Closing Recap

Wednesday, June 03, 2020

Equity Market Recap

·     U.S. stocks extend gains, rising for a 4^th straight session as the S&P 500 topped the 3,100 level, the Dow Jones Industrials rose above 26,000 and the Nasdaq Composite above 9,700 as moves within less than 2% of its all-time highs (the Nasdaq 100 less than 1% away from its record highs) as optimism over global economies reopening from virus-led shutdowns and investors continuing to chase performance amid fear of missing out on of further gains helped propel stocks. Cyclical stocks such as financials were among the market leaders, with banks, both large cap and regional, along with insurance stocks among the biggest beneficiaries. Better economic data out of China also helped boost sentiment for Materials and Industrial as that economy looks to be back on track recovering from the coronavirus pandemic shutdowns (PMI numbers were 55 vs. estimate around 47). Healthcare stocks were the lone sector laggards as even defensive utilities outperformed despite a spike in Treasury yields. Restaurant stocks (CAKE, RRGB) surged as several released re-open plans and metrics while transports touched best levels in months led by airline stocks on more economic optimism. European and Asian markets also extended rallies as the German Dax recorded a 7% gain over the last two days. News that the U.S. is set to bar Chinese passenger airlines from flying to the United States in response to China refusing to allow U.S. airlines to resume passenger service failed to dent market optimism as stocks markets have defied odds with a straight up “V” shaped rebound from the March lows. Gold prices slide with the further rebound in stocks and Treasury yields rise with the 10-year yield at the high end of its 1-month trading range, up around 8 bps to 0.76%. The three “P’s” pandemic, protests and politics have been no match for the cheap money stimulus measures provided by the Fed and expectations of possible additional stimulus measures in the near future. Overall, stock markets remain in cruise control as market participants continue to bet on a global market recovery.

Economic Data

·     Private payrolls data better than expected as ADP said U.S. firms cut -2.76M jobs in May, which was better than economist estimate for -9M jobs being lost while April was revised by 679k to -19,557M from -20,236M as reported last month (comes ahead of nonfarm payroll Friday)

·     U.S. IHS Markit May final composite PMI at 37.0 (vs. flash 36.4) and said the May final services PMI at 37.5 (vs flash 36.9); services sector final new business index for May at 36.9 vs flash reading 36.5 and final April 26.1

·     ISM Non-Manufacturing rises to 45.4 vs. est. 44.4 and above 41.8 prior month; business activity rose to 41.0 vs 26.0 prior month (biggest increase in records back to 1997); new orders rose to 41.9 vs 32.9, employment rose to 31.8 vs 30.0 and prices paid rose to 55.6 vs 55.1

·     Factory Goods Orders for April fell (-13%), in-line with estimates as Factory orders for March revised down to -11.0%; new orders ex-trans fell 8.5% in April after falling 4.0% the prior month and new orders ex-defense for April fell 12.3% after falling 11.2% in March; capital goods non-defense ex aircraft new orders for April fell 6.1% after falling 1.3% in March

Commodities

·     Crude oil prices reversed higher, with WTI crude up 48c or 1.3% to settle at $37.29 per barrel, touching three-month highs as bullish inventory data (EIA showed an unexpected weekly crude oil draw of -2,077M barrels vs. est. build of 3.0M) overshadowing Bloomberg reports earlier that the OPEC+ meeting suggested for Thursday is unlikely because of potential quota cheating by some countries on their deal to cut production. The reports indicated that OPEC+ will not hold an early meeting on June 4, and a scheduled gathering next week also appears threatened, unless all members first agree to cut output by as much as they promised, according to the report. Gold prices slide as August gold falls -$29.20 or 1.7% to settle at $1,704.80 an ounce – even weaker dollar fails to help as safe-haven assets sold off.

