Closing Recap

Friday, January 31, 2020

Equity Market Recap

·     U.S. stocks ended the trading session just off session lows, with investors exhibiting caution into the weekend on how many additional cases of the coronavirus could be revealed over the next few days after latest reports (as per the Global Times) said newly diagnosed new coronavirus pneumonia stood at 9,811 cases nationwide, with 213 having deceased and a total of 15,238 suspected cases. According to a report in the Lancet says a new modelling study estimates 75,800 individuals in the Chinese city of Wuhan may have been infected with 2019 novel coronavirus (2019-nCoV) as of January 25, 2020 – but authors caution that the true size of the epidemic remains unclear. Markets also fearful how much China markets will open lower when it resumes trading on Monday after being closed for the holiday week.

·     Stocks plunged, with the Dow Industrial Average dropping more than 600-points (earlier broke below its 50-day MA 28,436) and more than 1,100 points off the 52-week highs on January 17th (29,373). Disappointing earnings results from energy giants XOM and CVX hurt the index early, but it was a mass broad based sell-off that took markets lower. Meanwhile the Nasdaq Composite fell as much as 200-points from its morning highs (9,324) and the S&P came close to its 50-day MA support. Markets in Europe were weak as the Stoxx 600 dropped 3% the last five day, its worst in almost 6 months while the FTSE 100 dropped 4% on the week, Germany’s DAX fell -4.4% (worst in 6-months) and France’s Cac-40 down -3.6% (worst in 6-months as well) as slowing global growth fears amid the potential impact on demand from the coronavirus take a toll on sentiment. The virus concerns, coupled with weaker economic data (Chicago PMI lowest level in a few year) overshadowed earnings headlines that boosted shares of AMZN, CHTR, DECK and CL, while shares of AMGN, V, CAT and XOM dropped on results.

Economic Data

·     Chicago PMI for January a very weak reading at 42.9, below the economist est. 48.9, its worst reading since late 2015 pressuring sentiment

·     Personal Spending for December rose 0.3% MoM, in-line with estimates while personal income in December rose 0.2%, just below the 0.3% estimate; the savings rate at 7.6% in December vs 7.8% last month and down from 8.8% a year ago

·     Inflation data modestly higher as PCE prices rose 0.3% MoM for December, topping the est. 0.2% while rising 1.6% YoY and core prices rose 0.2% MoM, above the 0.1% est)

·     University of Michigan sentiment rose to 99.8, topping the est. of 99.1 (which was prelim reading as well) as the expectations index rose to 90.5 vs. 88.9 last month and the current economic conditions index fell to 114.4 vs. 115.5 last month

Commodities

·     Oil prices slipped on Friday, adding to its weekly and month declines as increasing coronavirus concerns, and the impact it may have on growth in China has weighed on heavily on prices for much of the week. WTI crude fell 58c or 1.1% to settle at $51.56 per barrel (6-month lows) while Brent slipped 13c to $58.16 per barrel. For the week, WTI ends 5% lower, for its 4th straight weekly decline, while plunging 16% in January. Prices edged higher early on reports Saudi Arabia has called for an emergency OPEC+ meeting to discuss the oil market in light of the coronavirus outbreak. Gold prices edged lower, down -$1.30 or less than 0.1% to $1,587.90 an ounce but ended the month up nearly 4%, around 7-year highs as fears over the coronavirus outbreak and negative impacts it may have on global economic growth helped boost its appeal.

Currencies & Treasuries

·     Treasury yields tumbled across the board given the extended rotation into safe-haven related assets with the 10-year sliding over 5 bps to 1.52%, the U.S. 30-year yield falling below 2% for first time since October (1.995% lows) and the 2-year yield slumped over 8-bps to 1.32%, its lowest since September 2017. The U.S. dollar dropped sharply following the weaker than expected reading in the Chicago PMI manufacturing report (worst levels since late 2015), giving back earlier weekly gains, while the Japanese yen rose 0.5%, and the British Pound jumped 0.75% to highs of 1.32, best levels in about a month as today market the UK exit from the EU.

