Closing Recap

Friday, August 14, 2020

Equity Market Recap

·     Stocks trading was lackluster to say the least, a true summer Friday as doubts crept in about a new U.S. stimulus bill, while the S&P 500 hovered (for a 3^rd day) below record intraday highs after a slew of economic data showed the economy was recovering from the COVID-19 pandemic. Among the top stories today, market reopening trades outperformed with airlines, theme parks, cruise lines and casinos rallying, while technology shares took a back seat. Consumer Discretionary and retail names outperformed following strong retail sales monthly data and better results from Dillard’s, while stimulus plans in Washington and 6-month revisit on trade talks between the U.S. and China are both delayed. Taking out a little uncertainty into the weekend, Reuters first reported that the U.S.-China six-month review of trade agreement delayed due to scheduling conflict and no new date set (was expected to speak this weekend). U.S. Trade Representative Robert Lighthizer, U.S. Treasury Secretary Steven Mnuchin and Chinese vice Premier Liu He had been expected to meet via videoconference on Aug. 15 (with many tensions between the two countries including trade deal promises, technology theft issues, and the U.S. blaming China/not notifying the world after the pandemic broke out in Wuhan). Not soon after the headlines, President Trump was out with some stimulus comments, saying he is ready to send more money to states and local governments to save jobs for police, fire fighters, first responders, and teachers and ready to have the U.S. Treasury and small business administration to send additional PPP payments to small businesses. Treasury yields rose to 7-week highs this week, the dollar ended the week near its lows, oil prices managed a weekly gain, while gold prices fell from all-time highs last week to close lower. Aggressive stimulus measures have helped stock indexes bounce from a coronavirus-driven crash in March, and the S&P 500 briefly traded above its Feb. 19 record close for a second straight day on Thursday.

Economic Data

·     Nonfarm Productivity for Q2-P was a strong 7.3%, well above the est. 1.5% while Unit Labor Costs surged to 12.2% vs. est. 6.9% (prior month also revised up to 9.8% from 5.1%)

·     Retail Sales Advance MoM for July rose a lighter than expected 1.2% below est. for 2.0% rise (but prior month revised up to 8.4% from 7.5%) while retail sales – less Autos for July rose a greater 1.9% vs. est. 1.3% (prior month revised to 8.3% from 7.3%) and retail sales ex auto and gas rose 1.5% vs. est. 1% (prior month revised to 7.7% from 6.7%

·     Capacity Utilization for July rate 70.6% vs. est. 70.3% and above the 68.5% in June, while Industrial Production for July rose 3%, in-line with estimates but down from the +5.7% in June; July manufacturing output +3.4% vs. est. 3% and compared to June +7.4%

·     Business Inventories for June fell (-1.1%), which was in-line with estimates as June business sales +8.4% vs. May +8.5% and inventory/sales ratio 1.37 months’ worth vs may 1.50 months

·     University of Michigan Sentiment for Aug-P rose 0.3 point to 72.8, near April’s pandemic low of 71.8 that was the worst since 2011, and slightly above the 72.0 estimate; the gauge of current conditions fell 0.3 point to 82.5, while a measure of expectations ticked up 0.6 point to 66.5.

Commodities

·     Gold prices dropped on Friday, as December gold slipped -$20.60 or 1.1% to $1,949.80 an ounce, posting its first weekly decline in 10-weeks on some profit taking as Treasury yields and stocks rose, with the precious metals pulling back off all-time highs last week ($2,089.20 an ounce). For the week, prices for the most-active contract lost about 3.9%.

·     Oil prices ended the day lower as WTI crude dipped 23c or 0.54% to settle at $42.01 per barrel as the demand impact of the coronavirus pandemic continues to cap price gains. Prices slid on the back of weaker global demand forecasts from the IEA, but declines in U.S. crude supplies helped prices tally a gain for the week, rising 1.9%. Brent crude also ended down slightly, slipping 16c to settle at $44.080 per barrel. Natural gas settles 8% higher at 8-month-high $2.356 as extreme heat in Texas and southwest boosts demand.

Currencies & Treasuries

·     The U.S. dollar sank late day despite a generally positive round of economic data on the day (and week) in the U.S., as the dollar index (DXY) slipped to weekly lows late day following a bounce in the euro. The U.S. 10-year yield climbed to seven-week highs, rising as high as 0.719% before holding around the 0.70% level the majority of the day. The yield spread, or inflation breakeven rate, between five-year Treasury Inflation Protected Securities (TIPS) and regular five-year Treasuries hit 1.565% on Thursday, the highest since February. U.S. 10-year and 30-year break-evens touched 1.6618% and 1.7105% on Wednesday and Thursday, respectively. Both levels were six-month peaks, as per Reuters. German government bond yields hovered at six-week highs amid a broader rise in yields led by a selloff in U.S. Treasuries this week.