Currencies & Treasuries

·     U.S. Treasury yields continued their recent ascent, with the benchmark 10-year yield rising to 0.768% at highs, best levels in about a month as investors sold safe-haven assets in lieu of riskier assets with stocks making fresh 3-month highs. The yield on the shorter-term 2-year yield climbed 3 bps to around 0.2%, best levels in a month as well. The dollar index (DXY) dropped to the lowest in almost twelve weeks after stocks gained following better-than-forecast economic data. The loonie erased losses after Bank of Canada said the impact from the pandemic may have peaked. The Euro rose to its highest levels since mid-March vs. the buck at 1.124 and the Pound climbed above the 1.26 level vs. the greenback before paring gains.

Sector News Breakdown

Consumer

·     Retailers; GOOS reports adjusted EBIT of -C$9.7M for FQ4 vs. C$13.0M a year ago and -C$10.3M consensus while gross margin was 66.4% of sales during the quarter vs. 65.6% a year ago and 64.0% consensus; VRA reported e-commerce sales growth of 20.5% in FQ1 to take some of the sting off of stores being closed/said expects a majority of stores to be open by the end of June; AEO shares surge despite weaker quarterly results as rebound in retailers continues as investors focus on strong online sales and demand recovery; MAT was upgraded to buy with a $13 PT at Jefferies following a virtual chat with MAT’s senior team, augmented by our own channel checks and data matrix pointing to a stable; KTB was upgraded to overweight from neutral at Piper citing attractive valuation, low risk of material downside to Street estimates and the underappreciated investor view of Wrangler brand potential

·     Consumer Staples; CPB raised full-year sales view to +5.5% to +6.5%, from prior -1% to +1% and sees FY adjusted EPS from continuing operations $2.87 to $2.92, up from $2.55 to $2.60 after Q3 EPS and sales beat (83c and $2.24B); BGS reports preliminary May net sales $160.1M, up 50.5%; net sales for fiscal May 2020 were $160.1M, an increase of $53.7M or 50.5%; net sales for the first two months of the second quarter of 2020 were $349M, an increase of $127.5M or 57.6%; shares of protein stocks (PPC, TSN, SAFM) were active after Dow Jones reported PPC current and former executives were indicted for price fixing

·     Restaurants; CBRL upgraded to buy and raise tgt to $133 at SunTrust as believe restaurants should trade on the pace of the recovery (implications for liquidity), the health of the LT model and interim risks; RRGB said it expects to have re-opened about 270 dining rooms with limited capacity by June 7, representing about 65% of currently open company-operated restaurants; Cowen raised its tgts on CMG from $950 to $1,160 & WING from $134 to $140 based on digital’s trajectory following a surge in digital orders in April and the optimism we encountered surrounding digital at our recent conference; DNKN said QTD comp sales as of May 23 week was -23% for open stores, and during the week SSS -15%, a "significant" sequential improvement from -25% seen in week of April 25/as of May 23, 650 of the 9,637 U.S. stores were temporarily closed; CAKE said Q2 to-date through May 31, 2020 comparable sales at cheesecake factory restaurants are down approximately (-63%); reopened cheesecake factory restaurants have recaptured, on average, approximately 75% of prior year sales levels

·     Housing & Building Products; SWK said it now sees Q2 organic revenue decline of 15%-20%, better than prior view of 20%-30% decline citing better visibility of stronger performance in the US Retail channel for Tools & Storage as well as global Security

·     Casino & Leisure movers; cruise lines CCL, RCL, NCLH were all downgraded at Morgan Stanley and cut price targets saying three things need to happen for the cruise industry to resume sailing and we think there is a risk this might not happen until ’21, and possibly later/see negative EPS until 2023 and then at only 20-50% of 2019 levels given lower EBITDA and higher finance costs, and we do not see 2019 EPS levels returning at all during our forecast period (CCL $11, RCL $33, NCLH $13); in gaming, PENN tgt raised to $41 at Bank America as believes the sports betting and iGaming oppty alone could be valued at $20-$25/share while raise PO’s across our entire Regional & Gaming REIT coverage; SPCE 5.6M share Block Trade priced at $15.20; PLNT said it reopened 800 clubs (40%) and plans to open 200 more by mid-June while average membership levels in reopened clubs have remained relatively consistent since the store reopened.

