Closing Recap

Thursday, June 04, 2020

Equity Market Recap

·     U.S. markets tried but couldn’t hold early gains, as profit taking set-in for major averages with stocks falling for the first time in five-days ahead of the monthly nonfarm payroll report tomorrow morning. The Nasdaq 100 index (top 100 names) traded to a new record high intraday (QQQ- $237.79) before slipping midday with the broader market and closing lower (Nasdaq Composite still about 2% away from its record highs). Jobs data tomorrow morning with estimates for -7.5M jobs lost in May for nonfarm, 6.75M private payrolls jobs lost and 400K manufacturing jobs lost with the unemployment number expected to jump to 19.1% (after 14.7% last month). Those type of figures and weak economic data has failed to dent market enthusiasm over the last few weeks as investors look at the data as backward-looking, with the worst being behind us as several business and states reopen and traffic, demand picking up. Casinos, restaurants, airlines, and theme parks have all announced opening dates/news or increased traffic which has helped push the beaten up sectors higher. None more evident than the surge in airline stocks today after America (AAL) said it is increasing flights for the summer season as it sees higher demand for air travel after many of its planes have been idle due to the coronavirus pandemic. Helping markets early, the European Central Bank (ECB) almost doubled the asset-buying program it has dedicated to fighting the coronavirus’ economic consequences, adding EUR600 billion ($675 billion) to the EUR750 billion it announced in March and said the program would continue until the end of June, 2021 (prior expected to end in December). The ECB decision came just one day after the German government added a significant layer of fiscal stimulus to the massive plan it had launched in March. Stocks blipped lower after White House aides said discussions on stimulus have been delayed, while administration envisions up to $1 trillion for next stimulus round. Healthcare companies again a big drag on markets along with profit taking in tech.

Economic Data

·     U.S. weekly jobless claims fell to 1.877Mm in latest week vs. est. 1.833M and below the 2.126M level last week; the 4-week moving average fell to 2.284M from 2.608M; continued claims rose to 21.487M in latest week from 20.838M prior week; insured unemployment rate rose to 14.8% from 14.3% in prior week

·     The trade deficit for April widened to (-$49.4B) vs. est. (-$49.0B) and vs. March deficit revised to (-$42.3B) from (-$44.4B); April goods deficit $71.84 bln, services surplus $22.4B; April exports (-20.5%) vs. March (-10.2%)

·     U.S. Q1 Nonfarm Productivity fell (-0.9%), better than the estimated decline of (-2.7%), as preliminary 1Q productivity was down (-2.5%); unit labor costs rose 5.1% in 1Q vs. up 4.8% preliminary while output fell 6.5% in 1Q (down -6.2% preliminary); said compensation per hour rose 4.2% in 1Q; up 2.2% preliminary

Commodities

·     Oil prices touched fresh 3-month highs, with WTI crude gaining 12c to settle at $37.41 per barrel and Brent crude settling just below $40 per barrel as markets watch OPEC and other top producers including Russia try to finalize an extension plan for their production-cut deal that would include improved compliance among some member countries.

·     Gold prices rose $22.60 or 1.3% to settle at $1,727.40 an ounce, snapping 3-day losing streak, getting a boost as the dollar slides for a 5^th straight session and as stocks paused its recent rally as dismal U.S. trade deficit data overshadowed slightly upbeat jobs numbers and optimism about an economic rebound. Spot gold recovered from a near one-month low of $1,688.89 yesterday.

Currencies & Treasuries

·     Treasury yields hit their highest levels in over 2-months, with the 10-year yield rising over 6 bps to move above 0.8% and break above the trading range it has been stuck in since late March amid mixed economic data Thursday and ahead of the monthly jobs report tomorrow. Bonds have been holding strong the last few months despite the sharp “V” shaped rebound in global stock markets amid optimism over the improving economic landscape following the coronavirus pandemic with US states and several countries relaxing their stay at home restrictions.

·     The U.S. dollar dropped sharply, erasing earlier gains after mixed economic data, as the dollar index (DXY) fell for a 5^th straight day; the euro rises to its best levels in about 10-weeks above the 1.135 level (52-week high 1.145) but the buck moved up against the Japanese yen topping the 109 level. Weekly jobless claims were higher than consensus, the trade deficit wider than expected, and revised productivity a bit better than forecasts.

