Closing Recap

Thursday, March 05, 2020

Equity Market Recap

·     To say we are in unusually volatile times is a gross understatement, with the Dow Jones Industrial Average rising or falling over 1,000 points several times over the last few days and Bespoke noted that we have only swung back and forth with 2%+ gains and losses like this 3 times ever, and all came in the early 1930s, never happened over the first four days of a trading week either. The volatility has been off the charts with major swings for global stocks, with today being a sharp decline as more and more cases of the coronavirus are popping up worldwide, including a growing number of cases in the U.S., hitting investors close to home (see updates below on latest toll count for various countries). In political news, Elizabeth Warren dropped out of the Presidential race, a day after Joe Biden won Super Tuesday leaving the race between him and Bernie Sanders at this point. Today’s stock declines were again broad based with financials (on plunging Treasury yields as the 10-yr broke below 0.9% to a new record low) and transportation stocks (several airlines at multi-year lows) among the hardest hit after the IATA said the virus could hit the airline industry by $100B (well more than its previous estimate of roughly $30B). Yesterday’s political induced market gains were all but erased today on the sell-off with no end in sight to the spreading of the virus which is impacting leisure, travel the most, but hitting stocks in every sector, including defensive ones with all eleven S&P sectors falling.

Economic Data

·     Weekly Jobless Claims fell 3K to 216K vs. est. 215K as the 4-week moving avg. rose to 213K in the week ending Feb. 29 from 209,750 prior and continuing claims rose 7k to 1.729m in the week

·     U.S. Q4 nonfarm productivity rose 1.2%, mostly in-line with the 1.3% estimate as unit labor costs rose 0.9% in 4Q vs. up 1.4% preliminary, output rose 2.4% in 4Q vs. up 2.5% preliminary

·     Factory Orders for December fell a greater -0.5% vs. est. -0.1%; New orders ex-trans fell 0.1% in Jan. after rising 0.6% the prior month; new orders ex-defense for Jan. rise 1.3% after falling 0.4% in Dec.; Durables orders for Jan. fell 0.2% after rising 2.8% in Dec.

·     The 30-year fixed mortgage rate for week ended today fell to 3.29% from 3.45%, Freddie Mac said, the lowest rate in survey history as 15-year rate avg 2.79%, down from 2.95% a week earlier and 5/1-year ARM rate avg 3.18%, down from 3.20% a week earlier

Commodities

·     Oil and energy related stocks slide, as WTI crude drops 88c or 1.9% to settle at $45.90 per share on demand fears (again) on the coronavirus impact to travel and businesses as well as caution amid the ongoing OPEC+ meeting this week as major OPEC producers agreed on deeper output cuts to bolster prices, but heading into tomorrow remain unable to immediately secure Russian support for the decision. Gold prices jumped along with other defensive, safe haven assets, with April gold rising $25.00 or 1.5% to settle at $1,668 an ounce, its best finish in over a week after touching 7-year highs late last week, getting a boost on a declining dollar too.

Currencies & Treasuries

·     The U.S. dollar was mostly lower, falling sharply against safe haven currencies, Swedish krona and drops below 106.50 vs. the Japanese yen (lowest since September with 52-week low at 105.20 in August ’19), though mixed vs. emerging market currencies as the Brazilian real fell to record lows vs. the dollar and the South African rand dropped after the country posted its first virus case. Economic leveraged to oil such as Canada also dropped vs. the buck while the euro pushed higher above the 1.12 level (bouncing off its 52-week low of 1.0778 on 2/20)

·     Treasury prices jumped again as yields set new record lows again, breaking below previously weekly lows as investors continue to seek safe-haven assets; the yield on the 10-year fell as much as 15 bps to break below 0.9% briefly as another 25 bps of Fed easing is priced in for the FOMC announcement on March 18, which will limit the Dollar’s upside potential and keeps Treasury yield depressed; the 2-year yield down over 13 bps to 0.55% lows and the 30-yr new record lows falling over 15 bps below 1.55%.

Coronavirus update

·     The U.S. cleared $7.8B in emergency coronavirus funding late day for containment, vaccine development. World health Organization (WHO) said in its daily update said there are now a total of 95,265 reported cases of #COVID19 globally & 3281 deaths, with around 80% of cases continue to come from just three countries and notes the number of new cases in South Korea declining. Iran will keep schools and universities closed for another two weeks and check up on people in the worst affected areas by telephone, the health minister said on Thursday (in the past 24 hours, 15 more people had died, bringing the total deaths to 107 – there were 3,513 confirmed cases in all, up by 591 from the day before). California declared a state of emergency after the death of a resident linked to a cruise ship from San Francisco to Mexico as more than 50% of about 2,500 people on the ship were Californians. In Washington, all schools in Northshore, near Seattle, will close for 14 days. Switzerland had its first death. Italy suspended sports competitions, closed cinemas and theaters and told the elderly to stay home as the country reports 769 new cases and 41 new deaths bringing total confirmed cases there to 3,858 and 148 total deaths. France says it now has 423 confirmed cases, 138 more than yesterday.

