Closing Recap

Monday, January 27, 2020

Equity Market Recap

·     U.S. stocks dropped across the board as the S&P 500 posted its biggest one day decline since October and snapped its streak of days without a 1% decline at 74 as the ongoing China virus outbreak stoked further economic concerns for global markets that came in to last week at all-time highs. The coronavirus, which started in China has spread to four continents (5 reported cases in the U.S.), taken at least 80 lives and have infected over 3,000 people while economically has slowed business demand that has taken a toll on several sectors including casinos, airlines, restaurants, retail, cruise lines and energy. The Stoxx Europe 600 declined 2.3% for its biggest one day drop since early October as most European major markets ended near their lows of the session. The CBOE Volatility index (VIX) jumped to morning highs of 19 before paring gains (52-week high at 24.81 back in August), as investors hedge. The attention today was firmly on the virus fear impact though quarterly earnings see the biggest week of results with 145 members of the S&P expected to report results. Interest rate sensitive names (and defensive sectors) seeing strength as Treasury prices rise and yields tumble, gold prices rise, though banks/financials stumble. Oil prices drop again, adding to last week’s 7% decline.

Economic Data

·     New Home Sale for December fell (-0.4%) to 694K from a downwardly revised 697K and below estimates for 730K; single-family home sales 0.694 mln unit ann. rate, vs. Nov 0.697 mln unit rate (prev 0.719 mln) and median sale price $331,400, +0.5% YoY

·     U.S. Dallas Fed manufacturing index rose 3.0 points to -0.2 in January after slipping -1.9 points to -3.2 in December. The employment sub index dropped to 1.9 from 6.2, but wages rose to 16.3 from 14.6. New orders surged to 17.6 from 1.6. Prices paid dipped to 9.5 from 14.5, with prices received falling to -1.9 from 0.7.

Commodities

·     Oil prices slide as WTI crude falls $1.05, or 1.9% to settle at $53.14 per barrel, its lowest level since mid-October, extending last week’s 7% decline on fears the virus will have impact wise on demand. February Gold prices rose $5.50 or 0.4% to settle at $1,577.40 an ounce, moving to its highest settlement since April 2013 as China virus concerns spark extended buying in safe-haven assets while NEM trades 52-week highs in gold mining space. Natural gas prices edge higher, rising 0.5% to settle at $1.90 mln btus.

Currencies

·     The U.S. dollar was modestly higher vs. rival currencies, as its reaction was muted against a slightly worse new home sales report, rising against the euro, pound and Canadian dollar, but slipped below the 109 level against the safe-haven Japanese yen. The Canadian dollar continues to underperform its major peers with oil prices down again today as markets anticipate a demand erosion as a consequence of the spreading coronavirus.

Bond Market

·     Treasury prices moved to their best levels since the middle of October as yields dropped across the board amid the flight to safety trade, as the yield on the 10-year fell 7 bps to 1.61% (after having decreased 16 basis points to 1.68% last week). The lower yields continue on risk aversion due to the spreading coronavirus and its bearish impact on equities. Also today, the U.S. Treasury sold $41B in 3-year notes at a yield of 1.448% vs. 1.437% when issued ahead of auction, with the bid-to-cover at 2.33 vs. 2.49 prior and indirect bidders awarded 60% of notes and directs 13.9%

Sector News Breakdown

Consumer

·     Retailers; Credit Suisse said the Coronavirus could be 3%-5% EPS hit for China-exposed consumer related stocks (notes NKE, EL, TPR among exposed names); CHWY upgraded to Outperform at Wedbush and raise tgt to $35 as now see higher pet industry online sales penetration potential to ~25% by 2023 based on trends in other sectors and increasing comfort that consumers

·     Consumer Staples; EL shares fall after Oppenheimer downgraded as expects Estee Lauder’s higher margin travel-retail segment to be adversely impacted at least in Q3 and potentially longer; ELF was upgraded to buy from hold at Jefferies based on a view that shares are oversold relative to fair value and that underlying demand remains robust (+DD)

