Closing Recap

Friday, March 06, 2020

Equity Market Recap

·     U.S. stocks were in an absolute whirlwind this week, ending the day lower (though rallied in a big way into the close off session lows 45-minutes prior) into the weekend as investors cut bait on fears coronavirus headlines will show a growing number of cases and associated deaths which have already spooked market sentiment. The flight to safety and defensive assets were prevalent amid the action in Treasury prices this week, as the 10-year yield plunged to a record low of 0.65%, the 30-year a low of 1.20% and the 2-year 0.39% before bouncing– as the latest tally of worldwide coronavirus cases is 100,330, still led by China (80,566), South Korea (6,593), Iran (4,747) and Italy (3,858) – with the U.S. total 233 with 14 deaths (though numbers will grow as testing has been moderate due to lack of kits). Stocks dropped globally amid mounting concern over the economic fallout of the spreading coronavirus and the risks disrupting global supply chains. The Nasdaq Composite fell below its 200-day moving average which stood around 8,420 (low 8,375), though managed to pop back above it late day while major averages recovered after falling more than 4%. Federal Reserve Bank of Boston President Eric Rosengren said in a speech today that the U.S. central bank should be allowed to buy a broader range of assets if it lacks sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases (though it did little to help markets). The other big story was oil prices, which plunged over 10% for its biggest one day decline in over 6-years, and falling to over 2-year lows as OPEC+ meeting failed to produce a new production output cut due to Russia failing to agree to the 1.5M barrel cut offered by OPEC. Lost in the mix today, a strong monthly jobs report for February and an unemployment rate dipping again.

Economic Data

·     The U.S. added 273K new jobs in February, well ahead of the 175K economist estimates, while the unemployment rate fell a notch to 3.5% from 3.6% and matched a 50-year low. Average hourly earnings rose 0.3% to $28.52 an hour (in-line with forecasts); the government revised the increase in new jobs in January to 273K from 225K while December’s gain was raised to 184K from 145K; Feb private payrolls 228K vs. est. 160K and manufacturing up 15K vs. est. decline -3K

Commodities

·     Oil prices were absolutely slammed, with WTI crude falling -$4.62, or 10.07% (near the lows of the day and biggest one-day decline since November 2014) to settle at $41.28 per barrel, down recently on weaker demand due to the coronavirus, but today markets disappointed after OPEC+ meeting in Vienna failed to come up with additional production cuts (current deal calls for cuts to stop in March), as OPEC decided yesterday on a 1.5M barrel monthly curtailment, but Russia wouldn’t agree, sending oil futures tumbling. The number of oil rigs operating in the US rose this week, as the count for oil in the US rose by four rigs to 682, highest since the week of Dec. 20^th

·     Gold prices rise a modest 0.3% to settle at $1,672.40 an ounce in what was a volatile session (high $1,690.70 and low $1,642.40 an ounce), managing to end the week high by about 6.8%, matching its biggest weekly return since 2011 amid a surprise 50 bps rate cut mid-week by the FOMC, causing the U.S dollar to crater from 3-year highs, and amid a rotation into defensive assets more immune to the fears on the economy due to the coronavirus impact.

Currencies & Treasuries

·     The U.S. dollar was pummeled, with the dollar index (DXY) falling as much as 1.1% to around 95.70 lows level despite the strong jobs report as expectations rise for a U.S. recession and further FOMC interest rate intervention (lower rates again at meeting in two-weeks); the euro touches highs of 1.1355 (best levels since early July of ’19 and now well below its 52-week low of 1.0778 on Feb 20th two weeks ago); the Japanese yen falls over 1% to 104.99 low (nearing 52-week low of 104.46 in August of last year)

·     Treasury market’s rally remain strong with yields falling across the board in the U.S. (and globally as German 30-year bond yield record low as well); the 30-year yield falls as much as 30 bps to record low of 1.203% (now down 22 bps at 1.32%), while the 10-year yield touched a low of 0.65% down 25 bps before paring losses to 0.75% as safe haven investments surge

