Closing Recap

Wednesday, April 08, 2020

Equity Market Recap

·     U.S. stocks opened higher, but unlike yesterday’s trading action, major averages were able to hold on to their gains, recovering most of yesterday’s unwind amid positive virus sentiment, despite another round of surging numbers. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases and one of the biggest proponents of “social distancing/staying at home”, says the U.S. death count related to the coronavirus is now lower than initially thought, and he anticipates a turnaround after this week…but notes virus efforts should be intensified. US CDC reports 690 new deaths due to coronavirus as of yesterday as total now 12,754 deaths vs 12,064 in previous report on April 7 and reports 20,682 new coronavirus cases as of yesterday as total now 395,011 cases vs 374,329 in previous report yesterday.

·     U.S. stocks also getting a boost on reports overnight the Trump Administration is said to be developing plans to get the U.S. economy back in action. Top U.S. Democrats in Congress said they would back the Trump administration’s request for $250 billion more in aid for small businesses if it includes additional money for hospitals, local governments and food assistance. In political news, Bernie Sanders suspended his Presidential campaign, opening the door for Joe Biden to secure the Democratic Presidential nominee this November (healthcare insurers UNH, CI, ANTM saw a notable spike in reaction to Sanders stepping down as he wanted to adopt a Medicare for all healthcare policy would have essentially abolished private insurance).

·     Travel, restaurant, retailer and leisure stocks were among the top performers in the S&P 500 today amid news the White House is said to be prepping plans to reopen the economy, depending on testing. Transports were among strongest sector gainers as the industry awaits payroll aid from the U.S. gov’t they had hoped could arrive as soon as this week, as the number of passengers passing through U.S. airports dwindled even further. Materials stocks jumped amid hopes for Federal infrastructure spending, while energy bounces behind oil recovery ahead of OPEC meeting tomorrow and transports outperform early led behind airlines and package delivery names. Markets are preparing for another week of soaring jobless claims (first time unemployment) tomorrow morning, with estimates for a spike of 5.25M (after 3.3M claims 2-weeks ago and a whopping 6.64M last week).

Coronavirus updates

·     The U.S. recorded 1,939 deaths during the 24-hour period ended 8:00 PM Tuesday — 50% more than any previous day of the pandemic, according analysis of data from Johns Hopkins University after New York, New Jersey, Louisiana and Illinois reported their highest daily death tolls from the Covid-19. Today, the number of confirmed coronavirus cases topped 1.4 million, with more than 83,000 deaths, according to Johns Hopkins data as U.S. cases approach 400K. New York Reports 149,316 virus cases, up from 138,863. Italy reports 3,836 new virus infections, highest in three days vs. 3,039 Tuesday and reported 542 new deaths from coronavirus, down from 604 on Tuesday. France says death toll in hospitals rises to 7,632 from 7,091 Tuesday from coronavirus.

Commodities

·     Oil prices managed to end sharply higher, rising $1.46, to 9.2% to settle at $25.09 per barrel despite weekly crude stocks rising by 15.2M barrels to 484.3M, the biggest increase on record, as refinery utilization rates plunged to the lowest since Sept. 2008 ahead of tomorrow’s virtual OPEC+ meeting. Crude inventories at Cushing, Oklahoma, the delivery point for U.S. crude futures, jumped by 6.4M barrels to 49.2M, the biggest rise on record. Despite the bigger builds, markets focused rather on the sharp drop in us oil production, which fell 600K barrels per day to 12.4M (biggest decline since July 2019) as the spike in builds was widely expected (estimates were for a build of over 9M barrels). Boosting prices late day to highs were reports of a larger than expected production cut tomorrow as Saudi Arabia and Russia are hammering out an agreement for a tomorrow that a delegate said will reduce global output by about 10 million b/d. That compares with OPEC’s estimate for demand to fall by 11.9 million b/d this quarter. Meanwhile, India — the world’s third biggest oil consumer — is set to snap up millions of barrels of Middle East crude for its strategic reserves to take advantage of low prices, according to Bloomberg citing officials. Gold prices end the day little changed, rising 60c to settle at $1,684.30 an ounce, a day after touching highs of $1,742 an ounce

