Closing Recap

Wednesday, March 18, 2020

Equity Market Recap

·     U.S. stocks fell over 7% midday, triggering the third market halt (15 minutes) in the last 2-weeks as global economic fears of the coronavirus impact and increasing concerns of liquidity evaporating has gripped investors, pushing the Dow Jones Industrial Average lower by over 10,000 points in just five-weeks (dropped below 19,000 late day – lowest since the 2016 election), and bringing its YTD decline to -33% (led by declines in BA, UTX, AXP, CVX). There was no place to hide outside of the U.S. dollar (which touched its best levels in years), as Treasury prices, commodities and stocks all plunged as investors rotate into cash to deal with the massive economic disruption caused by the coronavirus pandemic. With the recent closures of retailers, auto plants, restaurants, casinos and sporting events, along with the reduced travel and closing of borders worldwide (weighing on hotels), the economic situation has become very dire in just a matter of two weeks for many of those companies and sectors, raising bankruptcy concerns with companies generating little to no revenue for possibly an extended period of time. From record all-time highs for major U.S. stock averages in February to losses of more than 30% from those peaks has investors wondering when the bleeding will stop.

·     Oil prices meanwhile dropped to their lowest levels in about 17-years (Brent has lost 51% over the last 10-day, worst 10-day trading stretch since contract launch in 1988), while Treasury yields have bounced off recent record lows. Among Washington’s virus relief plans/efforts they propose phase 1: $8.5B for R&D and vaccines, phase 2: $105B for sick leave, unemployment; phase 3: $850B-$1.2T for economic support and phase 4: $45B for federal agencies according to reports. While the efforts by the Fed and government are trying to ease market fears, liquidity remains the biggest concern with so many companies tapping credit lines to fund short term expenses, raising fears if the banks are capitalized well enough. Also, with liquidity draining from the credit market, anxiety is running high about how the most indebted companies will refinance at higher borrowing costs. Meanwhile, record equity volatility is putting a premium on those with safer balance sheets. The S&P 500 has now moved 4% or more for a record 8-straight days in what has been one of the most unnerving times in stock market history.

Coronavirus news

·     Cases rose globally for the coronavirus, topping the 200,000 level, with cases in local New York and New Jersey jumping as more tests are administered

·     President Trump says the Housing and Urban Development Dept (HUD) is suspending all foreclosures and evictions for homeowners and renters amid the spread of the coronavirus.

·     The FHFA said in that to help borrowers who are at risk of losing their home, the Federal Housing Finance Agency has directed Fannie Mae (FNMA) and Freddie Mac (FMCC) to suspend foreclosures and evictions for at least 60 days due to the coronavirus national emergency.

·     President Donald Trump has announced that the US and Canada will close their land border to non-essential traffic, in the latest dramatic step to curb the spread of coronavirus

Commodities

·     Oil prices were absolutely annihilated with WTI crude falling -$6.58 or 24% to settle at $20.37 per barrel, falling to its lowest level since 2002 – its 2^nd drop of more than 20% in eight days. Natural gas prices dropped over 7.8% to decade low of $1.60. The carnage in energy far surpassing that of most of other industries following slowing global growth, drastically reduced demand (no airlines flying), a price far between Russia and Saudi Arabia which has flooded this market with supply to drive prices lower and a surging dollar. April gold prices plunged -$47.90 or 3.1% to settle at $1,477.90 an ounce, back to its lowest levels since December as risk assets and defensive assets alike saw steep losses as selling pressure in stocks likely forced investors to dump assets for cash to cover margin calls

Currencies

·     The U.S. dollar surged as investors bailed on Europe and emerging market currencies given the further plunge in oil prices and fears on how the virus outbreak is being handled overseas. The dollar index (DXY) trades as high as 101.70, first move above 100 since April 2017, rising over 2% on the day gaining vs. all currencies. The British Pound with an unprecedented decline, falling as much as 5% to lows 1.1453 vs. the dollar to its lowest level since 1985 Investors have doubted the U.K. government’s response to the virus, which has contrasted with more immediate lockdown measures across Europe. Treasury prices were one of the few orderly declines (in comparison to the carnage in stocks and commodities), as the US 10-year yield rose as high as 1.21%, up about 8 bps to 1.16% (far off its 0.31% low on March 9^th) as investors dump any and all assets to raise cash on fears of a liquidity crisis.

