Closing Recap

Tuesday, March 03, 2020

Equity Market Recap

·     U.S. stock markets thought they got what they wanted when the Federal Reserve announced an intra-meeting 50-bps rate cut this morning to help stimulate the economy struggling due to the impact of the coronavirus – but the reaction in stock markets was not what they/or investors were looking for with major averages plunging mid-afternoon and Treasury yield literally collapsing as the 10-year yield plunged below the 1% level for the first time (more than 20 bps move to 0.9% low) while the 2-year yield fell more than 25 bps to 0.62%, as investors fled for the safety of Treasuries and gold (which jumped over 3% for its biggest one day gain in over a year). U.S. stocks had surged more than 4% on Monday in anticipation of central bank intervention but fell sharply today on the actual announcement, though ended off the session lows. Selling pressure was once again broad based, led by declines in financials on the lower yields (effecting their lending margins), energy names as oil prices dropped and technology, while consumer staples, REITs and utilities (defensive and interest rate sensitive sectors) held up. The negative news on the coronavirus continues daily, with news cases being reported in the U.S. along with rising cases in several countries in Europe and Asia as well, feeding the market fears.

·     The Federal Reserve provided an emergency intra-meeting 50 bps rate cut, the first such since the 2008 financial crisis in a unanimous decision saying fundamentals remain strong but coronavirus poses evolving risks to economic activity and that they are closely monitoring developments and will use its tools and “act as appropriate to support the economy. The move was expected to help the stock market for now, but certainly isn’t going to get more people flying, taking cruises, eating at restaurants or going to large events (concerts) as the virus likely to still have an impact on the economy. The move followed Australia’s RBA Central bank cutting rates overnight while the Bank of Canada is expected to act tomorrow. The statement from G7 finance ministers and central bank governors indicates a willingness to use fiscal and monetary policy to fight the coronavirus impact on the economy but doesn’t outline any specific steps.

·     Election news the next market catalyst with Super Tuesday results expected tonight and help clear up the Democratic Presidential nominee picture. After last week’s drubbing that saw the Dow fell 12.4%, the S&P 500 lost 11.5% and the NASDAQ shed 10.5%, representing their worst weekly skids since 2008, stocks failing to bounce back meaningfully this week, erasing most of yesterday’s gains

Commodities

·     Oil prices held up relatively well despite the carnage in U.S. stock markets, as WTI crude rose 43c or 0.9% to settle at $47.18 per barrel (off earlier highs of $48.66 ) but remain down 22% YTD as fears of the coronavirus impact on demand due to less travel, etc. weigh on the industry.

·     Gold prices surged $49.60, or 3.1% to settle at $1,644.40 an ounce amid a rotation back into safe-haven assets given the ongoing carnage in U.S. stock markets, while also supported by a sharp decline in the U.S. dollar given the unexpected 50 bps point rate cut from the Fed today, as gold posted its biggest one day jump since June of last year

Currencies

·     The U.S. dollar dropped broadly across the board vs. major currencies, falling sharply late morning after the FOMC announced its surprise 50-bps cut which pushed the dollar index to around the 97 level, and now down over 2.4% the last 9 days (had touched 3-year highs on 2/20 at 99.91), while the euro jumped (touched highs of 1.1212 earlier), recovering off 3-year lows of 1.0778 on 2/20. The dollar fell to around the 107 level against the Japanese yen, a more then 1% decline to its lowest levels since October.

Bond Market

·     Treasury markets continued to push higher with new record lows for the benchmark 10-year yield, falling below 1% (down as much as 20 bps to 0.9% lows), the 30-year yield lows at 1.50% down about 19 bps and the 2-yr yield down as much as 28 bps to 0.62% before all pared losses with the move coming on the heels of a 50-bps rate cut by the Fed ahead of its meeting, as investors seek the refuge of safe haven instruments and out of riskier assets such as stocks and commodities.

