Closing Recap

Monday, April 06, 2020

Equity Market Recap

·     U.S. stock were in rally mode the entire trading day, opening higher and finishing around the best levels of the session in a broad sector rally. Major stock averages gained more than 7% late day, as markets rebound from losses last week after disappointing jobs data pushed sentiment lower (weekly jobless claims jumped 6.6 million and nonfarm payroll jobs lost topped -700K). Today’s market rally was based again on hopes as coronavirus infection rates and reported deaths eased in some key locations around the global and as the Trump administration issued a more optimistic tone overall this weekend saying the peak levels could be seen in the next week or so. The Federal Reserve and Treasury Department said they are planning to launch a new program to buy loans that financial firms make through the government’s emergency small-business lending program, just another tool to try and keep business afloat, help those unemployed and provide liquidity to markets over the last few weeks. There was strength in financials today, led by mortgage finance/MREITs that have been hit among the hardest in the space after a broad coalition of mortgage industry and housing organizations over the weekend urged the Fed, Treasury and the FHFA to establish a liquidity facility for mortgage service firms. Economic relief checks are expected to go out over the next two weeks, while the SBA small business outreach program started Friday with intentions for $350B going towards employee costs as well as rent and utilities. In the oil sector, prices slipped after last week’s bounce as OPEC+ will meet on Thursday (instead of an expected meeting today), offering some optimism about a possible settlement in the oil price war, but mixed messages from various participants had crude oil falling despite the risk rally. Stocks slipped off highs’ late day after headlines. Stocks spiked in the final minutes of trading to new highs following a report on Fox Business News that the Trump Administration is considering another stimulus plan in mi-May for around $1-$1.5 trillion. 

Coronavirus update:

·     More than 1.27 million people have been reported infected by the novel coronavirus across the world and 70,395 have died, according to a Reuters tally. Infections have been reported in 211 countries and territories since the first cases were identified in China in December 2019. Spain daily new COVID-19 deaths declined for fourth day in a row to lowest number in 13 days and daily new cases also declines for fifth day in a row to lowest number in 15 days. The U.S. leads with total cases over 330K followed by Spain over 135K, Italy 129K and Germany over 98K as Europe hit very hard behind the U.S.

Commodities

·     Oil prices fell -$2.26 or 7.97% to settle at $26.08 per barrel, while Brent prices fell -$1.06 or 3.11% to $33.05 per barrel in what was one of the few asset classes failing to rally today ahead of an emergency meeting later this week for OPEC+, which is now expected to meet Thursday (instead of initially today). Moscow might be willing to cut production by 1mm barrels/day if the U.S. joins according to some reports. Trump also threatened to use tariffs to protect U.S. energy jobs this weekend. Gold prices surged $48.20, or 2.9% to settle at a more than 7-year best of $1,693.90 an ounce (Dec 2012), rising despite the dollar and stocks moving higher, as the low rate environment, QE purchases by central banks and stimulus measures keep gold higher.

Currencies & Treasuries

·     The U.S. dollar was modestly (and quietly) higher vs. most major currencies, building on last week gains as it moved back above the 109 level against the Japanese dollar, while the euro dipped back below the 1.08 level in a generally quiet day given the lack of economic data and sharply higher global stock markets. Treasury markets slipped, but still remain fairly strong, as the yield on the 10-year note rose about 7 bps to 0.66% in what was a “risk-on” day.

Sector News Breakdown

Consumer

·     Retailers; CPRI among top gainers in the S&P given broad recovery for heavily beaten up retailers with gains in KSS, M, PVH, JWN as well); Wayfair (W) said it expects to meet or exceed its Q1 forecast for net revenue and adj EBITDA margin as it benefits from a bump in online orders amid coronavirus lockdowns/sees strong demand across most home goods categories in U.S. and international segments

·     Consumer Staples & Restaurants; KHC said it is adding shifts at plants that make packaged foods such as macaroni and cheese, soup and canned beans due to a spike in demand; EL was downgraded to EW from OW at Morgan Stanley and cut tgt to $163 as COVID related pressure from its brick and mortar retailer partners is likely to linger with near-term store closures; SBUX was downgraded to neutral from overweight at JPMorgan as believes consumers’ consumption habits are largely broken in the U.S. and may take time to rebuild; LK extends recent declines, says it will maintain normal operations at its stores even as a fraud investigation plays out

·     Housing related sector; the ITB jumps for its first daily gains for home construction ETF in seven days – all 44 names in the index were higher with more than 20% gains for CCS, TMHC, LGIH, SKY, KBH by midday; LGIH was upgraded at Wedbush saying F1Q20 unit closings grew 49% Y/Y versus our +34% estimate, and they updated estimates to reflect those results and our expected impact from COVID

