Closing Recap

Wednesday, August 26, 2020

Equity Market Recap

·     It was another day of records highs for Wall Street as the S&P 500 touched a new best for the 18^th time this year and the Nasdaq Composite hit its 39^th record high (up about 30% YTD), with no let up, specifically in the technology sector. Today’s tech gains were led by software after Salesforce.com (CRM) reported a beat/raise quarter, boosting the entire space. Shares of tech names setting 52-week highs in the S&P 500 today included: ADBE, GOOGL, MA, PYPL, AMZN, CDNS, SNPS, TXN, NOW, AVGO, MSFT, CRM, FB, AMD, and INTU as well as another record high for shares of TSLA ahead of its 5 for 1 stock split as technology stock remain unstoppable. Negative market catalysts have been absent recently, with positive news on COVID-19 vaccine (plasma news this week by FDA) while COVID-19 related cases and deaths decline. Also helping, economic data continues to show improvement, the Fed remains accommodative on rates and monetary policy (appears for a long-time) and even commentary with China on trade has been improving (while their economy has also recovered) – leading to the surge in global stocks, as the trend remains buy, buy, buy. Healthcare was a big drag today as biotech fell (IBB) and the biggest decliners in the Dow were UNH, PFE and WBA along with industrial (BA, RTX) and energy weakness (XOM, CVX) – while consumer space rose behind URBN, DKS earnings. A strong durable goods reading for July (jumped over 11%) easily topped estimates (5%) this morning, provided another boost. The U.S. dollar erased initially gains, as gold prices jump, and Treasuries slipped. Hurricane Laura, which reached category 4 today is bearing down on Texas and Louisiana, bringing a life-threatening storm surge, flash flooding and destructive winds that could crush devastate the area. Stocks look to Fed Chair Jerome Powell speaking virtually at Jackson Hole tomorrow in a meeting of global central bankers.

Economic Data

·     Durable goods orders for long-lasting factory goods jumped 11.2% in July, topping the 5% estimate as manufacturers boosted output and the economy continued its climb back; new orders for transportation equipment jumped 35.6%, ex-volatile transportation category, orders rose 2.4%; new orders for nondefense capital goods excluding aircraft climbed 1.9%

Commodities

·     Oil prices steadied near five-month highs, with WTI crude up 4c at $43.39 per barrel as Laura strengthened into a Category 4 hurricane and heads toward refining facilities on the Gulf Coast and is expected to slam the upper Texas or southwest Louisiana coasts as a major hurricane late Wednesday or early Thursday. Winds from Laura are expected to hit highs around 145 mph with roughly more than 80% of Gulf-region crude output and nearly 60% of natural gas production remains offline December gold prices rise $29.40 or 1.5% to settle at $1,952.50 an ounce (highest settlement in a week), getting a boost on the dollar dip and positioning ahead of Jackson hole Powell speech.

Currencies & Treasuries

·     Treasury prices dipped; the U.S. Treasury sold $51B in record 5-year note auction at a yield of 0.298% vs. 0.307% when issued prior with a bid-to-cover (demand) at 2.71 and indirect bidders awarded 66.25% and directs 15.93% (strong auction). Treasury yields edged slightly higher as investors again poured money into stocks, specifically technology names) as safe-haven assets slipped. There may have also been some profit taking ahead of Chair Powell’s speech tomorrow. The 10-yr yield was above 0.70% and the 5-yr around 0.3% after the auction. The U.S. dollar erased initial gains (dollar index rose as high as 93.36 after the better durable goods data), falling to lows around 92.85 late day as safe haven assets declined and traders position ahead of Powell.