Sector News Breakdown

Consumer

·     Retailers; BIG shares active after activists Macellum Advisors and Ancora Advisors nominate nine candidates for election to company’s board and send a biting letter calling for changes as they see a path through further improvement in operating performance (collectively hold a stake of 11% in shares); BURL was upgraded to buy at Citigroup; BJ was upgraded to overweight at JPMorgan; gun maker AOBC shares plunged after posting a significant quarterly miss for the third straight quarter (Q4 revenue $166.7M vs. $187M est.) and sees full-year revenue of 650M to $660M vs. $690M consensus and EPS of $0.58 to $0.62 is anticipated vs. $0.81 consensus; COST reported better earnings, and FNKO also active on earnings beat in toy space

·     Consumer Staples; USFD to buy Smart Foodservice Warehouse Stores from funds managed by affiliates of Apollo Global Management for $970M in cash; ULTA was upgraded to neutral at Nomura following recent sell-off but biggest downside risk to this call, in our view, is weaker consumer trends due to the coronavirus

·     Restaurants; SBUX shares slipped amid growing concerns over the impact of the coronavirus outbreak as the company said Feb China comp sales down 78% versus prior year but says believes impacts to operations are temporary; CMG was upgraded to outperform at William Blair following the more than 20% drop over the last month; separately, CMG founder, Steve Ells, has relinquished the position of Executive Chairman and has stepped down as a director; casual dining and restaurant names under pressure again early on expectations that virus will keep customers home as CAKE, TXRH, DRI, RRGB, CBRL among names hit hard lately); LOCO shares got a bounce on better earnings results while CHUY also a beat and better guidance for 2020

·     Casino & Leisure movers; cruise line RCL changes cancellation policy to allow guests on Royal Caribbean International, Celebrity Cruises, Azamara and Silversea to cancel up to 48 hours before sailing/applies to new and existing bookings; shares of cruise lines (RCL, CCL, NCLH), hotels (MAR, HST, H), theme parks (SIX, FUN, DIS, SEAS), and concert venues (LYV, MSGN) have been among the hardest hit on the coronavirus impact on travel bans, quarantines – tried to bounce today; online travel names mixed with BKNG downgraded at Argus but was initiated buy at Citigroup today along with EXPE in a group that has seen selling pressure as well

Energy

·     Energy stocks slammed again (oil prices fell over 8% to more than 2-year lows), with absolutely no bounce as news flow continues to weigh on sentiment and disappoint investors. Oil prices fell further two-fold, disappointed at OPEC+ talks end in Vienna end talks without a deal as Russia refused to agree with OPEC call yesterday for a 1.5M barrel a day cut to production to help plunging oil prices and on fears of slowing demand due to the virus impact. Oil and gas companies fall, tracking crude prices that dive more than 4% to their lowest since July 2017 as major oils (XOM, CVX, COP), E&P companies (EOG, FANG, APA), gas companies (SWN, RRC, COG), services (SLB, HAL) have been hammered; nat gas related E&P names (COG, SWN, EQT) outperform on likelihood nat gas prices will go higher because shale will have to slowdown now, and shale produces a ton of gas as a byproduct

Financials

·     Bank movers; probably the hardest hit sector over the last week given the significant collapse of Treasury yields, which will likely have a significant impact on lending margin returns for future quarters, taking its toll on large cap/regional banks and brokers, sending several names tumbling to 52-week lows such as MTB, RJF, BK, SIVB, SCHW, NTRS, C, USB, BAC, FITB; in stock news, JPM CEO Jamie Dimon successfully underwent emergency heart surgery and is recovering, the bank said Thursday; in analyst calls, Wells Fargo downgraded shares of RJF and said it is going neutral to negative on brokers, reducing EPS estimates because of the current, much lower interest rate environment, expectation for more Fed rate cuts this year and neg EPS estimate revisions; Piper said it is taking down our 2020E/20201E EPS estimates by a median 5.4% and 9.8%, respectively for its banking coverage

·     Insurance; PRU said it plans to issue a green bond with principal amount of $500M, representing the first issuance of its kind by a major U.S. life insurer; the green bond was offered alongside an additional $1B of Prudential debt on March 5.