·     Restaurants; dining stocks with exposure to China declined such as LK, YUMC, SBUX, MCD as fast-food and coffee chains operating in Wuhan region shut doors fearing the deadly coronavirus; CMG was upgraded to neutral at UBS given greater confidence in sustainability of strong sales and EPS over the next couple of years and raising tgt to $900 from $690, reflecting higher estimates (~10% EBITDA) & multiple expansion (23x EBITDA from 19x)

·     Housing & Building Products; sector continues to benefit from lower Treasury yields, helping pull down mortgage rates to best levels in over a year; DHI reported Q1 results above consensus for EPS and revs ($4.02B vs. est. $3.76B) while net sales orders increased 19% to 13,126 homes and issued higher 202 rev guidance

·     Casino & Leisure movers; the Macau casino sector plunged again (WYNN, LVS, MLCO) as reports out of China indicate more deaths from the coronavirus outbreak and new travel restrictions in Hong Kong are imposed while Macau officials have confirmed six cases of the coronavirus. From Friday through Monday (the day before the official start of CNY and the first 2 days of the holiday period), visitation into Macau is down 60% vs. the similar holiday period in 2019, while visitation from Mainland China is down 66% as per Bernstein; WYNN downgraded at Bank America; cruise lines (RCL, CCL, NCLH) also remain pressured over coronavirus impact concerns as RCL canceled one cruise over the weekend and will see an impact from some outbound Chinese tourists not making their trips; movie theatre chains (AMC, IMAX) were weak

·     Auto’s; TEN shares rose initially after company reconfirms that it has been reviewing strategic alternatives to maximize shareholder value; says it has added Lazard to its existing advisor team as an independent financial advisor; in auto suppliers, Credit Suisse upgraded auto seat supplier ADNT to outperform from neutral, and raise tgt to $26 from $22 saying with the auto sector dominated by a backdrop of choppy macro, ADNT stands out as its back to basics self-help can drive earnings growth- while firm downgraded BWA to Neutral citing concern on BWA’s margin profile given: transition in its product set, uncertainty in Europe, and CV pressures

Energy

·     Energy stocks very soft as oil prices extend recent declines as fears the coronavirus in China could hurt oil demand have quickly turned into a clear and demonstrable reduction in global oil consumption, with flights being cancelled, manufacturing plants shutting and schools closing. WTI oil prices fell -3.3% at $52.43 per barrel after dropping 7.5% last week; XOM and HES announce an oil discovery offshore Guyana at the Uaru well, the 16th discovery on the Stabroek block which encountered about 94 feet (29 meters) of high-quality oil-bearing sandstone reservoir/Exxon says discovery boosts its recoverable resources to more than 8 billion oil-equivalent barrels up from previous estimate of 6B Boe; MRO was upgraded to buy at Stifel; shares of XOM, CVX, FTI, COG touching 52-week lows in the S&P 500 energy sector

·     Utilities & Solar; in coal space, ARLP net Q4 earnings fell almost by to $25.8M, revenues were down 14.8% YoY to $453.3M, primarily due to lower coal sales revenues resulting from reduced coal sales volumes and prices, and lowered its quarterly cash distribution to 40c from 54c; in solar, SEDG was downgraded at Northland saying based on checks with solar installers, there are issues with new SEDG products out of the box, causing many to switch to ENPH; NEE, CMS, XEL, ES, LNT, SO, AEP, FE, ETR among utilities touching 52-week highs today

Financials

·     Bank movers; banks and financials in general moved to the downside given the ongoing bid to Treasury prices, pushing yields lower which weighed on banking stocks; GS shares dropped ahead of its first ever investor day on Wednesday (January 29) as Credit Suisse said they expect management to lay out a credible path to a ~15% ROTE, over time; market exchanges (CME, ICE were among top gainers in the S&P given the increased volatility of commodities.

