Closing Recap

Tuesday, March 10, 2020

Equity Market Recap

·     U.S. stocks rise for the first time in four days, with major averages extending gains late day to new highs after another volatile trading session. Bespoke noted last night that yesterday marked “the 10th Monday drop of 5%+ since we went to the 5-day trading week in 1952, and if we don’t rally 2.2%+ tomorrow, it’ll be a first.” After an initial jump at the open, stocks slumped midday before surging into the close, rising nearly 5% late day, a nice recovery after markets dropped over 7% on Monday due to coronavirus fears (which still remain) to the economy and plunging oil prices amid a price war between Saudi Arabia. Stocks got a boost overnight on market optimism after President Trump said in a White House news conference that he would seek payroll tax relief and other measures to help businesses amid the coronavirus outbreak. The comment by Trump, coupled with hopes for the Fed and other governments to deliver additional stimulus (in form of rate cuts, asset purchases) to combat effects of the spreading coronavirus, lifted markets. President Trump midday said cruise and airline industries will get help in comments today helping lift the beaten sector (lifting shares of those industries, while Vice President Mike Pence said health insurers also agreed to cover coronavirus-related telemedicine (TDOC, ONEM shares rose) in efforts by the U.S. to help. Trump in his meeting with Senate GOP today also talked about shale gas bailout idea as well, while Senators had mixed reaction to payroll tax cut idea. At the conclusion of the meeting with Republicans, there was no official resolution on the economic plan. Several airlines withdrew guidance today given the impact of the virus on operations, which continues to take its toll on the leisure, travel and lodging sector. Stocks also seemed to jump late day with the dollar and Treasury yields all surging.

·     Europe couldn’t hold on to its gains, as the Stoxx Europe 600 turned negative after gaining as much as 4.1% earlier, falling nearly 1% on the session as the headline from CDC’s Redfield saying Europe is the new China on virus forefront certainly not helping matters. Later in the afternoon, it was reported Italy coronavirus cases top 10,000, deaths jump to 631 – the recent cases is what has prompted the country to take extreme measures overnight, where no one is allowed to leave the city where they reside without special permission/bars and restaurants will close at 6:00 PM and no sporting events or large gatherings will take place until April 3^rd. There were reports late afternoon that Italy is discussing stimulus package of as much as eu16 billion.

Commodities

·     Oil prices rose $3.23 or 10% to settle at $34.36 a barrel, making back nearly half of its 24% decline on Monday on hopes Russia will come back to the table with OPEC on production and pricing for oil and on hopes for that US policy makers would launch stimulus measures to help soften the economic blow from the virus. Gold prices slid -$15.40 or 0.9% to settle at $1,660.30 an ounce, falling as the dollar and stocks rebounded after yesterday’s hefty declines. While gold has pulled back from the peak above $1,700 an ounce reached early Monday, it’s still near the highest level in more than seven years. Palladium dropped for a second day. Natural gas prices jump 15.8c or 8.9% to settle at $1.936 mln btu

Currencies & Treasuries

·     The U.S. dollar outperformed, rising over 1.75% to highs around 96.55 (off yesterday lows 94.65, but still down from recent 3-year highs around the 100 level), gaining vs. most currencies as stocks rebounded. The dollar jumped over 300 bps vs. the safe have Japanese yen to 105.50, while the euro slipped 1.35%, and the Canadian buck fell. Treasury yields rise after yesterday’s sharp decline that saw the benchmark 10-year hit a record low of 0.31%, though was up about 21 bps to 0.75% as yields gained across the curve. U.S. Treasury sold $38B of 3-year notes at a yield of 0.563% vs. 0.536% when issued prior, with the bid-to-cover (demand) at 2.20 vs. 2.56 prior auction and indirect bidders awarded 52.3% of the auction and directs only 3.7% (weak auction).

