Closing Recap

Friday, July 17, 2020

Equity Market Recap

·     U.S. stocks finish the week mixed as the Dow slips but S&P rises and after a few days of underperformance (though following weeks of outperforming to record highs), the Nasdaq Composite pushed to afternoon highs late day, getting a big boost from biotech as the IBB rises 2% to record highs led by vaccine names. Those vaccine plays get a major boost on the day with big gains for MRNA (record highs), AZN, DVAX, NVAX (record highs), VRNA all soaring as well as BNTX, INO, APDN see double-digit gains. Large cap tech saw additional selling pressure as AMZN falls -8% this week (down 5-straight days off record highs), MSFT -5% and NFLX -11% on week (mostly from overnight earnings/sub miss) as big tech takes a breather after record run for each name. Transportation stocks outperformed behind better earnings results for truckers (JBHT, MRTN) and rails (KSU) with more earnings in the space expected next week. Energy stocks mixed as oil prices close the week out flat, while gold rises. Economic data was mixed (better housing starts but weaker sentiment data), but has generally showed improvement, while surging COVID-19 cases in the U.S. and its impact on slowing reopenings weighs on sentiment.

·     Stocks overall have held up remarkably well the last few weeks despite coronavirus cases surging all over the country as ABC News the U.S. saw a 18.4% increase in new coronavirus cases from the previous week (including a record +70K cases Thursday), which has prompted several U.S. states over the last week to institute mandatory mask wearing outdoors (Alabama, Colorado, Arkansas, California, New Jersey among them). The headlines have stunted the rally in sectors hardest hit from the pandemic such as cruise lines, airlines, restaurants, retailers and leisure, seen again today. The U.S. dollar erased some of yesterday gains, pulling lower following the weaker than expected University of Michigan Sentiment reading for July prelim. Oil prices dip on signs that the recovery in oil consumption may be starting to slow. This week earnings was dominated by financials with GS and MS among the biggest winners and WFC, RF among losers, though nearly all banks reported rising provision for credit losses, well above estimates. Next week sees earnings from TSLA, MSFT, KO, PM, SNAP, TXN, UAL, CMG, LVS, DOW, T, TWTR, SWKS, INTC, AXP, HON, SLB, HAL, VZ to name a few of the big ones.

Economic Data

·     June housing starts rise 17.3% to 1.186M unit rate (mostly in-line with the 1.169M est.) while May was revised higher to 1.011M from 974K; June single-family starts +17.2% to 831,000 unit rate and multifamily up +17.5% to 355,000 unit rate. June building permits rose 2.1% to 1.241M annual rate vs. est. 1.29M while May steady at 1.216M

·     University of Michigan consumers sentiment prelim July was 73.2, below the consensus 79.0 and below the final June reading of 78.1; the current conditions index prelim July 84.2 vs. final June 87.1 and expectations index prelim July 66.2 below final June 72.3

Commodities

·     Oil prices dripped lower, with WTI crude down 16c to $40.59 per barrel as markets continue to balance expectations of stimulus program with the recovery in fuel demand as coronavirus cases surged, while major crude producers prepared to lift output in August. The United States reported at least 75,000 new COVID-19 cases on Thursday, a daily record. Prices fell Thursday after OPEC+ countries agreed to trim record supply cuts of 9.7 million barrels per day (bpd) by 2 million bpd, starting in August. The actual rise would be closer to 1 million bpd because Iraq and other countries, which produced more than their quota from May to July, would make extra cuts in August and September. Prices got a boost early in the week on better China data and bullish weekly inventory data. Gold prices rise $9.70 or 0.5% to settle at $1,810.00 an ounce, settling the week higher by the same figure (0.5%), again helped by a weaker dollar and rising COVID-19 fear.

Currencies & Treasuries

·     New day, same story as the U.S. dollar continues to show weakness against major rival currencies while Treasury prices remain strong and yields are at/or near their record lows as markets continue to exhibit some concern about the impact of the COVID-19 virus on the economy. Economic data points have definitely improved month over month, but seeing some small signs of slowing this week (jobless claims came in above views yesterday and sentiment slipped as unemployment benefits are set to expire for many at the end of the month). The 10-yeat yield ended around 0.62%, while shorter-term treasury yields remain at record lows.