Sector News Breakdown

Consumer

·     Retailers; BJ Q4 EPS dropped over 9% but was reported in-line with consensus as comparable club sales growth slows to 0.5% from 2.8% a year ago (COST reports earnings tonight); AEO Q4 profit and sales beat estimates, boosted by demand for its specific products, but shares fell after a higher open, dragged down by negative market sentiment; CATO reported February same-store sales decreased 3% and total sales declined 3% to $57.3M for the month.

·     Consumer Staples; in grocers, KR shares touch 52-week highs after Q4 adj EPS of 57c tops estimates by two cents on slightly better sales of $28.89B (up +2.9% YoY) while Q4 Identical-store sales excluding fuel +2% was in-line; KDP 40M share Spot Secondary priced at $27.25; not many places to high in today’s market sell-off, though pockets of staples held up well; restaurant and fine dining names dropped sharply again (RRGB, DRI, TXRH, CAKE, BJRI)

·     Media and Leisure movers; LYV continues to decline as concerns continued to grow over the impact the coronavirus would have on the company’s business; same concerns hitting theme parks, ticket, concert and events names as well such as MSG, FUN, MSGN, SEAS, SIX, MTN among them on fears of lower attendance in the future on travel bans, less attendees at events; lodging and hotel stocks also pressured with MAR, HST at 52-week lows, another brutal day for the cruise line industry (CCL, NCLH, RCL) after CCL said its second “Princess” cruise ship, the Grand Princess, diverted a ship bound for Ensenada, Mexico after a previous passenger on the vessel was reported to have died of coronavirus

Energy

·     Energy stocks declined with the broader market pullback along with oil prices as demand fears grow by the day amid the impact of the coronavirus on businesses and travel. Meanwhile, OPEC ministers agreed to cut production by 1.5m b/d in response to the coronavirus, delegates said, although their talks in Vienna didn’t include Russian Minister Alexander Novak, who yesterday had refused to support such a move. The proposed plan still needs to be approved by Russia and other non-OPEC allies on Friday; stock movers on news; MPC falls following reports that Seven & I Holdings, the Japanese company that controls 7-Eleven, dropped its effort to buy Marathon’s Speedway gas stations, according to Bloomberg; GDP Q4 adjusted Ebitda $20.9M vs. est. $19.2M; Q4 loss per share (8c) vs. EPS 58c YoY

Financials

·     Bank movers; financials and banks were hammered again, with shares of WFC touching it lowest levels since 2013 on plunging Treasury yields while the Federal Reserve issued an overhaul of Wall Street capital rules – shares of NTRS, CMA, MTB, SCHW, USB, CFG among banking names touching fresh 52-week lows as the ten-year Treasury yields dropped about 12 bps to 0.9%. Morgan Stanley said in a note today that near-term, outlook for the banks has turned decidedly more negative as they are cutting EPS estimates by ~6% for the midcap banks and taking down price targets by 11% as we build in a full 100 bps of Fed rate cuts in 2020, 7% higher CECL-related provision expense, and 70 bps of slower loan growth

Healthcare

·     Pharma & Biotech movers; companies leveraged to infectious vaccines bounced on coronavirus fears (NVAX, INO, DES), while there were some small pockets of beaten up biotech names; AMGN shares fell despite being upgraded to buy at Bank America and raise tgt to $250 from $245 citing a return to growth in 2020 that should provide momentum into data readouts later in the year; YTD underperformance tees up a good risk/reward into the remainder of the year, while the firm downgraded ALXN and MRNA to neutral from buy and added BMY to its US 1 list; in cannabis, CGC said that it was shutting down two of its cannabis-production facilities in British Columbia, and eliminating roughly 500 related jobs. Canopy also said that it no longer planned to begin production in a third facility in Ontario; said that it expects to record a pre-tax charge of C$700 million to C$800 million related to the announcement; BCRX said it is in active dialogue with relevant U.S. public health authorities as they assess potential approaches to treat and prevent coronavirus, and whether the company’s galidesivir antiviral could be useful; IONS shares fell on apparent concerns regarding a study suspension for its ASO therapeutic tominersen (RG6042) and implications for development, according to Wells Fargo late day

·     Medical equipment and devices; CODX shares jump after the firm reports higher shipments of its coronavirus test kits saying the FDA’s recent policy change and a spike in the number of cases worldwide led to a surge in domestic and international demand for its coronavirus detection kits; DGX announced it will launch a coronavirus (COVID-19) test service

