Closing Recap

Monday, February 10, 2020

Equity Market Recap

·     U.S. stocks again shrug off virus outbreak fears and energy weakness, as market gains were led by technology once again as well as REITs following a big M&A deal in the sector. The Nasdaq Composite touched a fresh all-time high led by large cap tech (AMZN, GOOGL, MSFT, NFLX) as Chinese workers and factories slowly returned to business following a Lunar New Year holiday that was extended due to the deadly coronavirus outbreak. Gold prices rose for a 4^th straight session, Treasury prices gained and oil prices slipped the fresh 13-month lows, all a product of the rising fears of the coronavirus and its potential impact to China’s economy. Speaking of the virus, as of the last update, there were over 900 confirmed deaths (nears the SARS outbreak figures from 2002-2003), and 3,062 new confirmed infections on Sunday, bringing the total number so far to 40,171, as per Reuters. There was one big M&A deal in the REIT space as mall owner SPG agreed to buy TCO in a $3B deal. The euro fell following political headlines in Europe. Earnings were generally quiet to start the week, but pick up steam the next three days, while Federal Reserve Chairman Jerome Powell delivers his semiannual testimony in Congress on Tuesday and Wednesday and ECB President Christine Lagarde speaks on Tuesday.

Commodities

·     Oil prices slide, with WTI crude dropping back below the $50 per barrel level as WTI crude settled at $49.57 per barrel, down 75c or 1.5%, once again hit on fears of slowing Chinese demand for crude in the wake of the coronavirus outbreak and indications OPEC and its allies are unlikely to immediately deliver an additional cut to production. The energy sector remains the biggest laggard in the S&P on the oil decline which fell 20% below its recent peak in January (defined as a bear market). Markets also await word from Russia on production cuts after saying last Friday that it needed more time to decide on a recommendation to reduce output. Gold prices rise with April gold up $6.10 or 0.4% to settle at $1,579.50 an ounce, rising despite the dollar at its best levels since early October, as the virus outbreak keeps safe-haven demand high.

Currencies & Treasuries

·     The U.S. dollar index (DXY) trades to its best levels since early October, with the euro falling again, extending last week losses (follows good US data last week and softer German data). There wasn’t much in way of macro news to drive currencies, which stayed generally steady. Treasury prices rose as yields fell across the board, with the 10-year yield slipping over 3 bps to below 1.55% (a week after the yield on the 10-year increased 6 basis points to 1.58%). Stocks may be trading around record highs but the bond market is telling another story, exhibiting fears and concerns over the possible global economic impact the coronavirus.

Sector News Breakdown

Consumer

·     Retailers; LB shares rose on reports it is close to a deal to sell Victoria’s Secret to private equity company Sycamore Partners, CNBC reported Sunday night, though a price was not reported, but said the deal could be announced this week https://on.mktw.net/2Uzc13s ; Cowen comments on TGT and WMT saying they like both but prefer TGT near-term as they’re more cautions on potential WMT’s digital profitability which may underwhelm

·     Consumer Staples & Restaurants; EPC shares jumped after Q1 EPS and revenues topped consensus and announced that following the FTC filing of a lawsuit seeking to block the proposed transaction, Edgewell terminated its merger agreement with Harry’s, Inc.; QSR rises after reports system-wide sales growth of 9.9% in Q4, driven higher by a 42% pop in Popeye’s sales as comparable sales soared 34.4% at Popeye’s vs. +14% consensus and were up 2.8% at Burger King outlets to offset a -4.3% decline at Tim Hortons vs. -2.9% consensus;

·     Autos; automakers look to restart production in China; TSLA resumed production at its Shanghai factory today; Volkswagen is opening a plant it operates with SAIC in Shanghai and most of the plants in the FAW joint venture; DDAIF and Ford (F) also restarting production at certain locations, while TM and HMC have extended their production shutdowns in China for the time being; FCAU flags multi-week disruptions at European factories due to parts shortages; NIO said it delivered 1,598 vehicles in January 2020, 11.5% lower than the same month last year; LYFT was upgraded to buy from neutral at Northcoast

Energy

·     Energy stocks failed to rally as oil prices remain pressured on slowing demand fears; energy stocks mentioned positively in Barron’s saying shares may have hit bottom and that investors may want to consider getting in, with some ways to play the energy sector include BP, CVX, COP, XOM and RDSA; in drilling, DO posts a smaller-than-expected Q4 loss of (45c) while revs beat but shares fell after warns sees 2021 cash flow negative if no change in the market/sees Q1 drilling costs in range $185M-$195M; Natural gas prices slide over 4% to $1.77 mln btus (SWN, CNX, EQT, ARCH – coal and stocks leveraged to natural gas remain under pressure on warmer temperatures and plunging natural gas prices)

Financials

·     Bank movers; quiet day for banks, ending modestly lower for large cap and regional banks; ICE was upgraded to overweight at Wells Fargo saying they think the decline in ICE’s stock price since news of a potential eBay acquisition surfaced has created an attractive entry point for investors

