Closing Recap

Monday, March 23, 2020

Equity Market Recap

·     U.S. stock markets extend recent declines (after posting its biggest weekly decline in over a decade last week), falling to their lowest levels since November 2016 when President Trump was elected and now erasing roughly 35% from peak all-time closing highs in February as market and global economic uncertainty due to the impact of the coronavirus takes another bite out of stock markets. Stocks failed this morning despite another bazooka from the Fed to try and provide liquidity and confidence to markets (see below), as investors instead focused on the ongoing squabbling in Washington between Republican and Democratic Senators who couldn’t agree on a broader stimulus package for out of work employees, small business and corporations suffering the most from the worldwide shut down and travel restrictions put in place by governments to prevent the spreading of the coronavirus. Washington had a second chance midday as another vote came, but again failed vote of 49 for to 46 against, disappointing markets when the country is at its most desperate times with many companies fearful of bankruptcies, failure to make loans and is laying off employees to cut costs, raise cash – and pushing markets lower.

·     Markets were volatile again with the NASDAQ trading in a 350-point range from high to lows and the Dow Jones Industrial Average in a 900-point range from high to low as the Federal Reserve took unprecedented steps to support U.S. households and companies more directly with credit. After already aggressively easing monetary policy this month, including sending interest rates to near zero, the central bank said it would now lend against student loans and credit card loans as well as buy bonds of larger employers. The Federal Reserve announced it would purchase an unlimited amount of Treasury’s and mortgage-backed securities in order to support the financial market. The Fed said it would buy assets "in the amounts needed" to support smooth market functioning and effective transmission of monetary policy. The Fed had previous set a $700 billion limit for asset purchases. In addition, the Fed announced several new lending programs worth $300 billion to support companies hurt by the shutdown of the U.S economy.

·     Interesting statistics, news and forecasts: 1) Goldman Sachs estimating a 24% plunge in U.S. real GDP in the second quarter; 2) Federal Reserve Bank of St. Louis President James Bullard said that he is forecasting the U.S. unemployment rate to hit 30% in the coming months; 3) NY confirmed infections has soared to 15,168 according to data released by Gov. Andrew Cuomo; 4) The International Olympic Committee is postponing the 2020 Summer Games—likely to 2021 according to USA Today; 5) Italy cases slow in positive development: Italy which has the highest number of coronavirus cases overall said it saw a decrease in cases from Sunday saying they had 4,789 new coronavirus cases, vs 5,560 Sunday with 601 new deaths from coronavirus vs 651 Sunday (reports 63,927 total coronavirus cases, 6,077 deaths).

Commodities

·     Oil prices managed a late day rally as WTI crude gained 73c or 3.2% to settle at $23.36 per barrel, but gasoline prices grabbed headlines, falling as much a 25% late day to below 50c at new all-time record lows. Oil remains one of the biggest pockets of weakness, with very few silver linings, given the reduced global demand due to less travel and people being asked to stay at home, along with escalating price war between Saudi Arabia and Russia. April gold surged $83 or 5.6% to settle at $1,567.60 an ounce, rising as stocks slid and the dollar pulled back from last week gains (biggest one day % gain since 2009), but still well below its peak levels two weeks ago as prices try and recover after investors sold the precious metal recently on a surging dollar, and as they raise cash. Copper prices fell to 4-year lows as pandemic fear intensifies.

Currencies & Treasuries

·     The U.S. dollar slipped from 3-year highs reached last week, while Treasury prices rose, sending yields lower in a mass risk aversion day with gold prices jumping over 5% as well. While stocks fluctuated, investors sought shelter in traditional safe-haven assets. The yield on the 10-year U.S. Treasury note fell to 0.758%, from 0.932% Friday. Access to credit and liquidity (which the Fed has done all in its power, including the new announcement today), the passing of the U.S. fiscal package, and the slowdown in the spread of the disease are the three things markets need.

Sector News Breakdown

Consumer

·     Retailers; BBY announced a series of operational changes (to pick-up and delivery only) in response to Covid-19. Prudently, the company has fully drawn down their $1.25b revolver and suspended all buybacks to maximize financial flexibility, while withdrawing their guidance; Macy’s (M) said it accessed the $1.5B available under revolving credit facility, suspends quarterly cash dividend and withdrew guidance; toy retailer HAS shares rise as CEO said in CNBC interview that supply chains are back up and running in China and doesn’t expect any layoffs, while remains in good financial state/warns it may miss shipment targets in Q1, but expects shipments to fully catch up by April; REAL was downgraded at Needham saying Covid-19 poses a unique problem for REAL as 50% of its products are procured from consignors via in-home pickup