Sector News Breakdown

Consumer

·     Retailers; CNBC reported this morning that TIF is prepared to litigate if LVMH proposes a price cut for the deal/LVMH has yet to propose any changes in deal terms; COST reported stronger-than-expected May comps with an adjusted increase of 9.2% in the US and a 108.1% increase in e-commerce sales; FNKO said it expects to reduce its global workforce by approximately 25% which will occur by the end of Q2 and the remainder by the end of Q3; SBH upgraded to outperform at Oppenheimer as re-opening of salons in the US, strength of the company’s growing e-commerce offering, and the May sales performance have exceeded expectations; MIK posted a surprise quarterly loss as Q4 net sales fell 27% to $799.9M on store closures, below the $1.03B est. and comp sales dropped over 27% for the quarter vs. down -2.9% YoY but shares rebound; GPS sued by SPG for $66M in unpaid rent; KIRK slips while DLTH, FOSL rise on results

·     Consumer Staples; SJM reports sales jumped 10% in FQ4 driven by an 11 percentage point contribution from higher volume/mix across the majority of categories and brands in the U.S. while generated adjusted gross margin of 38.5% vs. 37.9% a year ago and operating margin of 20.6% vs. 18.5% consensus and 18.6% a year ago (year EPS $7.90-$8.30 vs. $8.46 est.); TSN upgraded to outperform at Bernstein amid improving production levels as resumed limited operations at most beef and pork plants in the first week of May

·     Restaurants; PBPBP rises after saying its efforts to streamline and prioritize cash have resulted in a 75% reduction in the cash burn rate from the peak of the COVID-19 impact/said same-store sales have improved in eight of the last nine weeks, progressing from a decline of 68% to a decline in the mid-20% range; another day of gains for the casual dining space which continues to benefit from the economy reopening (CAKE, BJRI, RRGB, CBRL)

·     Casino & Leisure movers; RCL discloses that it plans to sell $2B worth of senior notes and senior convertible notes in a private placement; PLNT was downgraded to market perform at Raymond James noting since bottoming at $27.54 on March 18, the shares have rallied well beyond our target price and now approach $80 and believe optimism or recovery baked in; SEAS upgraded to Buy from Neutral, and raising our target price to $24 from $9 at Citigroup noting the company’s strategic efforts to promote its season pass has helped grow in-park spend, particularly in 2018 and 2019; casino stocks seeing momentum (WYNN, MGM, LVS, ERI, PENN) as several begin to resume operations; NIO said it delivered 3,436 vehicles in May, +215.5% YoY; company to increase production capacity and expand sales network to support future growth; LVS rolled on headlines Adelson’s Singapore casino probed for money laundering checks as per Bloomberg

Energy

·     Energy stocks; gains in stocks continued, but most specifically for oil services as the OIH rises as much as over 4% as investors continue to bet on a rebound in energy demand as the economy reopens, lifting transportation stocks as well (shares of PUMP, PTEN, RES, OIS, SLCA among top gainers); BP is in early talks to sell a ~10% stake in Oman’s Khazzan natural gas field, as part of its plans to cut debt, Bloomberg reports. in solar, JKS shares active as the U.S. International Trade Commission (ITC) issues favorable final determination concluding JinkoSolar’s products do not infringe a Hanwha Q CELLS patent

Financials

·     Bank movers; financials continue to play catchup over the last 2-weeks, helping lead markets in the early going with banks and insurance names the top performers while REITS came under pressure; AMTD shares rise after SCHW agreement to buy the rival online broker for $26B won U.S. antitrust approval as first reported by CNBC’s David Faber (deal announced last November calls for 1.0837 Schwab shares for each share of TD Ameritrade); GS was downgraded to Hold from Buy at Deutsche Bank and upgraded WFC to Buy from Hold saying that the good news for Goldman Sachs seems to be baked in with the stock outperforming, while Wells Fargo has been the worst performer and the bar has been set low, with a plan of a turnaround coming

