Closing Recap

Friday, April 17, 2020

Equity Market Recap

·     U.S. stocks were sharply higher to end the week, boosted by optimism about a possible coronavirus treatment following positive anecdotal data from GILD’s Remdesivir (shares rose more than 10% at one point) and as investors cheered the guideline plans (three phases) by the U.S. for reopening the U.S. economy. The Dow Jones Industrials outperformed, led by gains in Boeing (BA) which announced the resumption of commercial plane production at its Seattle-area facilities (helping lift shares of suppliers SPR, HXL as well). Energy was surprisingly the top gainer in the S&P today, this despite oil prices falling another 8%, hitting fresh 18-year lows (dipped below $18 per barrel) and was down 20% on the week as the coronavirus crushes demand. The combination of the GILD news (raises hope for cure on virus) and Trump saying last night that some states could start to reopen shortly (though overall the State Governor’s decision), based on new guidelines issued by the White House was enough for investors to buy beaten up sectors that have been most effected by the coronavirus worldwide shutdown (hotels, airlines, leisure, restaurants, casinos and retailers). The hopes also helped offset a week of atrocious (although not unexpected) economic data including China’s first contraction in decades falling 6.8% for the first quarter, as well as drops in jobs, manufacturing and housing data in the U.S. this week. Today’s laggards included tech companies that have benefitted from the “stay-at-home” orders over the last few weeks including ZM, AMZN, WORK, NFLX in tech as well as PTON, NLS in home fitness, grocers and packaged food companies GIS, KHC, CPB. Earnings pick up next week after a rough week of results in the banking sector.

Coronavirus update

·     Some State Governor’s announced plans to slowly open their economies today after the Trump Administration last night said several are close to being able to open due to low coronavirus cases. NY Statewide coronavirus deaths rise by 630 on April 16, vs increase of 606 a day earlier – as per Governor Cuomo while says net hospitalizations fall again. Vermont Governor Phil Scott, a Republican, will allow some low-density, low-risk work activities to resume on Monday. Michigan’s Governor Whitmer says aims to begin reopening state economy on May 1^st. Italy’s new virus cases decline even as record number tested, had 575 deaths from coronavirus vs 525 Thursday and reports 172,434 total coronavirus cases, 22,745 deaths. Texas announced they would close schools the remainder of academic school year, while said retail to open.

Commodities

·     Oil prices plunge, as WTI crude slides $1.60, or over 8% to settle at $18.27 after falling below the $18 per barrel level earlier as the coronavirus continues to cut global demand (and was down for 20% on the week). The 18-year low figures come despite reports Saudi Arabia and Russia signaled they may be open to further output cuts after the latest OPEC+ deal to curb global oil supplies failed to stem crude’s downward spiral. The Baker Hughes rig count also fell to its lowest levels since 2016, as oil drillers cut 66 rigs to 438 (overall rigs fell 73 to 529). Worries about rising U.S. supplies, a potential record drop in demand and tight storage capacity fed oil’s decline. Gold prices rolled on the day, falling -$32.90, or 1.9% to settle at $1,698.80 an ounce, pulling back from 7-year highs the last few sessions and ending the week lower by over 3%.

Currencies & Treasuries

·     The U.S. dollar index dipped back below the 100 level, but was overall mixed on the week, as currency markets dealing with awful economic data worldwide (jobless claims topped 21 million in just 4-weeks now with sharp declines in housing and manufacturing data as well). At the same time, the recent Fed and Treasury unprecedented actions to help support the economy in the form of rate cuts, stimulus, buying of muni’s and high yields bonds, repo market operations, etc. has caused mass volatility in both currency and Treasury markets. The yield on the 10-year fell back to 0.6% earlier today in a strong week for prices while long-dated Treasury yields fell to two-week lows despite higher risk appetite overall. Yields spiked late day as the 10-year rose above 0.65% late and the 30-year fell as well.