·     Autos; ride hailing stocks rose early after LYFT issued a business update showing May rides increasing by 26% vs. April/said rideshare rides have increased week-over-week for 7 consecutive weeks since week ended April 12, 2020 (UBER moved in sympathy); NIO was upgraded to buy from neutral at Goldman Sachs as a 37% YoY surge in delivery volume from January through April highlighted Chinese consumers growing recognition of this emerging auto brand and says the liquidity risks that were challenging its financial sustainability in 2019 have started abating; UBER said that rides business down 70% YoY while Eats category up 100% YoY

Energy

·     Energy stocks rallied behind broader market weakness, slowing pandemic concerns and improving demand; Inventory data for the week showed: API shows a draw of 483K barrels of oil for the week ending May 29; gasoline inventories reportedly show a build of 1.71M barrels, distillate inventories show a build of 5.92M barrels, and Cushing inventories show a draw of 2.22M barrels. The EIA reported an unexpected weekly crude oil draw of -2,077M barrels vs. est. build of 3.0M (bullish), while gasoline stockpiles rose +2,795M above the est. +300k (bearish) and distillates jumped with a +9,934M barrel build vs. est. +2,900M barrels (bearish)

Financials

·     Bank movers; in research, Stephens upgraded HBAN to overweight and downgraded KEY to equal-weight noting Super Regional bank stocks are +25% since May 13th as sentiment shifted from negative interest rates and probable dividend cuts to optimism around the opening of the U.S. economy and a COVID-19 vaccine; in credit cards, COF, AXP, DFS, ADS extend recent rally as credit card continue to surge on reopen optimism

·     Insurance; RNR 5.5M share Spot Secondary priced at $166.00 while RGA 6.173M share Spot Secondary priced at $81.00; CINF was upgraded to Outperform from Sector Perform at RBC Capital based on belief that the current multiple assumes beyond a worst case scenario for COVID-19 losses and a rebounding equity market lifts book value; the KIE Insurance ETF jumped around 4% late morning as nearly all 50 components were higher (ATH, AEL, UNM, PFG, PRU), rising despite recent violence protests (which are beginning to ease) and broader mkt recovery

Healthcare

·     Pharma & Biotech movers; NVAX, INO among decliners midday after the NY Times reported the Trump Administration selects five coronavirus vaccine candidates as finalists (AZN, MRK, PFE, JNJ, MRNA); HUGE shares surge as receives U.S. FDA approval to design and submit for clearance a clinical trial to test its anti-inflammatory drug, FSD-201, in suspected or confirmed COVID-19 patients; GILD was upgraded to outperform at Leerink as is now forecasting that sales of remdesivir may reach $7.7 billion in 2022; PLRX 9M share IPO opened at $25 after pricing at $16 per share

·     Medical equipment and devices; HOLX was upgraded at Raymond James to outperform saying concerns around the core women’s health business (growth, optimized margins) still linger, but business opportunities have materially improved with COVID-19; DGX disclosed that since its Q1 report on April 22, it has continued to experience a material decline in testing volumes due to COVID-19 disruptions/though says volumes in its base business, have rebounded faster than expected and, if the trends continue, believes that Q2 EPS could be breakeven to slightly positive

·     Healthcare services and providers; HQY shares slide as reported F1Q21 results that were generally in-line with consensus expectations, but withdrew its F21 outlook and offered F2Q guidance that was below consensus; EVFM 28.5M share Spot Secondary priced at $3.50

