Closing Recap

Friday, March 27, 2020

Equity Market Recap

·     U.S. stocks slipped going into the weekend, failing into the bell after Congress finally cleared the $2 trillion stimulus package that was passed late Wednesday by the Senate and as big pension rebalances that took place this week. Despite today’s market pullback, the S&P 500 index still posted its best weekly gains since 2009 (rising around 10%) following the 3-day surge from Tuesday-Thursday as investors scooped up beaten up sectors and stocks hurting from the impact on the coronavirus on global economies. However, the S&P 500 still stands roughly 25% off its February record highs. The further deterioration of oil prices took its toll on the energy stock complex, as well as other companies (industrials and metals) that benefit from energy spending, with oil prices down roughly 5% for the day. Safe haven Treasury prices were higher, with the yield on the benchmark 10-year dropping over 10 bps to 0.72%, though gold prices pullback about 1% and the dollar ended the week with its biggest five-day decline in over a decade. Given the U.S. government stimulus bill to help struggling small businesses, employees and corporations most directly affected by the COVID-19 virus, and the unprecedented moves by the Fed over the last 2-weeks (150 bps rate cuts, $700 QE program, and promise to provide unlimited liquidity needs), stocks were able to bounce despite COVID-19 cases and deaths rising around the globe. Numbers are only expected to go higher in coming weeks as testing ramps up and the impact to closing businesses is still undetermined at this point (as we are still not sure when the economy will reopen – despite President Trump saying this week he hoped by Easter).

Coronavirus updates:

·     The U.S. overtook China as the country with the most coronavirus cases with around 86,000 confirmed infections with fatalities around 1,300; Spain coronavirus death toll rises to 64,059 from 56,188 on Thursday; German coronavirus cases rise to 46,601 from 40,574; Italy has 5959 new coronavirus cases vs 6,153 Thursday while reports deadliest day of outbreak with 969 deaths Friday vs. 662 Thursday (Italy reports 86,498 total coronavirus cases, 9,134 deaths)

Commodities

·     Oil prices dropped on Friday, with WTI crude slipping -$1.09 or 4.8% to settle at $21.51 per barrel as the ongoing oil price destruction continued with Russia and Saudi Arabia headlines this morning not helping (no easing of tensions after Saudi flooded market with oil few weeks ago). A new OPEC+ deal to balance oil markets might be possible if other countries join in, according to Kirill Dmitriev, head of Russia’s sovereign wealth fund. Dmitriev and Energy Minister Alexander Novak were Russia’s top negotiators in the production cut deal with OPEC (current pact expires on March 31). Also adding to fears, plunging global demand due to travel restrictions. While global stocks staged a partial recovery this week as policy makers sought to cushion the blow from the virus, there have been more signs of a demand collapse. Oil prices dropped for a 5th straight week, falling 5%. Gold prices slumped -$26.20 or 1.6% to settle at $1,625 an ounce, but despite today’s pullback, registered a 9.5% advance for the week – helped in large part to the near 4% drop in the U.S. dollar.

Currencies & Treasuries

·     The U.S. dollar dropped again, adding to its worst weekly return since 2009 (dollar index dropped around 4%, erasing much of last week gains) sliding against all major peers…just one week removed investors dumped everything they could into U.S. dollars. The greenback dropped about 1.6% vs. the British Pound which rose above the 1.24 level today (well off last week lows 1.141), fell sharply vs. the Japanese yen (1.4% to 108 level and down 2.5% for the week) while the euro reversed higher above 1.11, closing the week up 4% (off Monday lows 1.063).

·     Treasury prices stayed strong all day, with the yield on the 10-year sliding 14 bps to 0.70% (off highs 0.84%), finishing the week just off lows. Given the massive $700B QE measures adopted by the Fed last week and liquidity operations to help ease credit markets, Treasury prices resumed its upward momentum, pressuring yields.

Economic Data

·     Personal Income for Feb rises 0.6% vs. est. 0.4% while spending rises an in-line 0.2% for the month; PCE deflator MoM 0.1% (in-line w ests) and YoY up 1.8% vs. est. 1.7%; for PCE Core Deflator MoM rises an in-line 0.2% while YoY rises 1.8% vs. est. 1.7%

·     University of Michigan Sentiment, Mar-F falls to 89.1 vs. est. 90.0 (prior reading was 95.9), while the expectations index fell to 79.7 vs. 92.1 last month and the current economic conditions index fell to 103.7 vs. 114.8 last month

