Closing Recap

Friday, March 05, 2021

Equity Market Recap

·     What a wild day for U.S. equities, seeing massive intraday swings before ending sharply higher and rebounding off key technical levels once again for the S&P and Nasdaq Composite. Gains were broad based as energy stocks rallied with oil prices touching best levels since April 2019 (and up 7^th straight week), financials rise on Treasury yield rise, technology gets a boost after plunging early (Nasdaq hit correction territory before strong rebound), transports surge on economic hopes and even defensive sectors rose behind Telco, Consumer Staples, and Utilities. The February payroll report showed job growth accelerate at a faster-than-expected rate than expected which helped back the Fed case that rates are rising due to economic strength. As yields back off their morning highs (10-yr topped 1.62% after the jobs data but ended around 1.545), the tech heavy Nasdaq Composite rebounded majorly, rising over 500 points off the lows of 12,400 as investors took the opportunity to buy heavily beaten growth stocks. Stocks recovered from yesterday’s drop after Federal Reserve Chair Jerome Powell fueled investor worries by not taking a firmer stance against rising inflation and heightened bond market volatility. Europe’s Stoxx 600 down 0.8% on the day, (up 1% for the week), Germany’s Dax down 0.9% on day, FTSE 100 down 0.4%, France’s Cac 40 down -0.8%, and Spain’s ibex down 1.8%; European technology stocks were down 5%. Stocks close at highs on another buying of the dip.

·     White House economic adviser Heather Boushey told Reuters today that the U.S. economy is in a jobs hole that is deeper than it faced during the "Great Recession" and it needs more support to ensure a strong, speedy recovery. The comments came despite a strong showing in monthly jobs data earlier as the BLS said 379K jobs were added in February, well above the 182K estimate along with a surge in private payrolls as well (+465K) as unemployment declined to 6.2%. Treasury yields jumped following the much stronger-than-expected February jobs report to highs above 1.62% (big gains in jobs, unemployment drops and wages stay steady), currently validating the Fed’s view that a rise in rates is in-line with an improving economy.

Economic Data

·     February payrolls data much stronger than expected as added: +379K vs. +182K consensus and the prior month (Jan) upwardly revised to +166K from +49K; the unemployment rate: 6.2% vs. 6.3% consensus and 6.3% prior while wages rise 0.2% (in-line with estimates); Private payrolls surge +465K vs. est. +210K) and prior month revised to 90K from 60K

·     January International Trade in Goods and Services showed a deficit of (-$68.2B) vs. (-$67.5B) consensus and -$67.0B prior (revised from -$66.6B), while exports $191.9B and Imports $260.2B

Commodities

·     Oil prices jumped over 3.5% on Friday, with WTI crude up $2.26 to settle at $66.09 per barrel following a stronger-than-expected U.S. jobs report and decision by OPEC and its allies not to increase supply in April. For the week, Brent was up almost 4%, rising a seventh week in a row, while WTI was up about 7% after gaining almost 4% last week. With today’s close, WTI crude finished at its highest levels since April 2019. Oil surged on Thursday after OPEC+ extended oil output curbs into April, granting small exemptions to Russia. Meanwhile, the weekly Baker Hughes (BKR) U.S. total rig count stood at 403 as U.S. oil rig count rose 1 to 310 and U.S. gas rig count unchanged at 92.

·     Gold prices ended lower by -$2.20 to settle at $1,698.50 an ounce, its first close below $1,700 since June of 2020 as stocks rebounded off morning lows and the U.S. dollar extended gains, moving to its best level of the week. The dollar index (DXY) climbed above the 92 level (+0.4%) following another sign of an improving economy as jobs data for February came in well above expectations and unemployment dropped. He euro dropped to the 1.19 level to the downside vs. the buck while the Yen/dollar trades to highest levels since June 2020.

·     U.S. Treasury yields end little changed, but that doesn’t tell the true story on the day. The benchmark 10-year note hit its highest level in over a year earlier, popping above 1.62% (7 bps rip) after February’s payrolls report was stronger than expected, stoking inflation concerns. Nonfarm payrolls surged by 379,000 jobs last month after rising 166,000 in January, well above the 182,000 estimate. That move prompted a spike in yields and further fears of inflation.

·     But as stocks reversed late morning back to the upside, yields slipped as Fed officials again reiterated their views that the jump in yields is due to an improving economy. “The recent run up in yields on longer-dated U.S. Treasury securities reflects improving expectations for the U.S. economy”, St. Louis Federal Reserve President James Bullard said on Friday, adding that he is not eyeing a specific level of yields that might concern him. The gap between yields on two- and 10-year Treasury notes widened by over 147.1 bps, most since November 2015. 

