Closing Recap

Tuesday, January 28, 2020

Equity Market Recap

·     U.S. stocks in full rebound mode as “Turnaround Tuesday” helped major averages recover from its worst sell-off in four months, with technology shares and banks pacing the gains, while safe-haven assets pulled back (Treasury prices, gold). Some of the companies that suffered the biggest losses during the recent equity rout due to the potential impact of the coronavirus such as chipmakers, casino operators and airlines, climbed on Tuesday, while energy stocks rise as oil snapped its 5-day losing streak. The combination of stronger economic data readings in the U.S., coupled along with no fresh bad news on the coronavirus (U.S. infected remained at five for the last 24-hours – 4,000 infected in China), allowed investors to focus on busy earnings results and M&A action in the auto parts sector as BWA acquired DLPH in a $3.3B deal. Earnings results were mixed as Dow components Pfizer and 3M declined on results, while markets await from earnings out of tech bellwether Apple tonight along with chip makers AMD, MXIM and XLNX as well as restaurant SBUX. It was a good day of returns for stocks that partially recover after two sessions of heavy selling pressure, and a day after the Dow Jones Industrials and S&P 500 index each posted their biggest declines since Oct. 2, while the Nasdaq Composite ended at 9,139.31, down 175.60 points or 1.9% for its biggest-one day fall since Aug. 23^rd.

Economic Data

·     Durable Goods Orders for December rise 2.4%, well above the 0.3% estimate and posted its largest gain since Aug. 2018; Durable goods new orders revised down to -3.1% for Nov. from -2.1%, while new orders ex-trans. fell 0.1% in Dec. after 0.4% fall

·     S&P CoreLogic Case-Shiller National Home Price index rose 3.54% y/y in Nov. after rising 3.25% in prior month ; the S&P/Case-Shiller 20-city NSA index at 218.68 after 218.42 in Oct.; the 20-city SA index rose 0.48% m/m in Nov. after rising 0.46% the prior month

·     Consumer Confidence for January reported at 131.6, topping the est. 128.0 (prior month revised to 128.2 fro, 126.5); the expectations index 102.5 in January vs. Dec revised 100.0 while the present situation index 175.3 in January vs. Dec revised 170.5

·     Richmond Fed Manufacturing for January a significant beat, reported at up 20 vs. est. for down -3 (and prior month -5); Shipments rose to 29 after -6 the prior month and new order volume increased to 13 after -13 the prior month

Commodities

·     Oil prices posted modest gains as WTI crude gained 34c or 0.6% to settle at $53.48 per barrel, well off earlier lows of $52.68, and snapping its 5-day losing streak, helped by reports that Libyan output could be days from coming to a complete halt due to internal conflict. Oil prices had slipped the last few sessions as coronavirus fears continue to ripple through the market. Oil had traded near the lowest close since mid-October on Monday as the market was dominated by alarm that the deadly coronavirus will hurt economic activity in China and beyond.

·     Precious metal prices slumped given the recent resurgence of the U.S. dollar, as February gold prices slipped -$7.60 or 0.5% to settle at $1,569.80 an ounce, while silver prices underperformed more. Gold pulled back from near 7-year closing highs yesterday as investors shrugged off the China’s coronavirus concerns (for the day at least).

Currencies

·     The U.S. dollar index (DXY) outperformed vs. most currencies, topping the 98 level for its best close in roughly 2-months on strong economic data. The U.S. dollar rallied off three-week lows against the Japanese yen (108.76 earlier) as U.S. stocks rallied and amid the unwinding of the severe risk-off conditions the last few sessions surrounding the uncertainty for the coronavirus outbreak. The euro briefly moved below the 1.10 level (1.0998), its weakest point since the middle of October (52-week lows 1.0899 on Sept 30^th) before ending flat vs. the buck. The dollar traded to 7-week highs vs. the Canadian dollar above the 1.32 level briefly before fading.

Bond Market

·     Treasury prices dipped for the first time in a few days, as yields recovered off multi-month lows following a rotation back into stocks and out of defensive/safe-haven assets (for the time being). A combination of better economic data in the U.S., as well as a relief market rally after the China virus outbreak numbers held relatively steady over the last 24-hours, helped push Treasury yields off their lows (10-year touched 1.56% this morning before ending higher by 3 bps at 1.645%). The U.S. Treasury sold $32B in 7-year notes in a weak auction, as the yield of 1.57% compared to the when-issued yield of 1.566% prior, while the bid-to-cover (demand) was 2.37 vs. 2.47 prior auction and indirect bidders were awarded 58% of the notes and directs getting 17.2%.