·     Casino & Leisure movers; ERI shares jump as Jefferies commented on the casino sector saying they believe the regional casino operators will survive the Covid-19 outbreak and ERI will close on the CZR acquisition; PLNT was upgraded to an Overweight rating from Neutral oat JPMorgan on a positive view that it can survive in a post-pandemic industry that might see consolidation and valuation also seen as attractive after the sell-off of shares; SEAS announced its CEO was stepping down after just five-months on the job; in cruise lines, Saudi Public Investment Fund reports an 8.2% stake in CCL

·     Auto sector; TSLA upgraded to buy at Jefferies while lower tgt to $650 from $800 calling it the only auto OEM 1) legacy-free, 2) engaged in a positive EV sum-game, 3) ~doubling market coverage with Model Y and 4) leading the industry’s technological transformation

Energy

·     Energy stocks were higher, but lagged broader markets amid uncertainty related to Saudi Arabia and Russia which were expected to hold a virtual emergency meeting today but got delayed to later in the week as they race to negotiate a deal to stem the recent price crash (down over 50% YTD) as diplomats said some progress was made on Sunday. U.S. Energy Secretary Dan Brouillette spoke to Saudi counterpart Prince Abdulaziz bin Salman at the weekend, telling him the Saudi-Russian battle for market share in the global oil has "major implications" for the United States and the world, the U.S. Energy Department said on Monday.

·     Oil services; Bernstein upgrading the sector to buy (raises rating on BKR, FTI, HP, NOV, SLB to outperform and upgraded HAL, OII, PTEN to market perform from underperform) noting since they started covering the space in 2014, firm has never been bullish, even in the depths of ’16..but expectations have dropped far too low and for the first time in 7-years, it is time to buy; PUMP shares active after Reuters reported oil billionaire Dan Wilks this week took a 10% stake in the company according to a regulatory filing

·     Utilities & Solar; utility stocks were among top performers, with the index up about 7%, as all 20 names in the index higher by more than 4.5% at least around midday, led by strong gains in CNP, PNW, DTE and AES among them

Financials

·     Bank movers; lots of headlines regarding applications for the first weekend of the $350B SBA loan program, which is intended to fund small business with less than 500 employees with access to loans from local lenders, backed by the government to provide funds for payroll, rent, utilities and other corporate expenses; shares of FMBH, WBS, WTFC, UBSI, CBSH were all upgraded at Raymond James saying from a capital perspective, banks look well-positioned to weather all but a worst-case economic outcome, while an earnings power/valuation analysis suggests a more bearish scenario being priced in; NTRS was downgraded to sell at UBS as we view them as more at risk to negative earnings revisions

·     Insurance; mortgage insurers remain pressured (ESNT, RDN, MTG, NMIH) as rising unemployment bodes ill for the pace of mortgage payment delinquencies, and declining home sales, which translates into lower new insurance written; ALL said on Monday that it would return more than $600 million in auto insurance premiums to customers; Piper upgraded CB and HRTG to overweight from neutral as are cautiously optimistic towards the P/C insurers due to the steep drop in stock prices and our view that the well-capitalized insurers will likely resume profitability after the pandemic and the resulting financial market turmoil has subsided

·     Finance and lending; TWO said Friday its liquidity position "remains quite strong" as it continues to make prudent risk management decisions during the COVID-19 pandemic/said that it completed the sale of substantially all of its non-agency portfolio; mortgage lending/REITs rebound led by LADR, TWO, IVR, XAN as the index has been pummeled since concern about Covid-19 began accelerating on Feb. 20, roiling markets; the index has sunk 64% since then, vs a 23% decline in the S&P 500

Healthcare

·     Pharma movers; TEVA was upgraded at UBS noting shares have underperformed a market that is overly discounting earnings, business disruption, and credit risks, whereas we see the risk to new product launches broadly balanced by opportunities; INCY followed up on its initial announcements in January and February, for its ruxolitinib cream. Incyte reports detailed results from two successful Phase 3 clinical trials, TRuE-AD1 and TRuE-AD2, evaluating a topical cream formulation of kinase inhibitor ruxolitinib in adolescents and adults with atopic dermatitis (AD).