Sector News Breakdown

Consumer

·     Retailers; DDS a bright spot for retail, as shares surge after reporting a smaller Q2 loss than anticipated on revenue of $919M vs. $1.428B a year ago and said it is uniquely positioned within the sector to weather the COVID-19 pandemic, noting the company owns 90% of its retail store square footage and 100% of its corporate headquarters, distribution and fulfillment facilities; FTCH shares rise as beats Q2 sales estimates as boutiques sold more of their merchandise through company’s website while their stores were closed; several analysts raise tgt price as co forecasts 40% to 45% growth in Q3 gross merchandise value (GMV); PRPL shares fell after missing top and bottom line results with no formal guidance issued; department stores outperformed in the early going with M, KSS, JWN all rising; gun makers SWBI, RGR active after NRA scores a win in California today as the 9th Circuit, led by a Trump-appointed judge, rules that ban on magazines with more than 10 rounds is unconstitutional.

·     Auto & Electric Vehicle sector; TSLA shares upgraded at Bank America to neutral and Morgan Stanley to equal-weight, as the bearish analysts raise tgts noting it’s been assembling assets, tech and people to put them in position to potentially unveil a vertically integrated battery supply business; BLNK Q2 rev more than doubled to a record $1.6M and product sales surge 350% as demand for EV continues to rise while net loss widened on higher costs; PRTS 6M share Secondary priced at $13.00

·     Consumer Staples; & Restaurants; KR shares spiked after Gordon Haskett note this morning speculates on activist post 13F; EAT shares outperform in casual dining and restaurant sector, rising 9-conecutive days (which included earnings mid-week); UBS laid out case for staples sector/packaged food names if Joe Biden wins election – said Biden, has proposed an increase in the US corp tax rate from 21% to 28% if he were elected this November – analysis shows that a 28% US federal tax rate (from 21% today) would increase the average US Staples company’s effective tax rate to ~26% from ~22% and reduce earnings by -5% on average and multinationals including KO, EL, CL, and MDLZ are best positioned

·     Casino & Leisure movers; DKNG in focus today as quarterly revenue topped estimates but news that both DraftKings and FanDuel fees deemed taxable in IRS memo is what weighed on shares, as the IRS said fees are wagers under US tax code; in lodging, MAR and HLT both upgraded to buy at Jefferies from hold, confident that efficiencies to the operating model should drive better returns for the companies and related owners as demand rebounds through 2021 and into 2022

Energy

·     Energy stocks; SWN priced its previously announced secondary 55M stock offering at $2.50; GLNG had 2H20, 2021 EPS and EBITDA estimates boosted at Jefferies, who sees significant upside potential; MR downgraded to Neutral with $5.50 pt from OW/$8 pt at JPM as they believe the SWN merger has capped upside; CRK announced plans to add an additional $200M to its $500M offering in June, due 2026; weekly Baker Hughes (BKR) total rig count fell -3 to 244, with oil rigs down -4 to 172, and gas rigs up 1 to 70

·     Utilities & Solar; AQN reported Q2 EPS $0.09 vs $0.12 est on rev $343.6M, flat YoY and missing the $365M est; NOVA priced 10M offering at $25; SKYS said Cayman Islands’ Grand Court overturned previous order that froze some of the company’s assets in favor of Hudson Solar Cayman and also filed a separate complaint against Hudson in the NY Supreme Court seeking damages; Following recent earnings, JPM lowered price targets on SO, CMS, ED and lifted its targets on NEE, DTE, AEE, WEC; Morgan Stanley lifts tgt on PPL, OGS, SR, SRE, PEG; Goldman Sachs lowers its tgt on DUK to $99 from $104

Financials

·     Brokers and Exchanges; ETFC daily average revenue trades for July were 1.01M, down 9% from June but up 288% in July 2019, while derivative DARTs in July 2020 of 273,257 fell 2% M/M and increased 196% Y/Y; through Aug. 12, 2020, August DARTs are 1.08M, derivative DARTS are 291,000; said net new retail accounts of 45,842 fell 49% from June; SCHW net new client assets for July of $11.2 billion, -42% YoY, total client assets $4.28 trillion, +14% YoY and July new brokerage accounts 206,000, +60% YoY

·     Consumer finance and lending; PYPL active as Bank America said eCom spending growth decelerates to 69% y/y in July Aggregated BofA credit and debit card data shows eCommerce growth decelerated in July, but remains very robust and well above pre-COVID levels

·     REITs; VTR was upgraded to outperform from sector perform at RBC on the expectation of a recovery in senior housing, and to in-line from underperform at Evercore ISI, which said the health care REIT addressed a restructured lease and reduced payout; RBC Capital raised tgt prices on CTRE to $20, PEAK to $32, MPW to $22, and WELL to $55 – slightly more encouraged on the sector following 2Q20 earnings results where 12 REITs surpassed consensus.

