Closing Recap

Tuesday, July 28, 2020

Equity Market Recap

·     U.S. stocks ended lower as defensive sectors outperformed, with Consumer Staples, REITs and Utilities among the top gainers in the S&P 500 today in what appeared as a search for yield, while technology stocks dropped late day, led by large cap tech names. CNBC noted that a whopping 64 S&P 500 companies, or about 13% of the index is reporting earnings on Thursday – but to get a sense of the scale that day, those 64 companies represent 29% of the S&P 500’s market cap (includes FB, AAPL, AMZN, GOOGL next two-days). Outside of the onslaught of earnings, there are still several potential market moving catalysts on the near-term horizon, including the FOMC meeting details tomorrow, and the finalization of the COVID-19 stimulus bill out of Washington (while COVID vaccine news and China tensions remain key drivers as well). Earnings results in the Dow today were mixed with MMM, MCD falling on misses while PFE and RTX advanced following their results. Weaker consumer confidence for July did not help sentiment this morning (index for July falls to 92.6 from 98.3 prior month and below consensus of 94.5).

·     U.S. Senate Republicans announced on Monday a $1 trillion coronavirus aid package hammered out with the White House, but the proposal sparked immediate opposition from Democrats who decried it as too limited and some Republicans who called it too expensive. More talks are expected later this afternoon with both Republicans, Democrats and Treasury Secretary Mnuchin. The HEALS Act, a $1 trillion coronavirus relief bill that includes money for health, testing, schools, liability protection, and small businesses; $1200 stimulus payments to Americans; and $200/week extra in unemployment insurance. The Fed is expected to reiterate its accommodative stance when it wraps up its two-day policy meeting on Wednesday afternoon. The dollar was mixed on the day while gold touched a record high for a 3^rd straight day and oil prices ended lower ahead of weekly inventory data.

Economic Data

·     S&P CoreLogic Case-Shiller National Home Price index rose 4.46% y/y in May after rising 4.61% in prior month; S&P/Case-Shiller 20-city NSA index at 224.76 after 223.92 in April; the 20-city SA index rose 0.04% m/m in May after rising 0.24% the prior month; national home price index rose 0.1% m/m in May after rising 0.41% the prior month

·     Consumer confidence index for July falls to 92.6 from 98.3 prior month and below consensus of 94.5; the expectations index was 91.5 in July vs. June revised 106.1 and the present situation index 94.2 in July vs. June revised 86.7

·     Richmond Fed Index jumps to a positive reading of 10, above last month unchanged and topping the consensus view of up 5

Commodities

·     Oil prices settle lower, as WTI crude dropped 56c or 1.35% to finish at $41.04 per barrel, sliding on signs that market fundamentals are getting shakier, though there was broader support from the recent slide in the dollar. Oil markets prepare for weekly inventory data tonight (API) and tomorrow (EIA) which was mostly bearish last week with surprise builds.

·     Gold prices end higher, reaching a record closing high for a 3^rd consecutive session (now up 8-straight days) as August gold futures rise $13.60 or 0.7% to settle at $1,944.60 an ounce, while the more active December futures traded as high as $2,000 before paring gains. This morning, Goldman Sachs said with more downside expected in US real interest rates, they are once again reiterating our long gold recommendation from March and are raising our 12-month gold and silver price forecasts to $2300/t oz and $30/t oz respectively. Gold prices gained ahead of tomorrow’s FOMC meeting results, which is expected to remain dovish in comments. September silver fell by 20 cents, or 0.8%, to settle at $24.30 an ounce after tapping a high of $26.275, the highest intraday level for a most-active contract since April 2013.

Currencies & Treasuries

·     The U.S. dollar no lift ahead of tomorrow’s FOMC meeting results, having fallen over the last few days to 2-year lows, with a big jump in the euro and British Pound. Economic data had been strong in June, but we’re starting to see a dip in July as evident by today’s consumer confidence pullback, and coupled with low interest rates and rising COVID cases in the U.S., investors have fled the buck over the last month (after touching 52-week highs in March).

