Closing Recap

Tuesday, May 19, 2020

Equity Market Recap

·     U.S. stock markets were holding on to modest gains, trading flat into the final hour before pulling back sharply after STAT News reported vaccine experts said Moderna (MRNA) didn’t produce data critical to assessing Covid-19 vaccine. Stocks quickly turned lower as the MRNA vaccine news yesterday was the main driver of market outperformance, so the headline took some steam out of markets late. Prior to the story, stocks were mixed with more outperformance in the Nasdaq (touched highs of 9,317 – best levels since late February and well off the 6,631 3/23 lows) behind large caps while mixed retail earnings (WMT better, KSS disappoints and HD misses falling from 52-week highs) weighed on the Dow and S&P 500 index. In other news, U.S. Treasury Secretary Steven Mnuchin in testimony before the Senate Banking Committee defended the Trump administration’s fiscal response to the coronavirus pandemic and told senators he was willing to consider extending and modifying a payroll loan program for small businesses. Fed Chairman Powell said the nearly $3 trillion in coronavirus rescue programs rolled out by the federal government over the past two months were working to support and that new Treasury-backed Fed lending programs aimed at mid-size companies and municipal bond markets would be up and running by the beginning of June. The comments were again supportive of the market while it weighed on the U.S. dollar. Commodity prices jumped with oil rising on expiration and gold rebounded. In a little bit of a downer, cases and deaths rose in some European countries as Italy had 813 new coronavirus cases vs. 451 Monday and 162 deaths from coronavirus vs. 99 Monday while in the UK, new virus deaths rise by 545 from 160 day before. Stocks have surged over the last month as Bespoke noted that 81.78% of stocks in the S&P 500 closed above their 50-DMAs yesterday, which was the highest reading since January 17th of this year.

Economic Data

·     Housing data showed housing starts MoM for April fell -30.2% to 891K vs. est. -26% to 900K and building permits MoM for April reported down -20.8% at 1.074M vs. est -25.9% to 1.0M vs. March 1.356 mln unit rate (prev 1.350 mln units)

Commodities

·     Oil prices rise with June WTI crude up 68c or 2.1% to settle at $32.50 on expiration day, recovering after dipping into negative territory late day. Natural gas prices inched higher by 2.6% to settle at $1.83 mln btus. Oil prices have continued to climb over the last few weeks and in much better shape than a month ago when May expiring contracts turned negative for the first time in its history. Prices have been buoyed by improved demand, lower production due to OPEC+ cuts and rig counts plunging to help deal with the massive oversupply due to the impact of the coronavirus pandemic global lockdown that essentially shut travel.  

·     Gold prices rose, with June gold gaining $11.20 or 0.7% to settle at $1,745.60 an ounce, getting a boost on the weaker dollar as well as solace from congressional testimony from Federal Reserve Chairman Jerome Powell assuring that the central bank is ready to use all the weapons in its arsenal to help the U.S. economy endure the coronavirus pandemic and that the central bank is expected to leave the benchmark lending rate near zero until the economy is back on track. Lawmakers of both parties pressed Mnuchin and Powell to move faster on hundreds of billions in lending to businesses, cities and states and others.

Currencies & Treasuries

·     The U.S. dollar was broadly lower vs. rival currencies, falling to near three-week lows vs. the Canadian dollar which continued to find support on the back of strengthening oil prices as WTI crude dipped below yesterday’s two-month high of $33.32, but held the $31 handle through the session. More dovish commentary about rates remaining low for an extended period time from Fed Chairman Powell and that the Fed has additional measures to help prop up the economy weighed on the buck. The euro ended higher around the 1.095 level vs. the dollar. After having jumped the day prior in dramatic fashion, Treasury yields were little changed on the day following weaker economic data (housing) and comments from Powell and Mnuchin as the 10-year yield held above 0.7% and the 30-yr dipped to 1.43% after hitting 2-month highs.