Healthcare

·     Pharma movers; AZN said the European Commission has reached an agreement to purchase up to 400M doses of COVID-19 vaccine AZD1222, if approved; BMRN tgt raised to $218 from $172 at Goldman Sachs saying Roctavian is likely to be the first approved (Aug-21 PDUFA) gene therapy in severe hemophilia A and believe that majority of physicians plan to prescribe the drug upon approval to ~30% of their eligible patients

·     Biotech movers; MESO said expert panel to U.S. FDA voted in favor of its lead drug candidate, remestemcel-L, for treatment of children with a type of graft versus host disease (GVHD), which occurs on rejecting a transplant/FDA is set to give decision on drug approval by Sept. 30; NVAX signed term sheet agreement with the UK Government for the purchase of 60M doses of company’s COVID-19 vaccine, NVX-CoV2373 and a Phase 3 clinical trial to assess the efficacy of the vaccine in the UK population; CVAC 13.3M share IPO priced at $16.00 (shares surged above $50 per share in its debut)

·     Medical equipment and devices and services; MASI announces FDA clearance of its PVi algorithm, a noninvasive indicator of fluid responsiveness in certain mechanically ventilated adult patients; ARAY reported solid Q4 results despite the significant disruption to its business from COVID-19, with a slightly smaller than expected loss on better revs of $95M; PAYS shares tumble as posts Q2 top-and bottom line misses as both plasma and pharma businesses negatively impacted by covid-19 pandemic according to BTIG, surprising investors; CODX shares tumble as Q2 EPS 43c on revs $24.04M both missed the 59c/$26.45M estimates; MCK rose after the U.S. Department of Health and Human Services (HHS) and Department of Defense (DoD) said MCK will be a central distributor of future COVID-19 vaccines and related supplies

Industrials & Materials

·     Materials, Industrial & Machinery; CAT July rolling 3-month retail machine sales fall 20% vs. June 23% fall, May down 23% while North America machine sales down 38% after falling 40% in June and Asia/Pacific sales in July up 5% after rising 7%; FSM slips after swinging an adjusted Q2 loss of $5.1M compared with a year-ago profit of $7.2M, and revenues slumped 34% Y/Y to $44.5M/Q2 adjusted EBITDA of $9.4M vs. $27.2M in the prior-year quarter

·     Transports; Dow Transports rebound a day after having its 11-day win streak snapped as FDX, JBHT, R, KSU pace early gains; airlines mixed as ALK provided traffic and revenue expectations for the month of August; said it expects total revenue for the month to be down 70% to 75% from a year ago, after a 73% decline in July (est. for 67.5% decline to $776M)

Technology, Media & Telecom

·     Internet; IQ shares fell as the SEC’s Division of Enforcement is seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020; also reported earnings results; BABA will enter the local Hang Seng Index on Sept. 7 and also join the ‘H-share’ Hang Seng China Enterprises Index; BIDU beat core operating income margin by nearly 7 points on strong cost controls, and provided encouraging signs of revenue recovery in the near-term, but Mizuho noted although IQ’s SEC inquiry is an overhang, management maintained confidence about its business practice; AMZN shares quietly down for the 5^th time in the last six trading sessions, pulling back from records

·     Semiconductors; AMAT tgt raised by several analysts after posted strong results and guidance, and it expects demand to improve in C2H20 as customers continue to move to advanced technology nodes – said expects CY20 WFE (Wafer Fab Equipment) spending to grow 10-15% Y/Y, and is forecasting a similar healthy level in CY21, and Services revenues at over $1B – shares of semi-equipment makers LRCX, TER, KLAC were among the early gainers; NVDA highlights earnings in the semi space next week (shares up 96% YTD)

·     Media & Telecom movers; towers AMT, CCI, SBAC mentioned positively at Cowen saying they would be buyers of towers in the ST given all their reasonable valuations and all tower operators public and private noted that 2020 has been a slow year with some operators speculating that since VZ is expected to aggressively deploy C-Band (and CBRS) in 2021; GLOB reported modest upside to revenue and EPS expectations and provided F3Q guidance slightly above consensus; MSGN upgraded to neutral at Guggenheim after earnings and income top expectations

·     Software, Hardware & Component news; Jefferies highlight recent connector/sensor (APH, LFUS, ST, TEL) data/channel checks and we point out that the auto recovery is intact and likely paces a 2H connector/sensor rebound led by US & China strength; NEWR downgraded to hold at Argus after recently posted lower non-GAAP EPS growth off of 15% revenue growth in the June quarter