Sector News Breakdown

Consumer

·     Retailers; SFIX shares drop as guides Q3 revenue $465M-$475M below consensus $506.21M saying the coronavirus, macro themes led to lowered revenue outlook/guides Q3 Ebitda loss (4M-$10M) vs. est. +$5.5M and lowers year; DKS posted a 5.3% comp in Q4 to easily top the 3.2% estimate saying transaction and ticket growth was strong during the quarter/saw gross margin improve 70 bps Y/Y to 28.6% of sales to top the consensus mark of 28.2%; ASNA shares came under pressure following Q2 results and Q3 sales; in staples, CLX traded to another new all-time high on expectations of rising sales due to high interest in cleaning/disinfectant products; overall weakness in retailers on expectations of slowing traffic due to virus impact (M, KSS, DDS)

·     Housing & Building Products; PRPL reported strong 4Q sales and EBITDA above expectations, driven by strength in both wholesale and DTC/issued initial 2020 guidance, calling for revenue growth of 28-34% and adjusted EBITDA growth of 32-47%; HOME said it sees preliminary Q4 and FY2020 net sales, comp sales and adjusted EPS above the high end of previous outlook (sees Q4 sales of $397.7M vs. previous guidance range of high end of $385M to $393M)

·     Casino & Leisure movers; cruise lines remain in the spotlight amid the coronavirus impact to the companies financials as bookings slow; RCL today withdrew its Q1 and full-year guidance citing the impact of the virus while S&P warned RCL may be cut to junk status, now on watch negative; casinos had an early bounce in another sector suffering from fears of reduced customers (WYNN, LVS, LVS, MGM); hotels also trying to recover though HST the latest to withdraw guidance; MTN withdrew its 2020 forecast amid a dearth of snow at some key ski mountains and the ongoing spread of the coronavirus outbreak which has reduced visitors

·     Auto sector; KeyBanc lowered estimates for auto suppliers under coverage to reflect their best assessment of COVID-19’s impacts strictly in China; KAR was upgraded to neutral from sell at Guggenheim noting shares have significantly underperformed the market since the IAA-spin and more recently during the broader coronavirus related sell-off

Energy

·     Energy stocks tried to bounce after yesterday’s blood bath that crushed many names in the complex between 10%-40% in some cases on lower oil prices, reduced production, and global slowing demand – but fell off highs. This morning, Saudi Arabia plans to supply a record 12.3M barrels of oil per day next month, up 25% from the previous month, as it ratchets up its oil price war with Russia. The production boost pushes Saudi Aramco’s supply over its maximum sustainable capacity (in February, Saudi Arabia produced ~9.7M barrels per day). On Monday, benchmark oil prices dropped more than 20%, the largest since the 1991 Gulf War.

·     Analyst rating changes in energy sector after slide in oil: Citigroup downgraded HAL, SLB, NOV, WHD, LBRT, NEX, NINE, SOI, and WTTR to Neutral with top pick remaining BKR, which they retain as lone OFS Buy given its balance sheet strength, robust equipment backlog, forthcoming aftermarket growth, more limited U.S. shale D&C exposure, and >4% dividend; Stifel sharply reducing 2020-21 estimates for oil service coverage universe and cutting target prices while downgrading the shares of FTSI, TH, TTI, and USWS to Hold from Buy; Raymond James downgraded a handful of names (PUMP, HLX, OIS, PTEN, NINE, USAC) saying we are likely to see activity fall at the fastest rates we have seen since 2016 (and likely even faster). Oilfield service companies will be tested in terms of the rate at which they can cut costs

·     Energy stocks; group partially rebounds after plunging yesterday on Saudi/Russia price war; in the E&P sector; OXY slashed its dividend to 11c from 79c while also announced it will reduce 2020 capital spending to between $3.5 billion and $3.7 billion from $5.2 billion to $5.4 billion and will implement additional operating and corporate cost reductions; MRO said it will cut 2020 spending by $500M to $1.9B, which is ~30% lower than its 2019 capital budget, hit by slumping oil prices/says will immediately suspend all operated drilling and completion activity in Oklahoma, where it is currently running three rigs and one frac crew (the news follows recent cutback from FANG, PE as well on reduced oil; CRC shares fell after reducing its capital investment due to the changes in the commodity market to a level that maintains the mechanical integrity of its facilities; FTI said it won a "significant" contract for engineering, procurement, construction and installation work from BP offshore Angola.