·     Treasury prices remain strong, holding on to recent gains as the yields on the 2 and 10-yr remain in a tight trading range ahead of tomorrow’s FOMC meeting. The 10-yr yield was down about 3 bps to 0.587% and 2-yr lower by 1 bps to 0.138% while longer-term yields fell as investors waited for Washington lawmakers to reach a deal on coronavirus relief. Despite stocks having pushed to record highs recently for some major indexes, Treasury prices have not budged, stay strong amid low interest rates (CNBC noted the next interest rate hike expected by the Fed isn’t until August of 2022 – that is 8-months longer than the prior survey results) and amid a safe haven view.

Sector News Breakdown

Consumer

·     Retailers; DKS tgt raised to $47 from $43 at UBS as think DKS has enjoyed strong momentum lately, driven by consumers who have been eager to be active after lengthy periods indoors; FRAN shares rise as expects Q2 net sales of $67M-$71M, assuming comp sales decline of 16%-11% and cash and cash equivalents was $10M-$12M

·     Consumer Staples; MO reinstates 2020 full-year earnings guidance based on a better understanding of COVID-19 impacts on adult tobacco consumer purchasing behavior and an additional quarter of ABI earnings contributions/revises its full-year domestic cigarette industry adjusted decline rate to be in a range of 2%-3.5% from a range of 4%-6%; LW shares fall after missing FQ1 EPS estimates that saw a 17% drop in volume and foodservice revs fell -44% YoY; WSJ was positive on KR, ACI saying that the supermarkets deserve more credit for their solid results, given that they’re well-positioned to benefit from the coronavirus pandemic; CHD, PG, KMB, CAG, MNST, K among consumer staples trading at 52-week highs today

·     Restaurants; MCD another drag on the Dow Jones Industrial Average as 2Q adjusted EPS 66c missed the 74c estimate (and down from $2.05 YoY) while 2Q comparable sales fell -23.9%, slightly worse than estimates while revs fell -30% YoY, but narrowly beat estimates; SBUX expected to report earnings after the close tonight

·     Housing & Building Products; in building products, MLM 2Q EPS $3.49 topped the $3.03 estimate on slightly better revenue of $1.27B saying product demand remains strong and will reinstate full-year earnings guidance when it has sufficient visibility (the group slipped – VMC, SUM, EXP – after MLM comments seeing likely lower product demand across the industry over next few qtrs due to Covid); builder DHI Q3 EPS beat includes $38M tax benefit ($1.72 vs. est. $1.28) while Q3 net sales orders rose 38% Y/Y to 21,519 homes and 35% in value to $6.3B; AWI shares plummet after guidance after saying sees FY sales in the range of $1.04-$1.05 bln, an annual growth of 7%-8% vs previously guided range of 7%-10% while Q3 missed on sales side while EPS beat; HD traded to all-time highs today

·     Casino & Leisure movers; HOG mixed Q2 results as motorcycle shipments fell 59% in Q2 vs. -43% consensus. U.S. retail sales were down 27% Y/Y and EMEA retail sales were 30% lower; DKNG said the PGA Tour announces an expansion of its multi-year content and marketing relationship with the company, becomes "the official betting operator of the PGA Tour." PII Q2 profit easily beats views ($1.30 vs. est. 63c) and reinstates year guidance while saying quarterly North America retail sales rose 57% YoY, with both ORV and motorcycle retail sales up significantly

·     Auto movers; Bernstein downgraded TSLA from Market-Perform to Underperform, and maintaining our price target of $900 saying despite their relatively bullish stance on electric vehicle evolution, and structural advantages they believe Tesla may hold, we find it difficult to justify Tesla’s current valuation even under our most bullish/imaginative scenarios; UBER tgt to $44 from $47 and LYFT to $31 from $34 at Morgan Stanley as lower rides ests due to slower re-opening and Uber/Lyft’s 50-60% exposure to commutes/travel