·     Consumer Staples; KO was upgraded to overweight at JPMorgan with $44 tgt as believe investors are not assuming an uptick in in-home demand or a recovery in the next 12-18 months, which we find too pessimistic; RBC Capital upgraded beverage names PEP and SAM to outperform, raise estimates modestly for CLX, REYN, KMB, CHD, CL, PEP, CPB, K, while cut EPS for 2020/2021 estimates by 10%+ for NWL, SPB, ENR, COTY, and E and believe STZ, MO and SAM are higher risk ideas that could rebound sharply as the feared hit to EPS does not materialize; Morgan Stanley also changes in space upgrading PEP, MDLZ, PG, CL in consumer staples

·     Casino & Leisure movers; in autos; Ford (F) temporarily suspends production in India, Vietnam, Thailand and South Africa; CTB announced that its tire manufacturing facilities in Europe will temporarily shut down to limit spread of coronavirus and to respond to affected market demand; gaming stocks again attempt to rebound after recent selling onslaught (WYNN, MGM, LVS)

Energy

·     Energy stocks suffer again with oil weakness, slowing global demand, fears of bankruptcies as production, cap-ex cuts hurt industry and company’s slash dividends to preserve cash; refiners fall (VLO, PBF, HFC, MPC) as refining margins for gasoline and jet fuel have tanked because of decreased demand for transportation fuels, as the pandemic has forced businesses to close and governments to push residents to avoid travel and public places; TOT and RDSA were among the latest energy companies to make adjustments to cap-ex

·     Utilities & Solar; sector among worst performers on the day and far from immune to market sell-off, down 19% over the last 3-days alone (UTY to 571 level, down from all-time highs 909 on Feb 18 of this year); PCG rises as its new commitments to its bankruptcy reorganization plan on Friday won the support of California Governor Gavin Newsom, who had raised concerns about the plan earlier; Morgan Stanley upgraded AES, FE, and PNW in utility sector and downgraded ATO to equal-weight saying sector still screens as attractive compared bonds and now is an attractive entry point for many stocks within the sector given that he sees an unusually wide disparity in relative valuations

·     MLPS; DCP cuts its 2020 growth capital program by 75% to $150M, down from its previous guidance midpoint of $600M, and chops its quarterly distribution in half to 39c from 78c in response to "extraordinary and volatile market conditions.” MMP was upgraded to buy at SunTrust as a defensive name in this down-cycle though cuts estimates across coverage in attempt to capture downside risks to midstream firms in this down-cycle

Financials

·     Financial movers; Private Equity/Asset Managers AB, APO downgraded to neutral from buy at Bank America and cut CG to underperform from neutral citing expected impact of the assumed recession scenario on earnings and valuations in stocks, but upgraded SCHW to buy from neutral citing its quality brand, strong relative organic growth, rising cash balances, and upcoming deal synergies in TD Ameritrade merger; WFC & JPM plan includes 90-day payment forbearance that can extend 12 months — proposal to offer assistance to borrowers affected by pandemic — banking groups offer mortgage assistance proposal to regulators

·     Insurance; insurance brokers AJG and AON upgraded at Raymond James while downgraded WLTW saying over the past couple of years, the group has become increasingly popular with investors due to stable/recurring revenue, stable/expanding margins, consolidation opportunities, and positive FCF; in life space, PRI upgraded to buy at SunTrust noting the company generates 2/3 of its earnings from Term Life insurance and 1/3 from selling mutual funds and annuities – they do that with a salesforce of 130,000 mostly part-timers

·     Consumer finance and lending; ADS tgt cut to $40 from $135 at SunTrust as see recession challenging growth, hence lower ests. but believe the company has ample liquidity and its business model is intact; IIIV was upgraded to buy at BTIG as believe IIIV stock’s underperformance has been driven in large part by investors reacting to the widespread closure of schools across the U.S. in response to the coronavirus, which they feel is overdone, while firm said favorite way of playing the anticipated acceleration in the shift from cash to digital and contactless payments is PYPL

·     Mortgage finance; several names in the space seeing renewed pressure again today (AGNC, MFA, CIM, NYMT, ARR, CMO, TWO, NLY) amid further selling pressure that has hit mortgage bonds, prompting unprecedented action by the Federal Reserve today to aid markets. Recall last week, two analysts (KBW, RBC) noted weakness after mandatory redemptions of two 2x leveraged mortgage REIT exchange-traded notes (tickers: MORL and MRRL). RBC also noted weakness also predominantly related to investor concerns about potential funding risk, particularly for the companies with mortgage credit assets funded with short-term recourse debt

