Closing Recap

Wednesday, August 05, 2020

Equity Market Recap

·     U.S. stocks surge again, as the S&P 500 rises a 4^th straight session, the Nasdaq Composite a 6^th straight to record highs (31^st of the year), trading above the 11,000 level for the first time ever, as market momentum remains strong. Markets were once again lifted on mixed economic data as ADP private payroll data missed, but revisions from prior month were much higher while the Institute for Supply Management (ISM) said its non-manufacturing activity index increased to a reading of 58.1 last month, the highest since March 2019. A perfect storm for data as it keeps the Fed on the monetary easing pedal with mixed jobs data, but ISM strong enough to show parts of the economy continue to improve from the coronavirus pandemic. Vaccine news also helped sentiment with NVAX and JNJ both out with positive news. Also helping sentiment, trade news as senior Chinese and U.S. officials will review on August 15th, and the implementation of the Phase 1 Trade deal. At the same time, markets remain optimistic for the finalization of the latest stimulus package in Washington after weeks of bickering between the White House and Democrats about key points that allowed unemployment benefits to lapse last week. Gold jumps for another new high as the dollar sinks to fresh 2-year lows and oil finishes higher. The S&P 500 index moves to within 2% of its February record highs.

·     Sector movers included; retailers playing catch-up after falling yesterday on RL results, as better than feared numbers from CPRI helped boost the group (ahead of TPR tomorrow); oil stocks jump as crude hits 5-month highs amid larger than expected weekly inventory drawdowns; materials and industrials paced the market gains; technology jumps on more positive upside momentum; airlines got a late day boost (AAL, JBLU) after Reuters reported 16 republican senators back new round of $25 billion payroll assistance to U.S. airlines; gold miners rise as gold tops another record high (up 13 of last 14 days); media stocks got a boost after earnings from DIS topped views, helped by Disney+ adds and plans of future streaming; FinTech helped as SQ with an easy quarterly beat and the telemedicine space active on an LVGO/TDOC merger deal.

·     While U.S. economic growth slowed in July, it could pick up in the third quarter and reach pre-pandemic levels by the end of next year, Federal Reserve Vice Chairman Richard Clarida said on Wednesday. "It will take some time, I believe, before we get back to the level of activity that we were in February before the pandemic hit," Clarida said in an interview with CNBC.

Economic Data

·     ADP employment for July shows 167K jobs were added vs. estimate for 1.2M jobs added (prior month revised up to 4.31M from 2.36M)

·     U.S. services industry activity gained momentum in July as new orders jumped to a record high. The Institute for Supply Management (ISM) said its non-manufacturing activity index increased to a reading of 58.1 last month, the highest since March 2019, from 57.1 in June. The index slumped to 41.8 in April, which was the lowest reading since March 2009.

·     Trade deficit narrowed to $50.7B in June vs. est. $50.2B and from $54.8B in prior month, the Commerce Department said (trade deficit fell 7.5% in June); Imports rose 4.7% in June to $208.95b from $199.49b in May and exports rose 9.4% in June to $158.25b from $144.69b

·     U.S. IHS Markit July final composite PMI at 50.3 (vs flash 50.0) and Markit July final services PMI at 50.0 (vs flash 49.6)

Commodities

·     Gold prices just continue to surge, rising another $28.30 or 1.4% to settle at $2,049.30 an ounce, continuing its historic run (GLD has risen 13 of the last 14 days), up a 4^th straight session, pushing further past the recently eclipsed $2,000 level amid a weak dollar and expectations of more stimulus measures from central banks to help boost the global economy, while stocks rallied on encouraging corporate earnings. Investors seek a store of value on fears government stimulus in response to the pandemic will trigger inflation, devalue other assets and keep bond yields low causing the dollar to collapse under the weight of $3 trillion in printed dollars. Despite a decidedly more risk-on mood regarding both US/China trade and progress being made regarding additional stimulus measures closer to passing in D.C., gold keeps going!.

·     Oil prices were very strong, with WTI crude rising 49c or 1.18% to $42.19 per barrel (off highs $43.52), boosted by bullish inventory data as the EIA reported U.S. crude inventories fell 7.4M barrels in the week ending July 31, much more than analyst expectations, while the API overnight posted a weekly drawdown of over 8M barrels, while a weaker dollar, which makes oil cheaper for holders of foreign currencies, also has supported prices. WTI crude touched its best levels in over 5-months after the news, as well as positive market sentiment. U.S. distillate stockpiles rise last week to highest since December 1982 for third week in row. Refining rates hit their highest since March (79.6%), while gasoline and distillate inventories rose.