Sector News Breakdown

Consumer

·     Retailers; big bounce for retailers on news of plan to slowly reopen the economy, with decision made by Governors (PVH, LB shares gain); JWN amended its $800M revolving line of credit and the closing of its 8.75% secured debt offering of $600M in order to provide extra liquidity amid the pandemic; KSS entered into an agreement for $1.5 bln senior secured, asset-based revolving credit facility which will mature in July 2024/suspends cash dividend; YETI downgraded to Hold from Buy at Stifel saying COVID-19 disruption clouds visibility to the underlying growth prospects of the business

·     Consumer Staples; Dow component PG beat expectations for quarterly profit on Friday as consumers stocked up on everything from diapers and detergents to toilet paper as sales at its health care unit rose 7%, while fabric, home care unit sales rose 8%; food related stocks such as GIS, CPB that have benefitted from citizens stocking up on food in recent weeks and CLX which has seen improvement in sales due to cleaning products saw their stocks slip today on plan to reopen economy slowly announced by the government yesterday

·     Restaurants; SHAK said t’s seen strong sequential sales increases on a weekly basis since the last week in March, but as expected the Q1 results were soft/said comp sales decreased 12.8% during the quarter, with March showing a 29% drop; good rally for broader restaurant industry on hopes States start implementing soft rollouts to open the economy

·     Auto movers; TSLA registers a 10th straight day of gains (last fell on April 2nd); Ford (F) warned of an adjusted Ebit loss of $600 million after pulling out $300 million in pretax special charges and $1 billion in tax and interest expenses; UBER withdraws FY20 guidance, warns of impairment charge on minority equity investments of up to $2.2B

·     Leisure sector; PLNT rises and stay at home exercise machine makers NLS and PTON shares fall as President Trump allows gyms to re-open in the first phase, if gyms adhere to strict physical distancing and sanitation protocols; movie theatre chain AMC spikes after saying it will offer $500M in first-lien five-year debt; WWE was upgraded at Benchmark citing cost cutting efforts and encouraged by valuation; FUN said it expects Q1 revenue $10M-$15M lower YoY

·     Casinos & Gaming; LVS CEO said it will suspend the dividend but says it has enough cash to proceed with its capital expenditure plans in Singapore and Macau; SunTrust said while gaming stocks continue to trade largely on liquidity concerns, we expect the focus to shift to fundamentals over time where our preference remains drive-to regional properties; SunTrust upgraded TRWH to Buy as view their regional exposure and cost focused operating philosophy favorably during the recovery phase and upped CZR to Buy from Hold on valuation as expect the pending acquisition by ERI to close in the next few months

Energy

·     Energy stocks were among the leaders in the S&P 500 Friday despite West Texas Intermediate dropping below $18 per barrel; oil service giant SLB posted mostly in-line Q1 earnings and revenue though cut its dividend by 75%, says results include $8.5B pretax charge and guides capex for FY to $1.2B vs. est. $1.31B. The Baker Hughes (BKR) weekly total rig count plunged -73 to 529 as oil drillers cut -66 rigs to 438, the 5^th straight week of oil rig count cuts (and lowest levels since Oct 2016) and gas rigs declined -7 to 89.

Financials

·     Bank movers; banks saw a nice recovery after a tough week of earnings and significantly higher provisions for losses from some of the biggest banks (JPM, C, WFC); regional banks early winners after sharp selling this week (CMA, FITB, KEY, HBAN rally); RF reported Q1 EPS miss with better NII/NIM being offset by higher core expenses while provision also came in above ($373M vs. $310MM est); CFG reported Q1 EPS beat on better NII and lower provision, partly offset by higher expenses

·     Insurance; Citigroup upgraded EQH and downgraded LNC saying changes reflect view that the life sector’s near-term investment thesis will mainly revolve around balance sheet and capital metrics, rather than new business trends; AFG, HALL both downgraded at Raymond James, resetting the outlook to reflect the COVID-19 pandemic for the remainder of our coverage including commercial lines insurers, life & health, and insurance technology & services companies

·     Consumer finance and lending; credit card companies such as DFS, SYF, COF, ADS were among outperforming financial stocks on Friday morning ahead of next week earnings for several (SYF reporting Tuesday morning, DFS Wednesday night, ADS and COF due on Thursday and AXP on Friday)

Healthcare

·     Biotech movers; GILD shares jumped after STAT News reported the University of Chicago Medicine recruited 125 people with Covid-19 into Gilead’s two Phase 3 clinical trials. Of those people, 113 had severe disease. All the patients have been treated with daily infusions of remdesivir. "The best news is that most of our patients have already been discharged, which is great. We’ve only had two patients perish” (analysts cautions this is an anecdote from one trial site and is not a substitute for the full data set including data from the control arm of the moderate trial); MRNA jumps after receiving $483M funding from U.S. govt. agency to accelerate development of its potential coronavirus vaccine/the vaccine being tested in early-stage trial by National Institutes of Health and Moderna expects to begin mid-stage trial in Q2

