Closing Recap

Monday, February 24, 2020

Equity Market Recap

·     U.S. stocks sunk as the S&P 500 index and Dow Jones Industrials each fall the most in over 2-years on renewed coronavirus outbreak concerns, as new cases pop up in new countries around the world raising global pandemic concerns. As of this afternoon, the CDC updated that total number of confirmed cases in U.S. now 53 with 14 domestic cases, 36 evacuated from the Diamond Princess cruise and 3 evacuated from Wuhan, but it was the new cases in Italy and South Korea that raised eyebrows overnight. In Italy, it was confirmed over 200 cases of the virus this weekend, with officials verifying at least seven deaths as of this afternoon, while those diagnosed in South Korea are nearing 800. The number of confirmed cases in China rose past 79,000, taking the death toll above 2,600. Stocks tumbled from record highs last week for the S&P 500 index and Nasdaq Composite, with Transports dropping sharply as well and fed funds futures now pricing in greater than 50% chance of a rate cut by the April 29th meeting to help offset the potential economic impact of the virus. The Dow Jones Industrial Average fell over 1,000 points at one point, while the Nasdaq Composite declined more, falling over 3% as investors bail on stocks. Gold rises to fresh seven-year highs while the 10-year Treasury yield fell 10 bps lower to 1.36% as safe haven assets rise. Stocks leveraged to travel, retail, energy, or have deep presence in China have been hit the hardest to start the day (cruise lines, hotels, airlines).

Commodities

·     Oil prices slide, down just under $2.00 or 3.7% to settle at $51.43 per barrel, its biggest one-day decline since January 8^th, falling sharply on slowing demand concerns amid the virus outbreak. Gold futures jump $27.80 or 1.7% to settle at $1,676.60 an ounce in another move to fresh 7-year highs amid rotation into safe-haven assets.

Currencies & Treasuries

·     The U.S. dollar index (DXY) opened the day higher (99.63 best), rising against most currencies as investors looked to it as a safe haven amid rising fears about the economic impact of the spreading coronavirus encouraged investors to seek safety in the U.S. dollar. However, the dollar erased gains against the euro after hitting more than 2-year lows around the 1.08 level while the British pound dropped as many see the U.S. economy as relatively well-shielded should the coronavirus hurt global growth significantly.

·     Treasury priced surged with the 10-year yield falling to its lowest levels of 2019 (and nearing record lows), while the 30-year yield did touch fresh record lows as investors continue to pile into the safety of Treasuries given the rising virus impact fears to global economies. The 30-year yield touched a fresh intraday lows at 1.8109% while the 10-year falls to 1.35% lows, down over 11 bps (not far off the 1.32% intraday lows from the summer of 2016).

Sector News Breakdown

Consumer

·     Retailers; CRI shares slide after Q4 EPS missed by 8c on in-line sales of $1.1B saying lower profitability was due to continued investments in its business and higher inventory-related costs and guided year EPS growth 4%-6% below the est. up 9%; NKE shares slipped as the Dow component has a large retail presence in China

·     Consumer Staples; KDP was upgraded to equal-weight at Morgan Stanley and raise PT to $29 from $28 saying after underperformance over the past year, believe valuation now better reflects a lower growth profile and higher risk vs. CPG peer; CLX shares outperformed in the Staples sector that was generally edging higher

·     Home retail, Housing & Building Products; Stephens downgraded building product stocks MLM and VMC and also cut tgt prices as sees higher demand uncertainty given the recent slowing of highway contract awards, difficult comps; in retail, Wayfair (W) was downgraded to underweight from at Morgan Stanley saying fundamentals are deteriorating when the market is less tolerant of unprofitable online retailers; FND was upgraded to neutral from underperform at Bank America and raises target price to $65 from $40; BLDR upgraded to Outperform at RBC Capital viewing the selloff post results as taking sufficient froth out of expectations and creating attractive risk/reward; housing stocks (LEN, KBH, PHM) could benefit as Treasury yields tumble

·     Casino & Leisure movers; cruise lines again among the hardest hit sectors (CCL, RCL, NCLH) after the coronavirus outbreak worsens in South Korea and Italy; NCLH was downgraded at Argus Research to Hold from Buy on top of the broad coronavirus concerns; movie theatre chains (AMC, CNK, IMAX) also susceptible to lower attendance as people go out less

·     Auto’s; LAD was upgraded to buy at Buckingham and up tgt to $155 saying with expectations for and valuation of LAD shares now significantly reset, they believe they are again compelling; CTB reports unit volume decreased 2.6% in Q4, Americas tire sales fell 1.4% to $655M and volume fell 2.2% Y/Y, International tire sales slipped 20.1% to $119M, and International unit volume squeezed 16.9%, primarily due to lower intercompany shipments

Energy

·     Energy stocks tank on lower oil; 52-week lows in the S&P 500 include XOM, DVN, MRO, NBL in the energy sector as oil tumbles as spreading virus sparks demand concerns. Crude oil futures plunge as worries about the impact of the coronavirus spike, with the number of infections rising outside of China raises slower demand needs. Note China’s promise of stimulus to help cushion the economic blow from the coronavirus has helped the commodity last week; KOS falls to 52-week lows as reported an unadjusted net loss of $35.8M in Q4 compared to a profit of $185.6M in the year-ago quarter, while revs jumped 49% YoY

