Closing Recap

Friday, July 10, 2020

Equity Market Recap

·     U.S. stock continue to defy expectations, with major averages surging, erasing the brief blip lower the day prior as the Nasdaq Composite reaches another record high (third straight record in a row and its 27th of 2020) paced once again by large cap (TSLA, GOOGL, AMZN, AAPL, NFLX reach record highs). Based on the action of global stock markets (China up over 15% this week) with well more than 45% advances from the March lows for major US averages, no one would believe that we are still in the middle of a global pandemic where COVID-19 cases surged yet again this week in the U.S. and many stores and restaurants remain on customer restrictions if they are open at all! The S&P 500 and Dow advanced today as a positive update from Gilead’s antiviral drug to treat COVID-19 countered nerves over a record rise in coronavirus cases, as its Remdesivir significantly improved clinical recovery and reduced the risk of death in COVID-19 patients, additional data from a late-stage study showed. Note several states have already back-pedaled on reopening plans, with rising hospitalization levels in various areas, but markets showing absolutely no fear to this point as even the travel and leisure names re-rated higher today with cruise lines and airlines the top gainers in the S&P Friday. Record monthly payrolls additions last week along with improving manufacturing data points to a revival in business activity in June have fueled the U.S. stock market’s stimulus-driven rally, along with hopes for additional government stimulus/relief efforts that are being considered. Attention turns to earnings next week, in particular for badly beaten U.S. banks with results from JPM, Citi, WFC, BAC, GS, MS and a handful of regional names expected next week. Treasury yields bounce off lows as stocks recover – 10-yr back above 0.63% (off lows 0.567% for the 10-yr), while gold prices rise for a 5^th straight week and gold ends the day higher, but lower for the week.

Economic Data

·     Producer Price Index (PPI) falls an unexpected (-0.2%) vs. est. +0.4% for June MoM while core prices dropped (-0.3%) vs. est. +0.1% MoM; YOY PPI for June plunged (-0.8%) vs. est. (-0.2%) and core PPI YoY rose 0.1% vs. est. (-0.2%)

Commodities

·     Oil prices closed the day higher, with WTI crude up 93c or 2.35% to settle at $40.55 per barrel, but still ended the week lower by a modest -0.2% as the spread of the coronavirus pandemic continued to threaten a recovery in the economy and crimp demand. Inventory data was mixed this week with bearish inventory data but bullish gasoline stockpile data.

·     Gold prices posted its 5^th straight week of gains, rising 0.7% over the last 5-days, though ended the day lower slipping -$1.90 to settle at $1,801.90 an ounce. Gold prices touched fresh 9-year highs earlier this week as the spread of the coronavirus and a declining dollar helped boosted the precious metals appeal as a hedge.

Currencies & Treasuries

·     The U.S. dollar ended the day little changed overall, though dropped -0.5% on the week for the dollar index (DXY), while Treasury prices reverse from morning lows as investors rotated back into stocks late morning, pushing Treasury yields highs (10-yr bounce off 3-month lows around 0.56% to afternoon highs above 0.63%.

Coronavirus update

·     Florida covid-19 cases rise 4.9% or over 11K vs. previous 7-day avg. 4.7% as Florida resident covid-19 deaths rise by 93 vs. previous 120 and positivity rate at 12.8% vs. 18.4% prior; Arizona virus cases rise 3.7%, matching prior 7-day average; New York had 0.2% rise in cases, consistent over the last two-weeks. California reports 7,798 coronavirus cases vs 7,031 yesterday. Wisconsin coronavirus cases rise by record 889 to 38,099 total on Friday, record increase second day in a row as per Reuters which also said Ohio coronavirus cases rise by 1,525 to 62,856 total on Friday, biggest daily increase since pandemic started.