Sector News Breakdown

Consumer

·     Retailers; GPS 4Q adj. EPS beat on better gross margins, while sales missed consensus primarily owing to store closures associated with COVID-restrictions; 2021 EPS outlook of $1.20-$1.35 on 5% EBIT margins brackets consensus at $1.27, with sales +mid-to high-teens vs. FY20; COST missed analysts’ estimates for Q2 profit as it spent more on employee benefits who worked through the COVID-19 pandemic and sanitizing its stores; HIBB profit nearly quadrupled in the last quarter, as net income was $23.9Mm, up from $6Mm as adj EPS of $1.40 beat the $1.37 estimate on sales $376.8M (missed the $381M est.); E-commerce sales grew 45% in the quarter, while brick-and-mortar sales grew 18%; HEAR reported 4Q results in-line with prior view on 2/10. FY21 revenue guide implies 3% growth YoY; BIG slight beat on EPS due to tax and share count as comps +7.9% in line with prior view and no FY guide; ELY tgt raised to $35 at Truist and raising 2021/2022 EBITDA estimates to reflect the pending close of the ELY/Topgolf merger,

·     Auto sector; TSLA tumbles to 3-month lows as tech sell-off intensifies, electric vehicle stocks tumble again with big declines for NIO, NKLA, AYRO, BLNK, SOLO, GP, RIDE, XPEV, LI among them (but all rally well off lows along with broader market rebound); FSR called favorite EV name at Morgan Stanley saying with nearly 80% upside to our $40 price target and nearly 300% to our $90 bull case, they position FSR as preferred risk-adjusted EV startup stock; NKLA was downgraded to neutral at JPMorgan saying the first batch of positive catalysts have played out; the story should heat up again in a few months from now.

·     Housing & Building Products; in building products, Loop Capital raised tgt on EXP to $145 (+$15) as their wallboard survey indicates significant upside to prior wallboard price assumptions; homebuilders defended at Citigroup noting the index fell -1.2% Thursday after Fed Chair Powell declined to push-back against the recent rise in interest rates and as the stocks are down -10.6% since peaking on 2/8/21 – they still see group benefitting from secular tailwinds (LEN, PHM, KBH)

·     Consumer Staples & Restaurants; defensive sectors such as food (CPB, K, CAG, TSN, KR) seeing strength the last few days as investors rotate out of high growth, high valuation names and into less risky defensive/staples; restaurants mostly lower on day along with pullback in “reopen” names as several of recent winners seeing profit taking

·     Leisure and Gaming; BALY was upgraded to Buy at Stifel after shares traded off meaningfully following earnings which factored the Q4 Adj. EBITDA miss, as well as potential investor disappointment around the timing of BALY’s highly anticipated online sports betting app launch being pushed back to 2H21 from Q2; NCLH sold 47.6M shares at $29.85 and plans to use the proceeds to repurchase exchangeable notes due 2026 and for GCP; SEAS said all SeaWorld Parks now open and operating with enhanced safety measures for the 2021 season; time share stock tgt raised at Truist, calling them favorite way to play the recovery (BXG to $11 from $9, HGV to $48 from $36, TNL to $74 from $62, VAC to $184 from $151

Energy

·     Energy stock movers; Shares of oil companies (CVX, XOM, MRO, APA, OXY, COP, etc.) rise premarket as crude prices hit 14-month highs after OPEC+’s decision yesterday to not increase supply in April as they await a more substantial recovery in demand; CVX acquired the remaining NBLX shares they do not already own in an all-stock transaction, where NBLX holders receive 0.1393 of a share of common stock of CVX; Barclays downgraded offshore drillers RIG, FI, DRQ despite Brent oil’s recent price appreciation as they still believe offshore’ s outlook is uncertain in 2021 and will not recover until late 2022; DZ Bank upgraded XOM to Hold with a $58 target; Citi initiated ARCH at Neutral with a $58 target as they see the company offering the best FCF yield in met coal for 2022, but do not see near-term catalyst to move met coal higher; AE reported Q4 EPS 65c on revs $249.75M vs 22c, $431.34 YoY; XOM hit a dry hole for the third time in four months in its otherwise successful drilling campaign offshore Guyana.

·     Utilities & Solar; In hydrogen, JPMorgan downgraded NKLA to Neutral as the company’s first batch of positive catalysts has played out and also lowered their price targets on BE, FCEL, PLUG but did not lower their estimates on the names, as they believe that the pullback in renewable energy (their Renewables Index is now in correction territory down 22% in one month vs S&P down 3%) will have a lingering effect on multiples, particularly the more speculative hydrogen pure-play stocks under coverage; AQN reported Q4 EPS 21c vs est. 22c on revs $492.4M vs est. $532.2M and expects FY21 adj EPS 71-76c (est. 73c)

Financials

·     Bank movers; Treasury yields jumped following the much stronger-than-expected February jobs report (big gains in jobs, unemployment drops and wages stay steady), helping boost bank stocks which tend to benefit from a rising rate environment; FITB was raised to the Conviction List at Goldman Sachs where they see 27% upside to $45 tgt, viewing it as a "cheap" way to play rate upside optionality with limited downside in a low rate scenario; IBKR initiated Buy and $89 tgt at Jefferies citing combo of elevated retail activity and the potential for higher interest rates both represent tailwinds to earnings in 2021 and beyond

