Closing Recap

Monday, June 08, 2020

Equity Market Recap

·     U.S. stocks rose to 15-week highs for the S&P, with the Nasdaq Composite setting a fresh all-time high for a second straight session and the SmallCap Russell 2000 outperformed its large cap peers with absolutely no stopping the upward positive momentum on the back of easing lockdowns bolstering economic improvement. Major averages are now up more than 45% off their March lows, with the S&P 500 index turning back into positive territory for 2020 as Friday’s surprisingly upbeat jobs report last week raised bets of a swift recovery from a coronavirus-driven downturn. The benchmark S&P 500 and the Dow are now about 5.5% and 7.5% away from their respective closing highs, after surging more than 45% from their pandemic lows. The energy sector climbed the most among the 11 major S&P sectors as major oil producers agreed to extend a deal on record output cuts over the weekend, though oil prices retraced recent gains. Other cyclical sectors including financials, industrials and consumer discretionary stocks provided the biggest boost to the benchmark index amid strong China data and store re-openings. Shares of cruise lines and airlines have catapulted higher from their March lows, while Dow component Boeing (BA) shares surged again, bouncing with the broader economic recovery expectations in the airline and travel sector, now up over 160% from its March lows below $90 per share (rose 40% last week alone) pacing the gains for the Dow Jones Industrial Average, rising a 6^th day. While the COVID-19 cases are slowing and economic data continues to come in “worse-than-feared” attention turns to this week’s FOMC meeting and hopes for additional stimulus packages from the government to help the struggling businesses. It appears to this point that the stock market is overbought while complacency remains high heading into another big week.

Commodities

·     Oil priced erased earlier gains, slipping -$1.36 or 3.44% to settle at $38.19 per barrel despite the good news over the weekend that OPEC and its allies extended production cuts through July. Economies are rebounding from Covid-19 faster than expected, and gasoline use is on the rise, which has helped push oil prices to their best levels since March. Oil-related stocks rose as the supply-demand balance in the industry continues to improve. OPEC+ said it would crack down on countries that don’t comply with production cuts and force them to make up for commitments they haven’t kept. Countries such as Iraq haven’t cut as much as others.

·     Gold prices ended the session higher by $22.10 or 1.3% to settle at $1,705.10 an ounce, recovering after a 2.6% decline last week. The rally came despite another advance in stocks markets as a decline in the U.S. dollar again helped support commodity prices. 

Currencies & Treasuries

·     The U.S. dollar fell to lows late afternoon, down -0.5% for the dollar index (DXY) to its lowest levels since mid-March as investors continued to pile into U.S. stocks and out of the safety of the U.S. dollar. The euro moved and held above the 1.13 level vs. the buck, while the dollar was down broadly vs. all other major currencies (Pound moved above the 1.27 level – above its 200-day MA of 1.2681). The yen was broadly higher vs. most currencies. Treasury prices gained after sliding last week as the 10-year yield fell about 3 bps to 0.86%, below last week’s 0.95% highs.

Sector News Breakdown

Consumer

·     Retailers; another day another bounce for retailers; GIII and PVH were both downgraded to equal-weight from overweight in retail at Wells Fargo saying they are less confident in a recovery and noting since mid-March, global brands in our space are +75% (vs SPX +34%) and the two that have seen the biggest gains are GIII (+280%) and PVH (+120%); AAN shares rose after solid guidance as expects Q2 revs $975M-$1B (est. $892M) while says for Q3/Q4 revs will be highly correlated to the volume of new lease originations/Aaron’s Q2 comps will be -1.5% to -2.5% (better than its -4.6% in 1Q); MIK upgraded to overweight at JPM and placing it on JPM’s US Equity Analyst Focus List as a value idea based on an expected re-rating to PE on 2021 EPS due to the path to positive comps over the next four quarters

·     Consumer Staples; restaurant suppliers SYY, USFD, PFGC all with positive mentions in Barron’s this weekend noting shares are sharply lower on the year but could rise as states reopen/even if a lot of local restaurants never reopen, distributors can still turn profits by servicing fewer locations, gaining efficiency, and lifting operating margins; BYND said it inked a deal with Chinese food distributor Sinodis to expand product distribution in China; SAM tgt raised to $575 from $427 at RBC as expect current industry leaders in the hard-seltzer industry Truly and White Claw to remain the leaders, as see the hard seltzer category evolving more like the energy drink

·     Restaurants; DNKN upgraded to overweight at KeyBanc saying that comparable sales were likely to improve as pandemic-related lockdowns in key markets started to end; as the reopening wave pushes northward in the months ahead, DNKN’s same-store sales deficit relative to other fast food companies will narrow and potentially normalize

·     Housing & Building Products; ZG was upgraded to buy from hold at Needham as expects the company to benefit as lockdown boosts adoption of online realtors/says company’s premier program for realtors, Flex, will benefit ZG, and its Zillow Offers unit that buys and sells homes directly, will recover

·     Casino & Leisure movers; in casino’s, PENN was downgraded to sell from hold and raise tgt to $22 from $12 at Deutsche Bank; in RV’s, THO shares rise after posted a strong EPS and revenue beat while North American Towable revenue fell 38% Y/Y to $773.4M in FQ3 and North American Motorized revenue decreased 42.5% to $264M;  CWH shares rise after Chairman Lemonis purchases shares according to filing; TSLA sold 11,095 Shanghai-made Model 3 vehicles in China in May, triple the volume of 3,635 cars in April, according to China Passenger Car Association (CPCA), reports Reuters.