Sector News Breakdown

Consumer

·     Retailers; WMT Q1 profit beats estimates saying Q1 U.S. comp sales rose 10% and online revenue jumped 74% on stockpiling of groceries and other staples during coronavirus-related lockdowns (TGT shares active ahead of earnings tomorrow morning); KSS said net sales declined 43.5% in Q1 while said was not reporting comparable sales due to store closures/decreased planned capital expenditures by ~$500M, and suspended its dividend and share repurchase program; GME released a letter to shareholders, offering an update on its Reboot Plan to reduce costs and debt amid criticism from shareholder activists/said it exited FY2019 with approximately $500M in cash after generating $62.3M in adjusted operating income, despite a challenging sales environment (specialty fall on KSS results and PVH saying it is being cautious with pace of store re-openings)

·     Consumer Staples; HAIN upgraded to outperform from market perform at Bernstein noting that margins are showing a healthy progression and relationships with retailers are improving; BYND was initiated with a buy and $173 tgt at BTIG based on growing adoption of plant-based meats and the sales potential from future restaurant partnerships (SBUX, DNKN, MCD) will quickly elevate Beyond to a national scale; CMG trades back near record highs after topping the $1,000 per share mark for the first time ever yesterday

·     Restaurants; DRI said for Q4 to date through Sunday, May 17, Darden same-restaurant sales declined (-47.9%) while said beginning April 27, they began reopening dining rooms limited to between 25% – 50% capacity, depending on local or state regulations

·     Housing & Building Products; HD with mixed Q1, as EPS of $2.08 on sales $28.26B compared to est. $2.27/$27.63B while Q1 U.S. comp sales rose 7.5% vs. est. 5.8% and overall Q1 comp sales rose 6.4% topped the est. 4.5% (HD touched all-time high yesterday); BZH files up to $500M mixed securities shelf; EXP rises after big quarterly beat as adjusted net earnings per diluted share of $1.28, up 45% from a year earlier, and easily topped estimates as sales by segment: Heavy Materials +17%; Light Materials -4%; Oil and Gas Proppants -44%; PIRRQ says it’s looking for approval from the bankruptcy court to begin an orderly wind-down of its operations as soon as possible after its roughly 540 stores reopen; SWK said it sees Q2 organic revs down 20%-30%, better than prior view for 35%-45% rev organic decline

·     Casino & Leisure movers; PTON estimates raised and tgt to $60 from $52 as remain constructive as PTON continues to be a net beneficiary of greater adoption of in-home fitness, caused by the pandemic; MGM announced the completion of $700M in OP unit redemptions (half of the $1.4B agreement); WYND upgraded to overweight from neutral and raise tgt to $35 from $25 at JPMorgan saying it offers a low risk way to play a potential recovery of the U.S travel consumer; regional casinos rise led by BYD as announced plans to resume operations at seven properties in Louisiana and Mississippi, pending receipt of final regulatory approvals, helping shares of PENN; LVS said it is allowing reservations for Venetian starting June 1

·     Autos; in auto retail, AAP posted a miss for Q1 top/bottom line (91c/$2.7B vs. est. $1.73/$2.74B) while Q1 comp store sales fell (9.3%) vs. est. (-8.8%) but upbeat guidance saying through first four weeks of Q2, comparable store sales improved significantly each week helped shares (AZO, ORLY also active on the results; SAH said sees May month to date used vehicle sales volume down less than 15% at franchised stores/continues to see increasing consumer activity; CVNA 5M share Spot Secondary priced at $93.00

Energy

·     Energy stocks giving back some of Monday’s gains despite another early bounce in oil prices after June monthly contracts expire today. In the E&P sector; Morgan Stanley downgraded MRO to underweight from equal-weight and PE upgraded to overweight from equal-weight with top picks HES, NBL, PE, & XEC saying compelling value exists in select higher quality stocks across North American E&P and Integrated Oil, with downside for others; HP will replace JCP in the S&P SmallCap 600 (being removed from S&P 500)

·     Pipelines, refiners; PBF was downgraded to underweight from overweight and cut tgt to $7 from $11 at Barclays noting the co has taken all the necessary steps to ensure survival, including asset sales, cost reductions, dividend cut and debt issuance of $1B, but also notes, these actions have left the company’s balance sheet and free cash flow outlook in a precarious state; TRGP estimates reduced for 2020 and 2021 EBITDA at Mizuho citing lower gathering and processing (G&P) volumes across basins including the Permian, but says 202 guidance conservative

Financials

·     Bank movers; quiet on the financial front as the sector continues to underperform given low yield environment as well as light M&A calendar; in consumer finance and lending; PAYX said it sees FY revs up 7%, down from prior view up 8%-9% and sees FY adj EPS up 5%-6% vs. prior view up 6%; MGI shares active as collaborates with Korean money transfer and payment fintech co E9Pay, enabling latter’s customers to connect to MGI’s platform

