Closing Recap

Tuesday, March 31, 2020

Equity Market Recap

·     U.S. stocks erased earlier gains, ending the day, month and quarter on a sour note, with major averages losing ground amid a broad late day swoon. Stocks took a turn lower around noon time, coinciding with the release of the daily New York coronavirus updates, which showed another starling jump in cases (more below), as well as energy stocks losing steam given a pullback in oil prices off earlier highs. Speaking of energy, WTI crude managed a 1% gain on the session but that was overshadowed by a monstrous 54% decline for March and a whopping 66% decline for the quarter as demand has disappeared given reduced travel around the world in an effort to limit the coronavirus outbreak. Stock selling late day could have been positioning into the new quarter as major averages to that point had been acting normally. Markets got a boost earlier after President Trump said a significant investment in infrastructure should be part of a fourth congressional coronavirus relief package, citing an opportunity in low interest rates, with the amount of $2 trillion dollars being mentioned, helping boost metals, E&C and building material stocks. Congress has already passed three major pieces of legislation to address the pandemic: a roughly $2 trillion stimulus bill that includes checks to households, bailouts for airlines and other distressed industries, and loans and grants for small business. Economic data was a positive this morning as Chicago PMI and Consumer Confidence for March fell from the prior month, but were above the consensus estimates, while in China overnight, its manufacturing purchasing managers index (PMI) jumped to 52.0 for March, up from 35.7, and the services PMI rose to 52.3 from 29.6. The dollar edged higher, Treasury prices end up slightly with the yield on the 10-year sliding to 0.68% (after starting the quarter just under 2%), while gold dropped sharply on the day. U.S. stocks are down roughly 18% the first three months of the year, but that is far improved than levels last week that saw major averages drop over 35% from their record peaks in February as the COVID-19 virus has destroyed economies, business and individuals with cases still on the rise.

Coronavirus Update

·     NY remains a growing fear on the coronavirus cases as NY Governor Cuomo said there were 75,795 virus cases, up from 66,497 Monday (1,550 coronavirus deaths in NY up from 1,218 Monday), total U.S. coronavirus deaths reach 3,393, exceeding China’s reported 3,305 deaths.

·     The death toll from an outbreak of coronavirus in Italy has climbed by 837 to 12,428, with the daily tally rising, albeit slightly, for a second day running. The number of new cases was broadly steady, growing by 4,053 against 4,050 on Monday, and bringing total infections since the outbreak came to light on Feb. 21 to 105,792. Some 5,217 new cases were registered on Sunday and 5,974 on Saturday, suggesting the growth curve of new infections is flattening. Italy’s largest daily toll from the five-week-old epidemic was registered on Friday, when 919 people died. There were 889 deaths on Saturday, 756 on Sunday and 812 on Monday. (more)

Commodities

·     Oil prices edge higher but finish off the best levels of the day (high $21.89) as WTI crude rose 39c or 1.9% to settle at $20.48 per barrel, but still sunk a whopping 54% for the month of March and is down over 66% for the quarter. Massive oversupply and lacking demand given the worldwide travel restrictions set in place globally to curb the spread of the coronavirus, coupled with Saudi Arabia flooding the market with oil in a price was with Russia has crushed prices over the last few weeks. The crash in prices is a major threat to energy producers around the world, including U.S. shale companies. President Trump and Russian President Vladimir Putin held a call Monday in which they agreed on the importance of stability in energy markets. Meanwhile, Texas regulators are considering curtailing the state’s output for the first time in decades to help prices stabilize.

·     Gold prices declined -$46.60 or 2.8% to settle at $1,596.60 an ounce to its lowest levels in over a week as the dollar gained, but still managed to end the month with a 1.6% for the month, its sixth straight quarterly rise and posted a roughly 6% advance for the quarter helped by U.S.-Iran tensions in January and since then the global pandemic.

Currencies

·     The U.S. dollar was volatile, though ended little changed overall (dollar index 99.15) while the Japanese yen was active (ends little changed around 107.70 – off overnight highs 108.73) as economic data on the day came in above expectations in the U.S. Treasury yields were down slightly, with the 10-year yield falling over 4 bps to 0.68% as the Federal Reserve continued its aggressive purchases and managers rebalanced their portfolios with the end of the first quarter. For the quarter, the 10-year yield traded in a wild range as it began the year at close to 2% and then traded down to a record low of 0.318% on March 9^th

Economic Data

·     Chicago PMI falls to 47.8 from 49.0 prior month but ahead of the 40 estimate; business barometer fell at a faster pace, signaling contraction while prices paid rose at a faster pace, signaling expansion

·     Consumer Confidence for March falls to 120.0 from upwardly revised 132.6 (from 130.7) but was above the 110.0 estimate; present situation confidence fell to 167.7 vs 169.3 last month and expectations index fell to 88.2 vs 108.1 last month

