Closing Recap

Wednesday, January 06, 2021

Equity Market Recap

·     It was another massive “risk-on” day for U.S. stock averages that saw record highs for the S&P 500, Dow Industrials and Russell 2000 that was disrupted late day by protests at the Capitol building in Washington as protestors reached the Senate floor. The incident occurred around the same time of debate in both houses of Congress of the objection to the Arizona electoral college votes. Still, major stock averages ended the day at or near all-time highs outside of the technology sector (which posted modest losses after early pressure). The protesting news dominated the last 2-hours of the trading day, which up to that point had been focused on the apparent Democratic Senate victory overnight after the Georgia election runoff and the potential further impact of fiscal stimulus that would help the economy, lifting infrastructure, retail, etc.

·     Market concerns of what a “Blue wave” meant to markets was unfounded as a handful of sectors surged on expectations of greater fiscal stimulus measures as Democrats appear to have taken control of the Senate after victories in Georgia runoffs. The prospect of more fiscal stimulus was the main market driver today, boosting Treasury yields which got the financials going (banks, cards, insurance names top S&P gainers). At the same time, retailers, materials, metals, industrials, infrastructure, energy, solar, cannabis, and autos also saw massive buying as the Smallcap Russell 2000 touched a fresh all-time high, surging as much as 5%.

·     Stimulus measures and the vaccine rollout overshadow rising Covid cases and expectations of greater taxes (and slowing economic growth). Markets also ignored weaker jobs data as the ADP report for December misses bigly, as private sector payrolls jobs decreased for first time since April (-123K vs. est. +60K) but markets shrug off. The 10-year Treasury yield jumped nine basis points, above 1% for the first time since the February/March panic on the expectations that the Democratic wins in the GA Senate runoffs will lead to more stimulus and debt spending.

·     Implications of the Democratic Senate victory: Big Tech stocks stumbled; electric vehicle stocks gain as Georgia election digested. Wedbush said the impact of the Georgia Senate elections is a clear negative for Big Tech as they expect much more scrutiny and sharper teeth around FAANG names (AAPL, AMZN, FB, GOOGL) with potential (although still a low risk) legislative changes to current anti-trust laws now on the table. Electric vehicles rise: Wedbush said a Blue Senate is bullish for the EV sector (TSLA, GM), with a greener driven agenda now certainly in the cards for the next few years – as believe a doubling down on EV tax credits and further consumer incentives and government initiatives around the EV sector will be on the horizon. Solar stocks (FSLR, SPWR, SEDG) jump as Democrats in complete power could give further support to a strong "green energy" push expected under the Biden administration. Cannabis names (TLRY, CGC, APHA) surge on the Senate wins as well – recall Biden and Harris have voiced support for decriminalizing marijuana on a federal level and are expected to adopt a more pro-cannabis legalization agenda. Banks among top gainers on a spike in Treasury yields on expectations of increased fiscal spending. Gun stocks (RGR, SWBI) jump as gun owners and first-time buyers accelerated purchases ahead of a potential clean Democratic election sweep, anticipating stricter legislation. Retailers (RL, URBN, NKE), metals (X, FCX, CLF), and infrastructure plays (MTZ, PWR, J) were among leaders on increased spending hopes.

Economic Data

·     ADP Jobs report for December misses as private sector payrolls jobs decreased for first time since April. Ahead of Friday’s monthly US jobs report, ADP private payrolls registered a miss, falling -123,000 compared to consensus expectation of a +60,000 increase.

