Closing Recap

Wednesday, February 05, 2020

Equity Market Recap

·     U.S. stocks in full-fledged rally mode, with the Dow Jones Industrial Average up over 500-points late session (components MRK and DIS both slipped following earnings results), the S&P 500 index close at new all-time record high and the Nasdaq Comp touching a fresh record high above 9,574 before paring gains following strong U.S. data (payrolls and manufacturing), waning coronavirus fears general stock momentum in the heart of earnings season. The ADP National Employment Report showed private payrolls jumped by 291,000 jobs in January, the most since May 2015, while a services report showed pick-up in activity. Riskier assets gained with oil prices rebounding, while Treasury prices slipped. In stock news, BIIB shares surged after winning a challenge from MYL on validity of a patent on its top-selling MS drug Tecfidera, while TSLA shares dropped as much as 20% after its recent surge and automaker Ford posted a wider loss with softer guidance to weigh on shares. The dollar rose broadly as safe havens such as the yen and franc slipped. While markets were touching new highs today, there is still no cure for virus despite upbeat reports last night, and those infected continue to grow.

Economic Data

·     Private payroll data crushes expectations as ADP said private employment change rose 291K vs. est. 157K while prior month revised to 199K from 201K (ahead of nonfarm payroll data Friday)

·     December trade deficit widened to (-$48.9B) from (-$43.7B) in the prior month and compared to the (-$48.2B) estimate; imports rose 2.7% in Dec. to $258.52B while exports rose 0.8% in Dec. to $209.64B from $208.06B. The annual trade deficit fell from $627.7B in 2018 to $616.8B in 2019, first decline in six years

·     ISM Non-Manufacturing index reported at 55.1, mostly in-line with est. 55.1 and prior month 54.9; Business activity rose to 60.9 vs 57.0 prior month while new orders rose to 56.2 vs. 55.3 MoM, employment fell to 53.1 vs. 54.8, inventory change fell to 46.5 vs. 51.0 from prior month and prices paid fell to 55.5 vs. 59.3

Commodities

·     Gold prices partially rebound from yesterday’s 1.7% decline as April gold gained $7.30 or 0.5% to settle at $1,562.80 an ounce after falling to 3-week lows, remains supported by the rising of cases and deaths of the coronavirus, while gains limited as the dollar jumped behind good economic data. Copper prices rebounded to their highest level in more than a month after having tumbled 13% during a string of 14 consecutive losing sessions on fears that the virus would curb economic activity and demand for metals.

·     Oil prices bounce, but finish well off their best levels as WTI crude rises $1.14, or 2.3% to settle at $50.75 per barrel (down from $51.88), rising on a Chinese media report that scientists have developed an effective drug against the coronavirus (though the WHO in the U.S. did not confirm there was a treatment at this time). Chinese media reported a research team at Zhejiang University had found two new drugs that can effectively "inhibit coronavirus," and Sky News said U.K. researchers had made progress in laboratory tests toward a vaccine for the virus. Concerns that the virus would hurt oil demand dumped crude prices into bear territory earlier this week. News that OPEC and its allies are considering further production cuts also support prices.

Currencies & Treasuries

·     The U.S. dollar index (DXY) rises, ending near its best levels of the day up 0.3% to 98.30 (and its best levels since early December) following stronger economic data as ADP reported that private payroll jobs added surged last month, well above consensus and ahead of the nonfarm payroll report this Friday. The Japanese yen and other perceived safe haven currencies slipped again as stocks pushed forward to near record highs for the S&P, while the Pound slipped below 1.30. Treasury prices dipped as yields spiked on the previously mentioned data, as the 10-year yield rises 4 bps to 1.64% and the 2-yr yield up about 3 bps to 1.435%.

Sector News Breakdown

Consumer

·     Auto’s; Ford (F) shares disappoint after recording a wider Q4 loss and a weaker-than-expected 2020 forecast due to higher warranty costs, lower vehicle volumes, lower results from Ford Credit and also sees 2020 adj Ebitda $5.6B-$6.6B below the $7.37B estimate; GM operating profit fell 96%, to $105M, due in part to lost production in October when the United Auto Workers went on strike (but adjusted EPS topped views) – is projecting adjusted earnings-per-share in 2020 between $5.75-$6.25 vs. est. $6.23; TSLA downgraded at Canaccord following massive rally in shares that topped out Tuesday at highs of $968.99 before sliding late yesterday