Sector News Breakdown

Consumer

·     Retailers; footwear and apparel active after Susquehanna upgrade FL to positive) and CAL to neutral) and raise tgt to $34 from $25 on FL while raises estimates on CROX and takes the price target up to $50 while keeping it as top pick in the footwear and apparel space (also raised ests on DECK, HIBB, SKX to reflect the benefits of the increased consumer spending); EXPR said it has reopened ~95% of its stores, traffic and sales have steadily improved and e-Commerce demand was positive in the month of June/comp sales for open stores sequentially improved from -50% in early May to ~-15% by the 3rd week in June; WDFC quarterly miss on both top and bottom line

·     In mattresses, SNBR upgraded to buy at Piper with $65 tgt saying mattress demand trends are bouncing back faster than expected, even for premium bedding/Google search for “Sleep Number” increased year-over-year in mid-April and has trended up by an average of +13% YoY (also note KeyBanc said they were encouraged by the performance during the holiday week, which they believe bodes well for TPX, PRPL, SNBR, AAN, and RCII)

·     Consumer Staples; BYND was initiated with a sell and $123 tgt at Citigroup as sees margin pressure on Beyond Meat due to the high operating costs; PEP to report earnings next Monday as first name in Staples sector; stay at home grocers and food names remain volatile as investors weigh the rising coronavirus cases and stay at home measures

·     Casino & Leisure movers; HOG was upgraded to sector perform at RBC Capital saying key is 2021 where setup especially favorable for HOG given easy retail comps/need to restock dealers (notes aggressive inventory mgmt now means an ugly 2H’20); in cruise lines, CCL said to accelerate removal of ships for FY20 – reports Q2 EPS loss $6.07) and revs $740M with $4.37B loss (cruise lines advanced early following the company update)/said secured over $10 billion of additional liquidity to withstand another full year in a $0 revenue scenario; in auto, TSLA surged to new record highs topping $1,480, up over 5% another round of short covering taking it higher – also lots of speculation of joining the S&P 500 from several articles overnight https://bit.ly/3iRU9dB

·     RV sector surged, led by gains in CWH after Stephens raised its tgt today to $33 and ests well above consensus as checks reveal a dramatic recovery in biz levels in May and June w strong consumer demand driving unit sales, GPU expansion and cost cutting efforts – driving significant op leverage (lifting the RV space – PATK, THO, WGO)

Energy

·     Energy stocks moved with oil prices, which bounced after earlier losses this week; PSX was reiterated as Overweight at Wells Fargo, albeit with a lowered price target of $88 from $92; FANG was included on Bank of America’s Best Small and Midcap Picks for Rest of 2020, while its subsidiary RTLR announced a $500M offering; RDSA announced plans to idle 1 of its 6 sulfur units at a Texas refinery; CTRA was downgraded at Benchmark to Hold from Buy; Baker Hughes (BKR) weekly rig showed the total U.S. Rig Count fell -5 rigs to 258 with oil rigs down -4 to 181, gas rigs down -1 to 75, and miscellaneous rigs unchanged at 2. Baker Hughes said US drillers cut oil and gas rigs to record low for 10th straight week

·     Utilities; DTE’s proposal to keep electric rates unchanged until 2022 was approved along with its renewable energy plan by Michigan’s Public Service Commission; AEP was mentioned positively at Argus for investors seeking regular dividend payments in the current low-yield environment; ELLO announced it has secured $9.2M in commitments from Israeli investors

Financials

·     Bank movers; CMA upgraded to outperform with $49 tgt along with WFC at RW Baird in banking space ahead of earnings starting next week for financials; KEY was downgraded to Underperform and cut tgt to $12 at Bank America saying it has greater risk of a dividend cut vs. peers; and has greater exposure to industries at higher risk of default in a COVID-induced downturn, at ~20% of total loans vs. 14% at peers; MC downgraded to Neutral at Piper saying while still has confidence in the strength of its franchise, they find it difficult to recommend adding to positions given the combination of macro-uncertainty facing M&A activity levels and MC’s increasingly apparent lack of expense flexibility; Consumer finance; PYPL little pullback after surging to record highs the last 2-weeks along with SQ amid surge for contactless payment systems during COVID -19 pandemic; earnings start next week for financials with JPM, C, WFC Tuesday, BK, GS, PNC, USB on Wednesday, BAC, MS on Thursday and ALLY, BLK, CFG, FHN, RF Friday