Currencies & Treasuries

·     The U.S. dollar was little changed overall throughout most of the trading session, essentially flat vs. the euro and yen given the lack of economic data and stock markets pushing higher. At the same time, Treasury markets slipped modestly as yields inch higher, back around the 0.75% for the benchmark 10-year note. The U.S. Treasury sold $17B in 30-year notes at a yield of 1.325% vs. when issued prior at 1.330%, with the bid-to-cover (demand) at 2.35 vs. 2.36% prior auction and indirect bidders awarded 66.4%.

Sector News Breakdown

Consumer

·     Retailers; LEVI reported Q1 EPS beat by a nickel with sales better at +6% (constant currency) vs. estimate up 5% helped by a large beat in the Americas division/gross margins beat by 90 bps; JWN said results for quarter ending May 2 and beyond will be “adversely impacted in a significant manner due to the impact of coronavirus shutdown; retailers on pace for its best week since Nov 28, 2008 as KSS up 58% WTD on pace for its best ever back to its IPO in 1992 while JWN up 49% WTD on pace for its best week ever back to its IPO in July 1971, as per CNBC

·     Restaurants; MCD Q1 comp sales down -3.4% and says will cut capex this year by $1B while withdraws forecast; DRI was upgraded at Wedbush to Outperform from Neutral and raising our PT to $94 from $37 in restaurant sector while view TXRH and DRI as best positioned among casual diners in both the near, medium, and longer-term; DENN reported Q1 domestic system-wide same-store sales are expected to be reported down approximately 6% Y/Y/same-store sales were up 2% through the end of February before plummeting 19% in March

·     Casino & Leisure movers; AMC was downgraded to sell at Loop Capital amid the specter of potential bankruptcy noting the movie chain was already over-levered into the virus shutdown; PLNT was initiated buy and $60 tgt at Davidson as thinks correction represents a good entry point, given the company’s leadership in fitness centers, attractive franchise business model, and superior unit economics; casino WYNN noted it has ~$3.0B in liquidity at present, which gives it about 1.4 years of property opex/cash interest expense burn.

·     Auto’s; AZO was downgraded to Neutral from Buy at Bank America due to what we view as mounting risks to medium-term auto parts replacement demand, and relatively less attractive valuation versus peers AAP, GPC (which they upgraded to buy), and ORLY; GM was awarded a $489M ventilator contract from the US Dept of Health and Human Services

·     Education services; TAL shares fall after disclosing that certain employee wrongdoing was discovered in the company’s routine internal auditing process which consisted of the employee conspiring with external vendors to inflate light class sales; LAUR was downgraded at Morgan Stanley saying the material de-rating and potentially tough year for the education segment across Latam is likely to postpone LAUR plans to divest assets

Energy

·     Inventory data: the API showed a build of 11.9M barrels of oil for the week ended April 3, while gasoline inventories show a build of 9.45M barrels, distillate inventories show a draw of 177K barrels, and Cushing inventories show a build of 6.8M barrels. This morning, the EIA reported a weekly build of oil inventories of 15.18M barrels vs. est. build of 9.25M barrels, while gasoline rose 10.497M vs. est. build of 5.5M barrels and distillate stockpiles rise 476K vs. est. 1.449M

·     Texas oil regulator Ryan Sitton said 20 million barrels per day of cuts are needed from OPEC, other countries; U.S. firms likely to ‘organically’ cut 4 million barrels per day in 3 months; says if OPEC, others do not cut production, oil storage likely to fill in two months (more)