·     Markit U.S. services sector final PMI for December at 54.8 vs flash reading 55.3 and final November 58.4; services sector final new business index for December at 54.6 (lowest since August) vs flash reading 55.0 and final November 57.6; the composite PMI for December at 55.3 vs flash reading 55.7 vs final November 58.6

·     Factory Orders for November rose +1% vs. +0.7% consensus estimate and slightly below the +1.3% prior reading (revised from +1%) as shipments rose +0.7% and unfilled orders fell -0.1%; factory orders ex-defense +1.0 pct vs. Oct +0.8 pct

Commodities, Currencies and Treasuries

·     Oil prices jumped as WTI crude gains 70c or 1.4% to settle at $50.63 per barrel, while Brent rose 70c or 1.31% to settle at $54.30 per barrel. February gold prices sink 2.3% or $45.80 to settle at $1,908.60 an ounce, erasing gains from earlier this week as Treasury yields jump and investors bail on safe-haven assets. The dollar index recouped losses from a dive to 2-1/2-year lows, making gold less alluring for those holding other currencies.

·     Treasury yields broke out of a long-standing trading range, as the benchmark 10-year yield climbed over 9 bps to 1.05%, breaking above the 1% level since last March following the Senate Democratic sweep in Georgia overnight. Victories by Ossoff and Warnock give Democrats control of the legislative and executive branches of government, allowing less restrictions to legislation brought forward, and giving less fiscal restraint.

·     The U.S. dollar bounced after sinking to its lowest level since April 2018 as it become clear that a Democrat win in the U.S. Senate election in Georgia would clear the path for a larger fiscal stimulus package. Markets expect a Democrat-controlled Senate would be positive for economic growth globally and thus for most riskier assets, but negative for bonds and the dollar. After a fall of nearly 7% in 2020, the dollar turned higher as a crowded trade began to unwind.

Sector News Breakdown

Consumer

·     Auto sector: TSLA new record highs and up a 9^th straight day as Morgan Stanley boosted its tgt to Street high $810 from $540 (Bull case $1,232) saying despite the extraordinary run in the share price, they continue to believe that Tesla can outperform vs. our sector in 2021; NSANY said Q4 sales of 243,133 units, down 19.3% YoY and total 2020 U.S. sales decreased 33.2% to 899,217 units; Piper noted overall app downloads for 7 major used car platforms (CARG, CVNA, VRM, TRUE, KMX) fell by 13% YoY in Q4 as decline mirrors a general softening in the overall used car market – said only CARFAX (owned by IHS Markit) grew downloads. Wedbush said a Blue Senate is bullish for the EV sector, with a greener driven agenda now certainly in the cards for the next few years. We believe a doubling down on EV tax credits and further consumer incentives and government initiatives around the EV sector will be on the horizon, which is a major positive for TSLA, GM, FSR, and other auto players/EV supply chain; Ford (F) said Q4 sales drop was about 10%, beating the 12% decline forecast by analysts

·     Housing & Building Products; ZG upgraded to Outperform from Neutral at Wedbush as expect real estate technology adoption will accelerate with an opportunity to transform this industry – raise tgt to $167 from $118; FND tgt upped to $110 from $88 at Guggenheim and reiterate Buy rating ahead of 4Q earnings as see the potential for our base-to-bull case for independent share shift to play out into 2021; OPEN initiated with an Outperform rating and a $31 tgt at Wedbush as they see a large market opportunity that they expect to have accelerated coming out of the pandemic; in builders, MDC said Q4 2020 new home deliveries increased 7% to 2,564 from 2,389 and Q4 2020 net new home orders increased 72% to 2,708 from 1,574; in building products, MAS jumps, while VMC rises on Stephens upgrade to overweight saying with demand holding in better than expected and good weather trends in the quarter, think 4Q20 should come in better

·     Consumer Staples; KO receives its 3^rd straight day of an analyst downgrade as Deutsche bank lowers to Hold from Buy (RBC cut on 1/4, and Guggenheim on 1/5); PEP and KDP downgraded to in-line from Outperform at Evercore ISI on new macro view which calls for a strong cyclical-driven earnings recovery in 2021, continued U.S. dollar weakness and emerging market strength, and higher commodity prices; Kellogg (K) downgraded to neutral at Piper as expect Kellogg’s top-line and earnings growth trajectory to lag peers over the next 1-2 years; BYND downgraded to neutral from overweight at Piper saying the company’s current retail trends fail to keep up with his expectations for Q4

