Closing Recap

Thursday, March 26, 2020

Equity Market Recap

·     U.S. stocks close higher bringing the winning streak to three straight sessions (its best 3-day advance since the Great Depression), overlooking a startling high (but not unexpected) jobless claims report as investors hang on to the stimulus bailout for the economy, which is expected to be passed by Congress after the Senate approved the $2 trillion bill yesterday. Stocks lost some steam mid-afternoon after Italy reported a sharp rise in coronavirus cases to 6,153, the biggest rise in the last 5-days with 662 deaths as it reduces hopes of slowing cases in the hardest hit region thus far (while numbers in New York city spike again). Markets also didn’t like the late day roll in oil prices, snapping a 3-day win streak to settle lower by over 7% as demand fears weigh heavily. But it didn’t matter as stocks rose to highs late day as the Dow Jones Industrial Average jumped than 1,300 points late, rising over 6% topping 22,500, moving 20% off its March 23^rd closing level (off bottom 18,213 on Monday 3/23). Defensive healthcare and utility stocks were among the top gainers. Jobless claims surged to a record 3.28 million Americans last week as businesses shut down to help prevent the spread of the virus.

·     Markets clinging to the Fed and the government stimulus package with the House expected to approve today/tomorrow to help small businesses, corporations and out of work employees, as well as receiving support from the ongoing liquidity measures the Fed has enacted the last few weeks to backstop the economy and credit markets (mirrored by other central banks as well). Fed Chairman Powell today said in an interviews: only limit to emergency lending authorities is how much Treasury will backstop it; the Fed is required to get full security for its loans; the Fed can continue to make loans to support the flow of credit to households and businesses.; the Fed is prepared to spend an unprecedented amount and will continue to step in aggressively.

·     Goldman Sachs on the massive virus relief bill: "the size and scope of the legislation is on par with the immediate economic effects of the virus, and most of it is going to affected businesses, workers, municipal governments, and the health care sector." The bad news? "The legislation is unlikely to substantially change the short-term outlook for growth, as the 6% (24% at an annualized rate) decline in output we expect in Q2 is driven by the physical constraints on economic activity imposed by social distancing requirements." But here’s the good-ish news: "However, these programs should reduce the medium-term damage to affected businesses and the labor market, and should allow for a faster recovery in Q3, assuming that measures to contain the spread of the virus have been loosened by that point."

Economic Data

·     Weekly jobless claims surged an unprecedented 3.28M, nearly double the 1.7M estimate (compares to last week was 281K when it rose 70K) – the 4-week moving avg rose to 998,250 in latest week from 232,500 prior week (previous 232,250); continued claims rose to 1.803M in latest week from 1.702M prior week (prev 1.701M) – prior to today, the highest weekly rise in jobless claims was 695,000 seen back in October 1982

·     GDP for Q4 was unchanged at 2.1% and compared to the second est. of 2.1% after rising the similar amount in prior quarter; personal consumption rose 1.8% in 4Q after rising 3.2% prior quarter (and was above the 1.7% estimate); Core PCE QoQ rose 1.3% vs. est. 1.2%

·     International trade for February in goods dropped -9.1% to (-$59.9B) narrower than the (-$63.8B) consensus and prior revised month of (-$65.9B); exports rose 0.5% or +$0.7B MoM to $136.5B while monthly imports fell -2.6% or -$5.3B MoM to $196.4B

Commodities

·     U.S. crude oil dropped -$1.89 or 7.7% (near the lows) to settle at $22.60 per barrel following three days of gains, as a massive spike in jobless claims remind markets about the lack of demand due to coronavirus travel bans and lockdowns overshadowing the effects of the $2T U.S. emergency stimulus package. This morning the SJ reported the Trump administration will press Saudi Arabia to restrain its scheduled oil production boost while separately, the U.S. Department of Energy has withdrawn an offer to buy oil for the Strategic Petroleum Reserve (SPR) due to uncertainty over funding from Congress. April gold prices advance $17.80 or 1.1% to settle at $1,651.20 an ounce, helped by a decline in the dollar and after record weekly jobless claims.

Currencies & Treasuries

·     The dollar index (DXY) tumbled 1.5% to around 99.50 late day, falling broadly vs. most rival currencies given the week jobless claims data and pullback from 3-year highs last week. The euro neared session highs against the U.S. dollar late day up 1.45% at 1.104 (steady climb all day as the dollar extends recent pullback from multi-year highs); the dollar slumped vs. the Japanese yen, down -1.5% to around 109.50 late day (off overnight highs 111.30), while the British Pound surged 2.35% to 1.21 vs. the greenback (off last Friday lows of 1.14). Treasury market’s not nearly as volatile as stocks or currencies, as the 10-year yield dips 8 bps to 0.79%, holding around the 0.8% level for a third day as defensive assets hold up well after the spike in weekly jobless claims this week and stocks paring recent gains.