Sector News Breakdown

Consumer

·     Retailers; AMZN shares surged to a record high before paring gains as the company’s market cap topped $1 trillion after Q4 results were well above consensus – revenue upside driven by strong holiday sales, AWS growth, and advertising strength, as well as operating income upside as Q4 net sales in North America jumped 21.6% to $53.67B topping the $52.2B est.; DECK upgraded at Jefferies to buy and tgts raised by analysts after a standout Q3 that saw Hoka grow an impressive 64% and drove upside to sales while UGG grew +2.6% globally and grew +8% domestically; LEVI another earnings related mover – says closes half its stores in China

·     Consumer Staples; CL shares jumped amid a bounce in organic sales growth, rising over 5% YoY and strength in Latin American pricing up 3.5% offset a decline in pricing in the U.S. (better sales on in-line EPS); COTT to sell S&D Coffee and Tea to Westrock Coffee Company, LLC for $405M on a debt free and cash free basis; in tobacco, MO upgraded to overweight at Piper with $57 tgt as believe Altria can deliver 6% average EPS growth in 2020-21, driven by pricing, cost savings, buybacks and equity income; PM was added to the negative watch list at Citigroup as believe the 4Q results/guidance may be quite difficult and more importantly we expect PM to guide to slower growth in 2020, in terms of organic sales, margins and EPS; LK broke below its 50-day MA support earlier of $35.73 as China virus fears take its toll and also mentioned negatively by short-seller Muddy Waters (off record highs of $51.38 on 1/17) – though Citron Research responds by saying thinks report falls short on accuracy saying LK business is “on fire in China”

·     Auto’s; ADNT shares surged after agrees to sell its 30% stake in Yanfeng Global Automotive Interior Systems to Yanfeng Automotive Trim Systems for $379M (sale is part of a broader amendment to its joint venture with Yanfeng, while posts solid Q1 EPS/revs beat; global auto industry feeling pain from slowing global growth fears on virus impact (F, GM, TM, NSANY); ORLY downgraded to neutral at JPMorgan giving mounting concerns on a record warm winter, moderating consumer, fading inflation tailwinds

·     Housing & Building Products; the sector has been a beacon of strength over the last few months with mortgages rates falling once again and earnings results stellar, but the group declined today with the broader market; BZH massive underperformance in homebuilders, down over 20% at lows (falling from 52-week highs the day prior) after being downgraded at Wedbush post earnings as they believe BZH has some company specific issues that could be detrimental to our outlook over the next 3 to 4 quarters.

Energy

·     Major oils and Dow components XOM and CVX both reported earnings: 1) CVX posted its biggest loss in a decade after it wrote down the value of North American natural gas fields and returns plunged from overseas refining and oil production/most of the Q4 loss from $10.4B in previously announced impairments (also saw profit fall from int’l downstream and upstream divisions); 2) XOM said its profit and revenue fell for Q4 though the results beat analysts’ expectations though results included $3.7B gain from the sale of upstream assets in Norway to Var Energi.

·     Refiner sector; MPC shares react after reports late Thursday it is exploring sale of its gas station and convenience store business, Speedway, alongside an IPO according to a Bloomberg; PSX shares slipped early after missing Q4 earnings expectations, hurt by lower realized margins and higher turnaround activity at its refineries.

·     Other energy news; EQNR and partner Royal Dutch Shell (RDSA) said they have paid a combined $355M to jointly acquire SLB’s 49% interest in Argentina’s onshore Bandurria Sur block as each partner bought a 24.5% interest in the block that covers ~56K gross acres; the Baker Hughes (BKR) rig count down -4 to 790, with oil rigs down -1 to 675 and gas rigs down -3 to 112.

Financials

·     Consumer finance and lending; Dow component Visa (V) reported F1Q20 adjusted EPS of $1.46, in line with the Street but pretax income of $4.0B was ~$70M below the Street, mostly due to higher expenses while also reflecting greater than expected F/X headwinds, muted cross-border trends; CACC shares dropped after being downgraded to sell at Janney after earnings saying the bulk of the miss was in the provision expense line which came in 14% above their estimate, while also noting a sharp drop in volume per active dealer accompanied by a drop in active dealers.

Healthcare

·     Pharma movers; VRTX posted better-than-expected Q4 profit of $1.70 EPS, well above the $1.21 estimate helped by revenue from its cystic fibrosis drug Trikafta while saying it expects 2020 total products revenue of $5.1B-$5.3B ahead of the $4.9B estimate; GBT was downgraded to hold and lower tgt of $75 from $110 at SunTrust as see near and mid-term headwinds as the company enters the launch phase in earnest; SNDX entered into an agreement with five leading life sciences investors, for the purchase of common stock at $8.00 per share, for expected gross proceeds of ~$35M

