Closing Recap

Wednesday, March 25, 2020

Equity Market Recap

·     U.S. stocks posted their first back-to-back gains since February 11/12, while the Dow outperformed behind big gains in Boeing and United Healthcare and the tech heavy Nasdaq traded in a 400-point range from the lows to the highs as stock markets surged after the Senate agreed on a $2 trillion stimulus plan overnight to help “right” the economy following the global business shutdown to prevent the further spread of the Covid-19 virus. The NASDAQ however slipped into negative territory late day after a report in the Nikkei indicated Apple is weighing delaying the next iPhone launch by months (which took steam out of the iPhone supply chain – semi names SWKS, AVGO, CRUS). The broader market also pared gains after Bernie Sanders threatened to hold up stimulus. Stocks had benefitted from positive comments out of St. Louis Fed President James Bullard who said on CNBC that Q2 is likely to see the most disruption due to the coronavirus outbreak, but the economy should bounce back by year’s end. Also, former Federal Reserve Chairman Ben Bernanke said on CNBC that the coronavirus economic halt is more like natural disaster than a classic depression. “It’s really much closer to a major snowstorm or a natural disaster, than it is to a classic 1930s-style depression,” he said in a “Squawk Box” interview. While they downplayed the long-term impact of the virus on global economies, stocks markets remained cautious as Treasury prices edged higher (sending yields lower) and gold was down modestly in comparison to its 2-day jump prior.

·     The bill had lots of positive developments as lawmakers and members of the Trump administration agreed on a massive $2 trillion stimulus plan to help American citizens as the economy remains shuts down due to the coronavirus impact. The package includes direct deposits for all Americans, $367 billion for loans to small businesses (business for 500 employees or less, get 8-weeks cash flow assistance through 100% federally guaranteed loans as long as they retain/rehire workers), and a program that will allocate $500 billion to the Treasury Department. Some of that money will be used to guarantee a Federal Reserve loan program for small and medium-size businesses. Most adults would receive direct payments of $1,200, while children would see $500 checks. Hospitals would receive some $150 billion under the deal and small businesses would get $367 billion in aid. The measure also includes a major boost to unemployment insurance, allowing workers who are furloughed but not laid off to be paid their regular salaries for up to four months. Airlines rally as the announcement includes a $50 billion package for the US airline and air cargo industry.

·     However there were concerns expressed late day by Senators about the bills wording as Sen. Pat Toomey (who supports the virus aid bill and will vote for it) said "It’s got a lot of flaws, but that’s the nature of big bills," he says. One flaw he sees: it could create an incentive over time for people not to work. "The combination of unemployment insurance and direct payments is so much that in and of itself creates incentives not to work." The wording raises some concerns overall ahead of a House vote later this week, unless wording can get adjusted.

Coronavirus updates

·     Governor Cuomo said New York has 30,811 coronavirus cases, up 5,146 and NYC has 17,856 cases, up 2,952; Spain Health Ministry reports 7,937 new cases, +20% vs. +19.9% prior days stats – Reports total cases at 47,610 (prior was 39,673) – Deaths at 3,434 (prior was 2696). Italy reports 74,386 total coronavirus cases, 7,503 deaths; has 683 new deaths from coronavirus vs 743 Tuesday and has 5,210 new coronavirus cases, vs 5,249 Tuesday (slowing in cases and deaths)

Commodities

·     Oil prices bounced off earlier lows, rising 48c or 2% to settle at $24.49 per barrel in a reversal of fortune for riskier assets, as stocks and commodity prices alike rebounded off session lows late morning as investors look to scoop up beaten assets. Inventory data was mixed as weekly oil inventories showed a smaller than expected build (bullish). Gold prices slip -$27.40, or 1.7% to settle at $1,633.40 an ounce, a small pullback after the precious metal surged 6% or $93.20 an ounce yesterday and $83 or 5.6% the day prior. Much of last week declines in gold came on a dollar bounce and likely forced selling pressure to raise cash for margin calls, not to mention the incredible stimulus from the Fed being inflationary. Today prices were down modestly compared to the outperformance in stocks.

Currencies & Treasuries

·     U.S. Treasury prices advanced along with gains in stocks, as investors still remain cautious despite the back-to-back stock market gains (first in over a month), as yields fell across the board; the 10-year yield dropped around 4 bps to 0.80% (high 0.87% and low 0.77%). Markets still grappling with fears of rising cases and deaths from the coronavirus, as U.S. numbers continue to rise, while Europe (still posting big numbers) have been slowing over the last few days (in Italy). The U.S. dollar tumbled late afternoon, erasing gains against the safe haven yen (off highs 111.68 before slipping negative at 111.17), while the euro and British Pound advanced.

