Closing Recap

Tuesday, April 14, 2020

Equity Market Recap

·     U.S. stocks were in rally mode, as investors grow more optimistic about the coronavirus outlook after President Trump said late Monday that he hopes to reopen the country "ahead of schedule," and is poised to announce a new working group to analyze options for exiting the lockdown, while some governors also are starting to look at how to gradually ease guidelines on social distancing. The mega-cap stocks led the Nasdaq Composite higher for a 4^th straight day (AAPL, AMD, AMZN, GOOGL, NFLX, MSFT), its longest winning streak since December as tech led a fairly broad based rally. There were two sectors bringing up the rear including financials, hurt badly by disappointing earnings results from large cap giants JPM, leading peers and regional banks lower ahead of a busy week of bank earnings. Energy also lagged given the sharp pullback in oil prices, essentially erasing all its gains over the last two weeks following the OPEC+ production cut deal. The Nasdaq easily surpassed key technical trading levels, moving well above its 200-day MA resistance of 8,397 and 50-day MA at 8,415 (hasn’t been above the 200-day MA in about 5-weeks), led by gains in big tech and semiconductors (AMD, INTC, NVDA).

·     The actions by the Fed over the last few weeks (rate cuts, added QE, liquidity back stops, buying of muni’s and high yield) have all supported market buying activity, and helped ease investors’ fears about liquidity or credit being frozen, hoping to stem bankruptcies. Meanwhile, the U.S. government’s “relief stimulus” actions for small businesses and individual citizens suffering from lost jobs have also boosted sentiment. U.S. Treasury prices were modestly higher despite the bullish bias in stocks, while oil prices decline. Pockets of strength remain with WMT an AMZN among names trading at all-time highs (along with DG, NFLX, LLY, REGN, and NEM as well 52-week highs). In virus news, the U.S. CDC reported 310 new deaths due to coronavirus as of yesterday as the total now 22,252 deaths vs 21,942 in previous report and reports 24,156 new coronavirus cases as of yesterday with the total now 579,005 cases vs 554,849 previously. Stocks got a midday bounce after Italy reported 2,972 new coronavirus cases, its lowest in a month and compared to 3,153 Monday as total cases are 162,488 and 21,067 deaths (after reporting another 602 deaths vs. 566 Monday). Will strong gains continue into earnings season, where numbers are expected to be weak and forecasts bleak if at all.

Commodities

·     Oil prices tumbled as WTI crude fell -$2.30, or over 10% to settle at$20.11 per barrel, back near 18-year lows after Texas shale firms urge regulators to order coordinated cuts as storage facilities nearly at full capacity. Inventories are set to continue rising despite recent supply cuts as futures fall for a third consecutive day, down about 65% this year. Prices have fallen despite a weekend agreement by OPEC+ and allies including Russia to curb output by about 10M barrels per day, along with coordinated efforts to cut from the U.S., Mexico and Canada (but may not be enough given some estimates for the demand drop are roughly 25 million to 35 million barrels a day). Traders were looking ahead to weekly U.S. inventory data slated for Wednesday. Gold prices rise $7.50 or 0.4% to settle at $1,768.90 an ounce (off earlier highs $1,788.80 an ounce), setting fresh 8-year highs as the dollar slides and investors hedge in safe-havens along with the rise in stocks

Currencies & Treasuries

·     U.S. Treasury prices rose as the benchmark 10-year yield fell 4 bps to 0.72%, and the 30-year slipped 3 bps to 1.37% as investors remain cautiously optimistic that the U.S. was nearing the apex of the coronavirus outbreak and looked forward to the reopening of the economy. Treasury markets have been well bid as equities have recovered from the March 18^th lows, while yields have held steady (after bottoming mid-March – 10-year around 0.3%) over the last week. On the short end of the curve, U.S. 2-year yields were last at 0.235%, down from Monday’s 0.243%. The U.S. dollar was broadly lower vs. all currencies as the dollar index slips -0.4% below the 99 level, impacted by the Fed actions over the last few weeks to help boost stocks/maintain liquidity.