·     Consumer Finance; MA tgt raised to $450 from $415 at Truist, calling it their favorite large cap FinTech ideas, and think the stock is an ideal holding for the current market environment; some of the stay-at-home, Fintech names that outperformed during the pandemic such as SQ, PYPL have seen pullbacks following the profit taking in high flier winners of 2020

·     Financial services; CSGP announced that it has withdrawn its bid to acquire CLGX and terminate any further acquisition discussions. CoStar Group believes rising interest rates will negatively impact the outlook for the mortgage refinancing market MSTR buys about 205 bitcoins for $10 million cash at average price of $48,888; now holds about 91,064 bitcoins

Healthcare

·     Pharma movers; sector quiet for a change as large cap defensive names saw strength with rollover out of high flier tech (JNJ, UNH rally early in Dow); Biotech space been under pressure as the XBI now down over 25% from Feb 9^th highs of 174.80) dropping below 130 now, with the 200-day MA support at 125.25; BGNE announces acceptance of a supplemental biologics license application in China for tislelizumab in second- or third-line non-small cell lung cancer

·     Healthcare services and providers; COO delivered Q1 revenue/EPS upside and FY21 guidance ahead of Street expectations and in MedTech and Equipment; EYES said the FDA approved the Argus 2s Retinal Prosthesis System, a redesigned set of external hardware initially for use in combination with previously implanted Argus II systems for the treatment of retinitis pigmentosa; FLGT shares surge on earnings as Q4 EPS $6.20 vs. est. $4.05; Q4 revenue $294.98M vs. est. $199.44M on higher guidance; TTOO posts Q4 revenue of $7.8M, below estimates of $8.1M on in-line EPS loss of 7c; ABT won FDA emergency use nod for PCR assay differentiating Sars-Cov-2 from other respiratory infections

Industrials & Materials

·     Transports; after falling with the broader market earlier, transports found solid footing midday, despite weakness in airlines (LUV, UAL, AAL, JBLU) as truckers, package delivery and rails helped rally the sector more than 1% midday; Dow Transports rise over 300 points (2.35%) at 13,500 late day despite broad weakness in airlines – rails leading with KSU, NSC, UNP all up 3.5% or better

·     Aerospace & Defense; SPCE extends recent decline as Chairman Chamath Palihapitiya sold 6.2M shares at an average price of $34.32 this week. He previously sold 3.8M shares in December to raise cash for other projects. He still holds a 6.2% stake in the space tourism company through a 15.8M share position; BA was upgraded to Buy with $275 tgt at Canaccord based on 1) the MAX return to service; 2) the improved outlook for travel and the airline recovery, which will correspond with a positive inflection in the aerospace cycle; and 3) the stabilization in the wide-body outlook; BDRBF was upgraded to Outperform at BMO Capital saying improvement in demand from pandemic lows and growth in aftermarket revenues alongside a steadily declining interest cost burden support upside

Technology, Media & Telecom

·     Semiconductors; AVGO reported a good JanQ and guided to AprQ with upside at $6.5B (est. $6.3B) noting JanQ strength from cloud & telco spend, and AprQ sustaining strength offset by weaker seasonal Wireless (several analyst raise tgt price); WDC upgrade from Neutral to Buy with $85 tgt at Goldman as believe the set-up is attractive given improving NAND supply/demand dynamics and our expectations for a recovery in the nearline market; ON estimates incurring costs between $58 mln and $62 mln during h1 2021 in connection with employment separations

·     Software movers; ORCL upgraded to Overweight from Equal Weight at Barclays and raise tgt to $80 from $66 at Barclay’s; JAMF reported another strong quarter, as ARR growth of 37% Y/Y easily exceeded the Street’s 31% forecast and added a record number of new devices under management; PAYC upgrade from Hold to Buy at Jefferies as shares off 25%from ATHs and 23% YTD and with the valuation below the pre-pandemic peak, we are getting off the bench; Bloomberg reported that MSFT is in danger of losing a contract to provide $10 billion of cloud computing services to the Pentagon; GWRE results came in above expectations on both the top and bottom line due to stronger license sales but outlook was mixed, with the revenue outlook being raised slightly, ARR holding firm, and operating income coming in below-consensus

·     Media & Telecom movers; SBAC upgrade from Outperform to Strong Buy with $309 tgt at Raymond James saying resulting valuation makes it attractive versus historical levels and REITs in general as well as specific REIT sectors; Telecom names (VZ, T, TMUS) saw strength early as investors rotated into high dividend paying/safer stocks; FOXA tgt raised to Street high $54 from $39 at Bank America citing some hidden assets not cooked into the stock’s value.

·     Hardware & Component news; CSCO was upgraded to Overweight at JPMorgan on a combination of Enterprise IT spending recovery tracking ahead of expectation, on-track transformation to subscriptions, as well as still inexpensive valuation following underperformance to peers, including FFIV, DELL, HPE, HPQ, and XRX