Economic Data

·     Durable Goods Orders for February rise 1.2% vs. est. down (-0.9%) while Durable goods new orders revised up to 0.1% for Jan. from -0.2%; new orders ex-trans. fell 0.6% in Feb. after 0.6% rise and new orders ex-defense rose 0.1% in Feb. after 3.6% rise. Non-defense capital goods orders ex-aircraft fell 0.8% in Feb. after rising 1.0% in January

Sector News Breakdown

Consumer

·     Retailers; Dow component NKE rises after quarterly earnings were in-line on better than expected sales above $10B (+6% ahead of consensus) and gross margin (was ~+10bps vs. est.), while also showed clear evidence of brand momentum and success evolving consumer engagement to higher return models (digital +36%); Goldman Sachs double upgraded ROST to buy from underperform as stress test analysis suggests the company can handle a prolonged period of closures due to a "strong balance sheet and flexible cost structure, while downgraded UAA to neutral from buy amid low operating margins and limited brand momentum and cut KTB to sell saying valuation looks dislocated relative to other; TJX upgraded to outperform at RBC Capital as see longer-term market share opportunities ahead as this event accelerates industry consolidation and provides ample future product availability and balance sheet strength; DKS said it is reducing its planned capital expenditures, temporarily suspending its share repurchases and evaluating its dividend program; TGT provided a business update and quantified the business acceleration they are seeing in March saying Feb comp sales trends +3.8% and March same-store sales trends +20% (essentials & food & beverage +50%, with apparel and accessories -20%).

·     Consumer Staples; HSY was upgraded to overweight from underweight and raise tgt to $138 from $134 at Piper saying it looks well positioned to benefit from strong consumer demand and retail traffic; APRN shares slid back below $10 per share (rose as high as $28.82 on March 19th on hopes of increased usage due to people stuck at home); tobacco stocks outperformed (PM, MO), while food stocks lagged (CAG, CPB)

·     Restaurants; YUM indicated that it expects 1Q20 same-store sales to decline mid-to-high single-digits as a result of the global coronavirus outbreak with a greater decline expected in 2Q20; CBRL said a significant majority its restaurants have been operating through the coronavirus outbreak, with virtually all of them operating, pick-up and delivery only with no dine-in service while is deferring its dividend and suspending its repurchase program; Cowen cut its 2020 and 2021 EPS by 29% and 6% based on an average 20%+ declines in same store sales through July for restaurants, a 20% reduction in the number of global store openings in 2020 and 2021, and full restoration in lost sales volumes in 202 while downgraded JACK and cautious on SHAK was upgraded to overweight at Stephens calling it a solid recession play; TXRH also suspends dividend

·     Housing & Building Products; KBH was upgraded to Overweight at KeyBanc based on greater comfort in the policy response of key government entities and a very reasonable valuation, with book valuation (0.6x) offering a historic support basis; HOME shares downgraded to neutral at Guggenheim citing uncertainty in the form of both store closures and, more importantly, post-reopening demand for discretionary product (follows in-line earnings overnight)

Energy

·     Energy stocks decline as early rally in group petered out – energy stocks remain hardest hit on plunging oil prices, minimal demand with no travel and price war between Saudi/Russia keeping prices low/supply plentiful; among top decliners in the S&P 500 today were energy again

·     E&P sector; OXY entered into an agreement with Carl C. Icahn and affiliated entities to add three new Icahn designated directors to Occidental’s Board – the move follows OXY earlier cutting its cap-ex for the year to $2.7B-$2.9B from prior $3.5B-$3.7B as cut year operating costs by at least $600M; in research, Piper transferred coverage and downgraded CLR, DVN, EOG, FANG, MRO, NBL, PXD to Neutral as think we have yet to witness the worst of the current oil market turmoil play out in the physical markets, which we expect to see in the coming months; SLCA announced annualized SG&A cost reductions of approximately $20M in response to drop in oil prices

·     Inventory data: overnight the API reported that U.S. crude supplies fell by -1.25M barrels for the week ended March 20, showed gasoline stockpiles down -2.6M barrels, while distillate inventories declined by -1.9M barrels. The EIA said weekly oil stockpiles rose 1.62M barrels, smaller than the 3M barrel forecast while gasoline fell -1.5M barrels s. est. -2M and distillates fell -678K barrels vs. est. draw of -1.6M barrels

Financials

·     Citigroup upgraded retail broker dealers SCHW, AMTD and LPLA to buy from neutral and upped RJF to neutral from sell as believes rates and the bulk of the market risk are now discounted as shifts to positive on retail broker-dealers from negative/sees "favorable structural changes" with advice gaining in importance and clients boosting cash allocations, which helps EPS.

·     Payments; SQ cut its net revenue forecast for the first quarter and withdraws FY20 guidance saying it sees Q1 total net revenue to $1.30-$1.34B and guides Q1 gross profit to $515-525M saying the range assumes a further deceleration in overall GPV through the last week of March, beyond the levels we have seen in recent days

·     Consumer finance and lending; Credit Suisse noted the Federal Reserve is attempting to ease consumer loan credit markets: Data show that consumer loan ABS deals (credit card, auto, student, personal, etc.) have slowed to a halt in the third week of March; however, the Federal Reserve announced a $100B facility yesterday to back buyers of consumer ABS securities similar to 2008’s TALF program wherein the Fed and New York Fed created a $200B facility that lent to buyers of AAA-rated ABS securities and was collateralized by those securities (said companies in their universe that have access to deposits and thus don’t depend primarily on ABS include COF, DFS, AXP, SYF, CIT, ALLY and SLM, though all have some ABS issuance). Lenders dependent on ABS, unsecured debt and bank-funding include CACC, SC, NAVI, NNI and OMF; CACC shares were mentioned negatively late day by Citron Research saying this is one that we will stay on until every last politician and banker understands the damage being done/this is their black swan

·     Business Development stocks; Wells Fargo upgraded GSBD to overweight while continue to favor TSLX, ARCC, BBDC, and OCSL as they reduce industry wide estimates on reduced LIBOR and portfolio level activity while increase target yields to account for wider market spreads, and believe the space is attractive given implied loss rates and overall funding stability.

