 from $64 citing the company’s significant progress in improving its near-term and long-term growth profile; NOW, AZPN downgraded to neutral saying while CRM, ADBE, and NOW will all likely be impacted by slower large-deal activity with enterprises, we view NOW as most at risk for the following reasons: 1) large, project based deals; 2) substantial internal change to the organization, which creates execution risk; and 3) valuation is high relative to peers.

·     Media & Telecom movers; DIS was downgraded to neutral from buy with $100 tgt at Guggenheim while they upgraded FOXA to a buy with $29 tgt as view the company’s exposure to live news and late-season sports content (primarily the NFL, college football and post-season baseball) as relatively attractive compared to media peer; CRTO was upgraded to buy from neutral at Citigroup saying while env’t is likely to challenge Criteo’s already challenged business, its share price is too low today due to the company’s financial profile, liquidity position

·     Telecom movers; towers AMT were both upgraded to Buy from Neutral at UBS saying the tower business is strong & defensive and firm believes both are well positioned to capitalize on industry trends of rising data usage and increased carrier activity (especially after shares have pulled back ~20% amid recent market turmoil)

·     Hardware & Component news; ZM shares slide for a 4th straight day following recent privacy concerns raised and new competition as RNG unveiled RingCentral Video, a new videoconferencing offering that will be included in its communications suite, which also includes messaging and voice features; INFN was upgraded to overweight at Piper as believe the network stress from work-at-home initiatives due to the COVID-19 outbreak is stressing carrier and datacenter networks and is improving the overall demand environment for optical equipment suppliers/also believe prior supply constraints are being alleviated with China manufacturing nearing full production capacity