Sector News Breakdown

Consumer

·     Retailers; BKE to furlough majority of store, corp office teammates, extends closure of stores indefinitely; URBN says it is furloughing a substantial number of store, wholesale and home office employees for 60 days, beginning April 1 (joins M, GPS, KSS); DG was upgraded to Overweight at Wells Fargo saying it has numerous underappreciated tailwinds gaining steam that they believe make the stock a particularly attractive investment at the moment; VSTO tgt raised to $11 at Cowen saying see near term trading upside

·     Consumer Staples; CAG reported mixed Q3 results as EPS missed on slightly better sales while saying FY20 organic net sales and earnings will be above the high end of its previous range on rising demand for its snacks and groceries as consumers stay at home and stock up amid coronavirus pandemic; MKC mixed earnings as EPS beat for the quarter but sales came in below consensus and prior year figure ($1.21B vs. $1.23B est.) while withdraws guidance

·     Restaurants; seeing an early rebound in casual dining, restaurants after falling lately; WEN was upgraded to outperform at Wedbush saying the restaurant chain is well positioned to accelerate top and bottom line growth after the Covid-19 pandemic subsides; DPZ shares slipped after saying Q1 same store sales growth for U.S. company-owned stores of 3.9%, U.S. franchise stores of 1.5%, U.S. stores of 1.6% (better than peers, but street wanting more)

·     Housing & Building Products; RH falls as reported revenue of $665M in 4Q19, missing consensus estimates of $709M driven by the elimination of holiday items and a reduction in inventory forcing select items to be backordered as per Wedbush

·     Casino & Leisure movers; cruise lines a sharp reversal higher after initial losses as CCL sure up liquidity after announced it was suspending its dividend and buyback, and sees sufficient liquidity for next 12 months. In addition, said it seeks to raise $6B through stock sale as lawsuits from passengers over COVID-19 emerge (RCL, NCLH bounced); gaming stocks managed to push higher as well on the day while hotel stocks were little changed

·     Auto sector; DLPH shares tumbled after the company said they received notice from auto parts maker BWA that Delphi’s decision to draw on its credit facility represents a material breach of the buyout agreement; UBS upgraded shares of TM and HMC to buy from neutral while downgrade NSANY to sell noting that the retreat in auto sales and earnings has been historic, and while the fiscal stimulus is expected to drive a sales rebound, expects stiffer competition to slow profit growth in the medium term; few analysts preview TSLA as it will be delivering its much anticipated 1Q20 (March) production and delivery numbers

Energy

·     Energy stocks try to recover after oil prices touched their lowest levels in 18-years on Monday, falling below $20 per barrel for WTI crude. Today, prices got a boost after U.S. President Donald Trump and his Russian counterpart Vladimir Putin agree to talks aimed at stabilizing energy markets; in stocks new, RDSA said expects only a "relatively minor" impact from the coronavirus on overall demand for its oil products during Q1 while said it has secured a new $12B credit facility as it seeks to safeguard dividends; PXD, PE both ask Texas oil regulators for an emergency meeting to consider curbs on production in the state in response to the collapsing oil market; the co CEO’s seeks a virtual meeting among the three-member Texas Railroad Commission no later than April 13, Bloomberg reports; RRC reduced its 2020 all-in capital budget from $520 million to $430 million. Range still expects to maintain production at approximately 2.3 Bcfe per day

·     Energy research; APA was upgraded to neutral from sell while at UBS while cut tgt to $4.50 from $22 noting that while the recent market concerns have surrounded the company’s balance sheet, Apache has taken important steps" to preserve liquidity; UBS cut RRC to neutral warning that the company may be challenged in remaining free cash flow neutral as NGL prices worsened in 2020; Piper downgraded CPE, OAS, QEP to underweight from neutral and adjusting tgts and estimates given the unprecedented global oil demand shock and accompanying "Washout" scenario

Healthcare

·     Pharma movers; AMRN shares plunge over 60% after U.S. District Court for the District of Nevada ruled in favor of generic companies RDY and Hikma Pharma in the patent litigation for its Vascepa capsule franchise, dealing a blow to the company (downgraded by several analysts); RETA shares fell after announced that the Phase 3 catalyst study in CTD-PAH has been stopped due to COVID-19, and an initial analysis suggested the study is unlikely to meet its primary endpoint; AKRO rises as announces positive results from a Phase 2 clinical trial, BALANCED, evaluating lead candidate AKR-001 patients with F1-F4 (minimal fibrosis to severe fibrosis) in NASH/all three dose groups (28 mg, 50 mg, 70 mg) met the primary endpoint; BHC said Phase II study evaluating an investigative soluble solid dispersion formulation of immediate release rifaximin in combination therapy with standard of care therapy met its primary endpoint; VVUS surges as accelerates the launch of telemedicine and remote monitoring modules to facilitate effective patient care during "social distancing"

