Closing Recap

Thursday, May 28, 2020

Equity Market Recap

·     U.S. stocks rolled off the highs late afternoon, erasing gains after President Trump said he will be giving a press conference on China on Friday, raising fears for a market that has surged every day of trading this week on economic rebound hopes. Prior to the late day slip, major averages were sailing smoothly, on track for strong weekly returns boosted today by gains in healthcare, technology and utility stocks, while recent market leading financials, travel/leisure stocks dropped. Investors remain hopeful for a swift economic recovery from a coronavirus-driven economic slump. Boeing shares paced the gains in the Dow after saying it had resumed production of its 737 MAX passenger jet at its Washington plant (at a low rate). The S&P 500 has now rallied about 38% from its low hit in March (and about 10% off its February record high) amid a restart in business activity after weeks of shutdown and massive amounts of stimulus measures to support the economy drove hopes of a recovery. Markets once again overlooked bad economic data as jobless claims, durable goods, personal consumption all posted weak readings, but was “less bad” as investors try to focus on the positive/future. Worsening ties between Washington and Beijing over the handling of the coronavirus outbreak and a new national security law in Hong Kong still pose a major threat to the stock market’s strong recovery – but not to this point. The number of Americans filing for unemployment benefits held above 2 million for a 10th straight week, while a separate report showed GDP contracted at a bigger-than-expected 5% annualized rate in the first quarter. Treasury prices slipped while gold rises along with oil amid a weaker dollar. Today the US House passed a bill increasing time small businesses have to use coronavirus loans to 24 weeks from current eight weeks. The Nasdaq Composite hit intraday highs of 9,523, not far from its 9,838 record highs.

Economic Data

·     U.S. GDP second estimate for Q1 fell (-5%) vs. est. decline of (-4.8%) after GDP rose 2.1% in prior quarter; personal consumption fell 6.8% in 1Q after rising 1.8% prior quarter (est. -7.5%) and GDP price index rose 1.4% in 1Q after rising 1.3% prior quarter (est. +1.3%); core PCE q/q rose 1.6% in 1Q after rising 1.3% prior quarter (est. +1.6%). Nonresidential fixed investment, or spending on equipment, structures and intellectual property fell 7.9% in 1Q after falling 2.4% prior quarter

·     Weekly jobless claims fell to 2,123,000 may 23 week (consensus 2,100,000) from 2,446,000 prior week (previous 2,438,000) while US continued claims fell to 21.052 mln may 16 week (con. 25.750 mln) from 24.912 mln prior week (prev 25.073 mln); insured unemployment rate fell to 14.5% from 17.1% prior week

·     Durable Goods Orders for April fell a smaller than expected (-17.2%) vs. est. down (-19%) while Durable goods new orders revised down to -16.6% for March from -15.3%; new orders ex-trans. fell 7.4% in April after 1.7% fall; new orders ex-defense fell 16.2% in April after 17.4% fall; non-defense capital goods orders ex-aircraft fell 5.8% in April after falling 1.1% in March

·     Pending Home Sales fell (-21.8%) in April more than the (-17.3%) decline estimate MoM, while YoY sales fell (-33.8%)

·     The 30-year fixed mortgage rate for week ended today fell to 3.15% from 3.24%, lowest rate in survey records going back to 1971, Freddie Mac said; the 15-year rate avg 2.62%, down from 2.70% a week earlier

Commodities

·     Oil prices reversed off earlier lows as WTI crude gained 90c or 2.74% to settle at $33.71 per barrel, shrugging off bearish inventory data earlier as the EIA revealed a 7.9M bbl rise in crude stocks vs. expectations for a decline in stockpiles. Signs that U.S. gasoline demand is rising (unexpected draw) and worries that China’s new Hong Kong security law could result in trade sanctions helped prices recover. Oil prices have rebounded in recent weeks on anticipation of improved demand after the coronavirus pandemic sapped worldwide consumption. Overall investment is dropping and U.S. production cuts are balancing out the supply glut, but demand still has not bounced back entirely. Gold prices edge higher $1.50 to $1,728.30 an ounce, pulling off the earlier highs of $1,743. 70 an ounce, rising initially on the dollar weakness; pared gains as stocks soared to afternoon highs, reducing interest in safe haven assets.

Currencies & Treasuries

·     Safe haven assets slumped as U.S. stocks continued to rip higher, with the dollar index (DXY) falling more than -0.6% to below 98.50, its lowest levels since the end of March, with the buck falling against nearly all major currencies. Economic data was mixed to weaker as figures showed expected weakness in jobs, GDP, Durable Goods and consumption, but the figures were “less bad” than economists had expected. The euro rises over 0.65% to 1.108. Treasury prices dipped with further rally in stocks, pushing yields slightly higher as the 10-year yield topped 0.7%. The U.S. Treasury sold $38B in 7-year notes at a yield of 0.553% vs. 0.544% when issued prior to auction with a bid-to-cover at 2.55 vs. 2.56 prior and indirects bidders awarded 63.5%.