Energy

·     E&P sector; big week of earnings coming up for majors such as XOM, CVX, COP later this week and shale firms such as PXD, EOG, PE and CLR NOV posted better-than-expected 2Q20 adjusted EBITDA of $84M, topping estimates around $60M despite revenue falling 20.6% sequentially as cost-cutting initiatives to "re-size the organization" have been gaining traction; CXO was upgraded to buy and tgt to $66 at SunTrust as believe the Street is missing the boat on 2020 FCF as we forecast nearly $1B this year versus ~$750mm Street consensus; MMLP shares slipped after Q2 revs dropped 25% amid weakness in transport and product sales while also cut its quarterly cash distribution to $0.005 from $0.0625 per unit and expands its cap-ex budget

·     Utilities & Solar; WEC agrees to acquire an 85% ownership interest in the Tatanka Ridge Wind Farm under construction in South Dakota from Avangrid (AGR) for $235M; DTE Q2 operating EPS well above expectations ($1.53 vs $1.29 est), reaffirms FY20 EPS guide ($6.47-$6.75) as mgmt citing cost reductions and warner weather for the beat; shares of FE and AEP remain active following recent 

Financials

·     Bank movers; as earnings season passes for the big banks and regional, attention turns to insurers and shortly FinTech which has seen strong returns over the pandemic (SQ, PYPL, while Visa (V) to report earnings tonight COWN said its strongest quarter ever was driven by capital markets activity in biotech and healthcare tools and diagnostics, and as an investment in electric-vehicle company Nikola added $64.9 million, or $2.21 per share, to economic operating income; in services, MSCI Q2 revenue was in line with expectations while EPS was ahead helped by cost control and lower tax rate offsetting higher interest expense.

·     Insurance; BRO reported a 6c EPS beat driven by national accounts segment; PFG also an EPS beat (16c) on stronger RIS Fee and specialty benefits, partially offset by weaker RIS spread while net flows were positive, especially at PGI; CINF with a 6c EPS beat on NII and expense ratio though most other metrics including cats were in line with pre-announcement.

Healthcare

·     Pharma movers; PFE reported a beat on the top and bottom line for Q2 while narrowly raised its profit and sales forecast for FY20; SPPI rises after the company’s drug, poziotinib, for previously treated non-small cell lung cancer, met the main goal of a mid-stage trial on Monday (the disease control rate (DCR) was 70% and the median progression free survival was 5.5 months)

·     Biotech movers; GILD shares active as Health Canada authorizes use of Remdesivir as Covid-19 treatment; TrialSpark, a tech-enabled drug development partner committed to improving the speed, quality, and innovation of clinical trials, today announced a collaboration with TORC; CRSP reported 2Q20 results and reaffirmed plans to report in 2H20 1) topline data from the phase I/II trial of donor-derived CAR-T CTX110 in B cell cancers and 2) updated data from the 2 phase I/II trials of ex vivo edited hematopoietic stem cell asset CTX001

·     Healthcare services and providers; in managed care, CNC slightly lowered its 2020 revenue forecast to between $109B-$111.4B from prior $110B-$112.4B view (but still above the Street) after posted adj Q2 EPS of $2.40, below estimates of $2.43 per share, hurt by rise in costs; EHTH shares adding to last week losses after Q2 churn weighed on shares (now cut by more than half from record highs of $152.18 in February); LH 2 profit and revenue beat estimates as company benefited from a surge in demand for its COVID-19 tests/says it is currently processing about 180,000 COVID-19 tests per day

Industrials & Materials

·     Industrial & Machinery; MMM shares slip (weighs on the Dow) after its top and bottom line Q2 (reported 12% decline in revs) consensus as coronavirus crisis hammers demand for its products, while continues to suspend guidance given uncertainty around the pandemic; OTIS 2Q adjusted EPS beat and upgraded guidance are underpinned by a surprisingly significant expansion of Service segment margin and resilient modernization sales; CMI Q2 EPS of $1.86 beats consensus view of $0.91 on better revs of $3.90B while saying expects Q3 revenue to improve from Q2; WAB rises as EPS 87c vs. consensus 73c as a result of better than expected topline (Transit drive beat), while operating Income better by 25%