Coronavirus update

·     U.S. CDC reports 72,045 new coronavirus cases as of yesterday; total cases now 3,555,877 vs 3,483,832 in previous report on July 16 and reports 926 new deaths due to coronavirus as of yesterday; total deaths now 137,864 vs 136,938 in previous report. NJ says virus transmission rate rises to highest level in weeks. Florida coronavirus cases rise by 11,466 on Friday to a total of 327,241. Arizona virus cases rise 2.9%, above prior 7-day avg. 2.6%. California reports 9,986 new virus cases vs 8,241 14-day avg.

Sector News Breakdown

Consumer

·     Retailers; AMZN down for 5th straight week off record highs; the retail sector continues to slip amid slower state reopenings as well as increased mandates for mask wearing outdoors as coronavirus cases surge this week in the U.S.; YETI tgt raised to $60 from $50 at Jefferies as continue see significant opportunity for YETI to expand its TAM as it broadens to non-heritage markets in the US and internationally (price target also raised at Citi – up to $51); mall based operators M, JWN remain pressured

·     Consumer Staples & Restaurants; in Food service equipment, Citigroup downgraded WBT to neutral as latest round of industry checks points to a more cautious 2H outlook for commercial FS equipment; FRGI shares rallied after saying there was "significant" sequential improvement in same-store sales through first two weeks of July/1 of July, comp sales of Pollo Tropical restaurant improved to ‑12.2% from ‑49.2% in April while Taco Cabana improved to -13.4%

·     Housing & Building Products; Bank America raised tgt on LOW to $170 from $160, and on HD to $275 from $260 as home improvement spending in June ’20 continued to soar, while broader indicators of economic growth remained weak; ZG tgt raised to $75 from $60 at JMP Securities saying housing looks stable and growing, backing the company’s Premier Agent business; gain in homebuilders early on record low 30-year mortgage rates and strong monthly housing starts data (DHI, PHM, MDC)

·     Casino & Leisure movers; in cruise lines, NCLH 16.7M secondary priced at $15.00 per share; in auto movers; Volvo (VLVLY) reports Q2 sales decline of 39% Y/Y and -38% on a constant currency basis. Vehicle sales decreased by 46% and service sales by 15%/sales dropped 39% in Europe, -61% in North America and -54% in South America. Trucks net sales -46% and Buses net sales -64%; NIO was downgraded to sell with $7 target at Goldman Sachs as believe the current share price reflects over-optimism given no substantial changes to volume/profit expectations

Energy

·     Energy stocks lagged as oil prices while defensive utilities were firmly higher for a second straight session as lower yields continue to make the sector attractive; solar stocks were mixed a day after shares tumbled as federal regulators on Thursday imposed new limits on which energy projects fall under the Public Utility Regulatory Policies Act, known as Purpa – Bloomberg noted that more than 30% of solar facilities online today benefit from the law and the new changes may alter those projects’ future prospects and eliminate a key incentive for future ones; PCG shares active after California investigators conclude that its power lines ignited last year’s Kincade wildfire, which forced the evacuation of tens of thousands of residents and destroyed hundreds of structures in Sonoma County wine country. The Baker Hughes (BKR) showed oil drillers fell for an 11^th straight week to record lows – total oil rig count fell 1 to 180 and gas rigs down 4 to 71

Financials

·     Bank movers; STT reported Q2 EPS more than 20c above street driven by better than expected fee revenue, despite lower NII (better fee revenue which decreased 0.9% q/q but increased ~5% yoy and NII down ~16% q/q and down 9% yoy as per Bank America); RF reported a worse-than-expected loss of (25c) vs. estimate for a profit as well as a credit loss provision topping net charge-offs of $700M citing adverse conditions and significant uncertainty around the economic outlook from COVID; SNV was downgraded to underperform at RBC Capital and lower tgt to $16 driven by the implications of our updated recession outlook, which include higher credit losses with expectations of dividend cuts sometime next year; CFG, FHN, BLK also rise on earnings; Citigroup (C) was downgraded by Odeon’s Dick Bove saying it can’t grow w/o making loans

