Closing Recap

Tuesday, March 17, 2020

Equity Market Recap

·     U.S. stocks surge after the U.S. government announced measures to stimulate the economy, directly looking to put money in American’s pockets while also helping struggling small business and beaten up sectors that have seen business come to a standstill (airlines, restaurants, cruise lines, hotels) in some cases due to the impact of the coronavirus (travel restrictions, business closures). Treasury Secretary Steve Mnuchin said late day the plan would inject $1 trillion into the economy, including direct checks and liquidity to help small businesses. He also said the gov’t would defer $300M in tax payments to the IRS (for up to 90-days), and said individuals can defer up to $1M in tax payments (corps up to $10M) while also said will lay out details of next aid package Tuesday evening. All 11 S&P 500 industry sectors were up decisively, with defensive utilities and consumer staples leading. The gains today were solid helping markets turn “green” for St Patrick’s Day, but were minuscule in comparison to the wealth destruction that has occurred over the last few weeks, with major averages having dropped as much as 30% from February peaks. Stocks were negative earlier in the session as the Dow dropped below the 20,000 level for the first time since early 2017 (touched low 19,882) before rebounding.

·     Coronavirus update: 185,067 cases, 7,330 deaths, as COVID-19 clinical trials begin in the U.S., with over 5,600 confirmed cases in the U.S. alone (New York approaching 1,000 cases) as per CNBC, while Italy reported 3,526 new cases and 345 new deaths with total to 31,506 cases and 2,503 dead. The CBOE Volatility Index (VIX) pulled back after closing at an all-time high (82.69) on Monday, surpassing the close of 80.86 on 11/20/08. Defensive sectors saw the biggest gains today led by consumer staples such as food and household products (CLX, CPB, GIS, KMB, CHD, HSY) and utilities (AEE, D, SO, XEL, ED) as investors put some money to work in beaten up sectors. More help with the coronavirus as New York State AG & governor Cuomo said they are suspending state debt collection saying New Yorkers with student debt, medical debt & other state-referred debt will have payments frozen for at least 30 days. Sectors such as energy (as oil falls another 6%), cruise lines, airlines, movie theatres, restaurants, and retailers remain the most exposed to the travel bans and closures, with many down well over 50% from year highs.

Fed News

·     The Fed was back to help markets as in its latest emergency action, the Federal Reserve established a lending facility to buy short-term loans from banks and companies to ease the flow of credit as the economy grinds to a halt from the viral outbreak. The Fed revived a program it first used during the 2008 financial crisis to unclog a short-term lending market for what is known as “commercial paper.” Large businesses issue commercial paper to raise cash to meet payrolls and cover other short-term costs. Borrowing rates in the commercial paper market have been spiking as more companies have sought to raise cash in the expectation that their revenue will plunge. t the same time, money market funds, among the largest buyers of the short-term loans, are seeking to sell commercial paper themselves. All that activity has made it harder for banks and other companies to raise the cash they need. The Fed said it has set up an investment vehicle to buy the commercial paper with the approval of the Treasury Department. The Treasury has also committed to guarantee up to $10 billion of the loans, to prevent the Fed from taking losses.

Commodities

·     Commodity prices were mixed with gold rising over 2%, but oil prices reversed earlier gains, sliding 6% or $1.75 to fresh 4-year lows of $26.95 per barrel as the U.S considers further travel restrictions to further contain the coronavirus outbreak. Gold prices rallied $39.30, or 2.6% to settle at $1,525.80 an ounce, bouncing after posting a 5-session decline. Oil prices inched higher initially ahead of weekly inventory data, but was again dragged down on slowing global growth, potential US recession and a price war between Russia and Saudi Arabia.

Currencies

·     The U.S. dollar was broadly higher against most currencies, posting a more than 2% gain against the euro (its biggest one day loss since June 2018) to lows of 1.0955 and the British Pound was down as much as 2% to lows of 1.2003 before paring losses (its 6^th day of losses). Emerging market currencies leveraged to oil (Russia, Canada) also tumbled again as the U.S. dollar posted a 4-year high against the Canadian dollar, topping the 1.40 level. The dollar index (DXY) gained 1.6% to around the 99.60 level (52-week high 99.91 on 2/21).

·     Treasury markets declined as yields rebounded after yesterday’s losses as the 10-year yield bounced 28 bps to move back above 1% late day, with traders putting money to work in riskier assets as stocks make back a portion of its recent losses following more stimulus measures by the Fed and the government announcing help directly to American.