Sector News Breakdown

Consumer

·     Retailers; TGT EPS beat while issued weaker FY20 profit forecast, and revenue miss as sees adjusted earnings of $6.70-$7.00 per share where at the midpoint misses the $6.87 estimate while Q4 revenue of $23.40B just misses the $23.50B est; KSS reports comparable sales were flat in Q4 vs. -0.1% consensus, while total revenue was up 0.1% during the quarter and gross margin fell 81 bps to 32.7% of sales during the quarter and guidance for year EPS $4.20-$4.60 vs. $4.58; YETI was upgraded to buy at Citigroup saying sell-off seems overdone; 52-week lows for retailers including UAA, M, and CPRI

·     Consumer Staples; CLX extends gains trading to a new all-time high as investors scoop up stocks with exposure to antibacterial, wipes given virus fears; BYND CEO said he company is looking to Asia to help it achieve "hyper growth" in the future on CNBC’s Mad Money show; BUD was downgraded to neutral at Bank America and cut estimates by 4-6% on top line and 9-14% on EBITDA, as they update for FY19 results, FX and FY20 guidance

·     Casino & Leisure movers; in hotels, Hyatt (H) withdrew its previously announced 2020 outlook following corporate travel restrictions in North America and Europe and cancellations outside of Greater China; in gaming, IGT shares rally after 7c EPS beat and adj EBITDA $436M above the est. $410.9M; a German cruise ship carrying 1200 passengers has been quarantined in the Norwegian port of Haugesund after two passengers were tested for the #COVID19 virus (CCL, RCL, NCLH shares remain volatile in the cruise industry); WYNN, MGM 52-week lows today

·     Autos; TSLA was upgraded to outperform with $1,060 tgt at JMP Securities saying the recent market-driven pullback provides investors with a good opportunity to enter the stock; UBER was added to conviction buy list at Needham with $54 tgt noting stock is now down over 20% since its post-earnings levels, and we think Coronavirus concern has created a very attractive buying opportunity; in auto retail, AZO shares slipped after Q3 EPS topped views but sales missed and comp store sales unexpected declined (-0.8%) vs. est for a 2.8% increase while inventory rose 7% (AAP, ORLY also active); HMC said monthly auto sales were up 4.2%, with trucks gaining 6% and passenger cars up 2% for the month.

Energy

·     Energy stocks tumbled with broader markets a day after surging on higher oil and buying on prior day pullbacks (in one of the more interesting stats – the combined market cap of all S&P 500 Energy stocks is now just $911 billion, down more than $1 trillion since mid-2014 as per Bespoke); in stock news, CDEV downgraded at Bank America to underperform citing the company’s unprotected exposure to weaker oil prices and limited ability to generate free cash flow; in oil service stocks, SLB and HAL were both downgraded to neutral at UBS, more cautious given the challenging backdrop for oil services saying for SLB, consensus earnings have been cut by about two-thirds over the last three years but we expect earnings cuts to continue and for HAL more cautious given weak fundamentals as its key end markets face overcapacity. Utilities one of the few bright spots with broader markets under pressure today the UTY up 0.5% helped by the plunge in Treasury yields

Financials

·     Bank movers; financials were among many sharp declines in the large cap and regional banking sector (SIVB, CMA, SCHW, ZION, MTB) among others after the Fed announces a surprise 50 bps cut; in insurance, GNW got closer to surmounting a significant hurdle in its three-plus year effort to consummate its deal to be acquired by a Chinese financial conglomerate today when it announced that it had reached agreement in principle on conditions that it expects would enable the New York State Department of Financial Services (NYSDFS) to approve the transaction

·     Consumer finance and lending; Visa (V) warned that it sees Q2 revenue growth 2.5-3.5 percentage points lower than prior view as cross- border growth rates have deteriorated week by week since the coronavirus outbreak in China (follows recent lowered view from MA); JPMorgan cut ests for V, MA and PYPL as COVID-19 fears have negatively impacted cross-border travel, especially tied to Asia, and to a lesser extent, e-commerce activity; Citigroup downgraded WEX to neutral from buy saying that FLT and WEX are the only U.S. stocks outside of the energy sector that are positively correlated with fuel prices and in heightened periods of volatility (up and down), the relationship strengthens significantly and with coronavirus fears becoming front and center, we see both stocks tracking more closely to the reset in fuel prices

Healthcare

·     Pharma movers; LLY said it doesn’t expect the coronavirus epidemic will result in shortages for any of its products, including all forms of insulin; ADMA said it has received another Notice of Allowance from the U.S.P.T.O for a patent application related to its intellectual property portfolio encompassing immunoglobulin plasma pool compositions used in the manufacturing of Asceniv; MNK shares fell after Dow Jones Newswire reported that U.S. regulators has sued the specialty drug maker’s subsidiary for allegedly underpaying Medicaid rebates.