·     Consumer finance and lending; TREE raised guidance saying Q2 revenue is now anticipated in the range of $182-$186M, above the prior $160M-$175M and adjusted EBITDA is now anticipated to be $28M-$32M from prior $12M-$18M view; ALLY top and bottom line beat while qtrly provision for credit losses up $110M to $287M due to Covid reserve build

Healthcare

·     Pharma movers; KPTI said it has entered into a cooperative research and development agreement with the National Cancer Institute’s Cancer Therapy Evaluation Program; FOLD reiterates 2020 Galafold revenue of $250M-$260M and 2020 operating expense guidance; VRNA rises after announcement of $200M private placement at $4.50 per share; CYTK 7.292M share Secondary priced at $24.00

·     Biotech movers; Reuters reported that the EU was in talks with MRNA, BNTX and Curevac for purchase deals on possible covid-19 vaccines; MGTX rises after Janssen Pharmaceutical Companies of JNJ said it expects the study of a RPGR Gene Therapy jointly developed by the two companies to progress to phase III; NVAX up for a 5th straight day on vaccine hopes after yesterday Wainright rose tgt to $132 saying believes a global market exists for SARS-CoV-2 vaccines that could peak at approximately $10B in 2023, and projects Novavax’s vaccine candidate, NVX-CoV2373, as annually sustaining 10% market share; ALXO 8.5M share IPO priced at $19.00; BLI 8.1M share IPO priced at $22.00; PAND 7.5M share IPO priced at $18.00

·     Medical equipment and devices; APDN reported positive results from preclinical studies of its COVID-19 vaccine candidates, being developed by partner Takis Biotech/says all five of its LineaDNA vaccine candidates showed strong antibody responses at low doses in mice studies; RNLX 5.5M share IPO priced at $13.50; LMNX rises on the heels of U.S. emergency use authorization for its xMAP SARS-CoV-2 IgG antibody test.

·     Healthcare services and providers; ALGN tgt raised to $350 at Stifel saying current diligence lays out the long-term bullish thesis (teen share-of-chair; resilient Adult market; limited competitive inroads and pricing tailwinds); AHPI, LAKE and APT remain strong as companies continue to benefit from the mask wearing mandates by many states this week

Industrials & Materials

·     Industrial & Machinery; DOV was upgraded to outperform at Baird as expect DOV earnings to be more resilient in the COVID-19 recession than peers(good cost execution momentum, better end-market mix in transports, rail, KSU Q1 EPS $1.15 on revs $547.9M was mixed vs. $1.11 and $553.6M estimate; truckers higher after JBHT reported Q1 EPS $1.14 on revs $2.15B vs. est. 83c while MRTN Q2 EPS 33c vs. est. 23c and revs $212.4M was above the $205.5M estimate

·     Metals & Materials; HL was upgraded to Sector Perform from Underperform at RBC Capital and raises his tgt to $4.50 from $2.50 as believe the risk/reward profile is more balanced as we look toward forecast operational/financial improvements in 2H20; in chemicals, ASH shares advanced following earnings results and PPG posted a top and bottom line quarter beat

Technology, Media & Telecom

·     Internet; NFLX one of the biggest drags in tech following mixed Q2 results (EPS missed while revs beat) but issued a weaker Q3 subscriber outlook (sees 3q streaming paid net change +2.50M, below est. +5.12M and guides Q3 revs $6.327B vs. est. $6.4B) – said Q2 rose 25% year over year while streaming ARPU increased 0.4% YoY – added a net 10.1M global streaming subscribers; RMBL shares surge after CARG announced late yesterday it would use the co’s technology and transportation and distribution services; LRN adds to weekly gains after positive Citron comments this week; shares up 24% in the last 3-days (strength in general in online education – CHGG, TWOU recently)

·     Software, Hardware & Component news; ERIC rises after better results, buoyed by strong 5G sales; company keeps 2020 and 2022 targets unchanged (no 2021 guide); NTNX shares surged after The Information reported they identify seven companies we think are acquisition targets, including Quibi, TikTok, search engine Neeva and enterprise software firm Nutanix https://www.theinformation.com/articles/the-informations-takeover-target-list