·     Transports; the airline lobby group IATA says traffic is not growing as fast as airlines are adding capacity, with demand for flights disappointingly low so far/doesn’t see global air traffic recovering to 2019 levels until 2024; had seen recovery by 2023/domestic load factors in June at 62.9% on average but international only 38.9%; AAL maintained sell at Citigroup; JBLU daily rate of a $9.5b burn per day vs. $11m prior guidance (improvement the result of both better revenue and cost controls) and reiterating Q3 FCF burn guidance of $7-9m/ day; US Class I rail traffic under coverage (CSX, NSC, UNP, KSU) had some very slight deterioration from last week. Total traffic declined by 8.6%, vs. last week -8.3%; QTD -8.2%, driven by accelerated ex-intermodal decline at 15.6% (vs. last week -13.9; QTD -15.0%)

·     Aerospace & Defense; Dow component RTX beat top and bottom-line estimates helped by strong defense business; HXL reported a Q2 sales decline of 37.8% Y/Y to $378.7M, with Composite Materials sale of $321.6M (-36.4% Y/Y), Engineered Products sale of $72.9M (-41.7% Y/Y) and Commercial Aerospace sales $203.9 (-51% Y/Y) as gross and operating margins fell

·     Metals; Goldman Sachs said with more downside expected in US real interest rates, they are once again reiterating our long gold recommendation from March and are raising our 12-month gold and silver price forecasts to $2300/t oz and $30/t oz respectively from $2000/t oz and $22/t oz; spot gold fell after topping above the $2,000 an ounce level overnight, as the FOMC gathers today for a meeting that may provide more direction for traders

·     Chemicals & Materials; RBC Capital raised RPM’s PT to $93 and EBITDA multiple to 16x after solid FQ4 results and outlook, ARD reported global bev-can volume growth of 3%, they raised CCK PT to $85 on food and bevcan volume growth, and raised SLGN PT to $45 on similar strength in food can consumption due to higher at-home food consumption; HUN reported a Q2 EPS/Ebitda that topped views and better guidance for Q3; SHW EPS $7.10 tops the street $5.69 on slightly better topline with a beat on every segment

Technology, Media & Telecom

·     Internet; SHOP was upgraded from Neutral to Buy at Goldman Sachs with $1,127 tgt saying following global shelter-in-place orders in response to COVID, e-commerce penetration went from 16% of retail spending in the US in 1Q20 to 40% in May; YNDX shares active after beating Q2 estimates on the top and bottom line, while online ad revenue fell 15% Y/Y to RUB29.1M due to the coronavirus pandemic

·     Semiconductors; INTC announced changes to its technology leadership team to "accelerate product leadership and improve focus and accountability in process technology execution. As let go its chief engineer; AMKR rises after Q2 beat and said it expects Q3 profit between 17c-35c above est. 17c and expects sequential revenue growth in Q3, driven by launch of flagship smart phones, including more 5G models; NXPI posted higher 2Q results and 3Q guidance driven by stronger performance in Industrial IoT and Communications Infrastructure & Other, while Automotive missed our expectations; MU cautious comments at Cleveland Research saying sees mixed near-term with weaker pricing offsetting demand, sees ASP downside next few qtrs with possible bottoming 1H21 and for WDC sees soft outlook on NAND pricing declines, inventory overhang

·     Media & Telecom movers; advertising space active as OMC posted in-line Q2 EPS but revs that missed analyst estimates, and said it sees similar reductions to its revenue through the rest of the year due to the Covid-19 pandemic (follows better view from Publicis last week that lifted the group initially); CTL wins State of Arizona network contract to provide connectivity and managed IT services that will support all state government agencies for a contact term of 5-year term with two 1-year options.

·     Hardware & Component news; KODK shares surged after won a $765M government loan under the Defense Production Act to support the launch of Kodak Pharmaceuticals and help speed up domestic production of drugs that can treat a variety of medical conditions; FFIV shares fell as revenue/EPS was ahead of expectations while other metrics were mixed; GLW Q2 net sales rise 7% to $2.6B, above analysts’ estimates of $2.4B as net sales in its optical communications business rose 12% to $887M, helped by 5G ramp-up by wireless carriers; VCRA reported strong 2Q20 results, which exceeded estimates as device revenue grew 18% y/y, while software revenue declined 21% y/y