Closing Recap

Thursday, February 27, 2020

Equity Market Recap

·     U.S. stocks were extremely volatile on Thursday (a major understatement) as what appeared to be another massive massacre market sell-off initially, with major averages down well over 3% (Dow fell as much as another 900 points and the Dow Transports were down over 500-points), turned into a massive buying opportunity midday, with major averages recovering (around the European close) in impressive fashion after major averages briefly breached key technical levels (the Russell 200 turned positive). But the rally could not hold, with stock dropping late afternoon as the Dow fell over 1,000 points to new lows following headlines from the CA governor saying they are monitoring 8,400 people for virus after a person in the state was identified with the first known infection not associated with previous outbreaks. The Dow Industrials briefly dropped below the 26K level this morning (recently touched 52-week highs of 29,568 on February 12^th), while the S&P dropped below its key 200-day MA support of 3,046 (Bespoke noted if the S&P 500 closes below 3,047.53 today, tomorrow, or Monday, it will be the fastest 10% decline from an all-time high in the S&P 500’s history). The Nasdaq Comp dropped more than 4% late day to around 8,600 (off its record high of 9,838 just last Wednesday), led by another drop in semis and software names, with MSFT warning of the impact to one of its unit due to the coronavirus. The list of companies warning that they won’t hit financials due to the impact of the virus on production, travel, facilities grows by the day, leading to a recent freefall in the airline industry along with cruise lines. Treasury prices have risen to record highs as yields on the benchmark 10-year and 30-year yields hit record lows. Goldman Sachs said U.S. companies will generate no earnings growth in 2020 if coronavirus becomes widespread as the firm revises their baseline eps estimates for U.S. companies are $165 in 2020 from $174 and $175 in 2021 from $183 which reflect severe decline in Chinese economic activity in q1, lower end-demand for US exporters. Fear dominating markets globally, with the CBOE Volatility index (VIX) rising to its best levels since December 2018 (above 36, before ending up around 20%). As of late yesterday – there were 81,312 confirmed cases of COVID-19 and at least 2,770 deaths, according to latest reports late yesterday, but it has been the growing cases outside of the epicenter in China that has markets on edge with new cases in Iran (now at 139 cases and 19 deaths), Italy (401 cases and 12 deaths), Japan (178 cases and two deaths), and South Korea (1,261 cases and 12 deaths).

Economic Data

·     GDP second estimate for Q4 economy grew 2.1%, in-line with estimates after rising 2.1% in prior quarter; personal consumption rose 1.7% in 4Q (in-line with estimates) after rising 3.2% prior quarter while the GDP price index rose 1.3% in 4Q (vs. est. 1.4%) after rising 1.8% prior quarter; core PCE q/q rose 1.2% in 4Q (vs. est. 1.3%) after rising 2.1% prior quarter

·     Weekly Jobless Claims rose 8K to 219K, above the 212K estimate; the 4-week moving avg. rose to 209,750K from 209,250 prior week; prior week claims revised up to 211k from 210k; continuing claims fell 9k to 1.724m in the week ending Feb. 15

·     Durable Goods Orders fell (-0.2%), better than the expected decline of (-1.4%) while Durable goods new orders revised up to 2.9% for Dec. from 2.4%; new orders ex-trans. rose 0.9% in Jan. after 0.1% rise and new orders ex-defense rose 3.6% in Jan. after 1.9% fall

·     Pending Home Sales for January rise 5.2% MoM, topping the up 3% estimate as the Northeast, Midwest and South were all up while the West fell

Commodities

·     U.S. WTI crude oil prices fall 3.4% to $47.09 per barrel (traded to 17-month lows earlier) as the coronavirus raises demand concerns which have crushed prices over the last few weeks. More airlines are pulling back flights in an effort to contain the viruses, denting demand while China, the epicenter of the virus outbreak has seen its economy shook from the impact.

·     Gold prices ended little changed, slipping -0.60 to $1,642.50 an ounce, giving up earlier gains to settle lower for a third consecutive session. Gold had had a great run over the last few weeks as a safe haven play to hedge against the uncertainty of the impact of the virus on the economy. Gold had also managed to rise despite the dollar touching 3-year highs last week – but over the last few days, gold prices have pulled back.