Healthcare

·     Biotech & Pharma movers; BMY files investor fact sheet on COVID-19 in 8-K regulatory filing saying they will temporarily suspended screening, enrollment and apheresis in cellular therapy clinical trials; MYL extends yesterday declines after FDA warned of some Epipen auto injector errors; GILD shares slumped to around the $71 level – down from 52-week highs around $86 just a few days ago as its Remdesivir seen as a possible treatment for COVID-19

·     Medical equipment, devices and services; ABMD said it is pausing the FDA STEMI-DTU trial in light of the tremendous challenge to medical providers to treat patients with the COVID-19 pandemic; MD withdrew its 1Q and FY20 guidance as a result of uncertainties from coronavirus/noted its Jan and Feb operating results were in line with outlook, though March was materially impacted by patient volume declines; in animal health services (ZTS, KIN), Stifel said they conducted quarterly checks earlier than usual and business appeared strong in January and February, but the trend-line changed toward the latter part of the quarter

Industrials & Materials

·     Aerospace and Defense; Dow component BA shares surged more than 35% at one point after Reuters reported the company plans to restart 737 MAX production by May, ending a months-long halt triggered by a safety ban on its best-selling jet after fatal crashes – stock also helped by the $2 trillion stimulus package revealed last night; AIR rises as Q3 adjusted EPS 67c beat the 64c estimate on better sales along with lowering headcount/costs

·     Transports; airlines soared early behind the large stimulus plan announced by the government, prompting an upgrade of several names at Deutsche Bank today (SAVE, LUV, HA, JBLU, AAL, DAL, UAL all to buy), while Cowen significantly reduced 2020 & 2021 estimates to account for declines in traffic and a prolonged recovery due to COVID-19 and are upgraded LUV to Outperform but downgraded MESA to market perform as 2021 revenue assumptions are now 12% below 2019 and we are estimating losses for the airlines this year

·     Chemicals sector; Citigroup upgraded shares of DOW & LYB to buy saying according to their analysis, both are trading at 23% and 24% of replacement value (historically, these shares have bottomed out at ~25-30% of RV); also said even in their stress test, CE and EMN cover their dividend with FCF by >2x; EMN said it will reduce planned 2020 capital spending to $325M-$375M, a 24% reduction at the midpoint from the previous expectation of $450M-$475M, which it says will provide a strong foundation during the coronavirus/expects Q1 earnings to come in above the prior year period and above previous expectations

Technology, Media & Telecom

·     Internet; FB warned it is seeing a “weakening” in its advertising business for some key geographies as a result of the Covid-19 pandemic/said “our business is being adversely affected like so many others around the world”; the FB news followed TWTR seeing reduced revs

·     Semiconductors; INTC was upgraded to buy at Argus noting the stock has declined 29% on a non-fundamental pullback (coronavirus-related broad market weakness) and although expect some loss of business in the medium term, Intel’s markets remain in reasonably good shape; ON announced that it has drawn down approximately $1.17 billion from its revolving credit facility; the Apple supply chain (CRUS, SWKS, AVGO, QCOM) fell after a report in the Nikkei indicated Apple is weighing delaying the next iPhone launch by months

·     Media & Telecom movers; WWE priced a 2.26M share Block Trade at $38.00; VG was upgraded to overweight at Morgan Stanley but lowered tgt to street low $7.50 from $12; CTL was downgraded to sell at Citigroup with revised target of $6 as expect the risks of faster revenue erosion, higher net debt leverage and future fiber investment needs may weigh; LAMR was upgraded to Neutral from Sell at Citigroup and slash tgt to 440 from $80 noting its management team was very effective at reducing costs and capex during the 2009 recession; DISCA slipped after withdrawing guidance following news of the delayed Olympics to 2021

·     Hardware & Component news; AAPL was upgraded to buy at Deutsche Bank with $270 tgt as have admired but have felt the recent valuation run was too rich for us from a risk-reward standpoint/but upgrades given the recent correction so far; SNX posted mixed Q1 results as EPS topped views but revs of $5.26B missed estimates while also suspended dividend effective immediately/Stifel slashed estimates to account for a dramatic decline in its Concentrix services business due to coronavirus-related work stoppages

·     Software movers; SAIL shares weak after Goldman initiated sell (only sell in space in sector initiations today), while picked up coverage of RPD and TENB with buy ratings saying Security Software consistently remains at the top of CIO priority lists, making it one of the most durable IT spending categories/said consolidation ahead as innovation remains prevalent across a broad and fragmented vendor ecosystem