Coronavirus updates tallies:

·     German coronavirus cases rise to 40,574 from 35,153; Spain’s coronavirus death toll rises to 4,089 from 3,434 as overall coronavirus cases rise to 56,188 from 47,610 on Wednesday; NY Governor Cuomo said there have been 37,258 tested positive up from 30,811 yesterday, 5,327 hospitalized, 1,290 ICU and 1,517 discharged. In a disappointing tally, Italy has 6,153 new coronavirus cases, vs 5,210 Wednesday and reports 80,539 total coronavirus cases, 8,165 deaths; NJ coronavirus cases jump 56% in a day to 6,876

Sector News Breakdown

Consumer

·     Retailers; SIG shares outperformed in retail after reported Q4 adj EPS $3.67 vs. est. $3.50 and comp sales rising 2.3% vs. est. 1.1%; MOV reports net sales declined 3.8% on a constant currency basis in Q4, gross margin rate contracted 280 bps to 52.7% and the adjusted operating margin rate squeezed 560 bps to 4.4%, while discontinued the regular quarterly dividend and suspended share repurchases; SCVL posted Q4 EPS/sales/margins above views while withdrawing guidance as Wedbush noted digital trends amidst store closures are encouraging

·     Consumer Staples; BYND was downgraded to sell from neutral at Goldman Sachs citing the dimmer outlook for food-service traffic growth while the firm upgraded NTR to buy and both INGR and HRL to neutral from sell in the agriculture space in light of recent market volatility that has dislocated several stocks; food stocks SYY, PFGC both upgraded to buy at Jefferies after stress tests for liquidity risk and view the recent 40%+ share losses as an attractive entry point for SYY, PFGC and USFD; PG was upgraded to buy at Argus as see investors allocating a higher percentage of their spending to maintaining a safe, healthy home

·     Auto’s, Casino & Leisure movers; another buying frenzy for some of the hardest hit sectors as cruise lines (CCL, NCLH, RCL) advanced initially before sliding late day after Wedbush noted a potential cruise line ‘bailout’ has been met with political pushback given that the companies are not incorporated in the U.S., while lodging stocks also pushed higher (HLT, MAR, H, WYND) and casinos were mixed after a good run the last few days; Ford Motor (F) said it aims to restart production at select North America plants as early as April 6/planning to resume production at Hermosillo Assembly Plant on April 6 on one shift

Energy

·     Energy stocks gave up big early gains late day as oil once again could not rally, pressuring the broader energy complex late session, with a broad hit to services, equipment and drillers while some majors held up relatively well such as CVX; in refiners; Goldman Sachs downgraded CVI to sell from neutral citing its leverage to Brent-WTI amid declining U.S. production and sees higher risk to CVI’s dividend (ests CVI reduces dividend to 40c from 80c), while firm upgraded PBF to neutral from sell after share weakness; Jefferies upgraded five refiners (VLO, PSX, PSXP, HFC, HEP) to buy though cut ests due to anticipated demand destruction amid proliferating COVID-19 responses (but says with a return to more normal conditions in 2021, strong balance sheets, & deep liquidity positions, find many attractive opportunities)

Financials

·     Bank movers; banking stocks rise (BAC, JPM, C, WFC) another beneficiary of all the Fed’s moves and the Senate’s stimulus bill as part of the package would likely delay until the end of the year a requirement that lenders partially write down losses when they make a loan while lawmakers also added a separate provision that would make it easier for banks to temporarily modify loans without downgrading them to troubled status, a step meant to give flexibility for borrowers. Regional banks benefit (PNC, USB, RF, ZION) as the postponement of the accounting rule — known as the current expected credit losses method (CECL) seen as a big win for regional lenders which have been lobbying for more than a year to get the standard changed

·     Consumer finance and lending; DFS, COF, SYF rise again as consumer finance stocks benefiting from stimulus package backstops – as Federal Reserve is attempting to ease consumer loan credit markets; GDOT upgraded to buy at BTIG as believe GDOT’s announcement that it had hired Dan Henry as its new CEO and President was a game-changer for the company inasmuch as the skill set and experience that he brings from his tenure as CEO of NetSpend

·     Mortgage REITs (MFA, RWT, IVR, NYMT, ARR) bounce after UBS said the Fed’s massive bond buying in response to asset price declines and delevering by mortgage REITs and other fixed-income funds, which pressured liquid assets sold to meet margin calls, was an early success

·     REITs; FRT, REG, SLG, MAC, TCO, SPG among mall, strip center REITs reeling from concerns of tenants possibly not making rent after CAKE said it won’t be able to pay rent for the month

Healthcare

·     Pharma movers; BMY said its oral treatment for MS, ZEPOSIA (Ozanimod) received approval, with no label-based first dose observation…but given the ongoing coronavirus pandemic, the company is delaying the launch of the therapy to patients; ARNA was upgraded to buy at Bank America and raised tgt to $56; cannabis stocks rally (TLRY, CGC, HEXO, APHA) amid strong demand and as several jurisdictions allowed dispensaries to remain open during stay-at-home

·     Biotech movers; DVAX rises after they and CEPI announce collaboration to support global effort to develop a vaccine for coronavirus; INO reports positive interim phase 2 VGX-3100 results in patients with HPV-associated anal dysplasia; BLUE said it expects the COVID-19 pandemic to shift the timing of enrollment and completion of clinical studies by at least three months and expects timing shifts to vary by clinical trial and by program.

