Closing Recap

Monday, March 16, 2020

Equity Market Recap

·     Global stocks markets cratered into the close, ending near the lows of the session as the impact of the coronavirus takes its toll on some of the world biggest operations, with companies, countries and local states and governments on virtual lockdown, shutting school, restaurants, travel, and retailers closing stores all in an effort to contain the virus outbreak which has created mass panic selling. U.S. equities dealt with their third circuit breaker market halt in the last 2-weeks (falling over 7%, prompting a 15-minute trading halt), even after massive efforts from the Fed on Sunday which announced an emergency 100 bps cut to 0%-0.25% and promises over the next few months to lift its holdings of Treasury paper by $500B and holdings of MBS by $200B while Fed explicitly encouraged banks to make use of its discount window and to use their capital and liquidity buffers as they lend to households and businesses affected by the coronavirus. With today’s decline, the Dow Jones Industrial Average dropped 30% from its record highs of 29,568.57 on February 12^th of this year, though all three major indices (and Russell 2000 as well) down over 20% from February highs (considered bear market territory). The Nasdaq Composite touched an intraday low around 6,900, while all eleven S&P sectors were lower again. Investors are hoping for either a reduction in confirmed cases, or a stimulus package for the most affected sectors from the virus (travel, leisure, and lodging) and small businesses to improve sentiment.

·     Coronavirus measures by States/countries: drastic measures being taken by countries, states and governments to prevent the risk of spreading the coronavirus outbreak – as schools were closed in New York city through April 20^th and New Jersey schools remain closed as well and NY, NJ, CT to ban gatherings of more than 50 people. The city of Philadelphia is closing all non-essential businesses at 5PM today. Canada said it was closing all borders to all non-citizens. Italy 349 people have died from COVID-19 in the country in the past 24 hours, bringing the country’s total number of fatalities to 2,158 while overall coronavirus cases topped 168K worldwide. Washington State will shut bars and restaurants for two weeks.

·     Central banks in action: The Federal Reserve cut its benchmark rate by a full percentage point to near zero and pledged to buy $700 billion in bonds. It will let banks borrow from the discount window for as long as 90 days and reduced reserve requirement ratios to zero percent. Along with other major central banks, it also lowered the rate on standing U.S. dollar liquidity swap arrangements by 25 basis points.

·     Today’s max 12% decline in the S&P 500 marked the third worst loss for the index ever, trailing only the Black Monday crash in 1987 and the Great Depression in 1929 according to Bloomberg earlier saying the good news is that if history is an accurate guide, the markets are almost guaranteed to rebound tomorrow: notes on 10/19/1987 fell -20.47% then up 5.33% next day, on 10/28/1929 fell -12.94% then gained 10.16%, on 10/29/1929 fell -10.16% then rose 12.53%.

Commodities

·     Commodity prices were absolutely pummeled given the plunging global growth fears along with reduced oil production, demand due to the coronavirus sending oil prices to their lowest closing levels since 2016 (WTI crude and Brent both drop below $30 per barrel). WTI crude dropped -$3.03 or 9.55% to settle at $28.70 per barrel while Brent dropped -$3/80 or 11.23% to $30.05 per barrel. With global oil demand plunging due to the novel coronavirus contagion, prices are in free fall. This has been worsened by the world’s top producer, Saudi Aramco, planning to boost oil supplies to 12.3 million barrels per day in April, and Russia lifting all production curbs.

·     Precious metals no safe haven today as gold erased its gains for the year, sliding -$30.20 or 2% to settle at $1,486.50 an ounce (lowest settlement since December), while platinum prices tumbled by more than a quarter as precious metals were hit by another wave of selling as investors attempt to raise cash.

Currencies & Treasuries

·     The U.S. dollar dropped about -0.6%, down against safe haven currencies (Japanese yen), with the dollar index slipping to around the 98 level following the Fed’s move to lower interest rates and announce another QE stimulus measure. The dollar rose further against the Canadian dollar (linked to energy markets), while the Pound dropped as European markets remain in turmoil. Treasury market’s rally as yields tumble (10-year yield hit low 0.62% before paring losses to above 0.8%, but ended around -0.7%, dropping late day along with the roll in stocks).