·     Utilities & Solar; CNP to sell its natural gas retail business, CenterPoint Energy Services, Inc. to Energy Capital Partners, LLC, a private equity and credit investor, for about $400 million; ED was downgraded to neutral from buy at Mizuho based on valuation and lower assumed earnings power following the release of a 3-yr EPS CAGR; in solar, FSLR was upgraded at Raymond James, turning positive for the first time since 2010 calling it one of the few remaining value ideas – arguably, deep value – in clean tech with a nice risk/reward (Bank America downgraded FSLR)

·     MLP sector; ENB was downgraded at Goldman Sachs to sell from neutral as believe after sizable outperformance and a major share price rally recently, risk/reward appears more unfavorable now — especially given our EBITDA estimates appear below consensus; Wells Fargo upgraded Canadian MLPs PBA and KEYUF while downgraded MPLX and WMB to Equal Weight, and cut AM to Underweight as they prefer Canada over the US given a better fundamental midstream outlook north of the border

Financials

·     Bank movers; sector slammed with weakness in large cap (MS, C, JPM, WFC, GS) and regional banks (PNC, RF, KEY, CFG) as Treasury yields plunge (10-year below 1.4%) making lending margins more difficult, while coronavirus fears also compound weakness along with Democratic Presidential nominee Bernie Sanders winning in Nevada (not seen as market friendly candidate); highlights this week include JPM holding an investor day on Tuesday, while many banks will speak at Credit Suisse conference this week and WFC which announced late Friday it will pay $3 billion to settle U.S. investigations into consumer abuses; in the insurance, sector, Reuters reported Third Point LLC has amassed a stake in Prudential plc (PUK) of over $2B, or just under 5%, and plans to urge the insurer to split into two companies

Healthcare

·     Pharma movers; GLPG downgraded to underperform at Bank America on valuation; in the cannabis sector, Cowen downgraded ACB, SNDL and TLRY to market perform from outperform on slower-than-expected growth of Canadian cannabis industry and cuts forecast for 2020 legal market cannabis sales by 32% to C$3.5B; CRON said it will delay its 2019 fourth quarter and full-year earnings release and conference call; PRGO reached a definitive agreement to acquire the oral care assets of High Ridge Brands for $113 million in cash; MNK shares sunk late day on a Dow Jones report it is weighing putting its U.S. generic drug business in bankruptcy

·     Biotech movers; GILD rises after its experimental drug Remdesivir, which is being tested for coronavirus, may be the only one that will work against the new pathogen, according to Bruce Aylward, an assistant director-general at the World Health Organization; NGM announces preliminary topline liver histology and biomarker data from 24-week Phase 2 study of aldafermin in NASH patients; CFRX rises following U.S. Breakthrough Therapy designation for Exebacase (CF-301) for the treatment of MRSA bloodstream infections (bacteremia), when used in addition to standard-of-care anti-staphylococcal antibiotics in adult patients; EPZM shares fall on mixed Q2 results as EPS loss wider than expected on slightly better revenue; along with GILD, vaccine makers VXRT, NVAX, INO also were volatile

·     Medical equipment and devices as well as healthcare services and providers; health insurers drop (CVS, UNH, CI) after Bernie Sanders won decisively in the Nevada caucuses on Saturday and strengthened his front-runner position for the Democratic presidential nomination; virus, up 2.7% at $71.74 in active premarket trading; test maker CODX shares rise as the company has designed virus detection test, while LAKE and APT shares rise as they make protective clothing

Industrials & Materials

·     Transports; Dow Transports bounced off the lows, dropping as low as 10,397 (fell more than 500-points or over 4.5%, dropping below its 200-day MA support of 10,548, led by broad declines in airlines (AAL, JBLU, DAL), package delivery (FDX, UPS), and car rental (CAR)

·     Metals & Materials; gold miners outperform given the flight to safety trade that has seen gold prices surge over the last few weeks on the virus scare as it spreads outside China and its potential impact on global economic growth prompts buying of the safe haven metal (shares of GOLD, NEM, AEM, HMY, AU among gainers); in copper sector, FCX CEO said today that the virus has taken “the legs out” of the copper rally noting that copper inventories are now building up after dropping

·     Paper stocks (WRK, IP, PKG ) among the biggest decliners today, falling after Baird noted the price decline for bleached board and coated recycled board prices in February ($30/ton reduction as per industry journal RISI this weekend) likely to weigh on sentiment, citing near-term negative in earnings due to decline in paperboard prices. Noted that RISI kept monthly containerboard pricing unchanged, though suggested that export prices should increase $10-$20/ton in the month ahead, at least to Europe

Technology, Media & Telecom

·     Semiconductors; among the hardest hit sectors in technology today as the market worries about the geographically spreading coronavirus outbreak, raising concerns about production of chips in China (AMD, NVDA, SWKS, QRVO, STM all weak); XPER said a company led by former CEO Tom Lacey has made a non-binding proposal to acquire the company for $23.30 a share in cash, but that it is sticking with its all-stock deal to merge with TIVO

·     Hardware & Component news; APH said it doesn’t expect to meet its Q1 sales and EPS guidance due to the coronavirus outbreak/says it’s currently unable to quantify the full impact; VHC rises after Bloomberg reported Supreme Court rejects Apple appeal of $1B VirnetX decision; video conference company ZM rises in reaction to the number of confirmed coronavirus cases outside China surged over the weekend