·     Restaurants; WING upgraded to an Overweight at Barclays saying it offers what they view as an attractive combination of outsized fundamental growth within preferred franchised model; Raymond James upgraded shares of both RRGB (to outperform and $26 tgt) and DIN (also to outperform with $75 tgt) – for RRGB, believe 1) a sizable tax refund collected in October (post 3Q) of $49M effectively shelves near-term liquidity concerns, while for DIN, believes a recent pullback (~15%) from its early December highs creates an attractive entry point for a 100% franchise business model trading below 10x EBITDA

·     Retail: retailers a massive jump (FL, URBN, GCO, M, JWN, SKX, AEO) all on increased stimulus relief bill hopes with Democrats in power; TIF presented record preliminary global net sales for the holiday period (+2% YoY), driven by Chinese mainland sales, and also showed accelerating US comps (sales comp -3% for Nov-Dec vs -14% for Aug-Oct quarter); Stifel reiterated LULU as a core growth holding and expects them to preannounce positive holiday sales at next week’s ICR Conference that will look exceptional against otherwise underwhelming apparel and footwear holiday spending

·     Leisure and Gaming; DKNG and PENN rise as according to the NY Daily News, Governor Cuomo will make the revenue-generating measures of online sports betting a central part of his policy proposals to be laid out in next week’s State of the State address https://bit.ly/35dq6YK (Cuomo later clarified reports suggesting running NY sports betting like the lottery where the state gets the revs – paring DKNG, PENN gains). Oppenheimer noted NY would be the most populous state with legalized OSB and we estimate the first full year industry revenue opportunity at $400-500M; in cruise space, CCL extending its pause in all ops in the U.S. through March 31

Energy

·     Energy stock movers: energy stocks stayed strong after leading major averages yesterday, helped as oil prices jumped following the OPEC+ agreement for February’s and March output restrictions, returning only 75kbpd each month rather than 500kbpd initially anticipated. Key energy service catalysts include strength in oil prices, sequential increases in rig activity in North America and positive earnings revisions

·     Utilities & Solar; Utilities & Solar; Solar names (TAN ETF, FSLR CSIQ, SPWR, etc.) were lifted by the Democratic sweep in GA runoffs, seen as positive under Dem sweep which could give further support to a strong "green energy" push expected under the Biden administration; Wells continues to like the long-term fundamental set up for utilities, naming AEE, ATO, CMS, DTE, ES, H.cn, NI, PEG, SO and WTRG as their top picks, upgrading CNP and EIX to Overweight on the opportunity for multiple expansion in 2021, but downgraded BEP, BPEC, CPK, FE, IDA, PCG, PNM and SJW to Underweight and BIPC to Equal-Weight on value and AEP to EW as they have less conviction in their prior overweight thesis; JPMorgan downgraded ORA to Neutral from OW on valuation, keeping their $86 pt after the stock rose ~28% since mid-November

Financials

·     Bank movers: regional banks (ZION, CMA, FITB, HBAN) the biggest gainers, but financials overall were broadly higher (BAC, C, GS, JPM, WFC) as the 10-year Treasury yield moves above the 1% level for the first time in about 9-months as investors hedged against the risk of more U.S. fiscal spending and borrowing. The election results in Georgia have led to the belief that the Democratic controlled Senate will vote in favor to add to the debt levels (more stimulus measures, higher spending), which will cause interest rates to rise, yields to rise, which is favorable for the banks. Wedbush cut RF to Neutral on valuation and removed it from its Best Ideas List after their original investment thesis in adding the stock as a best idea last March has played out, and they added HBAN as a Best Idea as they believe bank’s net interest income growth positions it well to handle the challenging macro environment and they like the recent TCF acquisition; TFC sold its institutional 401(k) investment advisory and recordkeeping services; Daiwa reinstated Buy ratings on C (Citi), JPM, and GS and Neutral ratings on BAC and MS