Financials

·     Bank movers; shares of the big U.S. banks partially recovered after the bludgeoning on Monday, reflecting a broader rebound on hopes of a coordinated policy easing to offset the impact from the coronavirus epidemic; shares of JPM, WFC, BAC, C and MS all posted strong returns after President Donald Trump promised "major" steps to combat the virus outbreak also saying he would discuss a payroll tax cut with congressional Republicans. A rebound in oil prices also helped ease pressure on banks tied to energy loans (CMA, TCBI, ZION, CFG) on fears of defaults

·     Consumer finance and lending; IMXI posted revenue slightly below the Street as EBITDA beat, and Cowen downgraded to market perform noting while the co continues to win share from competitors they see a more pronounced revenue deceleration in 20/21E relative to prior expectations

Healthcare

·     Pharma movers; TCON shares fall after the company and its development partner, Santen Pharmaceutical, discontinued development of its experimental treatment for wet age-related macular degeneration as drug, DE-122, did not improve the vision of patients; MYL wins court ruling over SNY’s Lantus solostar patent as Sanofi patent expiring in 2024 is invalid

·     Biotech movers; NVAX rises after the Coalition for Epidemic Preparedness (CEPI) has awarded $4M to Novavax to support the development of a COVID-19 vaccine. It is currently assessing multiple candidates in animal models/EBS will provide contract development and manufacturing services and will supply product through Phase 1 testing; UTHR was upgraded to buy at Jefferies saying its U.S. physician survey showed growth potential in the company’s Remodulin franchise despite generics as improved line-extension products launch in 2020.

·     Healthcare services and providers; MCK reports that its offer to stockholders to exchange its common shares for shares of PF2 SpinCo, which holds MCK’s interest in CHNG is overprescribed as about 98.2M of MCK shares were tendered, of which ~15.4M were accepted in exchange for ~176M SpinCo shares; CHNG was upgraded to outperform and $19 tgt at Wells Fargo noting that McKesson is almost completed its exchange offering and FCF is improving; GKOS will replace AKS in the S&P SmallCap 600 index on Friday March 13 (CLF is buying AKS); TDOC and ONEM spike on VP Pence headline that insurers agreed to cover virus-related telemedicine

Industrials & Materials

·     Materials, Industrial & Machinery; XYL was downgraded to underperform at Credit Suisse not as much predicated on absolute downside but underperformance relative to the sector as global markets stabilize; CAT shares fell sharply off opening highs of just above $109, moving below yesterday lows around $104; CVIA slipped after missed earnings as adj EBITDA reached $0.1M, compared to $43.9M in Q4 2018, due to negative impact of pricing declines for proppants

·     Transports; UPS was upgraded to buy at Stifel calling it one of the names most interesting to them due to healthy cash generation is UPS; Ryder (R) was also upgraded to buy at Stifel as believe the upside potential here significantly outweighs the downside potential; tanker stocks (FRO, TNK, STNG, NAT) were among the top gainers as Saudis make supertanker bookings to carry the flood of oil it announced it would release

·     Airlines officially withdrawing guidance due to coronavirus: DAL withdrew its March quarter & year financial guidance, said to remove 15 points of system capacity/international capacity reduced by 20-25%, domestic by 10-15% and said is instituting companywide hiring freeze and offering voluntary leave options; AAL announced additional schedule changes in response to customer demand related to covid-19 as it will reduce international capacity for summer peak by 10% vs previous selling schedule, including a 55% reduction in trans-pacific capacity and plans to reduce domestic capacity in April by 7.5% versus current schedule; UAL also withdrew its guidance for Q1 as sees incurring losses in quarter and sees reductions in May of at least 20%; SAVE said it is cutting April capacity by 5%, scraps 202 guidance and CEO takes 10% pay cut

Technology, Media & Telecom

·     Internet; BKNG withdrew its 1Q guidance, which had called for room night declines of (5)-(10)%, gross bookings of (10)-(15)%, revenue of (3)-(7)%, and adj. EPS of $9.05-$9.65, citing worsening travel demand in Europe and North America since it guided on 2/26 and suggested it was unable to reliably quantify the impact of the Covid19 outbreak.

·     Semiconductors; CY rises following news it received clearance from the Committee on Foreign Investment in the United States to be acquired by Germany’s Infineon Technologies; most semi names bounced given the sharp decline in the sector, led by SMTC ahead of earnings tomorrow

·     Software movers; EVBG upgraded to outperform and $119 tgt at Oppenheimer saying Covid-19 is likely to accelerate the CEM product suite adoption, has more confidence in 3- to 5-year 30% revenue growth CAGR and thinks investors likely to pay a premium valuation going forward; ATVI officially announced the anticipated Call of Duty battle royale Warzone, a game free-to-play and available to all, with or without owning CoD: Modern Warfare; ATVI was also upgraded at Oppenheimer given the pullback in shares as believe momentum from the CoD franchise will contribute to material upside