Economic Data

·     Import prices for March fell (-2.3%) MoM, slightly better than the (-3.2%) forecast and after falling (-0.7%) in the prior month; Import prices ex-fuels unchanged m/m after rising 0.3% in Feb; capital goods prices rose 0.1% m/m after rising 0.1% in Feb; export prices fell (-1.6%) MoM after falling (-1.1%) in February

Sector News Breakdown

Consumer

·     Auto sector; TSLA was upgraded to neutral from underperform at Credit Suisse while upping its tgt to $580 from $415 saying Tesla now “competitively has more edge in the transition to EV as coronavirus disruption will make it more difficult for legacy automakers to balance the long-term shift to EV in the face of near-term cycle disruption"; CVNA rises on apparent Yippit data through this weekend suggesting both orders and sales growth are rebounding off their lows

·     Retailers; WMT traded to 52-week highs today as investors rotate into large cap/strong balance sheets; DKS shares fell after modifying its capital allocation plan for 2020, including significantly reducing its planned capital expenditures and temporarily suspending its stock buybacks and dividends; YETI to replace LHCG in the S&P SmallCap 600 index; CONN retail same-store sales declined 13.3% in Q4 within the guidance range of -16% to -12%

·     Consumer Staples; BTI slips after The Times reports the company is the subject of a U.S. criminal investigation over suspected sanctions-busting/co says it is cooperating with the U.S. DoJ and Office of Foreign Assets Control without elaborating; NBEV rises after saying Q1 revs would come in between $62M-$64M, a gain of 6% to 10%, compared to the $58.3M a year earlier (est. $56.6M); beverage stocks jumped early (KDP, MNST, KO)

·     Casino & Leisure movers; in lodging, MAR said it expects global systemwide RevPAR down 23% in Q1 while roughly 25% of over 7,300 hotels are temporarily closed and expects Q1 RevPAR in North America down roughly 20% (also said booking trends in Greater China improving steadily in April, with occupancy rising to about 20% in the first week of the month); GOLF was downgraded to underweight at Wells Fargo given relatively high valuation, likely sharp downward Street estimate revisions, limited visibility into how the 2020 golf season unfolds including potential weather headwinds; cruise lines saw early bounce (CCL, RCL, NCLH)

Energy

·     Energy stocks were among top laggards on the day, pulling back along with oil prices after its recent bounce on OPEC+ production cut agreements; handful of companies still cutting cap-ex and production with PDCE today cutting capex by 50%; LONE Q4 adjusted Ebitda fell -20% YoY to $32.6M vs. est. $32M; 4Q avg production 17,547 boe/d, +33% YoY

·     MLPs; Wells Fargo upgraded PSXP to OW and DKL to EW, and downgraded ENBL to EW and OMP to UW saying top picks remain defensive names with steady cash flows, low counterparty risk, and conservative balance sheets including: ENB, EPD, KMI, MMP, PSXP, and TRP; Jefferies upgraded shares of MMP, OKE and SUN to buy from hold upgraded (while cutting midstream estimates due to anticipated COVID-19 demand destruction, forced US crude shut-ins), though expect a return to more normal conditions in 2021

Financials

·     Bank movers; disappointing earnings results as expected form big banks took its toll on peers and regional banks ahead of busy week of earnings: JPM reports Q1 EPS 78c vs. $2.65 YoY (and missed ests of around $1.84) while Q1 revs fell -2.6% YoY to $29.07B; Q1 provision for credit losses $8.29B vs. $1.5B YoY, which includes $6.8B of reserve builds largely as a result of COVID-19 – JPM also said they provided $25B+ new credit extensions for companies in crisis and lent over $500M to small businesses in March; WFC posted a Q1 provision for credit losses of $4B (reserve build $3.1B) vs. $845M YoY while NII fell -8.2% YoY to $11.3B (slightly above ests), said maintained strong liquidity – posted revs $17.7B, down 18% YoY and misses the $19.4B est. and profit was $653M vs. $5.86B a year ago; earnings tomorrow: BAC, C, GS, PNC, USB results expected Wednesday…BK, KEY Thursday and IBKC, RF, STT on Friday