·     Retailers; CPRI rises despite lowered profit guidance despite a strong Q3 beat as guidance is related to the coronavirus outbreak/sees Q4 revenue of $1.3B vs. $1.5B consensus and EPS of $0.68 to $0.73 vs. $1.18 consensus and lower year; BOOT shares slipped as missed qtrly EPS estimate by a cent, after 4 straight quarters of profit beat on slightly lower than expected Q4 EPS and sales; Macy’s (M) to cut roughly 2,000 positions, plans to close approximately 125 of its least productive stores over the next three years; AOBC shares rise along with movement in VSTO and RGR after the NICS monthly data showed yesterday background checks soared 18.6% in January on an adjusted basis, with handgun checks up 25% for the month

·     Consumer Staples; USNA surges after posting Q4 net sales in line with estimates while the mid-point of year earnings was above estimates ($4.10-$4.90 vs. est. $4.37); COTY shares jump as posts Q2 beat, fueled by demand for haircare and nail products by beauty professionals while revs were mostly in-line with views (helped shares of ELF); PFGC Q2 earnings came in above analysts’ estimates while sales rose YoY to $6.07B vs. est. $6.09B

·     Restaurants; CMG said it recorded higher digital sales and more expensive orders, lifting profit even as costs rose (food spending rose 17% and labor costs up 15%), while comp sales easily topped views at 13.4%; SBUX slipped as Pershing Square says exited position after 73% return

·     Housing, Furniture & Building Products; TOL was upgraded to outperform at RBC in homebuilder sector; ENR reports organic sales fell 3.4% in FQ3, primarily due to lower replenishment and phasing of holiday promotional activity. Improved pricing offset the organic decrease by 1.8%, while gross margin fell 640 bps during the quarter/reaffirms its full-year outlook for sales growth; ETH shares side as reported F2Q results in line with the Company’s preannouncement

Energy

·     Energy stocks jumped, with several names among the top gainers in the S&P 500 today as oil prices recovered following media reports in China that scientists developed a drug to treat the coronavirus that has weighed on global economic activity; shares CXO, DVN, NBL, FANG, HP, EOG among the top gainers in the space

·     Inventory data: the API reported that U.S. crude supplies rose by 4.2M barrels, showed a stockpile increase of about 2M barrels for gasoline, while distillate stocks declined by -1.8M barrels; the EIA weekly energy inventory data showed crude inventories rose 3.355M barrels vs. est. for build of 3M barrels; Gasoline stockpiles fell -91K barrels vs. est. for 1.8M barrels build and Distillate fell -1.5M barrels vs. est. for draw of -200K barrels

·     Coal, Utilities & Solar; in the coal sector, BTU reached a deal with activist Elliott mgmt to add four new members to its board – erasing pre-mkt declines after reported a larger than expected Q4 loss and a 20% Y/Y decline in revenues, with further weakness expected in early 2020; CSIQ says it signed a multi-year agreement to supply Lightsource BP with 1.2 GW of solar modules for projects in the U.S. and Australia; utility stocks also gained across the board (AES, DTE 52-week highs)

Financials

·     Insurance; very busy sector after earnings: AFL posts Q4 EPS/revs beat and raises dividend; ALL rises on EPS beat ($3.13 vs. est. $3.24), announces $3B share buyback and said Q4 catastrophe losses $295M, down -69% YoY; CB jumps on better operating EPS $2.28 v. est. $2.12 as 4Q net premiums written up 8.8% YoY to $8.00B; UNM jumps as its Q4 operating EPS of $1.44 beat by a nickel on better revs; PRU also rises as EPS beat ($2.33 vs. estimate $2.02) while Q4 AUM was $1.55 trillion, +13%

Healthcare

·     Pharma movers; MRK said it was planning to spin off its women’s health, biosimilar drugs and legacy products into a new publicly traded company and expects to receive $8B-$9B through special tax-free dividend from spinoff/also posted Q4 EPS above and sales below views; GSK announces that it will separate its consumer healthcare business into a standalone company and says the split, to occur over a two-year timeframe; AIMT rises in reaction to its announcement that Nestlé Health Science will invest an additional $200M in the company, raising its stake to $473M (25.6% stake); VVUS said the FDA approved an improved formulation of its Pancreaze delayed-release capsules that extends the shelf life to 36 months across all dosages; ZIOP prices 27.8M share secondary at $3.25 per share

·     Biotech movers; GILD posts lower-than-expected quarterly profit, as it takes a variety of charges and guides year earnings of $6.05-$6.45 per share, below consensus of $7.01 per share; ABUS upgraded to outperform at JMP Security as sees favorable risk/reward heading into the first human data of RNAi agent AB-729, used to treat hepatitis B virus (HBV), in late 1Q; HALO was upgraded to overweight at Piper as expect Dara SC will see rapid and near complete conversion and our KOL work suggests a 75% conversion just 1 year after approval; BIIB surged as much as 30% after winning a challenge to the validity of a patent on its top-selling multiple sclerosis drug Tecfidera as MYL had failed to prove that the Tecfidera patent shouldn’t have issued