·     Suppliers, services, medical equipment and devices; ISRG reported Q1 EPS $2.69 on revs $1.1 billion vs. est. $2.54 and $1.03B; said Q1 worldwide procedure growth +10% vs. +18% YoY and noted significant decline in procedure volume in March; CHWY downgraded to Equal-weight from Overweight at Morgan Stanley on valuation noting shares have outperformed the S&P 500 by +70% YTD, more than doubled since December

Industrials & Materials

·     Aerospace & Defense; Dow component BA shares jump after it announced plans to resume production of all commercial airplanes in a phased approach at its Seattle-area facilities next week/said 27K employees in the Puget Sound area will return to production of the 747, 767, 777 and 787 programs, and the 737 program will resume working toward restarting production of the 737 MAX (shares of suppliers also benefit with SPR, TDG, HXL rising); UBS downgrade BDRBF to buy from neutral given a weaker bizjet outlook coupled with greater risk on the portfolio transformation, while says likes RTX, LMT in earnings preview for industry

·     Transports; KSU the first rail to report earnings as tops estimates as revenue in all the commodity groups with the exception of energy came in ahead of last year’s marks/company’s operating ratio was 59.7% vs. 66.2% a year ago; JBHT was upgraded to buy at Argus as like its industry position, and think companies will increasingly focus on their domestic supply chains as the economy eventually recovers; Barclay’s downgraded several rails (CNI, CP, NSC) and package delivery (FDX, UPS) ratings

·     Metals & Materials; TROX rises after positive guidance for 1Q as benefited from the absence of Chinese TiO2 exports (lifted shares of CC as well); gold miners slide (NEM, AEM, GOLD) after U.S. President Donald Trump’s plans to revive the country’s economy and investors opting for riskier assets/gold prices tumble from 7-year highs; CTVA was downgraded to neutral at Bank America saying while H1 2020 results for CTVA are likely to exceed expectations due to a significant increase in high-margin corn seed sales, a reversal looks increasingly likely for 2021

·     Containers, packaging and paper movers; Wells Fargo downgrade ARD, OI in container/packaging to reflect a similar drop off in semi-discretionary end markets and premium products to the Great Recession which reflects low-to-mid teen declines in fragrance/cosmetic end markets and meaningful contraction in away-from-home dining

Technology, Media & Telecom

·     Semiconductors & Software movers; semiconductors failed to rally with broader markets as the Philly semi index (SOX) held around the 1,700 level as the index had a nice run this week (up roughly 6%); TXN was downgraded at Barclay’s to underweight citing a risk to gross margins while QCOM was cut to sell at Goldman Sachs

·     Media & Telecom movers; in the cable sector, KeyBanc recommended adding exposure to cable operators CABO, CHTR, CMCSA, and WOW (which they upgrade to OW) as cable business models are readily defensive, in their view, and hold utility characteristics that warrant higher multiples; CCOI was downgraded to sell at Goldman Sachs in light of the stock’s recent outperformance versus the S&P 500, near-full valuation; CMCSA was downgraded at Oppenheimer citing supply congestion

·     Hardware & Component news; AAPL downgraded to sell at Goldman Sachs and cut its price target to $233 from $250, as it reduced its earnings estimates for a third time since Feb. 17 saying they are modeling a far deeper reduction in unit demand through mid-2020 followed by a shallower recovery heading into 2021; CSCO was downgraded at KeyBanc as firm survey outlines major volatility in expected pipeline activity for C2Q20 and the remainder of CY20, highlighted by a -20% projected CY20 pipeline decline from -11% in a Survey we ran just a month ago; CAMP was upgraded to buy at Jefferies as think current valuations already price in the downside case for the business; Goldman Sachs downgraded LITE, NTNX, SONO and upgraded ADTN, JNPR

·     IT Services; EXLS was upgraded at Wells Fargo saying large exposure to more stable insurance sector and expectation of analytics business being sustainable, and they see EXLS as the least impacted; firm downgraded WNS and lower PT to $46 from $79 saying oversized exposure to travel sector, retail, and U.K. should relatively weigh on growth after CQ1 surge