·     Insurance: Piper is above consensus on most life companies led by favorable financial markets and highlight RGA as the stock they feel most comfortable with having above consensus estimates, and they upgraded MET to OW on the company’s stock repurchases, their P&C business sale reduces volatility, and they want to dispose of legacy liabilities, and they also downgrade HMN to Neutral given receding auto frequency tailwinds in 2021, competitive auto pricing challenging policy growth, and challenging sales as educators remain virtual for benefits enrollment even as they return to the classroom

·     Consumer Finance; MA was upgraded to Buy with a $400 target at Bank of America as the pandemic has accelerated the shift to electronic payments from cash and the vaccine distribution provides potential reacceleration in economic growth, consumer spending, and travel which they believe is not adequately reflected in shares; V (Visa) price target was raised to $250 from $210 at Susquehanna; Truist raised their price target on SQ to $300 from $250 as their CashApp is the leader in digital banking solutions and will benefit from the economy reopening in 2H21 as more sellers utilize leave consumer banks; COF was upgraded to Buy with a $123 target at Deutsche Bank; Goldman initiated SEIC at Buy with a $70.50 target, forecasting a shift to less market-sensitive revenue streams which will accelerate organic rev growth to 6-7% in 2021-2023 from 1-3% in 2018-2020; Morgan Stanley named SYF and AXP among their top picks (along with bank STT), saying large-cap banks and consumer finance stocks are poised to benefit from rising stimulus, loan growth, buyback resumptions, and the vaccine distribution providing a high degree of certainty that the pandemic-induced recession will end this year causing interest rates to rise and unemployment to decline; Bank of America issued a double-downgrade on FOUR to Underperform from Buy given the company’s exposure to restaurant and hospitality verticals, which make up about 60% of end to end payment volumes and will face increased pressure on continued lockdowns and restrictions

·     REITs; In lodging, Janney downgraded SVC to Neutral as it is at a growth disadvantage versus peers, upgraded CLDT to Buy, and raised their price targets on APLE, BHR, CDOR, HT, RLJand XHR, citing pent-up demand, healthy balance sheets, and opportunities for multiple expansion; Baird initiated VTR at Neutral with a $49 price target and WELL at Outperform with a $68 target; Credit Suisse upgraded COR to Outperform and reiterated DLR at Outperform as data centers, a sector well positioned to see continued relevance and growth and whose recent pullback provides a major buying opportunity and attractive entry points; Evercore resumed coverage on SPG at In-Line with a $89 target

Healthcare

·     Pharma & Biotech movers; AZN’s serum institute of India obtains emergency use authorization in India for AstraZeneca’s covid-19 vaccine; PRGO downgraded to Sector Perform at RBC Capital and lowers tgt to $49 from $59 as have not seen the EPS upside we had anticipated amidst COVID; cannabis names higher on Democrats winning Senate races in Georgia (party more favorable to industry) as TLRY, CGC, APHA among gainers; MRNA rises early after the European Medicines Agency (EMA) recommended conditional marketing authorization for its vaccine

·     Healthcare services and providers; CHNG rises after Optum, a part of UNH agreed to acquire the company for $25.75 per share in cash; says acquisition will boost UnitedHealth EPS https://on.mktw.net/38iz7li ; ABC to acquire majority of WBA’s Healthcare businesses for ~$6.5B, comprised of $6.275B in cash and 2M in ABC common shares as transaction is expected to close by the end of AmerisourceBergen’s 2021 fiscal year; RBC Capital said TDOC, TRHC, SHC are their favorite ideas in Digital health as expect momentum to continue into 2021 and see room for continued multiple expansion – TDOC (continue to expect it to outpace the broader telehealth market), TRHC (still confident in 20%+ revenue growth for 2021) and SHC (category leader and consistent executor).