Healthcare

·     Pharma movers; for one of the first times in a long-time, news flow in the healthcare space was very quiet; ABBV announces positive long-term results from two Phase 3 clinical trials, SELECT-COMPARE and SELECT-MONOTHERAPY, evaluating Rinvoq (Upadacitinib) in rheumatoid arthritis (RA) patients; Dow component WBA shares slipped after Mizuho cut its tgt to $48 from $53 and cut estimates as well due to limited earnings visibility

Industrials & Materials

·     Industrial & Machinery; the industry has seen recent buying strength given the improved economic outlook in China and as data recovers in the U.S. as well; Goldman Sachs removed URI from the conviction buy list and raise our price target to $165 following a series of data points that revealed improved visibility on a construction equipment utilization recovery, but see more attractive risk-reward across other parts of our Industrials & Materials coverage, including OSK which they added to the conviction buy list; NAV shares outperformed on sales beat, reversing earlier losses despite suspending production at assembly plant in Springfield, Ohio, for two weeks and withdrawing its forecast on COVID-19 impact

·     Transports; ATSG shares rose after AMZN announced the lease of 12 Boeing (BA) 767-300 converted cargo aircraft from the company as these aircraft will join Amazon’s existing fleet of 70 aircraft to bring its total network to over 80 aircraft; airlines extend gains (AAL, UAL), broadly higher on economic recovery optimism, along with more data showing travel demand picking up; AAL said it is increasing flights for the summer season as it sees higher demand for air travel after many of its planes have been idle due to the coronavirus pandemic.

·     Chemicals; VVV was upgraded to buy at SunTrust as view it is uniquely positioned not only to benefit from a surge in road trips over the next several months, but also gain share as it leverages its drive-thru quick lube business model; KeyBanc raised estimates on DOW, LYB and WLK saying fundamentals for crude oil and ethylene/polyethylene improved and sees DOW and LYB’s stocks as inexpensive based on 2021 multiples; however, Citigroup noted they expect 2Q/3Q to be difficult for NAM ethylene/PE companies (DOW, WLK, LYB); MEOH secures additional financial flexibility under its credit facilities and upgraded to outperform at Scotia Bank

Technology, Media & Telecom

·     Internet; EBAY shares rise as reports stronger volume growth and raises revenue and Gaap and non-Gaap eps guidance for Q2/said approximately 6 mln buyers added in April and May and classifieds revenues in qtr are performing at high end of previous expectations; LIVX to launch pay-per-view live stream music events, virtual tours and digital ticketing to drive new revenue-share model for artists

·     Software movers; ESTC reported a strong 4QFY20 ahead of expectations, reflecting better execution and broad product traction, but FY21 guidance was below consensus taking into account expected (not yet witnessed) macro headwinds; CLDR shares tumble after downbeat guidance as sees year revs $825M-$845M, below the $858M estimate; SMAR tumbles as after Q1 results above expectations, supported by strong large customer activity and a net retention rate of 132% but billings disappointed, sending shares lower; ZUO rises on much better than feared 1Q and 2Q guide (Q1 was better and 2Q was in line) while withdrew FY guide; GWRE reported strong 3Q results, beating estimates on top and bottom line due to an acceleration in cloud revenue growth and some longer-term license deals which closed during the quarter; ADSK tgt raised by several analysts following its annual Investor Day virtually where mgmt highlighted subscription growth that has thus far shown directional resiliency to the pandemic; GLUU 15M share Secondary priced at $9.25; CCC 48M share Secondary priced at $22.50

·     Media & Telecom movers; CRTO reported this morning that trends in 2Q20 thru May are tracking better versus guidance given in late April; ZI opened at $41 per share after 44.5M share IPO priced at $21.00; VG positive mention by Citigroup saying they recommend buying shares, as the combination of unlocking the sum-of-parts valuation should support our revised target

·     Hardware & Component news; CIEN printed a solid Q with margins well ahead of street and company guide while guided Q3 revs $955M-$985M vs. est. $969M and sees year annual revenue growth guidance 2%-5%; CMTL shares fell on mixed results as EPS topped views but sales of $135.1M missed the $146.5M estimate