Healthcare

·     Pharma movers; BMY postponed its Investor Day, scheduled for April 2, to a later date due to the COVID-19 pandemic saying it will continue to assess the situation to determine a new date; LLY said it would delay starting new clinical trials and pause enrolling new patients into ongoing studies in its efforts to free up healthcare facilities and doctors to attend to the growing number of COVID-19 patients; AMRX rises after company to ramp up hydroxychloroquine sulfate production, a possible treatment for Covid-19; ABBV dropped its patents on a drug combination that is being studied as a coronavirus treatment, becoming the first major drugmaker to drop its rights to make money from a drug that might be used during the pandemic.

·     Biotech movers; GILD said citing "overwhelming demand," they temporarily halted patient access to its experimental antiviral remdesivir, adding that it is transitioning its compassionate use program to expanded use programs as "rapidly as possible”; SNGX said it is expanding its ongoing collaboration with University of Hawaii at Mānoa to assess potential coronavirus vaccines; HOTH shares jumped on COVID-19 vaccine development plans

·     Medical equipment, devices and services; DHR shares rose as its molecular diagnostics company Cepheid received the U.S. FDA approval for the first rapid coronavirus diagnostic test

Industrials & Materials

·     Aerospace & Defense; BA CEO Dave Calhoun and Board Chairman Larry Kellner will forgo all pay until the end of the year, while the company suspends dividend, and pauses stock buyback until further notice (separately shares were upgraded to buy at Goldman Sachs); EADSY halts production and assembly activities at its plants in France and Spain for the next four days, as governments in both countries declared a state of emergency due to the coronavirus pandemic

·     Industrial & Machinery; in multi-industry, Morgan Stanley upgraded DOV, PNR to overweight as believes they will have less cyclical risk and better recovery potential, while raised ITW to Equal Weight citing its balance sheet and end market resiliency outside of Autos/firm downgraded EMR, HON to EW from OW citing their exposure to problematic end markets and a longer recovery horizon and also cut CGNX, HLIO given high valuation and high decremental margins

·     Transports; Morgan Stanley upgraded ODFL in trucking and both CSX, UNP to equal-weight in rails while raised broader view on the Freight Transportation industry to In-line from Cautious noting the average transportation stock now down 25% year-to-date, and believes the risk-reward for stocks may be approaching a balance given that transportation data points have held up relatively well so far and the air pocket will likely not be as severe as other sectors; CAR withdrew its outlook due to virus impact and said reservations down about 60%

·     Airlines; DAL suspended its capital return program, including the company’s stock repurchase program and the suspension of future dividend payments; entered into a $2.6B secured credit facility, enhancing liquidity and also drawing $3B under its existing revolving credit facilities; Raymond James upgraded perceived airline sector/region winners with strong balance sheets to Strong Buy including LUV, CPA, RYAAY and SKYW as well as LTM to outperform as believe it will be a big beneficiary of capacity rationalization among weaker competitors (outside of Brazil). Among network airlines, continue to favor DAL and IAG in Europe and maintain strong buys on ALK, MESA and outperform on SAVE while downgraded AAL to market perform on risk-reward

·     Metals & Materials; FCX announces suspension of first-quarter cash dividend on common stock and said it will cut costs, and warned that the revised operating plans would lead to temporary reductions in copper and molybdenum production in the Americas; gold miners AUY, AEM, NEM, GOLD among those surging given the 5% spike in gold prices today

Technology, Media & Telecom

·     Internet, Semi’s; SNAP rises on report out of China that it has seen a 10-fold surge in downloads since the beginning of the month of a tool that makes calls on services like Zoom Video Communications; MCHP announced the restructuring of a small portion of the company’s total debt; individual stock news relatively quiet for sectors

·     Software & Hardware movers; Internet security names PANW, CYBR both upgraded to overweight at Piper as believe security budgets will show resilience but few companies will escape the certain economic recession completely unscathed (also likes OKTA, FTNT, PFPT, RPD); video game software stocks jumped in the early going (EA, ATVI, TTWO); ZM rises to record highs as the video teleconferencing company continues to benefit from expected increased demand for its product due to workers forced to work from home

·     Media & Telecom movers; few analyst calls as Cowen downgraded AT to Market Perform amid mounting concerns with AT&T’s diversified business including WarnerMedia, the co is likely to miss guidance and we not believe they company will have an issue meeting its financial obligations; Baird also downgraded AT&T along with CMCSA while upgraded NFLX to outperform