Healthcare

·     Pharma movers; ABBV said China is testing Aluvia, an HIV drug, to treat pneumonia caused by the new coronavirus, multiple media outlets had reported; AGN and ABBV move a step closer to sealing their $63B deal by agreeing to shed brazikumab and Zenpep to resolve regulatory concerns over the deal; SRNE slips as rejects offer from a private equity fund to acquire a majority or all of co’s outstanding shares for up to $7.00 per share; MYL downgraded at Leerink; PRNB named new short call at Kerrisdale Capital, pressuring shares

·     Biotech movers; BIIB was upgraded to buy from hold at Canaccord and raise tgt to $360 from $305 saying shares do not currently reflect that co’s Alzheimer’s treatment aducanumab has a decent shot at FDA approval despite skepticism around its trial data; ACHN rises after the FTC granted early termination of the HSR waiting period in its acquisition by ALXN (ACHN holders voted to adopt the $6.30 per share deal at a special meeting on Dec. 19); DNLI upgraded to buy at Goldman Sachs as they transform into a multi-faceted company; shares of NVAX, BCRX, NNVC, VIVO, VCNX, CODX, LAKE, INO among names that were volatile amid the coronavirus outbreak

·     Medical equipment and devices; ISRG was downgraded to hold from buy at Deutsche Bank and cut tgt to $595 citing the impending launch of new surgical robot systems including MDT’s Hugo, and the impact on Intuitive Surgical and its ability to sustain growth; NURO shares plunged after posting Q4 results as revenue dropped 54% YoY to $1.7M (down from $3.7M), though posted a smaller quarterly loss ($1.1M); protective gown wear, masks company LAKE shares surged given the outbreak of coronavirus

·     Healthcare services and providers; in CRO sector, SunTrust downgraded ICLR and MEDP to hold from buy saying 2019 was a strong year for the Pharmaceutical Services industry, as the avg CRO was up 32% for the 53 weeks ending 1/17/2020 vs S&P up 28%. Performance was driven by a split between improvement in earnings and multiple expansion

Industrials & Materials

·     Metals, Industrial & Machinery; EMR said total trailing 3-month orders up slightly with underlying orders up 1%, excluding 1% unfavorable currency impact; big week of earnings coming off for group, led by CAT shares on Friday; industrial metals producers (Steel, copper, iron ore aluminum names) slump given the slowing global economic fears due to virus in China

·     Transports; airlines (AAL, UAL, DAL, SAVE, JBLU) and online travel stocks (BKNG, EXPE, TRIP, TCOM) fell again amid fears about the rapidly spreading viral outbreak (coronavirus), as well as continued uncertainty about the return of Boeing’s 737 Max aircraft; Dow Transports dropped below 10,800 – falls below 50-day MA earlier of 20,885 with 100-day MA support lower at 10,703

·     Aerospace & Defense; ARNC reports lower-than-expected Q4 EPS and revenue, and forecasts FY 2020 sales and profit below Wall Street estimate (note ARNC supplies aluminum sheets and plates for Boeing Co’s 737 MAX airplanes); Citigroup cuts tgt on aircraft parts designer SPR to $90 from $95 and Vertical Research Partners lowers to $75 from $80, citing extended shutdown of 737 MAX production by Boeing (BA) and a possible further cut in 787 Dreamliner production; RYCEY shares slipped as European Union Aviation Safety Agency (EASA) on Friday asked airlines to not pair affected Trent-1000 engines with over 24,000 hours or 8,000 cycles

Technology, Media & Telecom

·     Semiconductors; the Philly semiconductor index (SOX) falls to lows of 1,846, well off its record high of 1,974 on Friday (post INTC earnings) – as the group with heavy exposure to Asia and profit taking coming into play (ON, NXPI, AMAT, NVDA among decliners)

·     Software movers; CRM shares active after Cleveland Research said Q4 seems to be tracking ahead of expectations; ADBE was upgraded to buy at Cleveland Research as Partner forecasts and business trends appear to have improved over the past 60 days

·     Media & Telecom movers; Sprint (S) said it lost 115,000 postpaid phone connections during the last quarter after losing 91,000 such connections the prior quarter and lost 26,000 postpaid phone connections during the same period a year earlier (and now has lost postpaid phone subscribers every quarter since late 2018)