·     In cannabis, TLRY shares dropped after its Q4 results missed expectations with a wider-than-expected Ebitda loss ($35.3M vs. est. loss $21.8M) on weaker revs $46.9M vs. est. $55.4M; CANF shares jumped after saying its drugs, Piclidenoson and Namodenoson, have shown favorable safety profiles and risk-benefit ratios in more than 1,500 patients; CRON downgraded at Stifel with C$8 per share tgt to reflect the uncertainty surrounding the company’s inability to file its SEC filings and the investigation around its revenue recognition practices

·     Biotech movers; INO rises after saying it is accelerating the timeline for development of a vaccine to treat the coronavirus saying the company had designed its DNA vaccine INO-4800 in three hours after the publication of the genetic sequence of the virus; LVGO reported another quarter of triple-digit (100%+) organic revenue growth and guided year revs $280M-$290M vs. est. $278M; OMER rises after reports an update on clinical data from its pivotal trial of narsoplimab that markedly exceeding the FDA-agreed threshold for the primary efficacy endpoint; MDRX reported a top and bottom line earnings miss and provided weaker than expected 2020 guidance that implies revenue growth of only 1-2%; BGNE, PTCT other movers on earnings

·     Medical equipment and devices; QGEN to be acquired by TMO for 39 euros per share in cash, which is a 23% premium to Monday’s close in a deal valued at $11.5 billion, including the assumption of $1.4 billion of debt https://on.mktw.net/3arvaJp ; GNMK shares jump as reports it ships ePlex RUO test kits for SARS-CoV-2 detection offsets its earnings miss and lower guide

Industrials & Materials

·     Industrial & Machinery; ETN upgraded to overweight and $108 tgt at KeyBanc as believe recent portfolio moves (i.e., Lighting, Hydraulics divestitures; Aero/Electrical acquisitions) are supportive of multiple expansion; building products MLM and VMC were both upgraded to buy from neutral at Bank America as believes that the recent selloff overstates the risks given the improvement in U.S. construction industry; PHM, KBH, LEN and other housing stocks benefiting from the rate cut helping lower mortgage rates

·     Transports; UPS was upgraded to buy from hold at Deutsche Bank citing valuation following a recent decline, and singled out the shipping company’s dividend yield as a source of strength; DAL shares get a boost after Warren Buffett’s Berkshire Hathaway boosted its stake in the airline, buying about 1M shares in the price range of $45.48-$47.14, according to an SEC filing; in tankers, (DSX, NM, SB, SALT), the Baltic Dry Index rose 1.86% to 549 points in London to make it 13 straight days of incremental gains for the measure of dry bulking shipping rates with port activity in China improving from a near standstill at certain locations. The Baltic Dry Index bottomed out at 411 on February 10

·     Metals & Materials; GORO lower than expected FY 2019 earnings even as it achieved an annual gold production record of 40,318 oz., as well as output of 1.73M silver oz.; VALE was upgraded to overweight at Morgan Stanley; BHP was downgraded to hold at Argus; in chemicals, KWR reported a sales and earnings beat for Q4, primarily due to higher-than-expected synergies in the quarter from Houghton, as well as contribution from Norman Hay/excluding the impact of acquisitions, sales declined 10% YoY on 9% lower volumes and 1% FX headwind.

·     Aerospace, Defense and Gov’t services; Wells Fargo upgraded shares of BAH, LDOS (both to overweight, and MANT (to equal-weight) given defensive nature, increasing exposure to sector noting shares have outperformed in most market downturns, especially during the "Great Recession" in 2008/also has limited COVID-19 exposure

Technology, Media & Telecom

·     Semiconductors; AMD was upgraded to overweight at Piper and raise tgt to $56 from $45 saying the 19% pullback from the February high offers an attractive entry point for long-term investors as the products in the laptop/desktop and data center markets have never been better; MCHP reduced its F4Q revenue outlook and withdrew EPS guidance (now sees Q4 revs to be flat QoQ vs. up 5.5% previously) as China customers and supply chain partners returned to normal operations at a slower rate than MCHP had anticipated; QRVO also cut its revenue outlook, citing the estimated impact the coronavirus outbreak is having on the smartphone supply chai (sees Q4 revs $50M below the midpoint of the prior guidance range); VECO upgraded to buy at Stifel

·     Media & Telecom movers; WIFI rises after saying it engaged advisors to assess opportunities after saying has multiple inquiries on potential transaction/company suspends financial guidance until further notice; in hardware & component news; MSI upgraded to neutral at JPMorgan on valuation saying the stock has declined 7% over the past two weeks (S&P 500 down 9%) and is now trading in close proximity to our $170 price target