Industrials & Materials

·     Industrial & Machinery; DY was upgraded to buy at Davidson as an extended period of share price declines coupled with meaningfully reset NT expectations and continued opportunity for a ramp in 5G/telecom infrastructure spend; DCI falls as lowers year EPS view to $2.05-$2.19 from $2.21-$2.37 (est. $2.25) and sales to down (-3%-7%) vs. prior view down -2% to up 4%; in aerospace, Dow component BA falls to its lowest levels since 2017 on slowing demand/travel fears; big name industrial stocks CAT, GE, UTX all pressured with global slowing demand fears

·     Transports; Dow Transports fell as much as 5.5% to below the 9,000 level led by a mass exodus of stocks, mainly airlines; airline stocks continue to lose altitude, as disruption caused by the coronavirus could cost global airlines more than $100 billion in lost revenues this year as carriers slash flights in response to the outbreak, the industry’s body IATA warned this morning; LUV said in recent days, experienced significant decline in customer demand, increase in cancellations; now estimates Q1 operating revenues to be negatively impacted in the range of $200M-$300M and now sees Q1 operating RASM to be in the range of down 2% to up 1% vs. prior view for increase of 3.5%-5.5%; A record two million containers of seaborne shipping capacity was idled in late February, according to Alphaliner, a Paris-based marine data provider. That is more than the 1.5 million containers of capacity idled in 2009 at the height of the financial crisis.

·     Metals & Materials; gold mining stocks (NEM, AEM, GOLD, AU) among beneficiaries from the rotation back into gold prices as stocks slump; however, chemical stocks, industrial related metal names (copper, steel, aluminum, etc.) were again pressured on slowing global growth fears

Technology, Media & Telecom

·     Internet; VIPS posts Q4 EPS of $0.41 beats est of $0.31 (2.17 yuan) and revs of 29.3 bln yuan ($4.23 bln) beating est of 27.77 bln yuan, as results driven by 19% jump in active customers/sees Q1 rev decline by ~15%-20% due to short-term impact from the coronavirus outbreak; SNAP was upgraded to buy at MKM with $19 tgt saying the recent sell-off in shares has created an attractive buying opportunity; CARS was upgraded to buy at Davidson saying the stock looked undervalued after a recent decline (falling more than 35% from peak late February); MEET shares declined after ProSiebenSat.1 Media SE and private-equity firm General Atlantic LLC agreed to pay $6.30 a share in cash to acquire the company ( 7.6% discount to yesterday’s closing price); NFLX remains strong as Piper noted today search index points to Q1 subscriber addition upside for both UCAN (U.S. & Canada) and international.

·     Semiconductors; SWKS was upgraded to buy at Canaccord but lower tgt to $125 saying it looks well positioned to grow faster than the broader semi market for the next several years due to more complex smartphone mix among Chinese OEMs requiring integrated RF solutions, growing IoT opportunities, and the ramping 5G market opportunities; MRVL outperforms for the quarter, and also announced extended partnerships with NOK and Samsung for 5G radio access networks; SLAB and MPWR were both upgraded to buy at Needham calling them attractive entry points after shares declined on growing investor concerns about the potential impact from supply chain; CY shares dropped late day on reports from MLex that the deal for Infineon acquiring the chip company is facing national security concerns from the Committee on Foreign Investment in the United States, or CFIUS, that could jeopardize their merger deal announced last June

·     Software movers; GWRE shares declined as reported strong 2Q FY20 results, beating estimates on revenue and EPS. However, GWRE provided 3Q guidance that was below consensus and lowered its full year outlook, citing a faster transition by carriers to cloud-based subscription models; SPLK reported EPS of $0.96 and $791.2M in revenue versus consensus of EPS of $0.97 and $783.4M, and although mgmt. reiterated its guidance, rev guidance for FY2021 is lower than consensus anticipated due purely to a higher mix of cloud bookings; CHKP downgraded to sell at Goldman Sachs with $100 tgt saying channel surveys have consistently reflected share loss for Check Point and recent checks at the RSA Conference implied a lack of improvement, while upgraded FEYE to buy from neutral with an $18 tgt saying the recent decline in FireEye shares have been more pronounced than the average move across the sector; shares of WORK and DDOG both notable outperformers in the software space today

·     Hardware & Component news; HPQ rejects unsolicited exchange offer from XRX; ZM shares dropped overnight despite a quarterly beat and guidance solidly above consensus, though expectations were very high for guidance as company seen as a major beneficiary from the reduced travel by corporate America using their video conferencing (guidance conservative); in optical, CIEN shares rise after Q1 results topped estimates with better margins saying coronavirus to impact business to certain extend in Q2 but says confident in long-term targets