Currencies

·     The U.S. dollar dropped, falling -0.5% for the dollar index to below 98.50 (after touching 3-year highs a week ago as it neared the 100 level, plunging recently as yields have dropped sharply and expectations for Fed intervention (possibly cutting rates at the April FOMC meeting) has pressured the buck. The Canadian dollar slides to near 6-month low vs. the buck given the continued fallout in oil prices. The euro jumped about 1% back around the 1.10 level after touching multi-year lows last week below 1.08.

Bond Market

·     Treasury market’s advanced again as the 10-year yield dipped 5 bps to 1.28%, but off earlier lows (hit record low of 1.240%) while the 30-year slipped 5 bps to 1.77%, but again off earlier lows (touched record low 1.74%). Treasury prices pared gains late morning, helping boost stock markets which closed well off session lows. Later in the afternoon, the U.S. Treasury sold $32B in 7-year notes at a yield of 1.247% vs. 1.233% when issued prior with a bid-to-cover (demand) at 2.49 vs. 2.37 prior auction and indirect bidders awarded 63.0% of the auction and directs getting 13.1%. All in all, Treasury markets had been overbought, prompting the dip.

Sector News Breakdown

Consumer

·     Retailers; CROX shares fall following a weak sales forecast, hurt by coronavirus outbreak as sees FY sales growth range between 8% and 12%, compared with analysts’ est. of a 12.4% rise, and expects 2020 revenue to take $40 to $60 mln hit due to disruptions to its Asia business; CHS said Q4 comp sales rose 2.2% as all the retailer’s brands delivered positive growth; LB posted q Q4 EPS beat and comps that fell less than expected (-1% vs. est. -2.9%); ETSY shares jump after strong Q4 results while analysts (KeyBanc, Needham) positive on Etsy Ads program they say will act as both a GMS and EBITDA driver; BBY mixed results as posted strong Q4 sales helped by holiday on EPS beat while its outlook fell short of consensus

·     Auto sector; TSLA shares fall in weak auto market as registrations of new Tesla’s in China plunged 46% last month as the coronavirus outbreak impacts, Bloomberg reports (last month, 3,563 Teslas were registered in China, down from 6,643 in December); ride hailing companies UBER and LYFT dropped over 10% late morning before paring losses

·     Consumer Staples & Restaurants; BUD shares fell after warning its operating profit was hit by $170M and its revenue was dented by $285M over two months from the impact of the COVID-19 disease outbreak; KDP slides after saying that its 2020 forecasts for net sales growth and adjusted EPS growth will be tempered in the first half of 2020 for several reasons; SBUX said it has reopened hundreds of its China stores that closed in response to the coronavirus outbreak; CMG down a 6th straight day, Pershing’s Ackman reduced stake to 4.2%

·     Lodging stocks were active on the virus news as well as several earnings results including that from MAR that reported 4Q revenues that missed estimates and said that the impact from the coronavirus could be material, STAY Q4 FFO and revenues topped consensus

Energy

·     Energy stocks a nice rebound off lows moving along with broader markets; APA outperformed after losses widened in Q4 as operating expenses ballooned, due primarily to higher impairment charges but still topped estimates/said expenses more than doubled to $4.73B from $2.1B in the year-ago quarter and recorded impairments of $2.7B in the quarter; CLR falls after Q4 earnings beat on higher revs but 2020 oil production guidance was 8.5% below consensus (guided to 198-201kbd for FY20 oil volumes, which is roughly flat with 2019, down vs 4Q19, and well off consensus at 217kbd) and 2020 capex guidance was 2.9% below consensus; QEP plunges as quarterly EPS and revenues miss estimates; WLL Q4 results top consensus but warns Q1 production impacted by severe weather conditions, associated electric submersible pump failures on multiple high-value wells

Financials

·     Bank & Brokerage movers; banks remain pressured due to the impact of the bond market, with Treasury yields staying at or just off record lows, which is seen as a negative for lending margins for major banks; GCAP surges after INTL agrees to acquire the company in an all-cash deal representing ~$236M in equity value, paying $6.00 per share in cash; in exchanges, shares of CME (52-week highs), ICE, NDAQ active following the increased market volatility

·     Consumer finance and lending; PYPL said sees Q1 revs at low end of prior $4.78B-$4.84B range as carefully assessing the effect of COVID-19 as conditions continue to evolve; SQ rises on impressive 4Q results, exceeding expectations on the top/bottom line driven by a combination of strong GPV trends and notable strength within Cash App and Capital