·     Biotech movers; CTMX earned a $40M milestone payment from collaboration partner ABBV triggered by the achievement of pre-specified criteria for the dose-escalation portion of the ongoing Phase 1/2 clinical trial, PROCLAIM-CX-2029; KNSA rises following early data from a small study of mavrilimumab in a treatment protocol in patients with severe Covid-19 pneumonia and hyper-inflammation

·     Medical equipment and devices; LMNX said it receives $642,450 from the Biomedical Advanced Research and Development Authority (BARDA) to fund development, testing and submission for an Emergency Use Authorization (EUA) for its COVID-19 detection test (the test, ARIES SARS-CoV-2 Assay, is designed to generate results in approximately two hours)

Industrials & Materials

·     Industrial & Machinery; President Trump said he was also calling for a $2 trillion infrastructure bill to help the economy which helped boost construction materials (MLM, GVA, USCR, VMC), E&C stocks (PWR, J) and metals stocks (FCX, NUE); ITW was downgraded to hold at Jefferies saying they continue to see it as one of the premium plays in industrials, but with automotive, commercial food service and welding providing ~50% of 2019 EBIT they see potential for significant N-T earnings downturn

·     Metals & Materials; copper, steel and iron ore names got a boost late morning on headlines about President Trump wanting a $2 trillion infrastructure bill; VALE said it expects iron ore production cuts because of lockdowns, calculates roughly 18 mln tonnes of output could be interrupted in transoceanic market; GLNCY said it had deferred a decision on its proposed $2.6 billion dividend payout for this year and said there could be material disruption to production due to the coronavirus epidemic.

·     Chemical movers; MOS upgraded to Buy at Bank America reversing its downgrade of shares earlier in the month saying now a Chinese potash contract appears likely in coming weeks, as domestic demand has substantially increased; DD shares higher after late Monday evening, a Delaware court upheld DuPont’s demand for arbitration of a dispute with CC over PFOA/PFAS liabilities, one of the key issues for DD shares (KeyBanc said they view the event as a significant positive that could start bringing investors’ attention back to shares); SQM downgraded to underperform at Bank America saying lithium prices are in “free fall” due to lower electric vehicle sales; SSL said it hedged ~80% of its synthetic fuel production in Q4 at near $32/bbl and will continue to hedge crude for the next 12 months

Technology, Media & Telecom

·     Semiconductors; KeyBanc downgraded SYNA to sector weight, said recommends building long-term positions in semi-cap and memory stocks (LRCX, MKSI, AMAT, KLAC, MU, TER and ENTG) and recommend owning ADI, AVGO, and NXPI while lowering estimates for the group; CRUS was upgraded to buy from Underperform at Bank America and raise tgt to $80 from $60 as believe CRUS has strong visibility into a 15%-25% content boost in next-gen iPhones which provides a path for the company to grow at least in line with core semis in 2020 (-4-5% YoY) even if global smartphone units decline -10% YoY; Apple supplier Japan Display seals $200 mln funding deal- sources, Reuters reported; STX ests and tgt cut at Stifel citing uncertain NAND demand trends for H2, saying there could be a digestion period in NAND flash market if recession occurs; MX shares rose after selling its foundry business and the factory in Cheongju (Fab 4) to a company in South Korea for about $435 million

·     Software movers; CVLT shares were higher after Starboard Value, a well-known activist, filed a 13D disclosing that it had taken a 9.3% stake in Commvault; TWLO was downgraded to neutral at Piper on model risk and cut COUP to neutral on valuation while lowering estimates across its coverage list on increasing risk of a broader economic contraction that could temper SaaS industry growth (says models most at risk near-term include TWLO, SHOP, and AYX); PANW signs pact to buy CloudGenix, a cloud-delivered SD-WAN provider for about $420M in cash

·     Media & Telecom movers; SIRI was upgraded to buy at Citigroup saying it sees the LSXMA discount as unwarranted; AT said it boosted its position in spectrum valuable for 5G in the latest FCC auction as it on spectrum licenses covering more than 99% of the U.S. population in FCC Auction 103, it reports.

·     Hardware & Component news; ZM shares slipped after New York Attorney General Letitia James is looking into the data privacy and security practices of the videoconferencing app, whose traffic has spiked amid the COVID-19 outbreak; HPE was upgraded to overweight and $14 tgt at Wells Fargo, modeling for a recovery into 2H2020; Computer monitor sales doubled in the first half of March to 80K units while laptops grew 10% Y/Y, according to NPD data (DELL, HPQ, MSFT); Mobile phone accessories dropped 14% during the period; B2B notebook sales were up 50% as companies rushed to outfit their newly remote work staff