·     Insurance; PGR was upgraded to overweight at Morgan Stanley citing its low COVID-19 exposure, favorable frequency trends, and strength when auto pricing turns render it a safe haven in the current climate overshadowing most commercial carriers

·     Consumer finance and lending; COF, DFS, AXP pulled lower after WFC noted that credit card spending fell 15% in March due to coronavirus impact; SQ downgraded to Neutral at UBS as believe there remains downside risk to their recently reduced revenue and EPS forecasts because of SQ’s orientation toward in-store spending and as current share price exceeds revised valuation

·     REITs; SPG was downgraded to neutral at Bank America despite the 48% move off the highs saying the game changer for them is the unprecedented challenges and uncertainties SPG and its mall peers are likely to face even when the world does re-open/says lack of visibility for retail real estate has never been this limited, in their view; NSA downgraded at Baird as believe the country-wide shutdown will limit the storage REITs’ ability to capture the typical spring/summer lease-up; KBW raised tgts on mortgage REITs NLY to $7 from $5.50, NRZ to $9.50 from $6.50, CIM to $10 from $8.50 and EFC to $11.25 from $5 saying previous numbers assumed further significant declines in capital driven by pressure on asset prices, and ongoing financing challenges in the repo market

Healthcare

·     Pharma movers; JNJ beat analysts’ estimates for Q1 profit on higher sales of cancer drugs and consumer products while sales in medical device unit down 8.2% to $5.93B, due to estimated negative impact of COVID-19 pandemic and deferral of medical procedures/also cut year profit and sales view to $7.50-$7.90 vs. prior view $8.95-$9.10 and operational sales down 3% to up 0.5% from prior view up 5%-6%; MEIP surges after news it will receive $100M upfront payment from Kyowa Kirin Co as part of a licensing deal for its drug candidate ME-401 and is also eligible for an additional $582.5M based on certain milestones; AMRN Q1 Vascepa sales of $150M which was better than expectations but focus continues to be on key patents that were recently ruled invalid by a federal judge, which AMRN is appealing

·     Biotech movers; ALNY receives FDA Fast Track designation for Vutrisiran, an investigational therapeutic for the treatment of the polyneuropathy of hereditary transthyretin-mediated (hATTR) amyloidosis in adults; MRNA announces opportunity of mRNA vaccines at its first vaccines day; MDGL phase III NASH trials continue without protocol modifications/new data demonstrate that reductions in liver fat achieved by resmetirom predict NASH resolution and fibrosis reduction

·     Medical equipment and devices; INSP 2M sport secondary priced at $58 after issuing lower guidance due to COVID-19 impact; DGX announced new temporary cost cutting measures to help manage the 2Q downturn and an update on increased COVID-19 testing capacity; Piper noted that MedTech universe was down 44% from the February peak to the March 23 bottom and has since recovered about 34% and would recommend MDT, NUVA, and SPNE from our list

·     Healthcare services and suppliers; LHCG migrating to the S&P Midcap 400 from the S&P SmallCap 600 effective on the close 4/16; RAD said it plans to expand COVID-19 testing sites as part of its partnership with the White House Coronavirus Task Force

Industrials & Materials

·     Industrial & Machinery; ALSN was upgraded to strong buy at Raymond James on a relative basis (to the group) uniquely positioned to weather this storm given its outsized, leading EBITDA margins/FCF profile (by a sizable gap), strong core pricing power; FAST Q1 EPS 35c on sales $1.37B vs. est. 34c/$1.36B and said adjusting for the one additional selling day in the current period, our daily sales increased 2.8% in the Q1 when compared to the Q1 of FY19; DE was cut to neutral at Citigroup citing potential for further near-term downside in cash corn prices; ITT downgraded to hold at Stifel based on our view that the majority of ITT’s revenues face possibly severe near term demand headwinds (automotive, oil & gas, commercial aerospace); GE tgt cut to $5 from $6 at JPMorgan calling it the most expensive value trap they’ve seen