·     Insurance; Loew’s (L) shares led in the insurance sector after beating expectations for Q4, as res rose $3.88B, rising 18% YoY as results were helped mainly due to increased net investment income at CNA and the parent company; WLTW was downgraded at Credit Suisse saying while some of the issues depressing WLTW’s FCF may only be temporary, they have less confidence that WLTW will meaningfully increase its FCF conversion rate in the coming years; MCY shares rise as Q4 revenue topped estimates as net premiums written rose 5,4% YoY to $896.1M

·     REITs; a big day in the REIT sector as SPG said it would pay $52.50 a share in cash to acquire mall based REIT operator TCO in a deal valued at about $3.6B. The Taubman family will sell Simon about one-third of its ownership interest in Taubman and remain 20% owner in the operating subsidiary of its namesake real-estate firm https://on.mktw.net/31F92b8 (shares of MAC, SKT, WPG, PEI among other REITs moving in sympathy)

Healthcare

·     Pharma movers; LLY and Roche Holdings AG’s Genentech unit said a phase 2/3 study of their investigational therapies for Alzheimer’s disease missed its primary endpoint in people with a rare, early-onset, inherited form of the disease/study didn’t show a significant slowing of the rate of cognitive decline in people treated with Lilly’s solanezumab and Roche’s gantenerumab compared with placebo; AQST said the FDA accepted its new drug application for Libervant buccal film for the management of seizure clusters/would be the first oral diazepam-based therapy for management of seizure clusters; ABBV rises again following better earnings last week as shares rise for a 6th straight day to fresh 52-week highs; VTVT jumps after the company said it saw positive results from part 2 of the Phase 2 Simplici-T1 trial assessing TTP399 as an oral adjunctive therapy to insulin in adults with type 1 diabetes

·     Biotech movers; BHVN shares fell after its late-stage study testing experimental drug troriluzole as a treatment for Generalized Anxiety Disorder misses main goal – the trial was testing 100 mg doses of the drug administered twice daily over eight weeks against placebo; INO said the FDA has accepted its Investigational New Drug application to evaluate its DNA medicine INO-3107 in a Phase 1/2 trial for treatment of recurrent respiratory papillomatosis; TRVN said it resubmitted its New Drug Application to the U.S. FDA for IV oliceridine, the company’s lead investigational product for the management of moderate-to-severe acute pain; ADVM rises following new preliminary data from a Phase 1 dose-ranging study, OPTIC, evaluating gene therapy ADVM-022 in patients with wet age-related macular degeneration; ABUS slips after saying it will discontinue AB-452, its orally available hepatitis B specific RNA-destabilizer

Industrials & Materials

·     Transports; FDX was upgraded to buy at UBS and raised tgt to $187 from $161 as they believe that a combination of low expectations (both EPS and the stock) and a visible step toward improving the B2C cost structure of Express support a favorable outlook for the stock; CAR named Bernardo Hees will be the new board chairman, succeeded Leonard Coleman will continue as a board member and he is investing $15M in Avis’s stock

·     Metals & Materials; BHP is in talks with Chinese customers to delay shipments of copper concentrates amid extended plant shutdowns to combat the spread of the coronavirus, Bloomberg reported. Suppliers are considering giving buyers in China flexibility on deliveries to discourage them from declaring force majeure, according to the report; UFS was upgraded to at BMO Capital saying while they remain conscious of structural declines in paper and risks to a nascent recovery in the pulp market, further downside in the stock appears limited

·     Chemicals; TSE upgraded to Neutral at Citigroup as they think investors likely have discounted a weak 2020 on anticipated styrene capacity additions and lower free cash flow of ~$40mm based on guidance which assumes no working capital benefit; NTR was downgraded to neutral from buy at Cleveland Research

Technology, Media & Telecom

·     Semiconductors; NVDA price target raised to $301 from $251 at RB Capital as checks suggest both gaming and data center demand came in better than expected particularly when compared to Street estimates; TSM reports January revenue of NT$103.68B, up 0.4% M/M and 32.8% Y/Y; SWKS and QRVO both initiated outperform at Wells Fargo; PLAB was upgraded to buy at Stifel as believe Photronics is on track to achieve its previously stated goal of $0.80 in EPS on $630M revs

·     Software movers; WORK shares outperformed, trading to its highest levels since mid-October ($25 level) after Business Insider published a story that Slack just scored its biggest customer deal ever as IBM will move all 350,000 of its employees to the chat app, sending shares higher

·     Media & Telecom movers; WWE was double downgraded from Overweight to Underweight at Wells Fargo saying there have been too many misfires at WWE for investors to take interest in the near future; Intelsat (I) was downgraded at Raymond James following the FCC issuing details Friday of the C-Band Draft Order, while Intelsat will not receive as significant a windfall as some had hoped for, they note $4.852B of ARP will allow Intelsat to continue addressing its over $14B of net debt and improve leverage; DIS ABC broadcast of the Oscars had some 23.6M viewers tuned in on average, a 20% drop-off from last year, and down 46% from a peak in 2014.

·     Hardware & Component news; a report from researcher TrendForce expects a virus outbreak in China to take global smartphone production down by 12%, its lowest level in five years, in Q1 and expects Huawei, AAPL and other companies to bear the brunt; HPQ rises after XRX raises its offer price for the company to $24 per share, which includes $18.40 in cash and 0.149 Xerox shares for each HP share/last November, Xerox offered $22/share, and HP declined, then Xerox then went hostile https://on.mktw.net/31GkDGZ