·     Biotech movers; AMGN shares slump after issuing 2020 EPS guidance of $14.85-$15.60, below consensus estimate of $16.14 as Q4 product sales fell 2% to $5.88B, hurt by increased competition from biosimilar and generic versions of its chemotherapy drug Neulasta (as sales fell 43% to $665M while Sensipar sales plunged 76% to $107M) – downgraded at Baird; JPMorgan with a few changes as they upgraded shares of ARNA, UTHR while downgraded ITCI, RUBY in a rebalancing of ratings; ADRO tgt raised to $7 at Leerink saying the company’s is testing ADU-S100 (MIW815) in three separate early and mid-stage trials to treat lymphomas and recurrent or metastatic head and neck squamous cell carcinoma; ESPR said the European Medicines Agency’s advisory group CHMP adopted a positive opinion backing approval of its Nustendi

Industrials & Materials

·     Industrial & Machinery; NAV shares surge after Volkswagen’s Traton offered to acquire the rest of the company it doesn’t already own at a price of about $2.9B or $35 per share, in cash https://on.mktw.net/37FWAKo ; CAT posted better Q4 EPS but guided 2020 EPS $8.50-$10.00 vs. est. $10.55 as sees global economic uncertainty pressuring sales/expects dealers to further cut inventories after having cut machine, engine inventories by about $700M during 4q; HON posted mixed Q4 results (EPS beat, sales miss) while guides year sales to $36.7B-$37.8B, below the $38.1B estimate and organic sales flat to up 3% for the year

·     Chemicals; SSL shares drop after saying that it expects to report a fall in its key earnings metrics for the 1H’20, blaming a weak economic environment – said EPS are expected to drop 68%-78% and Ebitda to fall between 22%-32%; CE shares slide as earnings and revenue fell, missing estimates while company also recorded over $100M in net other charges; LYB drops with weak Q4 amid broadly lower chemical margins as Q4 Ebitda fell -3.3% YoY to $1.17B below the $1.33B estimate while overall sales fell roughly 8% also missing estimates

·     Transports; DAL said it has decided to temporarily suspend all U.S. to China flying beginning Feb. 6 through April 30 due to ongoing concerns related to the coronavirus; USAK shares dropped to 52-week lows after reporting a larger-than-expected quarterly adjusted loss and gross margin plummeted to 11.5% of sales from 14.6% a year ago; airlines SKYW, HA active after earnings; ARCB another trucker sliding on weaker results as revs fell short of consensus

·     Metals sector; steel maker U.S. Steel (X) posted a smaller-than-expected Q4 loss with total shipments of 3.5M tons vs. 4.02M tons, while cut its dividend further and said it currently expects Q1 to be the trough for the year due to the normal seasonality of its mining operations and lower Q1 shipments in Flat-rolled; Citigroup noted U.S. steel imports fell 17% in 2019 and are now 27% or 9 mt lower than in 2017 (pre-Section 232); NUE was downgraded to neutral at Goldman Sachs noting the company put together a much better-than-guided 4Q19 and offered optimism on the domestic steel markets into 2020, but they came away from the earnings call with a less constructive view on the company’s capital spending and cash flow outlook

Technology, Media & Telecom

·     Software movers; EA reported Dec. quarter results slightly ahead of consensus driven by strong sales of Star Wars Jedi: Fallen Order, while FY20 EPS guidance was raised by more than the Dec. quarter beat, but remains below consensus; PFPT results top expectations for billings, revenue, margins and FCF as the company continues to deliver on all fronts. Revenue and billings upside was driven by strong competitive win-rates/strength in emerging products

·     Media & Telecom movers; in media sector, WWE shares dropped sharply after saying its co-presidents, George Barrios and Michelle Wilson, would depart after 10 years of service, prompting at least two analyst downgrades saying the abrupt nature of release suggests a tumultuous situation at the company; CHTR shares touch 52-week highs after Q4 profit and revenue topped estimates while saying it lost -101K pay TV subscribers/said Q4 total residential and SMB customer relationships increased by 268,000, compared to 248,000 YoY

·     Hardware & Component news; IBM shares very strong after CEO Ginni Rometty, who has held the position for 8 years said would step down while IBM’s current cloud business head Arvind Krishna will take over, effective April 6 (Krishna lead IBM’s $34B acquisition of Red Hat last year); in the EMS sector, FLEX shares rise after Q3 EPS and revs well above views as a result of continued growth in industrial segments, energy, automotive businesses and as well as continued progress on executing mix strategy; INVE negatively preannounced Q4 and lowered `20 guidance due to a variety of factors including pushouts, customer weakness, and headwinds from customers (expects net loss of $2.1M-$2.2M in quarter compared to a profit a year earlier)