Currencies

·     Dollar weakness continues; stronger ISM services data, a mixed ADP private payroll report were both unable to turn the fortunes of the plunging dollar, as the dollar index (DXY) sunk to 92.56 lows before ending down around -0.6% (lowest since May 2018). The ADP jobs report missed estimates by a wide margin but sharply higher prior month revision mitigated the headline miss however. The euro touched highs above 1.19 vs. the dollar before paring gains, while the Pound held above $1.31 and then buck fell to around 105.60 vs. the Japanese yen.

Bond Market

·     Treasury yields inch off near record lows for some maturities, as stronger ISM services data boosted optimism about the economic, allowing Treasury prices to slip and yields recover. The yield on the 10-year Treasury rose above 0.54% from 0.514% Tuesday, which was the second-lowest closing level this year, while the 2-year yield inched off its lows to around 0.11%. Yields have weakened in recent weeks following guidance from major central banks that interest rates are likely to remain low for an extended period. Treasury auctions will continue shifting toward longer-term notes and bonds in coming quarters to fund measures to offset the impact of the COVID-19 epidemic, the department said on Wednesday. The Treasury said on Monday it planned to borrow $947B in Q3, about $270B more than its previous estimate.

Sector News Breakdown

Consumer

·     Retailers; CPRI beats Q1 revenue estimates and reports a smaller-than-expected loss – reports a 66.5% fall in overall Q1 revenue, which was lesser than the 70% drop it predicted in July, helped by higher online sales (follows weak RL results the day prior); the report, along with better earnings results from WWW and BOOT helped boost the sagging retail space with 52-week highs today for LULU, TGT, COST, DG; GOLF tumbles after Q2 profit and revenue decline, both missing estimates and withdrew guidance

·     Consumer Staples; BYND Q2 EPS loss (2c) on revs $113.3M vs. est. loss (4c)/$78.94M; Q2 adjusted gross profit of $39.6M, or adjusted gross margin of 34.9% of net revenues, reflecting exclusion of expenses attributable to COVID-19; 2020 outlook remains suspended; TSN and SAFM downgraded to neutral from outperform at Credit Suisse warning of another weak year ahead for the company’s chicken and prepared foods divisions; MNST estimates and tgt (to $95) raised at Bank America after taking in the company’s strong Q2 and July sales update; ANDE shares jumped on mixed results as EPS beat but revenue missed for Q2; COKE jumps after posting its Q2 results above views; WW falls as missed top and bottom line results last night

·     Housing & Building Products; MBA mortgage applications index fell 5.1% in week ended July 31 after falling 0.8% in prior week; Purchases down 1.8% after falling 1.5% in prior week; Refi’s fell 6.8% after falling 0.4% in prior week; Wayfair (W) swung to a big profit beat in Q2 as orders delivered more than doubled (Orders delivered increased 106.2% to 18.9 million, while the average order value declined to $227 from $255) – number of active customers in the Direct Retail business grew 46.0% to 26.0 million

·     Leisure movers; cruise lines (CCL, RCL, NCLH) active as industry extends suspension of U.S. cruise operations until Oct.; gaming stocks hurt by another weak report as WYNN shares fall on EPS miss; gym owner PLNT falls after a weaker Q2 report and withdrew its guidance for the year

Energy

·     Energy stocks Oil-related stocks rise with oil prices at their highest since early March – helped after the API reported U.S. crude inventories down by 8.6 mln barrels in week to Aug. 1 vs analyst expectations of 3 mln barrel decline. Oil prices maintained strong gains after the EIA reported U.S. crude inventories fell 7.4M barrels in the week ending July 31, much more than analyst expectations. A weaker dollar, which makes oil cheaper for holders of foreign currencies, also has supported prices.

·     E&P sector; CPE announced 1-for-10 reverse stock split of common stock on Tuesday and also posted Q2 loss of $1.56 bln vs profit of $55.2 mln a year earlier, hurt by a $1.28 bln charge; OAS posted a surprise Q2 ad EPS profit as attributes success to low per unit lease operating expense despite significant shut-ins as shares rise; DVN announced a special dividend, took down sustaining capital requirements for 2021, and increased its cost savings target to $300Mn; PXD another mover following earnings results; PSXP and ET shares jumped late day after Court of Appeals for the DC Circuit puts Dakota Access Pipeline injunction on hold – the district court judge failed to find facts necessary to support shut down.