·     Stock news; MRO revised its capital budget by about 50% from 2019 to $1.3B from $2.4B and now plans to suspend further drilling activity in the Northern Delaware, with only a limited number of wells to sales expected through the balance of the year; HFC cuts cap-ex by about 15% as reduces 2020 total capital expenditures to a range of $525M-$625M from prior $623M-$729M; overall energy stocks hung strong as oil prices try and extend gains off 18-year lows reached the prior week on plunging demand

Financials

·     Bank movers; JPM files an amended prospectus for a $64.2B mixed shelf offering (ahead of earnings expected next week); in brokers, SCHW and AMTD both downgraded to market perform at KBW Inc.; the Fed eased WFC growth cap to boost lending amid virus; regarding credit cards (AXP, COF, MA, V), Senator Kamala Harris called for an immediate suspension of credit card interest, fees, and penalties for the duration of this crisis.

·     Insurance; BRK.A’s Geico insurance said it will give its auto and motorcycle policyholders a 15% credit on their bills as their policies come up for renewal between Wednesday and Oct 7. The credit will also apply to new policies bought in the same period (follows ALL, PGR moves); at RBC Capital, reduces 2020 EPS estimates by 7-10% for P&C Insurance space but maintains his constructive stance on the group – favorite ideas are MKL, CB

·     Consumer finance and lending; NLY shares bounce after co update as guided q1 eps 20c-21c vs. est. 27c/estimate on a preliminary basis our book value per common share at March 31 was between $7.40 and $7.60; Wells Fargo downgraded shares of ADS, JKHY, and WU while lowering estimates and target prices as believe investors should take an approach of balancing low with companies exposed to digital and B2B payments (highlight EVOP, FLT, PYPL, and QTWO as names that fit this criteria); PFSI shares rose after completes an agreement for new servicing advance financing through PNMAC GMSR Issuer Trust, an indirect/wholly owned subsidiary of PFSI

·     REITs; Raymond James downgraded EXR, LSI, CUBE rating – notes self-storage REIT sector has outperformed the REIT average by 1,600 bps since the start of the COVID-19 pandemic (Feb. 21). As a recession-resilient – though not recession-resistant – asset class, that comes as no surprise. That said, we believe the cash flow resiliency and safety provided by these names is reflected in current valuations and the outlook from here is less-attractive; in mortgage REITs, NMYT said they are now current with their repurchase agreement payment obligations and no longer need forbearance agreements while IVR said counterparties already sold $3.5B of pledged securities; building REITs MAA, CPT, SLG downgraded to market perform from outperform at BMO

Healthcare

·     Pharma movers; BMY announces acceptance of U.S. and EU regulatory filings for Opdivo (nivolumab) plus Yervoy (ipilimumab) combined with limited chemotherapy in first-line lung cancer; PRGO said it experienced a Q1 sales boost due to the COVID-19 pandemic/expects adjusted operating income of $220M-$$225M of about $1.3B vs. est. $195M and $1.26B; managed care stocks pushing higher (UNH, CVS, ANTM, HUM, CI) since the announcement by Bernie Sanders he was ending campaign as President who was a proponent of “Medicare for All”; MOH was upgraded to buy from underperform at Bank America

·     Biotech movers; PTCT said the FDA extended the review of risdiplam by three months following the submission of additional data, to August 24, 2020; SAGE announced a massive restructuring, as it is immediately cutting 53% of its workforce (from 675, less ~360, to ~315) to refocus its capital and attention on its most valuable asset, its late stage depression drug, zuranolone; NVAX rises after saying it has identified its vaccine candidate to combat the coronavirus and expects to start its first-in-human trial in mid-May with preliminary data in July; XLRN announced the FDA granted Breakthrough Designation for Sotatercept in Pulmonary Arterial Hypertension (PAH), which will expedite the development and review for potential approval