Healthcare

·     Pharma movers; GSK slips after the U.S. FDA said it would review GlaxoSmithKline’s experimental treatment for multiple myeloma, a common form of blood cancer, for a reported side-effect which affects the eyes of patients; CNTG 3.5M share Secondary priced at $14.00; NKTX 14M share IPO priced at $18.00; PSTX 14M share IPO priced at $16.00

·     Biotech movers; GILD rises after additional data on the company’s remdesivir drug shows improved clinical recovery as 74.4% remdesivir-treated patients recovered by day 14 and Remdesivir associated with 62% risk cut in mortality

·     Medical equipment and devices; IART announced that it expects 2Q20 revenue to be in the range of $254.0M (-33.8% Y/Y) to $256.0M (-33.3% Y/Y) which was above consensus of $246.7M – but analysts caution results reflect MoM improvements in business trends that culminated with declines of 15% YoY compared to June 2019

Industrials & Materials

·     Transports; MATX shares rise after guidance was well ahead of consensus yesterday; said it sees Q2 operating income for Ocean Transportation to be $40.5M-$42.5M vs. $19.7M YoY; and sees Q2 EPS 70c-75c vs. est. 12c saying China service strength, including additional vessel charters, primarily drove increase in operating income; in rail, GBX reported quarterly results that topped expectations

·     Airlines; space saw a small bounce today after recent selling pressure; AAL has threatened to cancel some of its orders for BA’s troubled 737 max jets the WSJ reported saying the airline has struggled to secure financing for 17 of 737 max jets it had expected Boeing to deliver this year; HA said in a filing it continues to experience significant operating losses as travel is slowly recovering from the coronavirus pandemic, and the company expects to make some job cuts.

·     Metals & Materials; in the timber sector, CTT upgraded to outperform at RBC Capital as see Timberlands as an attractive asset class due to their steady income characteristics and long lifespan; RBC also upgraded PCH to outperform and up tgt to $45 citing a more attractive backdrop like very strong North American softwood lumber markets and record-low rates; in chemicals, BASFY said 2q operating result above market expectations; in metals, gold miner EGO reports Q2 preliminary gold production of 137,782 ounces, up 50% from a year earlier

Technology, Media & Telecom

·     Internet; AMZN tgt raised to $3,550 from $2,700 at Citigroup saying total U.S. retail sales are only expected to grow 1% in 2022 compared to 2019 while E-commerce is expected to grow 43% in that period while brick-and-mortar falls 4%, according to eMarketer data; NFLX was reiterated a buy and $670 tgt at Goldman Sachs saying they believe shares advance has been driven by growth in content on the platform, a lack of competition for entertainment hours and spend driving churn lower as well as many stay at home orders; online education names (CHGG, TWOU, LRN) have seen big moves already on remote learning, potential for rising volatility as schools make determinations for Fall; GOOGL, NFLX, AMZN, all record highs

·     Semiconductors; chip names were mixed as the Nasdaq Comp saw pockets of strength and weakness (semis hit record highs yesterday; NVDA tgt raised to $500 at Rosenblatt as continue to like the Nvidia story over the long-term, as we see the secular shift to data processing units within the data center (tgt also raised to $461 at RBC)

·     Software movers; FSLY downgraded to Underperform from Buy at Bank America while raising the tgt to $90 from $50 saying fundamentals are intact but valuation is difficult to justify/also adds that stock is proving to be the most expensive in its coverage; PI tgt raised to $35 at Piper and $34 at Needham as view Impinj as a market leader in RAIN enabled connectivity as the market grows from billions to trillions of items connected per year; TWLO tgt raised to $280 at KeyBanc saying its First Look Data for credit and debit cards suggest an ongoing recovery in Twilio’s Consumer on Demand; Cloud services firm Rackspace Technology Inc., owned by private equity firm Apollo Global Management, filed for a U.S. initial public offering on Friday.