Economic Data

·     U.S. retail sales fell in February by the most in a year, as retail sales fell (-0.5%) below the estimate for a 0.2% increase while retail sales less autos fell (-0.4%) in February worse than the est. up 0.1%; retail sales fell to $528.113b in Feb. vs. $530.93b in January; the report suggests consumers had already begun to scale back before the number of coronavirus cases in the U.S. began accelerating

·     Industrial Production for February rose 0.6%, topping the 0.4% estimate after falling (-0.5%) in January (which had been revised down to -0.5% from -0.3% prior); Capacity utilization rose to 77% from 76.6% in January, revised down from 76.8% (est. 77.1%)

·     Business Inventories fell (-0.1%), in-line with expectations, while in housing the Home Builders’ Confidence index in March falls to 72 vs 74 last month, according to NAHB/Wells Fargo, with the present single family sales falls to 79 vs 81 last month, future single family sales falls to 75 vs 79 last month and prospective buyers traffic falls to 56 vs 57 last month

Sector News Breakdown

Consumer

·     Retailers; the list of retailer companies shutting stores temporarily to deal with the coronavirus impact grows by the day (AEO, CHS, EXPR, FL, FOSL, JWN, LB, M, PLCE) and many of those companies are also withdrawing their future looking forecasts amid the uncertainty to their businesses; WMT was upgraded to outperform at Oppenheimer ($125 tgt) as believe WMT is well positioned to still deliver on financial targets, and shares could benefit from money flows shorter-term as investors seek safety in a more uncertain global economic backdrop

·     Consumer Staples; CLX extends recent gains on expectations of increased sales 9trades to 52-week highs) along with gains in CHD, KMB, while food related names also rising early (CAG, HSY, GIS, CPB) as consumer staples getting a bounce; ARMK shares plunged mid-morning while Stifel noted earlier in a note that with shares down 59.2% since 2/21/20 (versus the S&P 500 down 28.5%), they believe the shares are pricing in an existential threat to the business; APRN shares jumped on expectations that the meal-kit provider will benefit as restaurants nationwide close

·     Restaurants; along with airlines, cruise lines and retailers, restaurants among the hardest hit sectors on reduced traffic, forced closures and lost revenues; PLAY, RUTH downgraded to neutral at Piper citing Dave & Buster’s large party experiential business within the context of what is poised to be an increase in social distancing and Ruth’s correlation to RevPAR and what is poised to be a high-end slowdown; an awful few weeks with BJRI, CAKE, DRI, EAT, TXRH, RRGB falling

·     Casino & Leisure movers; CHDN to reschedule the 146th Oaks and Kentucky Derby Presented by Woodford Reserve. The 146th Kentucky Derby will be rescheduled from May 2, 2020 to September 5, 2020 and the 146th Kentucky Oaks will be rescheduled from May 1, 2020 to September 4, 2020; MTN announced today that all of its North American resorts and retail stores will remain closed for the 2019-20 winter ski season amidst the continued challenges associated with the spread of coronavirus; movie theatres CNK, AMC downgraded at JPM after movie chains close business temporarily to deal with coronavirus efforts

Energy

·     Energy stocks trying to recover, but plunging oil prices and global demand have been hitting the sector; XOM said it is "looking to significantly reduce spending" due to the coronavirus pandemic and weaker oil prices, as shares slump to a 17-year low/company’s statement does not say whether cuts would affect dividends, which consumed $14.65B last year; HES announces a revised $2.2B capital and exploratory budget for 2020, an $800M reduction from its previous $3B budget, and entered into a new $1B three-year term loan agreement with JPMorgan Chase.

·     E&P sector; more cap-ex cuts given low oil and slow demand as PXD announced the decision to reduce its 2020 capital budget by ~45% to $1.7-1.9 billion resulting in 2020 oil production flat relative to 2019 (~211 Mbo/d)/plans to reduce its operated rig count from 22 to 11; ENLK cuts its FY20 cap-ex to $225M-$285M from prior view $315M-$425M; CXO cuts FY capital expenditure to approximately $2 billion, down from prior $2.6 billion to $2.8 billion view citing the dynamic environment and substantial decrease in oil and natural gas prices; CPE reduces 2020 capital program by over 25% and provides operational and hedging updates as reducing operational capital plan for full-year 2020 to $700 to $725 mln from $975 mln

·     Utilities & Solar; Utilities outperformed as the UTY up over 10%, led by gains in WEC, ED, XEL, D among others on increased usage at home, flight to defensive stocks

Financials

·     Bank movers; participated in the broad market rally on the stimulus measures, Fed liquidity intervention again and general market momentum; JPM, BAC, GS said will tap the Fed’s discount window along with five other big banks to reassure smaller firms they can do the same without stigma; Baird upgraded shares of BAC, TFC, and USB saying banks are priced for an extended recession and increasingly offer a near free call option on recovery and firm believes that is an attractive setup despite the more challenging near-term headlines/data