·     Medical equipment and devices; GNMK rises after guides 2020 revenue to $112M-122M, up from prior view of $100M-110M citing a positive impact from COVID-19, and sees Q1 revenue of ~$38.7M, up about 80% from a year ago and 46% above consensus of $26.5M; PACB announces that it is working with commercial, academic and government research teams investigating SARS-CoV-2 citing the highly accurate long leads produced by its Single Molecule, Real-Time (SMRT) Sequencing technology; MYGN withdrew its F20 financial guidance, though noted volume trends prior to mid-March were consistent with expectations across all products; NUVA was upgraded to outperform from neutral at Baird and says virus outbreak will narrow the lead of NUVA’s rivals MDT, GMED whose spine robots are already in the market; IART, HOLX with COVID-19 updates

·     Healthcare services, supplies and providers; APT shares jump after saying it has booked orders worth $36.7M for its N-95 masks since Jan 27, compared with its last update of $22.6M in orders on March 11/says orders for its face shields has also jumped to $11.6M, up from the $1.6M reported on March 11; EHTH shared fell after Carson Block of Muddy Waters reveals short call on CNBC segment this morning; XRAY was upgraded to outperform from neutral at Baird despite expecting a 70%-80% fall in demand for dental procedures and equipment in Q2 2020 saying XRAY history suggests near-term risk from coronavirus pandemic is for basic dental equipment

Industrials & Materials

·     Industrial & Machinery; Water names at Goldman Sachs as they upgrade AQUA to Buy while downgraded XYL to sell and MWA to Neutral from buy while remain buy on PNR saying while water names tend to be more defensive in the context of less-cyclical growth, we believe there will be heightened dispersion coming out of this downturn as water spending trends and end market dynamics appear bound to experience a more pronounced and varied impact in the current recessionary environment given the uneven impacts of COVID-19

·     Transports; ODFL downgraded at Bank America to underperform on valuation as shares have rallied over 30% since mid-March, and are now less than 5% off their all-time high in February; FDX and UPS rise after AMZN decided to suspend its U.S. shipping from June as the company needs people and capacity to handle a surge in its own customers’ orders/says is dealing with a demand surge in the U.S., where most residents are under stay-at-home orders; CSX upgraded to buy at Goldman Sachs in rail sector saying while the upcoming quarters certainly bring elevated EPS risk, they believe CSX on a 12-month basis offers solid risk/reward

·     Metals & Materials; RPM reported Q3 adj EPS 23c on revenue $1.17B vs. est. 21c and $1.18B and sees Q4 revenue decline 10%-15% YoY while withdraws its yearly forecast; iron ore exports from Australia’s leading port surged to a record for the month of March in a signal that supplies from the top exporter are back to normal after weather disruptions, threatening prices just as global demand takes a powerful hit from the coronavirus pandemic; NTR was raised to Buy at Citi

Technology, Media & Telecom

·     Internet; PINS shares spiked higher after guiding March revs to $269M-$272M which was above the $266.7M estimate while withdrawing guidance for the full year, while warning that it is seeing softening advertising demand; said sees global monthly active users of 365M-367M; TWTR was upgraded to market perform at Bernstein saying after underperforming in the COVID selloff, the valuation of Twitter is now more reasonable; ANGI was upgraded to Buy at Citigroup saying while there are tough times ahead, the current stock price reflects a more challenged 2021 than is expected at this time (cuts tgt to $6.50); BKNG offers $750M in aggregate principal amount of its convertible senior notes due 2025 to qualified institutional buyers and said it entered into an amendment to its $2 billion revolving credit facility

·     Hardware & Software movers; GLUU shares fell after Stephens cut to underweight and $4 tgt based on the view that Disney Sorcerer’s Arena would disappoint relative to expectations/says two weeks post launch, firm sees very little in the data that he tracks to indicate that DSA will become a profitable LT growth pillar for GLUU; SGH advanced following earnings results; INSG shares jumped after saying will exceed 1Q rev ests, and guided 2Q revs well above Street

·     Media & Telecom movers; DIS was downgraded to equal weight from overweight at Wells Fargo citing concerns about the company’s parks business saying "we don’t think Parks can get back to anything close to full capacity until testing and/or vaccines are far more ubiquitous and that means it could be 24 months before parks attendance normalizes