Sector News Breakdown

Consumer

·     Retailers; many analysts weighing in with changes after impact of coronavirus has shut retailers physical locations; LULU shares fell despite posting strong 4Q with comps +20% driven by +9% store comps, 41% Ecom growth and EBIT margin +140bps, capping off a strong year; GME shares rise after Q4 EPS handily topped estimates ($1.27 vs. est. 77c) helped in part by higher demand due to the coronavirus; OXM shares dipped on its earnings miss while SPWH EPS beat; in research, GIL was upgraded to buy at Stifel saying big picture, disruption to supply chains increases the strategic value of Gildan’s cost-advantaged manufacturing infrastructure, while downgraded UAA to hold saying COVID-19 disruption annuls our turnaround thesis; SIG downgraded to underperform at Bank America saying a low online penetration (12.2% for F19) and a reliance on credit to drive half of sales are all risks; department stores KSS, M, JWN downgraded at Cleveland Research citing halted and/or canceled orders due to a Covid-19

·     Consumer Staples; Stifel upgraded shares of CL and PG to buy with the recent pullback creating an attractive risk/reward; in beverages, PEP upgraded to outperform at Credit Suisse from neutral and raise tgt to $144 calling it a high-quality asset trading at a discount with near, medium, and long-term drivers, while STZ was upgraded to buy at SunTrust saying the COVID-19 related market pullback has created a highly attractive entry point for a company with a resilient portfolio and strong FCF generation; WW upgraded at Morgan Stanley saying while sub growth is likely negatively impacted in the short-term, attractive valuation and a potential beneficiary post "shelter in place" lead to upgrade

·     Restaurants; WEN withdrew its 2020 and 2021-2024 long-term outlook given uncertainty, with plans to provide an updated financial outlook on its 1Q call. In the week ended 3/22, SSS were down ~20%, following strong trends in the first two months of the quarter; KeyBanc lowered tgts and estimates for MCD, CMG, SBUX, QSR, WEN, YUM, DNKN, EAT, TXRH as assume hamburger and sandwich chains with drive-thru capabilities will see trough weekly SSS declines in the 30-35% range, while expect coffee-based chains will likely see slightly larger declines in the 40-50%

·     Housing & Building Products; KBH posted 1Q beat while orders -51% YoY in 2Q (vs. the group 38%) reflecting economic deterioration, exposure to areas seeing "shelter in place" orders, and the impact of KBH’s decision to close sales offices nationwide as per RBC Capital

·     Casino & Leisure movers; cruise lines falling (CCL, RCL, NCLH) after the WSJ reported the major cruise-ship operators will not qualify for aid under the roughly $2T coronavirus stimulus package headed for a House vote Friday; SunTrust lowers 2020/2021 estimates for the three park operators under coverage (FUN, SEAS, SIX) as notes all three stocks are down 50-70% since mid-February due to coronavirus impact on park closures; gaming stocks which had rallied the early part of the week have been giving up profits the last few sessions (WYNN, MLCO, LVS, PENN); in autos, LEA announced cost cuts, drew on credit line and suspended buybacks; in lodging, HLT the latest to halt dividend & suspends share buybacks while eliminating capex for the year

Energy

·     Energy stocks demolished again (APA, DVN, NBL, OXY) given the ongoing destruction of oil related prices, forcing many companies over the last few weeks to cut cap-ex plans for the year, lower production, slash dividends and halt buybacks in an effort to improve cash and liquidity for an industry that could see many defaults on loans and bankruptcies over the next few months given the plunge in global demand due to travel restrictions and constant over supply. The weekly U.S. oil rig count dropped -40 to 624 as the total rig count fell -44 to 728 and U.S. gas rig count down -4 to 102

·     Oil services; Piper the latest to turn negative after downgrading SLB, FTI, AL, NOV to neutral from overweight calling it overdue and mechanical adjustment to their "don’t touch" energy call which has been in place since late-January (says BKR is lone remaining OW and has been top OFS pick for the past two years due to balance sheet strength, low capital intensity)

Financials

·     Bank movers; U.S. banking regulators today allowed banks to delay capital impact of new ‘current expected credit loss’ accounting standard for two years – regulators allow banks to early adopt new methodology for measuring credit risk for derivative counterparties, beginning at end of march; BGCP shares dropped sharply after the company slashed its dividend to 1 cent per share from 14 cents, raising concerns and questions about the firm’s liquidity

·     REITS; data REITS positive mention at Wells Fargo saying traffic growth trends are substantially higher than levels they saw in Feb and believe the pipe owners will grow in strategic performance coming out of the crisis. As demand for ‘fatter pipes’ continues to grow – this should have a trickle down positive impact to the connectivity rich data centers (CCOI, COR, CTL, DLR, EQIX)