·     Biotech movers; MNLO shares fall after late-stage trials of Serlopitant, a skin drug to treat itches, did not meet primary endpoints; GILD said it aims to produce more than 1 mln treatment courses of its experimental coronavirus drug remdesivir by end of this year (currently has 1.5M doses of the drug, roughly equal to 140,000 treatment courses); VIR rises after news GSK will partner with them to develop new treatments for COVID-19, and also make an equity investment of $250M in the company; IMMU surges after saying its phase III confirmatory Ascent study will be halted due to compelling evidence of efficacy (breast cancer study); XLRN was downgraded at Goldman Sachs as expect new launches will be impacted by social distancing mandates and decreased sales force interactions; INO says early-stage clinical testing of its COVID-19 vaccine candidate, INO-4800, will begin this week after U.S. FDA accepts Investigational NDA/1st patient dosing planned for today

·     Medical equipment and devices; 2020 guidance withdrawals continue, adding HSIC, PDCO, SWAV and TMO to the list as each company withdrew guidance this morning; MYGN reimbursement approval and launched the BRACAnalysis Diagnostic System in Japan to assess Hereditary Breast and Ovarian Cancer risk in people with breast and ovarian cancer; Jefferies lowered estimates for MDT, ABT, BSX, EW, SYK, ZBH and ALC as anticipate that 2020 sees a sharp falloff in non-essential procedures and cap-ex revenue in 2Q and 3Q, with a slow recovery in YE and into 2021; CODX rose in reaction to the FDA’s granting of Emergency Use Authorization for its Logix Smart Coronavirus COVID-19 Test that detects the RdRp gene of the SARS-CoV-2 virus.

·     Healthcare services and providers; CVS opened two new rapid COVID-19 drive-through testing sites in Georgia and Rhode Island and said the sites will use testing equipment made by ABT that can deliver results within minutes; HSIC joins a list of companies that have addressed COVID-19 impact or withdrawn 2020 guidance (MD, THC, DGX and IQV was upgraded to neutral at UBS saying risks have been introduced to the WBA story from the COVID-19 outbreak, though they think drug retail SSS should be fairly resilient once activity levels normalize

Industrials & Materials

·     Industrial & Machinery; KeyBanc materially lowered estimates and price targets amid findings from Coronavirus Impact Analysis to identify names in which risk/reward is most and least attractive/upgraded shares of AIMC and NDSN to Overweight, and highlighting CFX, CIR, HSC, PNR, and RXN as high-conviction upside plays, and AOS, HLIO, and GGG as those with greater potential downside

·     Transports; airlines active on several stories; DAL and LUV shares weak initially after Warren Buffett’s Berkshire Hathaway disclosed the sale of 12.9M common shares of DAL and about 2.3M shares of LUV according to regulatory filings late Friday; JPMorgan downgraded AAL, SAVE underweight from overweight, JBLU downgraded to neutral while upgraded LUV to neutral and ALK to overweight

·     Aerospace & Defense; WWD and HXL today announced that the companies have mutually agreed to terminate their merger agreement, previously announced on January 12, 2020, under which the parties had agreed to combine in an all-stock merger of equals.

Technology, Media & Telecom

·     Internet; SPOT was downgraded from Strong Buy to Market Perform at Raymond James citing less engagement and fewer downloads during the coronavirus lockdowns as think Amazon Music is gaining market share in the U.S. due to increased smart speaker use; EBAY upgraded to Buy at Guggenheim saying it has an increasingly defensive and relatively safe name in the retail group; GDDY was upgraded to outperform at Wedbush as view the model as relatively resilient to coronavirus pressures, believe business fundamentals continue to move in the right direction, and trough valuations create a strong relative entry point

·     Semiconductors; semis outperform in tech; INTC was upgraded at Raymond James primarily based on view that the company is exposed to the right end markets for this pandemic – namely, notebooks and datacenter, at same time, firm lowers estimates across a large number of analog and broad-based companies (ADI, MXIM, NXPI, ON), to account for both supply disruptions and lower end demand resulting from the global shutdown; AVGO says is experiencing some disruption to parts of our global supply chain; says Malaysia warehouse is currently fully operational, pursuant to a critical industry exemption

·     Software, Hardware & Component news; ZM shares fell after being downgraded to underperform at Credit Suisse noting they see the current crisis accelerating the adoption of video communication, but at 40x CY20 consensus revenue, the current share price embeds significantly greater conversion of free users than their upside model; CMTL rises after it reported earlier $1.6M in orders for equipment from the world’s largest mobile operator, based in China; HPE withdrew its guidance for the year and suspended its share repurchases; WORK said it plans to sell $600 million worth of convertible senior notes, due 2025 as the notes will be convertible to cash, shares of common stock, or a combination of both