·     MedTech and Equipment; BAX was downgraded to neutral from buy at UBS saying given a slower anticipated recovery, gaps in the near-term pipeline, and lingering costs, they see downside to consensus and are lowering our estimates and target; DXCM was upgraded to Buy at UBS and raising tgt to $445 from $410 citing its ability to withstand 600bps of channel and pricing pressure over the past two years and still expand gross margins by 200bps; SYK tgt raised to $278 from $253 at Credit Suisse

Industrials & Materials

·     Industrial & Machinery; CAT, HON, GE among industrials higher early as while Democratic sweep could mean higher corporate taxes that could pressure company earnings – a growing expectation has been for a large infrastructure spending package for a Biden administration; MSM reported mostly in-line Q1 EPS and revenues, while the company’s janitorial and safety business grew during the Covid-19 pandemic; ORA downgraded to Neutral from Overweight at JPMorgan primarily on valuation noting stock up ~28% since the mid-November equity issuance

·     Transports; broad strength in transports early, led by truckers, freight and rails (modest weakness in airlines) as the Dow Transports outperformed; JBHT was upgraded to Buy from Neutral at Citigroup and moving target up to $165 as they believe we are entering a multi-year earnings growth cycle, most similar to 2012-2015, which could see ~80-100% EPS growth over three years; in rail cars, GBX shares slide after reporting a larger than expected Q1 EPS loss of (30c) and revs of $402M missed the $481M estimate

·     Materials; the S&P 500 materials index hits record highs today, boosted by the surge in metals (FCX, AA, RIO, CLF, X) across the board, extending gains from late last year amid a China economic rebound, stimulus measures, and a booming housing market among catalysts; the expectation that under a full Democratic control that spending on infrastructure, roads, etc. will be boosted and easier to pass the legislation with limited opposition also raised building, E&C and infrastructure names (MTZ, PWR, J, FLR, KBR)

Technology, Media & Telecom

·     Internet: AAPL, AMZN, FB, MSFT, GOOGL lagged broader market strength after Democratic Sente victory in Georgia; Wedbush noted the impact of the Georgia Senate elections is a clear negative for Big Tech as they expect much more scrutiny and sharper teeth around FAANG names (AAPL, AMZN, FB, GOOGL) with potential (although still a low risk) legislative changes to current anti-trust laws now on the table; BABA and TCEHY shares rolled late day after the WSJ reported U.S. officials are considering prohibiting Americans from investing in Alibaba Group Holding Ltd. and Tencent Holdings Ltd., https://on.wsj.com/35gfcBr

·     Software movers; not much news specifically in semis and software, but groups were generally lower amid a rotation into financials, energy, materials, industrials and consumer and out of outperforming tech names (Nasdaq up back-to-back 40% gains in 2019 and 2020); in news, TWLO new outperform and $420 tgt at Macquarie and TEAM with outperform and $259 tgt; ESTC positive mention at Opco, positive on its growing platform breadth and its Elastic Cloud-first approach; PLTR is expanding its work with Fujitsu with a one-year by signing $8M contract; for UPWK, BTIG said given positive tracking, they are raising our 4Q20 revenue estimate to $98.6MM, above the high end of guidance as well as the Street’s $97.3MM

·     Media & Telecom movers; TGNA said it expects Q4 revenue in the range of $932M-$937M above consensus of $908.64M, driven by record political advertising and continued growth in subscription revenue; CHA, CHL, CHU in focus again as the NYSE to proceed with delisting three Chinese telecom companies (comes a day after reversed a decision from last week to delist U.S. listed shares of China Mobile Ltd, China Telecom Corp Ltd and China Unicom Hong Kong Ltd); ROKU said preliminary estimated data for Q4 ending dec. 31, 2020, of 51.2 mln active accounts – up by approximately 14 mln accounts in 2020 (also had price tgt raised to $400 at Deutsche bank)