Sector News Breakdown

Consumer

·     Retailers; sporting goods stores surge after DKS Q2 comps of over 20%, more than doubling the estimate while Q2 EPS and sales beat easily ($2.71B vs. $2.46B) – said favorable shifts in consumer demand have continued into 3Q, partially offset by softness across key back-to-school categories – also said E-commerce sales up 194% YoY in the quarter (HIBB, BGFV, SPWH shares active on results); URBN another bright spot in retail after reporting better-than-expected quarterly results, including net sales that topped the highest sell-side est and said Q3 sales could decline by only mid-single digits, with comps improving for both retail and wholesale segments; JWN Q3 sales dropped over 53% amid low exposure to athleisure and casual clothing, as well as home-goods, and the shift in its anniversary sale to August from July; EXPR marks wider Q2 EPS loss of (-$1.48) vs. est. (-$1.16) citing continued pressure on its stores due to the COVID-19 pandemic and said Q2 comparable retail sales down 15% from a year earlier

·     Auto sector; TSLA tgt raised to $2,500 at Jefferies saying they assume Tesla will set new benchmarks and ambitions for battery density, materials and industrial processes leading to pack costs <$100 in coming years; BWA M&A deal one-step closer to finish line as the European Union assigns a provisional deadline of September 30 to rule on BorgWarner’s purchase; NIO receives second analyst upgrade in as many days as Morgan Stanley upgraded; LAD to move from the S&P 600 to the S&P Midcap 400 effective opening of trading on 9/1 replacing LOGM

·     Housing & Building Products; BBBY announced a major realignment of its organizational structure, estimated to generate future annual pre-tax cost savings of ~$150M (last night); TOL reported FY3Q adj EPS of $0.90, consensus of $0.70, driven by stronger margins while FY3Q orders rose +26.4% YoY though Q4 deliveries/community count viewed as a little light; shares of LOW, HD, GNRC, PWR among names active ahead of hurricane Laura

·     Consumer Staples; HAIN was upgraded to outperform from in-line at Evercore/Isi after earnings and upped tgt to $38 from $35; SJM was raised to neutral from sell at Guggenheim following the company’s 1Q "beat and raise" that benefited from higher rates of at-home consumption and lower SD&A spending and think the incremental EPS flexibility in 2Q and beyond presents a significant risk to being short the stock; KDP was upgraded to overweight and raise tgt to 434 at Morgan Stanley on strong near-term trends with increased at-home coffee consumption and heritage DPS share gains, as well as longer-term household penetration gains in coffee

·     Leisure and Gaming; CCL active after saying Princess Cruises is cancelling its early 2021 World Cruises and Circle South America cruises on two ships; New Jersey said its 1,200 gyms can reopen on Sept. 1 at 25% capacity with spaced workout equipment, masking and other safety precautions (shares of PLNT among names active on report); casino revenue on the Las Vegas Strip fell 39% to $330.1 million in July from a year ago, the first full month properties were open after the coronavirus shutdown (WYNN, LVS, MGM)

Energy

·     Energy stock movers; all eyes on Hurricane Laura which is poised to become a Category 4 storm that could wreak catastrophic damage in Texas and Louisiana, bringing a life-threatening storm surge, flash flooding and destructive winds that could leave areas uninhabitable for weeks or months. Laura’s winds are forecast to peak at 130 miles (209 kilometers) per hour over the Gulf of Mexico but may weaken slightly before hitting the coast on Thursday. More than 84% of oil output in the Gulf has now shut, while almost 3M b/d of refining capacity has been closed.

·     Inventory data: the API showed a draw of 4.52M barrels of oil for the week ending Aug. 21, gasoline inventories a draw of 6.39M barrels, distillate inventories show a build of 2.26M barrels and Cushing inventories show a draw of 646K barrels. This morning, the EIA reported weekly crude stockpiles fell a greater -4.68M barrels vs. est. draw of -2.5M barrels (bullish) while gasoline fell -4.58M barrels vs. est. draw of -1.75M barrels and distillate stockpiles rose 1.388M

·     Pipelines; NBLX was upgraded to Overweight from Neutral at Piper saying assuming CVX closes on the NBL acquisition, believes this could serve as a catalyst for CVX to acquire the remaining 37% of NBLX that is not currently owned by NBL Citigroup downgrading CQP to Neutral, while maintaining Buy on LNG though target price decreases to $74 from $80. We believe LNG remains a key C-Corp holding and don’t buy into some of the bear arguments