Sector News Breakdown

Consumer

·     Auto sector; auto parts supplier DLPH rises after agreeing to be acquired by BWA in an all-stock deal valued at $3.3B with DLPH shareholders to get 0.4534 shares of BWA for each DLPH share held/BWA also announced a share buyback program of up to $1B https://on.mktw.net/2O3N8so ; ALV reported Q4 profit and revenue that topped consensus as auto supplier group boosted today on the earnings and deal in the sector; UBER was initiated buy and $56 tgt at UBS; separately, CNN Business reported that Uber Eats has lost the exclusive rights to make about 15M McDonald’s (MCD) deliveries each year in the U.K., CNN Business

·     Retailers; Telsey Advisory downgraded FL to market perform from outperform and cuts PT by $8 to $42, saying softness in apparel, which accounts for about 20% of sales, and increased competition from DKS in premium footwear offset positives; ADDYY was upgraded to outperform at Telsey as believe ADS-DE, along with NKE, is among the few companies with leading, differentiated, and high-quality business models that can command a premium valuation; GRMN upgraded to neutral at Credit Suisse and raise tgt to $100 from $73 saying headwinds for ADS-B sales in the Aviation segment are less severe than previously expected; luxury retailers dipped after LVMUYQ4 organic rev growth 8% vs. est. 8.7% (CPRI, TPR)

·     Consumer Staples; MKC shares slumped on mixed results for Q4 and guided year EPS $5.20-$5.30m, below the $5.56 estimate saying business expenses and a projected higher tax rate will likely offset gains from its underlying business performance; BYND was downgraded to neutral at JPMorgan citing valuation; COTY and EL shares bounced after LVMH reported organic sales for its perfumes & cosmetics business rose 12% in Q4 to almost double the consensus expectation

·     Restaurants; PBPB shares rise after activist 180 Degree Capital Corp reported a 6.0% holding in the company and may propose a strategic review or sale process, according to a new 13D filing; LK small bounce back after recent China virus fears hit stock, as Morgan Stanley lifts its price target to $42 from $27 as estimates the value of the Luckin Tea franchise stores is $15 per share; MCD expected to report earnings tomorrow morning, with SBUX tonight; WING was upgraded to buy from neutral at Northcoast with $122 tgt

·     Housing & Building Products; homebuilder PHM the second homebuilder to report better earnings and revenues in as many days (DHI beat Monday), while backlog rose 18% YoY to $4.5B though net orders slipped -11% YoY to up 33%; in furniture retail, WSM upgraded to outperform at Oppenheimer saying the worst now appears behind WSM as operating margins seem to have at least stabilized; appliance maker WHR Q4 EPS of $4.91 came in ahead of Street of $4.27, in large part driven by a much lower tax rate and North America another impressive margin 13.3%

·     Casino & Leisure movers; more pain in the casino sector (WYNN, MLCO, LVS, MGM) after the Hong Kong Maritime Department is suspending ferry services between Hong Kong and Macau, while authorities on Mainland China have also reportedly stopped issuing travel permits to Macau after a seventh confirmed case of the new coronavirus hits the area; in leisure, RV’s, shares of HOG decline after reporting Q4 EPS of 20c, missing the 25c estimate saying retail-level sales of its motorcycles fell in the fourth quarter, reflecting lower demand in the U.S.; PII mixed results as EPS topped views for Q4 but sales missed ($1.74B vs. $1.76B) while sales of its off-road vehicles and snowmobiles grew 7% to $1.14 billion from a year ago, and sales in its motorcycles and aftermarket segments also rose.

·     Services; LAUR shares rose early after the company stated that it is exploring strategic alternatives for each of its businesses to unlock shareholder value/said have been discussing the likelihood of the company being sold in pieces to return cash to shareholders since 2Q18; LRN shares stumbled after in-line results overshadowed by weaker Q1 revenue outlook; LOPE shares came under pressure after Citron Research that the company is using a captive subsidiary to manipulate earnings

Energy

·     Energy stocks tried to rebound after oil prices have plunged the last few days amid concern the coronavirus in China would have a significant impact on overall energy demand; HES unveils a $3B capital and exploratory budget for 2020, with more than 80% allocated to high return investments in Guyana and the Bakken shale/forecasts full-year net production of 330K-335K boe/day, excluding Libya, with Bakken net production averaging 180K boe/day; HAL says it was awarded seven contracts for drilling and completion services for the next phase of field development of the Ichthys project offshore northern Australia; financial terms are not disclosed

·     Utilities & Solar; PCG was upgraded to buy at Mizuho saying they are getting "fired up" about PG&E as the AB-1054, June 30, 2020 deadline approaches/believe that parties will do whatever it takes to approve a viable reorganization plan as quickly as possible

Financials

·     Bank movers; banks and financial stocks rebound from yesterday decline, as a bounce back in Treasury yields (though remain at historical lows) help lift prices; ZION and WFC were both upgraded to neutral from underperform at RW Baird; several SmallCap banks out with earnings results including BHLB, BPOP, CIT, FBC (falls on higher Q4 expenses despite eps beat), GWB (in-line earnings), HTLF (upgraded at Piper after strong Q4 results), TCF and WASH

Healthcare

·     Pharma movers; Dow component and top drug maker PFE misses Q4 profit estimates for the first time in at least two years and posts a 9% drop in Q4 revenue, hurt by intense competition for its pain treatment Lyrica that lost patent protection last year/FY EPS guidance brackets consensus while rev guidance midpoint light; MYL shares rise after PFE said sees 2020 Upjohn revs $8-$8.5B vs prior 7/29 presentation of $7.5B-$8B as now to include Meridian and Japan JV