·     Consumer finance and lending; AXP said it can no longer forecast full-year results amid the spread of coronavirus and warned that first-quarter profit would be lower than analysts’ estimates (guided year EPS $1.90-$2.10 vs. est. $2.16); ADS shares dropped to new 52-week lows – stock 52-week highs $182.95 last April) as consumer driven names extend declines (SYF, ALLY, DFS); SQ was upgraded to outperform at Cowen saying pullback provides compelling entry point for the stock for over 3 years; ALLY announces suspension of buyback program

Healthcare

·     Pharma movers; DBVT shares fall as the FDA raised some questions regarding efficacy, including the impact of patch-site adhesion, during a review of the company’s BLA for investigational Viaskin Peanut (shares of AIMT rise which has competing drug rose); ALXN cut at Oppenheimer as see downside risk to the stock based on tough 2018/2019 sales/earnings comparisons, conversion pricing pressure on Ultomiris which is 10%-20% below SoC Soliris, and competition

·     Biotech movers; REGN rises after saying it has identified hundreds of virus-neutralizing antibodies and plans to initiate large-scale manufacturing by mid-April with antibody cocktail therapy/sees potential to enter human clinical studies by early summer; NVAX upgraded to Overweight at Cantor and raising tgt to $16 from $6 results from enhanced conviction for the P3 readout of NanoFlu/Matrix-M non-inferiority immunogenicity; MRNA shares remain active after dosing the first patient with coronavirus vaccine in early-stage trial yesterday

·     Healthcare services, Medical equipment and devices; HOLX said that the FDA granted Emergency Use Authorization for the company’s Panther Fusion SARS-CoV-2 assay that detects the coronavirus/expects to provide tens of thousands of SARS-CoV-2 tests this month as it ramps up production capacity; TDOC shares outperformed today as President Trump again notes use of telemedicine

Industrials & Materials

·     Transports; Dow Transports erased early gains, falling below the 7,000 level before rebounding; the IATA said today that the global aviation industry could need a general guarantee of about $150 billion to $200 billion; airlines again feeling pain this morning; truckers WERN, HTLD upgraded to outperform at Baird as recent channel work indicates a pick-up in spot truckload activity in recent weeks given growing supply chain disruptions amid developing COVID-19 pandemic; ODFL, XPO were both upgraded to buy at Bank America; UBER slumped after began suspending shared rides in the United States and Canada due to the coronavirus pandemic.

·     Metals & Materials; RBC Capital upgraded six forest product stocks after they suffered large declines stemming from the negative impact of the Covid-19 virus on their businesses, raising the rating on CPFUF, UFS, MERC, OSB, JHX and WFSTF noting that tissue producers and panel makers are best positioned amid Covid-19 uncertainty; industrial metals were mixed as slowing global demand and loss of production and construction have taken their toll on steel, copper names

Technology, Media & Telecom

·     Internet; FB announces $100 million program for small businesses impacted by coronavirus (also gave $1,000 to each employee); JD was upgraded to outperform and $52 tgt at Bernstein saying it is a 100% China play and the worst period of COVID-19 in China, JD outperformed peers (JD also announced a $2B stock buyback plan today); AMZN said it was suspending shipments other than medical supplies and household staples; GRUB shares jumped on expectations more business going to delivery given restaurants shut down

·     Semiconductors; LRCX to temporarily stop on-site work at its Fremont and Livermore locations for three weeks effective March 17/withdraws its prior financial guidance for the fiscal quarter ending March 29, 2020; the Philly semi index (SOX) jumped as high as 1,428 (after falling to earlier lows of 1,282 – 52-week lows) as investors scoop up beaten up names

·     Software movers; EA was upgraded to buy at MKM Partners as continue to view their 3-4% revenue and 5% EPS growth for FY21 (March) as reasonable and says growth should accelerate in FY22; CHKP upgraded to buy at SunTrust as feel it best to be defensive and among names that have a strong balance sheet and cash flow generation ability; COUP shares surged following better quarterly results and guidance; CTXS was at 52-week highs, upgraded at Raymond James following a series of checks with resellers indicating increased demand for remote access "work from home" solutions including Citrix Virtual Apps and Desktops

·     Media & Telecom movers; WWE shares fell initially after cancelling the public events around its flagship WrestleMania in the area of Tampa Bay. Fla., in response to the COVID-19 outbreak/will live-stream the event on April 5 on its WWE Network and pay-per-view, but it will take place from a closed set at the company’s Orlando training facility; media related stocks also benefit from the rebound in broader markets on stimulus hopes