Economic Data

·     Housing Starts for February fell 1.5% to 1.599M from 1.624M annualized above the est. 1.50M; after rising 1.4% the prior month; single-family starts rose to 1072k; multifamily starts fell to 527k in Feb. Building permits fell (-5.5%) to 1.464M vs. 1.550M in Jan (est. 1.5M)

Sector News Breakdown

Consumer

·     Retailers; warehouse stocks rise with WMT upgraded to outperform at Credit Suisse as reflects a more defensive near-term view on US Retail amid COVID-19 concerns (traded 52-week highs); other warehouse stocks rallied with BJ shares higher (upgraded at Bank America to buy with $33 tgt) along with COST gains; however, department stores and apparel retail stocks remained under pressure with most closing or suspending operations for the next few weeks

·     Consumer Staples; in beverages, MNST and KO both downgraded at Morgan Stanley which also reduced its view on the beverage industry to in-line from attractive saying government mandated closures for businesses, and restrictions on public gatherings will hurt consumption; grocers UNFI, SPTN, SFM all upgraded to market perform from underperform at BMO Capital saying near-term grocery trends due to effects of the coronavirus are benefiting all grocers; APRN rises on hopes the online meal kit preparer will see a boost of business amid the closing of restaurants across large parts of the U.S.; CLX another 52-week high

·     Food sector; Bernstein tactically upgraded food names CAG, CPB, GIS, K and SJM to Market-Perform as expects a coronavirus-related sales lift and broader economic uncertainties to support stock valuations in the near term, but once plays out likely opportunity to become more negative as longer term structural pressures resume, and the sector tends to underperform; GIS reported a beat on quarterly earnings, while sales missed but raised its guidance for the year to up 6%-8% for EPS, topping prior view of up 3%-5%

·     Restaurants; SBUX announced it will buy back up to 40M shares; restaurant industry under siege with people staying home, no travel, and sporting events being closed around the globe; Wedbush today said they sees little liquidity risk across coverage even in a scenario of 50% transaction declines for a full quarter and another quarter of 20% transaction decline – said of company-owned names, CMG, DRI, SHAK , TXRH, and SBUX will not even need to defer CapEx, but CAKE is cutting it close…says DIN, DNKN, DPZ, JACK, WEN, and WING have sufficient cash on hand for their working capital needs; CMG and Uber Eats (UBER) today announced a national delivery partnership. For the first time, fans can get the Chipotle food they love delivered through the Uber Eats app and ubereats.com. This month, the Delivery Fee will be waived on any Chipotle order of $10 or more on the Uber Eats app and ubereats.com. Service fee applies.

·     Housing & Building Products; industry is down over 50% from its peaks as the wealth destruction over the last month has likely hit the housing market in a big way despite record low mortgage rates; today JPMorgan upgraded DHI and NVR to Overweight while downgrading LEN, PHM, TNHC, CCS to neutral and LGIH to underweight

·     Casino & Leisure movers; casino stocks hammered yet again (WYNN, LVS, MGM, PENN, MLCO) after the governor of Nevada officially ordered all casinos in the state to shut down for 30 days beginning at noon today. The state’s latest coronavirus containment effort will apply to all bars, gyms, malls and restaurants that do not provide takeout and delivery services

·     Lodging stocks pain continues on travel stoppage for many countries and people being forced to stay home; MAR, HLT were both downgraded to underperform from market perform at BMO Capital and cut tgt saying that the lodging scenario is "worse than expected" amid single-digit occupancy and expected closure of most of the company’s hotels in major cities; RLJ slashed its quarterly dividend to 1c

·     Media, theme parks and leisure names weak again; SIX was downgraded to perform at Oppenheimer owing to the risk all parks remain closed through the beginning of July (estimated time of containment) and social-distancing impacts attendance after reopening; AMC was downgraded by a few analysts, with Citigroup cutting to sell and $1 price target predicated on the company receiving additional liquidity beyond what is currently available

·     Autos; industry coming off news yesterday that the UAW requested a two-week shutdown of GM, F and FCAU operations to safeguard its members; HMC to suspend North America production starting March 23^rd; TSLA was upgraded at Bank America with $500 tgt on valuation, though shares fell after the company appears to be under county order to close its Fremont plant; ORLY was added to conviction buy list, at Goldman Sachs and upgrade from neutral while cut tgt to $357 from $430 saying auto part retailers are one of the most defensive names in the hardlines space when there is a slower macro environment

Energy

·     Energy stocks decimated again as WTI crude falls to its lowest levels since 2002 (below $23 per barrel) and Brent crude to lowest since 2003 as travel and social lockdowns triggered by the coronavirus pandemic slam demand globally. Goldman Sachs forecasts Brent crude falling to as low as $20/bbl in Q2, while also expects a demand contraction of 8M bbl/day by late March and an annual decline this year of 1.1M bbl/day, which it says would be the most on record. The energy sector is now -57% since the end of 2019 vs. a 24.5% YTD drop in the S&P 500.

·     More oil companies reducing capex/saving cash; COP reduces 2020 cap-ex by $700M and reducing planned buyback program – says to review capital and operating plans; WPX revises capital expenditure for the FY to $1.28B-$1.4B, cutting by $400M while maintains current oil production; ESTE reduces FY20 adjusted capital budget to $50M-$60M (from $160M-$170M) citing the recent drop in oil prices, and said it plans to run one rig into the Q2 and operated completion activity will be limited to three wells currently in progress; PE cuts 2020 capital budget to less than $1.0 billion from previous range of $1.6-$1.8 billion.