Financials

·     Insurance; Goldman Sachs said a Houston landfall for Hurricane Laura (RE, RNR most exposed) will likely prove far more costly than a landfall in the Western Louisiana-Eastern Texas area (TRV, CB most exposed), but we caution against comparisons to 2017’s Harvey — a slower moving storm which resulted in massive rainfall and flood losses

·     Services; INTU reported strong FQ4 results above consensus and delivered Consumer segment (tax) revenue growth of 13% growth (vs. 10% consensus), driven by DIY share gains and TurboTax Live adoption – analysts note strong small business revenue growth of 16% Y/Y (versus consensus of -1%) should alleviate investors’ concerns

Healthcare

·     Pharma movers; JNJ had its diabetes medicine canagliflozin boxed warning about the amputation risk removed by the FDA following its review of new data from three clinical trials; ALT announces data presentation on alt-801, its balanced and long-acting glp-1/glucagon receptor dual agonist for NASH, at the digital international liver congress™ 2020

·     Biotech movers; PTCT announced that the company achieved a $20 million milestone payment from Roche under its License and Collaboration Agreement; MRNA said its experimental coronavirus vaccine induced immune responses in people aged 56 years and older that were comparable to those seen in younger adults in a small study

·     MedTech and Equipment; FLDM shares jump after its saliva-based COVID-19 test received emergency approval from the FDA; the test is a less invasive method to detect the novel coronavirus compared with the commonly available nasal swab method; HOLX announced it has acquired Acessa Health

Industrials & Materials

·     Industrial & Machinery; DY announced a new $100M share buyback plan while sees Q3 contract revenues, margins in-line to modestly lower after mixed Q2 results as EPS beat and revs missed; materials and industrials failed to participate with tech rally (BA, RTX, CAT), though machinery company DE outperformed; North American rail traffic fell 5.1% last week, an improvement from a week earlier, as U.S. intermodal volume remained positive, data from the Association of American Railroads showed. Carload volume fell 12.5% for the week ended Aug. 22 on 12 reporting U.S., Canadian and Mexican railroads, while intermodal traffic rose 2.4%

·     Aerospace & Defense; HEI shares fell as revs/EPS beat expectations although core organic flight support revenues sunk 44.3% organically YOY while the bottom line was boosted by lower taxes and lower interest (impacted shares of WWD, TDG, AIR)

Technology, Media & Telecom

·     Internet; FB touched new record highs as neared the $300 level, while NFLX also a straight shot higher, also rising more than 5% early in what was another stellar day for large cap momentum tech names; semiconductors lagged with money pouring into software on CRM results and Internet as prices just continue to surge; FB had a small blip lower after saying it will stop collecting some id info on AAPL devices as Apple’s changes to IOS will dramatically hurt ads

·     Software movers; CRM soars as a day after news it will be added to the Dow Jones Industrial Average (takes effect this upcoming Monday), the company with strong Q2 performance which well exceeded modest expectations amid strong top line performance (revs +18%, billings +17%, cRPO bookings +34%); PLAN surges as Q2 revenue rises ~26% to $106.5M, topping the $103.4M estimate and posts a smaller than expected Q2 loss of (4c) while also forecasts Q3 and FY sales above expectations; ADSK price tgt raised by several analysts as reported good F2Q results, with upside to revenue, billings, and EPS as COVID-19 impacted new business activity, although renewal rates were strong, and FY revenue guidance was raised at the midpoint; the better CRM results had a large ranging effect on the space with TWLO, WDAY, TEA, ZUO all surging; earnings results tonight from ESTC, SPLK tonight on the space

·     Hardware & Component news; HPE handily beat revenues ($6.8B vs. $6.1B) and EPS ($0.32 vs. $0.23) while FCF was strong, buoyed by an improvement in cash conversion and provided guidance for Q4 that was above consensus; PSTG shares fell after a report that included a beat without official "guidance"; however, a suggestion that sales might be flat q/q vs. consensus above 10% sunk shares; BOX, SMTC among earnings results expected tonight