·     Consumer finance and lending; SQ cut its adjusted loss per share forecast for Q1 to (2c-4c) down from prior view up 16c-18c (est. 17c) and sees FY adjusted EPS 88c to 92c, compared to prior 90c-94c (est. 93c), weighing shares (note over the last week both MA and Visa issued lower revenue outlooks due to the impact of cross border transactions amid the coronavirus)

·     Services; HRB shares dropped as earnings beat but mgmt noted that HRB’s assisted tax preparation volumes were down slightly versus the IRS’s data through the first four weeks of the 2020 tax season/BTIG noted data that through those four weeks reflected an ongoing shift away from assisted tax prep and toward do-it-yourself (DIY).

Healthcare

·     Healthcare services and providers; CVS said Aetna will waive co-pays for all diagnostic testing related to COVID-19/for next 90 days, Aetna to offer zero co-pay telemedicine visits for any reason; STIM rises in reaction to Breakthrough Device Designation in the U.S. for NeuroStar for the treatment of bipolar depression; COO reported F1Q results, with slight misses in revenue ($646M vs. $647M cons) and EPS ($2.69 vs. $2.72), despite benefit from tax and maintained its yearly revenue outlook; ANTM affiliated plans waive member costs for coronavirus test

Industrials & Materials

·     Industrial & Machinery; BGG rises early after announces details of its planned strategic repositioning/says actions include a sharp focus on the company’s global expertise in power application, a simpler organization through strategic divestitures and a streamlined overall business to drive improved capital; outside of the slowing global growth fears that has gripped the market on coronavirus impact, not much in individual news as industrial stocks dropped including CAT, DE, GE, UTX, IR, CMI, etc.)

·     Transports; sector has absolutely been decimated, led by a sharp plunge in airline stocks as one would imagine given the travel bans, fears of contagion from the coronavirus and generally slowing demand – but prices of airlines with a nice bounce on the day after many cratered to 52-week lows, along with package delivery and truckers

Technology, Media & Telecom

·     Semiconductors; AMD said it will maintain its revenue guidance for the current quarter despite the spread of COVID-19, though admitted that sales will likely come in toward the low end of its $1.8 billion, plus or minus $50 million range; CY continues it drop from yesterday after MLex said that it facing CFIUS pressure over merger deal announced last year; ON becomes the latest of a string of semiconductor companies to warn on revs due to the impact of the coronavirus on operations as cuts Q1 rev guidance to between $1.28B-$1.33B from $1.36B-$1.41B prior flagging soft order trends in the weeks after the Chinese new year, but says orders have picked up since; Oppenheimer reducing near-term estimates for the group as semiconductor companies continue to wrestle with the depth/duration of the coronavirus drag on supply/demand

·     Media & Telecom movers; TGNA rises after Reuters reported TV station operator GTN offered to buy its larger rival for $8.5 billion, including debt, for about $20 a share in cash and stock for Tegna, citing unidentified people familiar with the matter https://reut.rs/3cBISva ; CBB said it has determined Macquarie’s $15.50 per share offer is a ‘superior’ proposal to Brookfield Infrastructure’s at $14.50 per share; DISH was upgraded to Market Perform at Bernstein with a $34 price target calling the company a triple stack of leverage with underutilized capacity, high debt, and difficult to extract strategic value, but with the increasing visibility of T-Mobile/Sprint merger sees the strategic outlook for Dish’s wireless business as expanding

·     Software, Hardware & Component news; OKTA FY21 revenue guidance was revised higher by $20M to $770-780M (+32.2% y/y at mid-point), while billings and RPO growth were impressive as they accelerated vs. the October Q.