·     Medical equipment and devices; Barclay’s upgraded BRKR to overweight with $48 tgt and ICLR to overweight with $170 tgt, MTD upgraded to equal-weight from underweight with $680 tgt, and QDEL downgraded to equal-weight with $90 tgt; DHR was upgraded to outperform at RBC Capital as believe that its high-quality, defensive portfolio (70% recurring revenues) should outperform in an economic downturn; QGEN shares rose as its CEO on CNBC discussed the company shipping coronavirus test kits to the U.S.

·     Hospitals; THC, UHS, CYH, HCA strong early – hospitals higher in general, Raymond James said the sector a major beneficiary of the legislation with more than a $100B in additional funding outside of the status quo. Congress delays the 2% Medicare sequester through the end of the year, creates a Medicare add-on payment of 20% for COVID-19 treatments

·     Healthcare services and providers; managed care stocks weak (UNH, CI, ANTM, CNC, MOH) after Goldman Sachs noted a provision in the stimulus bill (risk corridors) was not included in the final Senate stimulus bill – said there was focus on whether the bill would include this provision that would significantly dampen risks associated with higher costs in Medicare Advantage; AMRS said it is in active discussions to target the broad application of its squalene in flu and potential Covid-19 vaccines; LH and DGX extend recent gains as companies instrumental in performing COVID-19 tests each day (providing potential revenue tailwind)

Industrials & Materials

·     Transports; Dow Transports pushed above the 8,000 level today (off 3/18 lows of 6,481) before paring gains late, as airlines led with DAL, LUV, ALK among top movers; truckers lagged broader transports (JBHT) as transportation/shipping still being effected

·     Chemicals; RBC Capital downgraded shares of HUN saying its now-greater exposure to autos, appliances, and other discretionary items could see weaker demand as uncertainty increases, while raised RPM to outperform as see it as a relative winner given the recent market selloff; KeyBanc initiated on the group (AXTA, DD, EMN, FMC, HUN at overweight) and 8 at Sector Weight (ALB, CE, CTVA, DOW, LTHM, LYB, OLN, WLK) saying the OW rated names have the deepest balance sheet to withstand a recession and valuations already priced at worst case; FUL reported in-line quarterly EPS while saying sees Q2 revenue down 5%-15% YoY

Technology, Media & Telecom

·     Internet; EXPE downgraded to sell at Goldman Sachs in online travel as risk is high that investors may be overly optimistic about the prospects for a sharp recovery in online travel or Expedia’s ability to fully participate given the company’s balance sheet and the need to reduce costs and investments; AKAM was upgraded to neutral at Goldman Sachs saying the company is benefiting from increased internet traffic

·     Semiconductors; MU a bright spot for semiconductors after reported revenue at the high end of the reported range for February, and still managed to deliver some slight upside for May despite some impact from the virus on the handset markets (prompted upgrade to buy at Bank America with $60 tgt); AMBA was upgraded to buy at Stifel as believe the stock has reached an attractive risk-reward level in the current environment (currently trading at 4.1x net cash/sh and 3.8x price-to-tangible book value; IDCC sees Q1 revs $73M-$76M from prior view $73M-$75M; INTC upgraded at Bernstein (follows upgrade at Argus day prior) noting the valuation looks more attractive after a recent sell-off; Jefferies lowered semiconductor estimates for 2H20 and 2021 EPS by 10-20% across our coverage due to COVID-19 (said AMD, AVGO, LSCC, NVDA, INTC and XLNX would exhibit the least amount of negative operating leverage during a downturn)

·     Software movers; TWLO was downgraded to neutral at Goldman Sachs and cut tgt to $105 from $140 saying the company’s revenues are more at risk from COVID-19 since they are mostly transactional and are reliant on usage; NOW was upgraded to buy at Mizuho saying having declined 26% from its high five weeks ago, we find the risk/reward attractive; WORK shares rise after its CEO tweeted that the company had added 7K net new paid customers halfway through Q1 and said by Tuesday of this week, that number crossed the 9,000 mark

·     Media & Telecom movers; AMT was upgraded to outperform at Raymond James saying while tower stocks are not immune from major market disruptions, the public tower company management teams have learned very valuable lessons from the previous events and are in better position now to deal with this crisis than tech bubble burst; in the media sector, Bernstein lowers tgts for several names to street lows (VIAC to $10, AMCX to $21, DISCA to $15) saying there’s "not much left for equity holders" amid the fallout, suggesting media investors can find "much more upside" elsewhere even in case of a quick recovery.