Economic Data

·     The Empire State Manufacturing Index dropped last month to negative -21.5, the lowest since March 2009, from positive 12.9 in February and optimism about the future was the lowest since the financial crisis more than a decade ago, the Federal Reserve Bank of New York said to reflect the impact from the coronavirus outbreak. The 34 point drop was the largest in the survey’s history dating to 2001

Sector News Breakdown

Consumer

·     Retailers; retailers dropping again on slowing traffic amid retail store closures in parts of the country (weighed on GPS, LB, CPRI, TPR among top losers in the S&P); VFC announced the temporary closure of all owned retail stores across North America, effective March 16 through April 5; URBN decided to close all stores globally until at least March 28, while e-commerce and subscription businesses will continue to operate; other retailers that announced retail closures included NKE, PVH, ANF, and LULU; COST was upgraded ay Morgan Stanley saying it should be a share gainer due to its in-store and online value

·     Consumer Staples; defensive MO upgraded at Morgan Stanley to overweight as see an attractive 2:1 bull/bear skew and 22% upside to our $49 PT; CLX upgraded to overweight at JPMorgan on the back of higher than previously modelled demand for 20-25% of its products with disinfecting claims (home and institutional use, including hospitals), as well as trash bags, salad dressing and charcoal as more consumers stay home; food service wholesales such as PFGC, USFD, CHEF declined as casinos, hotels and some restaurants shudder operations to limit spread of virus

·     Restaurants; industry remains among the hardest hit as people stop going out amid fears of the coronavirus; group double whammy after select states move to delivery and take-out services only this weekend as some restaurants in states without mandates have removed tables across their store-base, and some towns/cities have elected to implement delivery/take-out only

·     Casino & Leisure movers; another day of absolute destruction for casino, cruise lines (CCL, RCL, NCLH), theme park (SIX, FUN, SEAS, DIS), movie theatre (AMC, CNK, IMAX) related names on closures, hits to revenue and lost traffic; casino stocks plummet amid widespread closings; casino stocks drop after a large number of companies closed resorts (PENN, MGM, BYD, WYNN) due to the coronavirus outbreak and directives from state authorities; MTN said it will suspend the operations of all its North American mountain resorts and retail stores March 15-22 and will use that time to reassess approach for the rest of the season; gym related stocks mixed as PLNT shares decline with measures put in place while PTON, NLS shares got a boost

·     Auto industry; FCAU shares fell after saying it will temporarily suspend production across the majority of their European manufacturing plants until March 27; AZO was upgraded at Wedbush and Morgan Stanley as believe aftermarket parts/retailers will provide investors with further downside protection; RBC Capital downgraded shares of AXL, DAN, BC, HOG in auto and leisure space saying in terms of absolute units, they don’t have the industry getting back to 2019 levels until 2022, and even by 2023, still ~3% below 2017 peak/February 2020 retail sales were down -80% y/y and checks indicate that March-to-date is probably down about -50% YoY; the UAW, GM, Ford (F) and FCAU will form a coronavirus task force to implement enhanced protections for manufacturing and warehouse employees at all three companies

Energy

·     Energy stocks bludgeoned on reduced production, plunging oil prices (Saudi Arabia/Russia price war certainly not helping), and declining demand (from travel) given the coronavirus impact; in the E&P sector, several more companies reacting as EQT cut its capital expenditure forecast for the full year as sees FY capital expenditure $1.08B-$1.18B from prior view $1.15B-$1.25B while VET cuts 2020 capital budget by c$80m-c$100m, revised capital budget C$350m to C$370m and cuts its monthly dividend to C2c from C11.5c; EOG updated its full-year 2020 capital plan as a result of the significant decline and increased volatility of commodity prices; WLL reduces its full-year capital budget plan to $400M-$435M, a $185M or 30% decrease at the midpoint from 2020 levels, due to the volatility in commodity prices and said it expects to drop one rig and one completion crew within the next month.