·     Utilities & Solar; Utilities near lows down over 1% as defensive sectors lag with stocks soaring (EXC, ED, FE, D among top decliners early); EVRG announces a new 5-year strategic plan on boosting shareholders value, including entering into an information sharing pact with Elliott. The company also forecast adjusted FY EPS as midpoint missed the average analyst estimate; ED pressured after they reported a near-historic amount of power outages in the greater New York City area, bringing down equipment that left 257K customers without power (destruction from Tropical Storm Isaias surpassed Hurricane Irene, which caused 204K customer outages in 2011); SRE rises on Q2 profit beat, raised guidance and $2B shares buyback

Financials

·     Brokers; financial sector outside of FinTech relatively quiet, continuing to suffer amid low yields for an extended period of time, which is expected to hurt lending margins; EVR was upgraded to buy at Goldman Sachs while downgraded MC to sell as independent advisers continue to outperform broader financial stocks due to an expected pick up across M&A and restructuring along with few headwinds from low interest rates and credit losses

·     Consumer finance and lending; SQ trades to record highs as online payment volume jumped more than 50%; Rev on the cash app surged 64%; guidance commentary on Q3 not as upbeat; IMXI shares spike after earnings beat which prompted an upgrade to outperform from JMP Securities with $18 tgt

·     Insurance; Raymond James downgraded AOC to Underperform from Market Perform as part of a market-neutral strategy relative to other names in our coverage universe as expect AON to report negative revenue (and organic) growth for the remainder of 2020 due to FX and the poor economic outlook, but continue to anticipate some quarterly operating margin improvement (firm also downgraded WLTW to market perform – two companies in current merger); EVER reported largely in-line 2Q results and 3Q guidance and modestly increased full-year guidance; PRU shares jumped on earnings while ALL slipped on its results

Healthcare

·     Pharma movers; TEVA 2c EPS beat and reaffirms outlook; HZNP rises as sees FY net sales $1.85 billion to $1.90 billion, saw about $1.4 billion to $1.45 billion and raises Ebitda view; LLY and Boehringer Ingelheim report top-line phase 3 results Empagliflozin; met primary endpoint in reducing risk of cardiovascular death or hospitalization for heart failure in adults with and without diabetes; JAZZ reported 2Q20 adjusted diluted EPS of $3.71 on revenue of $562M, compared to Street estimates of $3.11 and $503M, respectively and Xyrem volume growth was a healthy 5% in 2Q20 versus 2Q19; PFE says the Phase 3 CROWN study of Lorbrena (lorlatinib) in people with previously untreated advanced anaplastic lymphoma kinase (ALK)-positive non-small cell lung cancer met its primary endpoint; JNJ said it has agreed to supply the U.S. government with 100 million doses of its SARS-CoV-2 investigational vaccine.

·     Biotech movers; NVAX spikes as announced Phase 1 data from its Phase 1/2 randomized, observer-blinded, placebo-controlled trial of its COVID-19 vaccine with and without Matrix-M adjuvant in healthy adults 18-59 years of age (analysts boost tgt with JPM raising to $275); REGN posts better-than-expected Q2 results, helped by a $228 million gain and on higher sales of its eczema treatment Dupixent; EPS $7.16 beat the $5.98 est and posts quarterly revenue of $1.95 bln vs est $1.74 bln; MRNA out with earnings today as well

·     Medical equipment and devices; NUVA Q2 results were in line with the company’s pre-announcement of preliminary results on July 20. The lower-than-expected decline in sales was driven primarily by a faster-than-expected recovery of elective procedures in Q2, consistent with other medical device names in our universe; HAE reported F1Q revenues ~1.4% below Street revenues, but missed consensus plasma sales by 22.5%; CRL hits record highs after posts Q2 profit above est on resilient demand for its research services