·     Payments sector; FIS and FISV were upgraded to overweight at JPMorgan and stay OW on GPN noting a lot has changed since they relaunched on the group in 4Q19, when liked all three on defensiveness of earnings from deal synergies, but prioritized payment revenue mix for having greater growth upside potential in preferring GPN

Healthcare

·     Pharma & Biotech movers; BLUE was upgraded to buy at Stifel saying that while the story is not perfect, now believes the stock is oversold, adding that recent events have created a good entry point for investors; TLRY rises a 5th straight day (rose 56% yesterday and 25% prior) as cannabis names seeing renewed mkt interest (closed at $3.65 last Friday)

·     Medical equipment and devices; ABT shares active after VP Pence announces point-of-care test submitted to the FDA last night (results would come back in 15 minutes); Morgan Stanley makes several rating changes in the space, as upgraded HOLX saying while elective mix and modest capital exposure risks are clear – thinks risks priced in at current valuation, while downgraded DGX to equal-weight saying with only 7% upside to our base case price target, we view risk-reward as balanced, while cut VRAY to underweight saying COVID-19 will impact capital purchasing significantly, creating further cash flow pressure; LMNX rose after an FDA website showed the company’s NxTAG CoV Extended Panel Assay received Emergency Use Authorization (EUA) for the duration of the Covid-19 outbreak

·     Healthcare services and providers; NXGN was upgraded to Equal Weight from Underweight at Wells Fargo as COVID-19 impact seems exaggerated (though cuts tgt to $10 from $16); CRL upgraded at Morgan Stanley as highlight the group (IQV, PPD and CRL) as an attractive long-term investment opportunity; SDC shares jumped after saying it begun 3D printing medical-grade face shields for healthcare workers amidst the COVID-19 pandemic

Industrials & Materials

·     Industrial & Machinery; DE was upgraded from Underweight to Neutral at JPMorgan on valuation, though remain cautious on the structural challenges facing US, magnified by a strong US dollar and current fundamentals in ethanol; CAT was downgraded to neutral noting it has a strong balance sheet and nearly 4% dividend yield, but so do a lot of other companies and notes suspended guidance which only underscores the degree of demand and supply side; GNRC was upgraded at William Blair to outperform as believe the roughly 20% decline in the share price from the recent high offers an attractive entry point for long-term investors; KBR was upgraded at Credit Suisse reflecting view that KBR’s upgraded business model should prove more resilient in a downturn while offering solid growth prospects over the long term

·     Distributors; Baird upgraded GWW and MSM to outperform as taking a more constructive view as recession looms and cyclical factors align positively for industrial supply distributors (notes follows recent upgrade of FAST). Says industrial distributors have historically outperformed the market into and during recessions (and for several years thereafter), making the current ugly economic setup favorable for the stocks overall.

·     Transports; index remains softer on slowing global transportation and store closures; in airlines, UAL drew down its entire $500M term loan that was entered into on March 20^th; SAVE disclosed identified weakness in internal controls, to restate 2019 on cash flow classification error

·     Materials; Citigroup lowered estimates for Timber REITs (2020 EPS estimates –16% on average), as they expect the core driver of Wood Products demand, single-family housing starts, to slow sharply in 2020 due to coronavirus disruptions. We’re reducing our full-year total starts forecasts to 1.2mm in 2020 (Feb SAAR was 1.599mm) – while upgraded RYN to buy as expect the company’s pure-play Timber portfolio to outperform in a period of lower rates

Technology, Media & Telecom

·     Semiconductors; semi’s slipped, interesting week after tumbling Wednesday on reports that AAPL may delay the next launch of its iPhone by several month, hurting the supply chain but rebounded yesterday before today’s volatility; UBS upgraded semi-equipment stocks AMAT, KLAC, LRCX and semi maker TXN saying the ~20% EPS cut now baked into stocks is enough to make them believe that staying negative would be fighting an uphill battle over the next few Qs, even as autos in particular remain tough

·     Media & Telecom movers; Intelsat (I) shares slipped after Cowen downgraded shares to market perform with a $1 price target; QUOT was double upgraded to buy at Bank America from underperform; advertising stocks feeling the pinch (IPG, OMC, WPP) on fears that companies to cut ad costs in order to stabilize in tough environment

·     Hardware & Component news; ADTN was upgraded to buy at MKM Partners as look for the telcos to accelerate new fiber broadband access solutions later this year which is also 40% of what ADTN does; BKYI shares surge after closing a contract to provide its biometric software and hardware solutions to support a program launched by the Nigerian Ministry of Labor aimed at finding jobs for 1M recent college graduates there