·     Equipment and services, FTI, an oilfield services provider, shelved the plan to split up its two businesses, citing material changes in market conditions due to the coronavirus; in research, TS, HP, DRQ, DO were upgraded at Morgan Stanley while downgraded HAL, NBR, PDS, PTEN, RES, FET, FTSI, VAL shares; in majors, Goldman Sachs upgraded HES to buy while Jefferies downgraded BP, RDSA, OXY as expect that 1H20 will be the most oversupplied oil market in the modern era; in E&P research OXY, CLR, FANG downgraded at Morgan Stanley and upped XEC

·     Refiners; Morgan Stanley said sharply falling oil prices and more medium sour supply will benefit refiners, but looming demand risk weighs on the margin outlook with the situation potentially getting worse before better (upgraded PSX while downgraded PBF); Credit Suisse said PSX and VLO are the only two names in the coverage for which they see some positive traction as relative longs vs. other refiners or broader energy.

Financials

·     Bank movers; obliteration for the banks on several factors outside of the virus concern, as eight of the biggest U.S. banks (JPM, BAC, C, GS, MS, BK, STT, WFC) will stop buying back their own shares, and will instead use that capital to lend to individuals and businesses; also weighing was rate cuts as the Fed slashed its benchmark rate near zero over the weekend, its second emergency interest-rate this month. Banks are under stress as interest rates fall, crimping profits, and as concern rises that borrowers won’t be able to pay back loans.

·     Insurance; U.S. and European insurers (AIG, TRV, MET, PRU among them) slumped as they face sharp rise in claims at a time of big investment losses due to the spreading coronavirus pandemic; as recession threatens the global economy along with rising bankruptcies, all companies with trade credit insurance, from airlines to retailers, are feeling the heat, which is creating pressure on insurers. Insurers’ investments are also a cause for concern as big government bond holdings are becoming problematic

·     Consumer finance and lending; AGNC was upgraded to Buy at Nomura following the company’s late Friday release of its Feb ending book value (of $17) and March dividend (which was reaffirmed at$0.16), both of which surprised to the upside/also Fed announced Sunday night it will begin purchasing$200bn of agency MBS as part of a new wave of QE

·     Credit card monthly Master Trust data; SYF reports February net charge off rate 4.22% vs. 4.26% last month and 30-plus day delinquencies 2.80% vs. 2.77% last month; COF said February charge-offs 4.68% vs. 4.31% prior month while 30+ day delinquencies 3.88% vs. 4.10% prior month; JPM Feb net charge-offs 2.20% vs. 2.19% last month and delinquencies 1.14% vs. 1.14% last month; BAC charge-offs for Feb. of 2.52% vs. 2.62% YoY and Feb. delinquencies 1.61% vs. 1.70% YoY

·     REITs; MAC cuts dividend to 50c from 75c in REIT space; mall REITs pressured given the closures of several retailers in various locations, as rent fears rise (SPG, TCO, MAC, WPG)

Healthcare

·     Pharma movers; MNK shares drop after the U.S. District Court for the District of Columbia has upheld the decision from CMS to reverse its determination of the base rate average manufacturer price (AMP) use to calculate rebates for Mallinckrodt’s top seller Acthar Gel (if the ruling stands, it will have to pay ~$650M for the period from January 1, 2013 to the present); MRNA rises on reports of clinical trial of a coronavirus vaccine that would start today being co-run with NIH, will start with a 45-patient healthy volunteers safety trial in Seattle