Industrials & Materials

·     Industrial & Machinery; BA jumped over 13% above $173 late day and was the top gainer in the Dow as shares are now off the March lows of $89; Goldman Sachs upgraded KBR to Buy from Neutral as they see scope for multiple expansion on derisked estimates (down -18% YTD) while they downgraded WAB to Neutral from Buy as we rotate into KBR; industrials as a whole continue to outperform on hopes and optimism that the economic recovery after the coronavirus pandemic will be quick and strong to the upside

·     Transports; Dow Transports rose more than 3%; airlines lead the way with massive gains in UAL, AAL, DAL, JBLU, ALK, LUV amid extension of optimism over economy reopening; truckers upgraded at Bank America, raising the rating on ARCB to buy from Underperform with a price target of $26, up from $21 as medium-term prospects for the company improved in the post-COVID environment and CHRW raised to neutral from underperform as well with tgt to $86 from $67; SAIA presented data for the first two months of Q2, saying LTL shipments per workday declined 16.2% in April and LTL shipments per workday declined 9.2% in May; ODFL said revenue per day decreased 16.2% as compared to May 2019 due to a 12.1% decrease in LTL tons per day

·     Metals & Materials; gold miners sliding (NEM, GOLD, AEM) given the pullback in gold prices with investors adding to riskier bets such as equities; VALE was upgraded to buy at UBS for the first time in 3-years as a rising oil price should lift the overall iron ore cost curve in support of prices and, in turn, Vale’s shares

Technology, Media & Telecom

·     Semiconductors; MCHP boosted its JunQ rev/EPS guidance by 3%/7%, citing easing supply chain disruptions and customer manufacturing reopening in China, US and Europe/MCHP raised Q1 EPS view to $1.35-$1.53 from prior $1.25-$1.45 and Q1 sales to $1.247B-$1.326B vs. est. $1.24B; AMBA posted in-line Q1 revenue of $54.6M but guided Q2 revs $50M, missing the $55M est.; WDC shares rise despite cautious comments from Cleveland Research saying NAND pricing expected flat/down in 3Q and declining further in 4Q; softer demand outlooks in Mobile, Server and Datacenter/see NAND 3-4 pts oversupplied for CY20 (similar vs prior), with oversupply becoming more pronounced throughout the year

·     Software movers; ZM quarterly earnings and guidance steals the show highlighted by 169% Y/Y top-line growth and a doubling of its full-year revenue outlook as quarterly results and guidance far surpass even the most bullish of expectations prompting many analysts to raise tgt prices (RBC upgraded to outperform and tgt to $250); in internet security, CRWD reported stronger-than-expected FQ1 results from the top down, guided FQ3 ahead, and increased its outlook for the year while Q1 growth of 88% y/y likely exceeded bullish buy side expectations; CLDR was upgraded to Overweight and tgt to $14 from $8 at Morgan Stanley citing stabilizing execution post-merger with Hortonworks, a major product cycle and an inflection to positive cash flow combine with low expectations and an attractive valuation; earnings tonight in software space for CLDR, SMAR, ZUO, GWRE); APPS surged after earnings and guidance beat

·     Media & Telecom movers; WMG 75M share IPO priced at $25.00; AMC said today they continue to manage proactively our cash resources to control our monthly cash spend rate/at the same time, we have begun to ramp up our cash spend with the intention of reopening theatres this summer/believe we have the cash resources to reopen our theatres and resume our operations this summer or later; SECO rises after QD agreed to purchase a total of up to 10.2 million newly issued Class A shares of Secoo at a per-share purchase price of $9.80 in $100M investment

·     Hardware & Component news; AAPL tgt raised to $340 at Morgan Stanley and raising June Q Services forecast to +17% on the back of strong App Store outperformance as estimate App Store net revenue grew 39% Y/Y in the month of May, the strongest Y/Y growth for the App Store since April 2017, and an 8 point acceleration in Y/Y growth from April; IDC said it expects worldwide smartphone shipments to plummet 11.9% in 2020 fueled by ongoing covid-19 challenges and worldwide smartphone market is forecast to decline 11.9% in 2020 with shipments totaling 1.2 bln units