Healthcare

·     Pharma movers; ZGNX shares slide as the FDA PDUFA target action date for Fintepla for the treatment of seizures associated with Dravet syndrome has been extended by three months to June 25; generic drugmaker PRGO slides after mixed Q4 results while guidance falls short of consensus views; large cap pharma holds up well vs. rest of market (JNJ, MRK, PFE)

·     Biotech movers; GILD rises as announced it would start two late-stage trials to test its experimental antiviral drug, remdesivir, in patients with cases of illness caused by coronavirus; other vaccine related hopes/plays on the virus continue to gain traction including shares of MRNA, NVAX, VIR (which was downgraded at Baird on near-term upside that fails to reflect the material pipeline), GILD as well as suppliers/equipment names (CODX, APT, LAKE); other movers on earnings in biotech included SRPT, BMRN

·     Healthcare services and providers; TDOC rises after reported better than expected 4Q19 revenues, and management provided revenue guidance above consensus expectations; MED shares plunge after guidance disappointed Wall Street, and resulted in Jefferies downgrading the stock to hold from buy (guided full-year revenue $715M-$745M below Jeff est. $798M); RAD was upgraded to neutral at Guggenheim ahead of investor day saying it doesn’t see any catastrophic downside for indebted RAD in the near future, 

Industrials & Materials

·     Transports; Dow Transports fell below the 9,500 level, lowest levels since January 2019 led by CAR and airlines with many hitting 52-week lows; airlines continue to feel the impact of the coronavirus on passengers, with JBLU this morning saying it will halt change and cancel fees for new flight bookings starting Thursday through March 11 for travel completed by June 1; Buckingham downgraded seven airlines (AAL, ALGT, ALK, JBLU, LUV, SAVE, DAL) on a demand impact from COVID-19 that likely proves far greater than investors appreciate based on data they track; volatility very notable for the group with LUV having traded at 52-week high on Feb 14th at 58.83 – touched 52-week low today of 45.64; in cruise lines, CCL, RCL, NCLH all started the day sharply lower again before a rebound in markets helped the oversold cruise sector

Technology, Media & Telecom

·     Internet; online travel sector was already weak on reduced travel due to spreading of coronavirus, but BKNG shares fall initially after saying it had more cancellations, fewer new bookings and pressure on average daily rate in Greater China due to impact of virus (beat on earnings but guidance for 1Q EPS $9.05-9.65 well below est. $11.86) – shares later turned positive along with bounce in transports; CVNA dropped after the company’s 2020 outlook disappointed high expectations (guided to slower growth & better profitability)

·     Software movers; MSFT a shot across the bow for software names after warning it does not expect to meet Q3 More Personal Computing guidance due to impact of coronavirus; SPT a bright spot as reported a solid first quarter post IPO with ARR at $118M vs. $111M estimate as well as billings growth of 32% y/y vs. KeyBanc 22% estimate and 3Q19 at 35%; ESTC beat in billings + FY raise to 56% y/y growth helping offset CRO transition; PLAN plunges despite posting Q4 beats and an issues an in-line Q1 forecast – R&D expenses increased 58% to $20.4M

·     Media & Telecom movers; DISCA shares fall as beats street est for Q4 adj profit and posts rev in line with estimates though reports higher operating costs in Q4 due to higher content spend and marketing and personnel expenses (said invested between $300M-$400M in 2019 to develop new streaming services, which weighed on the company’s profitability); WPP shares slumped after forecasting flat comparable sales in 2020 and reporting a sharper-than-forecast drop in profit in Q4; GCI said it plans to continue tapping a source of cash a number of newspaper companies grappling with difficult conditions have leaned on: real estate; CCI reported messy 4Q results due to its decision to restate financials and consequently revised down 2020 AFFO/share guidance by 0.21c

·     Hardware & Component news; NTNX reported slightly better than expected TCV revenue and billings results of $338M and $420M and subscription grew to 79% of billings, up 6 points q/q (vs. the previous quarter at +2 points mix shift), but falls as guidance was weaker than expected by $50M-$80M for FY20 as the Company cited caution primarily related to COVID-19 impact; ZM rises again as continues to benefit from virus – Bernstein yesterday noted the video conferencing company is seeing a surge in downloads amid coronavirus panic; DMRC downgraded at Craig Hallum after posts wider than expected Q4 loss as revenues decline; DELL earnings tonight