·     Transports; Dow Transports rose as high as 8,300 led by airlines (UAL, DAL, ALK), and ahead of trucker earnings tonight (JBHT); airlines rose amid hopes to see official details of rescue aid – Bernstein from this morning noted: "While formal details have not been fully disclosed, our current understanding is that CARE Act support to industry will include a "part Grant part Loan" – or Groan – equal to last year’s baseline payroll. The Groan will require 30% repayment in a period of 5 years at a low rate, and we understand that airlines will need to issue warrants to receive this part of the assistance package as well.

·     Metals & Materials; CLF announced it will be curtailing output at two of its iron ore pellet production mine sites – Northshore (Minnesota) and Tilden (Michigan) – due to weaker macro conditions for about three months each beginning in April; gold miner NEM traded to fresh 52-week highs as group benefits from stronger gold prices

·     Aerospace & Defense; BA shares slipped after company posts another 75 cancellations for the 737 MAX jetliner in March and reported a total of 150 MAX cancellations in March as the coronavirus crisis worsens disruptions from the grounding of its best-selling jet; SPR said it would swing to a first-quarter loss and warned of a bigger blow in the current quarter, as customers Boeing Co and Airbus SE whittle down production due to the coronavirus pandemic.

Technology, Media & Telecom

·     Internet; AMZN trades to intraday record highs, one of the best performing stocks during the coronavirus pandemic amid strength of its Amazon Prime video and shipping of essential items; SABR positive mention at Oppenheimer saying they believe SABR’s upsized debt offering provides ample liquidity to sustain current COVID-19 headwinds and actively participates in travel’s gradual recovery; ETSY was downgraded to neutral at BTIG on achievement of price target, while remains a top-tier online platform, but furious rally and unknown depth of coming recession moves risk-reward into balance

·     Semiconductors; Philly semi index (SOX) rose over 4% at 1,690 (off March 18 lows 1,233), topping its 200-day MA resistance of 1,650 and 50-day 1,660 with all 30 components in the index higher late morning; the sector among the market leaders in tech despite many analysts having lowered estimates, but industry still seen as bellwether; KeyBanc said it expects TSM to lower its capex outlook this week, perhaps to $13B-$14B, down from prior guidance of $15B-$16B, which could drive further estimate reductions for semiconductor equipment names in 2020 (KLAC, LRCX, TER, AMAT); despite lowered estimates for many Apple suppliers (QRVO latest today at Canaccord), the sector continues to push higher

·     Software movers; Morgan Stanley with several rating changes as they upgraded COUP and WDAY to overweight (joins ADBE, CRM, MSFT) while downgraded APPN, NET, ZUO to underweight and NEWR to equal-weight; WORK CEO Butterfield said in an interview that the week of March 9 was "the most productive" in the company’s history, Marketwatch reported and that the platform added 9,000 new paid customers from Feb. 1 to March 25, as more employees were forced to work remotely because of the COVID-19 pandemic (noted MSFT “Teams” had 44M DAU’s but notes is only about a 20% adoption rate, out of the 200 million Office 365 customers)

·     Media & Telecom movers; ROKU shares jump after issuing prelim Q1 revenue that beats Street estimates as more people used its video streaming devices during the coronavirus lockdown/said it expects viewers to stream 13.2 bln hours of content in Q1, 49% jump YoY; IHRT initiated an additional $200M in OpEx savings for 2020 driven by: reductions in compensation for employees, Furloughing of non-essential employees, Suspension entertainment expenses

·     Hardware & Component news; AAPL shipped roughly 2.5M iPhones in China last month, according to government data/Chinese online retailers are offering steep discounts on all of the iPhone 11 models; AAPL tops its 50-day ($280.60) and 100-day ($285) MA on the day