·     Healthcare services and providers; TDOC and LVGO in merger deal – the two agree to merge in a deal valued at $18.5B in the telehealth sector with LVGO holders to receive 0.592 shares of TDOC plus $11.33 per share in cash https://on.mktw.net/33uRPnM; CVS posted a Q2 EPS and revenue beat; ABC raises guidance – raised its adjusted diluted EPS guidance for fiscal 2020 to a range of $7.80 to $7.95 from the previous range of $7.35 to $7.65; ACHC Q2 revenue of $750.3M (-4.9% Y/Y), missing consensus and U.S same facility revenue decreased 3.4% including a 0.7% decrease in patient days and a 2.7% decrease in revenue per patient day compared to Q2 2019; HUM better earnings help the managed care sector

Industrials & Materials

·     Transports, Metals & Materials; gold miners have surged (GOLD, NEM, AEM, AUY) with gold rising for its 12th dup day in the last 13, setting new record high for 3rd straight day with gold firmly above $2,000 an ounce now; FMC delivered a Q2 EPS beat, but sales missed due to greater FX headwinds, which impacted sales by ~7%; LYB upgraded to neutral from underperform and price objective to $68 from $59 at Bank America; in industrials; ASTE shares jumped as Q2 EPS and sales easily surpass estimates while backlog stood at $182M (down from $246.1M a year ago); airlines (AAL, DAL, UAL, JBLU) got a boost late day after Reuters reported 16 republican senators back new round of $25 billion payroll assistance to U.S. airlines

Technology, Media & Telecom

·     Semiconductors; MCHP reported JunQ (F1Q21) rev/EPS of $1.3B/$1.56, in line with its updated June-2nd guide of down ~3% q/q, though guided to a surprisingly weaker than expected SepQ, down ~4% q/q vs. cons down 1% and peer TXN guides of up 5%/11% q/q respectively; COHR shares dipped as a softer Q4 rev outlook of $290M-$320M vs. est. $325M overshadowed a better Q3 results; Philly semi index slips after earlier touching record highs of 2,215

·     Software movers; BIGC shares opened at $68 per share after its IPO priced at $24; LPSN reported a strong Q2 and raised guidance ahead of consensus (second consecutive beat and raise after COVID-19); TWLO posted strong Q2 results and above-consensus Q3 guidance highlighted that TWLO stands to be a significant beneficiary of COVID-19 in the short-term, boosting usage volumes dramatically; PAYC reported mixed Q2 results versus consensus expectations and given the strong headwinds from the rise in unemployment due to COVID-19, the company did not guide for 2020, but guided a mixed Q3; UPWK delivered a nice beat in raise in 2Q, but shares fell on a surprise CFO transition; NEWR falls as analysts note included a beat on revenue and EBIT versus the company’s guidance, but flattish ARR growth q/q and a deceleration in net expansion rate to 100% from 116% last quarter weighed

·     Video gamers; ATVI reported better than expected results last night and guided 2020 EPS ahead of consensus; GLUU slips as Truist notes reported a mixed 2Q20. Positives: 1) 2Q revenue/EBITDA were well ahead of Truist and consensus while negatives: 1) In terms of pipeline, Originals seems unlikely to make it to market and Deer Hunter has been pushed from 4Q20 to 2021;

·     Media & Telecom movers; DIS Q3 adj EPS 8c on revs $11.78B vs. est. loss (64c)/$12.39M; said global reach of our full portfolio of direct-to-consumer services now exceeds an astounding 100 million paid subscriptions/said it will put Mulan out on Disney Plus in the U.S. and other markets Sept. 4th at a premium access price of $29.99 in the U.S.; FOXA reported revenue $36m ahead at $2.418b (-3.8% Y/Y) and EBITDA $68m ahead at $742m (+5% Y/Y), with beat was entirely Television, with advertising -29% vs. our -35% and costs coming in 230bp better. FCF was $203m better at $853m, up 5% Y/Y. As expected, mgmt did not repurchase any shares; NLSN with Q2 EPS of $0.41 on $1.5B rev; raises FY2020 EPS guidance to $1.50-$1.62 range; NYT drops as Q2 beat but signaled a decline in ad revenues for the current quarter – note for Q2, digital revenue passed up print revenue for the first time.

·     Hardware & Equipment; ANET posted Q2 beat and raise while Raymond James said despite the better outlook, management continues to forecast flat cloud (40% of sales) in 2020, which could be considered disappointing in light of better spending forecasts from its top two customers; RXT 33.5M share IPO priced at $21.00; ZAGG surges after narrower Q2 EPS loss and beats on revs