Healthcare

·     Biotech movers; MRNA shares pulled back late day after STAT News reported Vaccine experts say Moderna didn’t produce data critical to assessing Covid-19 vaccine (the MRNA news yesterday was the main driver of market outperformance, so headline took steam out of markets late day today https://bit.ly/3cKHbuQ ); DVAX shares jump after saying it expects one or more of its collaboration partners in the development of a COVID-19 vaccine will begin a Phase 1 clinical trial as soon as July; ABUS rises after Wedbush upgraded it to outperform from neutral and raised tgt to $4 from $2 following positive data from an early-stage hepatitis B drug trial; XBIO entered into a research funding and option agreement with Scripps Research to advance the development of the XCART technology for B cell malignancies; BLPH 3.077M share Secondary priced at $13.00; BLUE 9.09M share Secondary priced at $55.00; CLVS 11.09M share Spot Secondary priced at $8.05; GMDA 13.333M share Secondary priced at $4.50; GOSS 9.434M share Spot Secondary priced at $13.25; KRYS 2.3M share Secondary priced at $55.00; MRNA 17.6M share Spot Secondary priced at $76.00; TPTX 5.42M share Secondary priced at $60.00

·     Pharma movers; WST will replace HP in the S&P 500; ALLO upgraded to buy from neutral by Roth saying latest data published at the ASCO suggests the company is “on to something” with its allogeneic CAR-T cancer treatment approach; MNK shares were downgraded at JPMorgan saying the fundamental story looking increasingly challenged amid Acthar, Inomax and Ofirmev erosion, and multiple legal challenges facing the business

Industrials & Materials

·     Industrial & Machinery; E&C stocks benefit after DY Q1 results handily topped views as adj EPS 36c/$814.3M vs. est. 6c/$753.2M; had cash and equivalents of $643.9m at April 25; is not providing guidance at this time

·     Transports; LUV reported load factor for April of 8% with prelim April capacity -58%; said they experienced modest improvement in Bookings in June; has Cash & Short-Term Investments of About $13.0B; said April prelim operating revs fell 90% to 95% and sees May operating revs down 85% to 90%; UAL said it sees reduction in customer cancellation rates and modest improvement in demand and sees its July 2020 scheduled capacity to be down about 75% vs. 2019 levels; DAL said sees $40 million/day cash burn as carrier exits June and sees having more than $12 billion cash at end of June; MRTN was downgraded to hold at Loop Capital on valuation

Technology, Media & Telecom

·     Internet; EXPE was downgraded to hold at Jefferies as analyzed OTA web traffic data, TSA throughput, and int’l flight cancellations, all of which point to 75%+ y/y declines in bookings; BIDU shares rise following Q1 results and as forecasts Q2 revenue above expectations, as businesses reopen after strict lockdowns to curb the spread of the coronavirus; PINS shares active after Microsoft’s Chromium Edge is getting Pinterest suggestions, sidebar search, and business features; SPOT signed a deal with comedian and TV host Joe Rogan, gaining exclusive rights to one of the most popular and influential audio programs in the U.S.

·     Semiconductors; ADI tgt lowered at RBC to $122 from $136 and lowering estimates for both April and July quarters due to numerous macro-economic factors (ahead of earnings tomorrow); NVDA tgt raised by more analysts ahead of its earnings Thursday night (RBC to $385, and upped to $425 yesterday at BMO Capital on expected data center strength); semi equipment names such as AMAT, KLAC, LRCX, which fell sharply last Friday on headlines Trump stopping shipments to Huawei have rebounded sharply the last 2-days

·     Software movers; AYX upgraded to Overweight at Piper on hiring activity, new products, and secular tailwinds and raised tgt to $160 from $90; TTWO tgt raised to $149 from $142 as expects to deliver better-than-expected Q4 results on franchise games such as Grand Theft Auto and Red Dead Redemption and also anticipates co to give strong Q1 forecast; still a busy week ahead for earnings with PANW, SPLK, TTWO the next two nights; SE upgraded to outperform at CLSA with $74 tgt saying key businesses are showing strength in the face of the global pandemic

·     Media & Telecom movers; DIS was downgraded to hold from buy at Loop Capital stating that the Street is overestimating the speed of recovery from the pandemic, while the loss of the company’s Streaming business head Kevin Mayer announced yesterday adds to the uncertainty; CMCSA downgraded to neutral from buy at Guggenheim saying there is a slow recovery ahead with "depressed" growth and profitability as the media-exposed elements of Comcast are "likely to experience virus headwinds for a while; TMUS falls after the WSJ reported that SoftBank Group plans to seek buyers for about $20 billion of its shares in the mobile-phone company; ATsaid it closed its DirecTV operations in Venezuela, due to U.S. sanctions on the country; CABO a $400M common stock offering with an option representing $60M of additional shares