Energy

·     Energy stocks again among the top market leaders, falling despite the pullback in oil prices (on profit taking) after a 6-week rally as OPEC and allied nations agreed Saturday to extend a production cut of nearly 10 million barrels of oil a day through the end of July, hoping to encourage stability in energy markets. OPEC+ members met via video conference to adopt the measure, aimed at cutting the excess production; shares of OXY, MRO, FANG, SLB, NBL, HAL were all among the top gainers in the S&P 500 today in the E&P and equipment space

Financials

·     Bank movers; Bank America upgraded banks BKU, FHB and TCB to buy from neutral as update tgts to reflect the improved macro outlook, higher market multiples and updated methodology of 50%/50% ‘20e/’21e TBV vs 75%/25% previously; alternative asset managers APO, BX, CG all downgraded to neutral from buy at Citigroup given their recent inclusion in the Russell index as sees the "deepest downside" at RMR which was downgraded to sell from neutral but also recognizes its lack of trading liquidity

Healthcare

·     Pharma and Biotech movers; GILD rises following weekend report from Bloomberg that AZN had approached GILD for a potential merger last month, but the U.S. firm was not interested in combining with another big pharmaceutical company; SRPT announces positive expression and functional data from the SRP-9003 gene therapy trial to treat limb-girdle muscular dystrophy type 2e; MGTA upgraded to buy and $15 tgt at Goldman Sachs as think the stock is well positioned for a re-rate as the pipeline continues to advance and additional de-risking data arise over the next 12 months

Industrials & Materials

·     Industrial & Machinery; in heavy duty truckers (CMI, PCAR, NAV), North America preliminary class 8 orders declined 39% YoY in May to 6,700 units. The May pace annualizes near 90K units, a sequential improvement from April’s 50K-unit trough. Medium-duty orders declined 57% YoY in May to 8,900 units and annualize near 110K. This was a sequential step up (+13%) from the 98K unit annualized pace in April; AYI upgraded Perform to Outperform at Opco as believe AYI’s recently established supply agreement for Ushio America’s germicidal/disinfectant UV module/excimer lamp with patented filtering technology affords a truly promising value

·     Transports; airlines market leaders – again! ALK was upgraded to buy from neutral and JBLU to neutral from underperform in airlines at Bank America saying the recent recovery in the group since around mid-May is in line with the firms forecasts, given that airlines were not going to have zero revenues forever; RYAAY CEO said today sees lower load factors into UK due to quarantine, far too early to quantity impact on financial results and says will certainly have a damaging impact on passenger numbers; in trucking, Goldman Sachs continues to like the truckload sector (WERN, KNX, SNDR) during the early economic recovery phase and moves his already above consensus 2021/2022 forecast modestly higher on tightened supply

·     Metals & Materials; CLW rises after saying due to favorable demand, production, and cost trends in April and May, now expects Q2 Adjusted EBITDA in the range of $71M-$77M vs. prior outlook of $45M-$55M; several firms out on the copper space with Citigroup said with Phase 1 of the copper recovery mostly complete, with copper back to the cost curve, and equities back to ~0.8x NAV they reduce some risk and downgrade SCCO to sell while remain bullish on FCX and FM; in steel, CMC was downgraded to neutral on valuation and lowered estimates ahead of the company’s results based on higher than expected scrap costs.

Technology, Media & Telecom

·     Internet; AMZN tgt raised to Street high $3,300 at RBC Capital saying recent survey results and industry data suggest that adoption of Online Shopping has accelerated materially, and we view Amazon, Walmart, Etsy, and eBay as beneficiaries of this secular shift; TWTR mentioned positively in Barron’s saying the co.’s battle with President Trump may be good for the stock, saying it is benefiting through increased user growth; Airbnb said U.S. bookings increased Y/Y during the period between May 17 and June 3, showing the first signs of growth since the coronavirus pandemic hit the industry in March

·     Semiconductors and Software stocks were better for sale throughout the trading day, giving back some of the recent gains as investors sold winners YTD and rotated into lagging sectors such as financials, energy, retailers, travel and leisure. Last week, the Philly semi index (SOX) rallied ~8%, while the NASDAQ increased ~3% and the S&P500 rose ~5% as semis benefitted from a strong guidance update from MCHP which noted trends were improving at a better than expected rate, along with a solid earnings announcement from AVGO pushing the SOX index to all-time highs on Friday. In addition, broader based semiconductor companies benefitted from a string of better than expected economic data, which suggests the economy is recovering at a nice pace; in stock news, NLOK was upgraded to outperform from neutral by Baird

·     Hardware & Component news; LLNW was upgraded to Outperform at Raymond James as believe the company’s revenue growth potential is underappreciated and risk/reward for shares looks compelling at current levels/believe investors are not giving Limelight enough credit for its efforts in improving the performance of its network and its increasing focus on video streaming