·     Medical equipment and devices; BSX reported a mixed Q4 result as EPS beats by 2c while revs miss estimates and issues downside guidance/said sees a reduction in volume for all non-emergency medical device procedures in February and March in china due to negative impact from coronavirus

·     Healthcare services and providers; HUM Q4 results top estimates as the quarter was helped by strength in its Medicare business that offers health plans to elderly and disabled and expects year revs between $73.9B-$74.5B, well above analysts’ expectations of $72.01B; CERN Q4 revenue was in line with estimates and adjusted EPS 1c beat while exceeded its 4Q19 operating margin target 4and Q bookings were $1.665 billion, which was ahead of guidance as well; managed care stocks outperformed in general with UNH among the top gainers in the Dow in a bit of a relief rally for the healthcare sector as President Trump’s State of the Union address didn’t include a mention of a plan to lower the cost of prescription medicines

Industrials & Materials

·     Chemicals and Materials; OLN reported Q4 net loss of $77.2M vs. a profit of $53.3M a year earlier saying lower demand pressured pricing in two of its chemical businesses/Q4 sales fell to $1.39B vs. $1.64B YoY; OI missed on adjusted EBIT in 4Q19 (beat on adjusted EPS on lower interest expense and lower net income to minority interests) and guided below consensus for 1Q20; CCK reported a roughly in-line 4Q19 (slightly missed on adj. EBIT) and guided below consensus for 1Q20 adj. EPS and roughly in line for 2020 adj. EPS; lithium producers paring some of yesterday gains with ALB (downgraded at Baird), LTHM, SQM down on the day

Technology, Media & Telecom

·     Internet; SNAP missed Q4 revenue estimates amid tough competition from digital advertising giants GOOGL and FB as its DAUs rose 4% to 218M topping the 215M est but guided Q1 revs $450M-$470M vs. est. $461.6M; SPOT Q4 misses on EPS/revs and said op expenses grew 80% Y/Y to €551M/inline Q1 revenue guidance of €1.71-1.91B and said for Q1 sees total MAUs of 279-289M and total premium subscribers totaling 143-153M; earnings tonight from PINS, GRUB

·     Semiconductors; Hon Hai Precision Industry Co., AAPL’s main production partner, cut its 2020 revenue growth outlook after assessing the potential impact of a deadly coronavirus outbreak; MCHP delivered a solid quarter and guide with consistent strength across the data center and early signs of a recovery in auto and industrial; in equipment, KLAC reported a beat in the Dec-Q and mixed Mar-Q guide saying without the Corona virus impact revs would have been 35% higher or above Street estimates; earnings tonight from QCOM and MPWR

·     Software movers; TTWO shares slide after Dan Houser, vice president, creative, at Rockstar Games will be leaving on March 11 (Rockstar Games has published popular titles like "Grand Theft Auto" and "Red Dead Redemption 2"); PCTY delivered F2Q20 revenues above consensus and raised FY20 revenue targets, but there was no change to annual EBITDA guide/recurring revenue increased 25% Y/Y and continue to trend modestly ahead of FY19 levels; NEWR posted a billings and revenue beat, but reduced profitability and lower-than-expected net expansion due to an uptick in churn weighed on results/Wedbush downgraded to neutral; MANH reported beat-and-raise dynamics across cloud subscription revenue, combined license/cloud software revenue, professional services and total revenue, but shares slid; earnings tonight from CTSH, FEYE, CDAY, GLUU among others in software

·     Media & Telecom movers; Dow component DIS overall revs and EPS for Q4 topped views helped as its Disney+ streaming service had 26.5M subscribers at the end of first quarter, beating estimates of 20M subscribers; MTCH slips as misses Q4 revenue estimates and forecasts Q1 revenue below estimates as sequential subscriber growth on its popular dating app, Tinder, fell to its lowest in at least a year (added about 200K average subscribers in Q4); Intelsat (I) shares dropped sharply after Bloomberg reported late day that it is considering a possible Chapter 11 bankruptcy filing if U.S. regulators don’t increase the amount of compensation the company would receive for giving up some of its C-band spectrum

·     Hardware & Component news; KN Q4 revs missed views ($234M vs. est. $237.5M) and posted a 5c EPS miss citing weakness in handset market and soft trends in mobile segment; PLT plunged as much as 30% as posts Q3 revenue below estimates for the fourth straight quarter and issued Q4 earnings loss and a lower view for next quarter revs; CNXN shares drop after Q4 sales miss