·     Biotech movers; REGN and SNY said they have begun clinical trials to test a drug’s efficacy in treating patients with severe Covid-19 cases/the Phase 2/3 trial, beginning at hospitals in New York, will enroll as many as 400 patients to test the companies’ sarilumab drug in patients with severe disease caused by the new coronavirus; BNTX jumped following announcement that it expects to initiate clinical testing of BNT162, its mRNA vaccine candidate against COVID-19, by the latter part of next month (subject regulatory sign-off); William Blair said although the coronavirus currently appears to have limited impact on the industry, disruptions in the U.S. clinical trials, drug launches, and FDA timeline delays could be on the books for biotechs

·     Medical equipment and devices; FLDM rises early on the heels of its announcement that a consortium of medical schools, led by the Icahn School of Medicine at Mount Sinai, is using its microfluidics technology to develop an epigenetic (related to non-genetic influences on gene expression) test for the early detection of SARS-CoV-2

·     Healthcare services and providers; TDOC was upgraded at KeyBanc after the Company reported a pick-up in patient demand related to fears of COVID-19 saying by their models, TDOC is now set up for 30%+ revenue growth in 1H20. Also, 50%+ of the new visits last week were "first timers," which could translate to further utilization even as COVID-19 fears subside

Industrials & Materials

·     Transports; Dow Transports fell over 8%, touching lows around the 7,000 level (7,008), its lowest levels since June 2016 led again by airlines; UAL said that it is projecting March revenue will be $1.5 billion lower than a year ago, as the air carrier said there have been more than one million fewer passengers in just the first two weeks of the month as a result of the COVID-19 pandemic/will reduce capacity by 50% for April and May; AAL will slash long-haul international flights by 75% because of the collapse in travel demand and government restrictions imposed to slow the spread of coronavirus; weakness across the board truckers, rails, package delivery

·     Metals & Materials; TX upgraded to overweight at Morgan Stanley as see an attractive entry point emerging after the recent sell-off/still expect earnings to improve in 1H20 and for Ternium to continue delivering superior results over the cycle; copper prices fell to 40-month lows (FCX, SCCO) following slowing economy fears along with other metals names

·     Paper & Packaging; Bank America upgraded SON, BCC, SLGN, while downgraded UFS because in a recession packaging and quality tend to do best while paper/forest tends to perform better when we are deeper into a recession adding that as consumers stay in, e-commerce gets a boost that could result in pick-up for box businesses while weaker housing activity hurts plywood peddlers.

Technology, Media & Telecom

·     Media & Telecom movers; Raymond James upgrading VZ to Outperform while downgraded AT to market perform and lowered CTL to an underperform rating while in cable, downgraded CHTR to Outperform from Strong Buy and CMCSA to MP and downgraded CONE in data centers saying names across all the sectors have a lot of debt and a lot of capex and in firms experience, the line is drawn at 2.5x net-debt to EBITDA, and anything over this is suddenly viewed as toxic and even a bankruptcy risk; VVI lowers Q1 guidance to loss (44c-59c) below estimate loss of (2c) on lower revenue and withdraws FY20 guidance as GES business is being impacted by near-term event postponements and cancellations resulting from virus concerns

·     Hardware & Component news; AAPL said Saturday it’s closing its hundreds of retail stores outside of Greater China until March 27 and is moving to remote work in order to help reduce the spread of coronavirus; in communication equipment, Citigroup downgraded HPE, GPRO and INFN to sell from neutral and downgrade COMM to neutral from buy as the firm again reducing sales & EPS estimates but this time for actual demand declines whereas our prior reductions were more of a push out of demand and potential recouping of that demand later in 2020/cutting all our estimates below company guidance metrics given the elongated resolution of the Coronavirus and the ripple economic effect associated with the global nature; AVYA upgraded to overweight at Morgan Stanley while remain OW on COMM, lean positive IIVI and cautious where we see potential cash burn (INFN, CASA, PLT)

·     Semiconductors; the Philly semi index (SOX) falls over 8% after touching lows of 1,354 (52-week lows on 5/29/19 at 1,287) – with CREE, NXPI, MCHP, MXIM, TXN, SMTC, MRVL touch 52-week lows; as high flying group of 2019 under pressure in tech today