·     Inventory data showed: The EIA said weekly crude inventories rose +1,954M barrels, smaller than the expected 3.7M barrel build while gasoline stockpiles fell a greater -6,180M barrels vs. est. draw of -3,811M and distillates fell -2,94M barrels vs. est. draw -2,45MPADD 1 Distillates -82k. Overnight the API said that U.S. crude supplies edged lower by 421,000 barrels for the latest week, showed gasoline stockpiles down -7.8M barrels, while distillate inventories declined by -3.6M barrels

Financials

·     Bank and insurance stocks movers were again among the hardest hit sectors on fears of a run on liquidity from big companies borrowing on their credit lines to keep day-to-day business going. Banks came into this crisis well capitalized, but fears grow that stress tests couldn’t take into account of an entire country closing down for weeks. Big banks (JPM, WFC, BAC, C) along with insurers (life and P&C) under significant pressure.

·     Financial Payments; PAYX was upgraded to equal-weight at Morgan Stanley citing push into the solid growth PEO market and more recent focus on margin expansion, and its exposure to the relatively more vulnerable SMB segment; separately, Citigroup downgraded PAYX to Neutral as prefer ADP over it while EPAM remains a top idea and might not need to lower estimates, believe the Genpact (G) sell-off is overdone and count CSGP among our top Buy ideas, believing the stock to be an early rebounded; Citigroup also downgraded SQ and FLT; QD posts and 85% decline in profit in Q4 compared to Q3

Healthcare

·     Pharma movers; ABBV and AGN announced that they have entered into a consent decree agreement with staff of the U.S. FTC regarding AbbVie’s pending acquisition of Allergan; SAGE unveiled plans to conduct three additional trials of its depression drug just months after a failed study sent shares spiraling. SAGE will start the three late-stage trials in a range of depression types this year, with plans to publish data sometime next year

·     Biotech movers; ARWR said it’s pausing new patient screening for at least four weeks in study of ARO-AAT for the treatment of alpha-1 liver disease; BNTX shares surged one day after closing up 67% after the company said it and PFE agreed to a letter of intent regarding the co-development and distribution, excluding China, of a potential mRNA-based coronavirus vaccine

·     Medical equipment and devices; Needham said ZBH, HOLX, CMD and SIBN are the most "beaten up" MedTech stocks due to coronavirus outbreak among their top-rated stocks/says HOLX, ZBH, CMD and NUVA are the least expensive relative to their ten-year average NTM P/Es, while RMD, TFX and MASI are the most expensive relative to their ten-year average NTM P/Es; GMED was upgraded to buy from neutral with $46 tgt at BTIG saying with shares down ~33% from their high at YE19, they believe the time has come to go long GMED shares

·     Healthcare services and providers; MDXG slides after restating its financial reports from 2014-2016 to reflect a reduction in net sales; WBA outperforms today in pharmacy retailers rising 4%, as CVS shares flat following 10% rise yesterday and RAD flat after gains of 29%, 12% and 21% the last three trading sessions); the WSJ reported that hospitals across the U.S. are running out of masks, gowns and other protective equipment needed by staff amid COVID-19. Yesterday, the Pentagon stepped up with an offer to supply up to 5M respirator masks.

Industrials & Materials

·     Transports; FDX reported Q3 results that were better than expected, with Express over delivering though Ground margins coming in much worse than expected as the move to less productive e-commerce volumes continues to weigh on cost/pulled guidance over COVID uncertainty; airlines cant gain traction, with major airlines plunging further (AAL, DAL, UAL, JBLU) as travel at a near standstill given the rising number of travel restrictions by countries to contain spread of coronavirus, with no let up for truckers or rails as well – Transport index fell over 9%; car rental stocks obliterated as HTZ shares to record lows and CAR down over 40% in car rental space

·     Industrials, Metals & Materials; GEF rises after says Q2 to date in line or slightly better than forecast and says virus has not had material adverse effect; industrial metals plunging further (steels, aluminum, iron ore, copper) given the broad global economic growth slowing fears; CAT was upgraded to neutral from sell at UBS saying market expectations are pricing in a steeper decline, and are now more realistic than a year ago; UTX suffers its worst day in over 19-years as among top decliners in the Dow Industrials

·     Aerospace; BA shares fell below $100 for the first time since 2013 (traded as low as $90), had its delivery outlook lowered at Bernstein, shifting MAX deliveries back slightly, reducing 787 and 777 rates, and applying a slower long-term ramp all due to the Coronavirus crisis that we expect will lead airlines to move more slowly in updating their fleets; TDG was downgraded to underperform from buy at Bank America and cut tgt to $300 from $730 saying FY20 and FY21 topline growth will likely be bound by decreased air travel demand due to the coronavirus outbreak

Technology, Media & Telecom

·     Tech in general not a lot of general news outside of a few earnings results (SMAR, MDB) that were largely overlooked given the broad based macro market selling pressure due to production halts, retailers closed and general market fear hitting all aspects of markets. Online travel names (BKNG, EXPE, TRIP) hit the hardest as expected given travel bans and no one staying at hotels, while even social media names felling pressure (FB, TWTR, SNAP) as investors raise cash. FAANG names overall holding up well with AMZN likely to benefit from more “social distancing” less trips to stores, while GOOGL, NFLX also hold up well. Semiconductors smashed, with the Philly semi-index taking out yesterday lows to 1,280, falling as much as 9%.