·     Biotech movers; XLRN shares jump after its Sotatercept achieves primary and secondary endpoints in Phase 2 PAH trial, as well as meaningful functional improvements; INCY announced positive topline results from its randomized, vehicle-controlled, pivotal Phase 3 TRuE-AD2 study evaluating the safety and efficacy of ruxolitinib cream; CLSD and BHC said Phase 3 study, called the Peachtree Study, showed that about half of the patients taking the treatment had an improvement in visual acuity

·     Medical equipment and devices; PKI 4Q EPS & revs better but Q1 EPS guidance and FY guidance light vs estimates (4Q $1.35 on $805.7M vs. est. $1.33/$800.6M)/organic growth of 5% was ahead consensus estimates of 4.8% and in line with guidance of 5%

·     Healthcare services and providers; Practice Fusion Inc., an electronic health record provider acquired by MDRX in 2018, will pay $145M to resolve criminal and civil allegations that it engaged in a kickback scheme encouraging physicians to prescribe opioids; in hospitals, HCA reported in-line Q4 earnings with a $2B stock buyback and slightly better sales; CNC tgt raised to $103 at Bernstein which reflects the accretion associated with the WellCare merger, along with underlying organic strength from Medicaid growth; ABC shares rose after Cleveland Research said research indicates ABC is gaining share within drug distribution and specialty including TN Oncology and incremental share within Premier

Industrials & Materials

·     Industrial & Machinery; industrial conglomerate MMM shares slide as Q4 profit fell 28% due to restructuring and litigation charges with earnings missing estimates while also said to cut 1,500 jobs globally to reduce costs and guides 2020 EPS between $9.30-$9.75 vs. est. $9.61; UTX reported Q4 results that topped consensus but warned that 737 Max issues will crimp results at its aerospace unit/says EPS, revenue guidance for Raytheon provided after merger closes; PCAR Q4 profit declined, but beat Wall Street expectations (profit was $531.3M, down 8.1% to $1.53 per share but above the $1.50 est.) while net sales of $5.71B topped views; GGG rises as reported an 8c 4Q19 operating EPS beat on broadly better than expected results while 2020 organic sales growth guidance was in-line with consensus expectations

·     Metals & Materials; steel producers got a beat from NUE for Q4 results (EPS 21c beat on higher revs) saying inventory destocking ended and sees demand improving after a tough year; GPK said it plans to purchase 15.1M partnerships units in Graphic Packaging International Partners from IP for $250M as news followed a quarterly miss on revenue and in-line earnings; gold and silver miners underperform

Technology, Media & Telecom

·     Semiconductors; AAPL was planning to boost first-half production by 10% from a year ago but has received warning from some of its suppliers that the coronavirus outbreak could complicate those plans, according to a report from the Nikkei Asian Review; AMD to report earnings tonight in the chip sector along with MXIM and XLNX; chip names AVGO, SWKS, CRUS, QCOM, TSM among those markets watching with AAPL reporting after the close tonight

·     Software movers; SAP 2019 full-year results were in line with expectations but revised guidance for 2020 is slightly below forecasts while expects 2020 revenue on a non-IFRS basis of between EUR29.2 billion and EUR29.7 billion at constant currencies, up from previous guidance of EUR28.6 billion and EUR29.2 billion; GWRE only software name initiated at underperform this morning at Wells Fargo (Initiation Overweight ratings on TWLO, WORK, PLAN, TEAM, CDAY); tgt prices hiked at Piper this morning into earnings – TTWO to $141, EA to $124 and ATVI to $69

·     Hardware & Component news; AAPL to report earnings after the close tonight; JNPR shares fall after reporting slightly better Q4 results but issued a below consensus earnings guide for Q1 due to OpEx and a 1% revenue growth guide; XRX rises after beats Q4 estimates and guides upside FY20 EPS of $3.60-3.70 versus the $3.51 consensus and reported Q4 gross margin was 41.6% versus the 40% last year; the UK said Huawei to have a limited role in 5g and says Huawei new restrictions should be placed on the use of high risk vendors in the UK’s 5g; DDD was downgraded to neutral from overweight at Piper and $12 tgt citing disappointing channel checks, increasing competition, a lack of positive catalysts this year, and the limited upside in the current valuation; FFIV reported better-than-expected quarterly profit, helped by customer demand for its software solutions and related services but analysts cut tgt citing concerns about slowing software growth and weaker product revenue

·     Telecom and Media; Intelsat (I) shares slid late day as a bill introduced today in U.S. Senate proposes limited payout to satellite companies such as Intelsat and SES that vacate C-band airwaves, as noted by Bloomberg – the bill would establish $6b fund for paying relocation expenses and incentive payments to move off frequencies in a timely fashion and also calls for $5b for deficit reduction, and rest of funds raised at auction for advanced 911 emergency calling services and rural broadband