Sector News Breakdown

Consumer

·     Retailers; specialty and dept stores giving back some of the prior two day gains (GPS, JWN, M, KSS); dollar stores a bright spot after earnings as investors flocked during the quarter to store up amid the coronavirus stay-at-home lockdowns; DLTR reported 7% surge in Q1 same-store sales (vs. est. 5%) benefiting from consumers stockpiling on groceries and other essentials while withdraws FY forecast due to uncertainty caused by the pandemic; DG similar with big comp beat of up 21.7% vs. est. around 4% on better sales and higher margins; ANF reported Q1 earnings and sales that missed expectations as net losses totaled $244.1M (adj EPS loss was -$3.29 vs. est. loss -$1.39) while sales of $485.4M were down from $734.0M last year and below the $497M estimate/Hollister sales fell 36% to $273.0M while Abercrombie & Fitch sales declined 30%; shares of CTRN and BURL other retailers rising on earnings results

·     Consumer Staples; TSN was downgraded to hold from buy at Argus as expect Tyson’s FY20 results to be hurt by COVID-19/will incur costs to reduce volumes, shutdown plants and protect its employees’ health and safety; SAM was downgraded to neutral on valuation at Credit Suisse while remain positive on the growth outlook, but believe it reflected in today’s $6.5B valuation; SPTN shares rallied following stronger Q1 results; in the protein sector, SAFM reported mixed quarterly results while cut its chicken output estimate on grocery shift

·     Restaurants; SBUX shares higher after William Blair, Cleveland Research post + notes; QSR said Tim Hortons Canada comp sales were trending in negative mid-twenties as of the third full week of May, up from the negative mid-forties in 2H of March/Burger King US comparable sales were trending in neg mid-single digits up from the negative low-thirties in the second half of March/Popeye’s US comps trending in positive low-forties up from flat in the

·     Housing & Building Products; Homebuilder stocks rose after TOL reported Q2 EPS well ahead of consensus  which included higher-than-expected homebuilding gross margin (21.0% vs. 20.5% est.) and a lower SG&A ratio (11.8%) while saying recent trends suggest the housing market is “more resilient” than it looked two months ago (follows good housing data yesterday); in building products, flooring co LL rises after posting profit beat with adj profit of 44c well above the 3c estimate noting margin enhancement efforts, tariff exclusions and supply chain efficiency positively impacted results; HD, and LOW each trade to 52-week highs today

·     Casino & Leisure movers; a little bit of a “give-back” day for the theme parks and casinos that have seen massive surges over the last few weeks as economies reopen and several have announced their plans to reopen in the next few weeks (SIX, SEAS, WYNN, MGM among them); POOL shares positive mention at William Blair noting the pool business is booming and the company reported improving trends in the latter part of April and “strong” demand in May as state construction restrictions eased; gambling stocks DKNG and GAN high rise as DraftKings announces live stream capabilities in their mobile app with Sportradar partnership, GAN announces new PA client

·     Auto’s; NIO posted a narrower-than-expected loss and revenue that fell less than forecast, but the China-based electric vehicle maker slid after soaring 27.5% over the previous two sessions; William Blair was positive on CVNA, KMX saying their weekly survey suggested a big positive, with car buying up for the 3rd straight week and 8% of respondents planning to buy a car in the next 3 months; BWA was upgraded to outperform at Wolfe Research

Energy

·     Inventory data showed: the API posted a surprise build of 8.73M barrels of crude oil for the week ending May 22, following last week’s 4.8M-barrel draw; gasoline inventories show a build of 1.12M barrels, distillate inventories show a build of 6.91M barrels, and Cushing inventories show a draw of 3.37M barrels. The EIA said weekly crude inventories rose +7,928M barrels vs. est. draw of -1,911M barrels, while Cushing stockpiles fell -3.395M; gasoline fell -724k vs. est. +150k and distillates a bigger build at +5,495M vs. est. +2,500k

·     Energy stock movers; oil services HLX, LBRT, HP were all upgraded to buy from neutral at Bank America and raised WHD to neutral from underperform saying while the OSX has risen 54% from mid-March bottom, the index remains down 58% year-to-date as he sees more upside for select names given the less dire outlook for global oil inventories during 2021; HP was upgraded to overweight and raise tgt to $25 at Piper saying the best-of-breed oil service franchise has lagged during recent reflation frenzy, and our asset valuation analysis finds an inefficient relative discount here vs. land driller and pressure pumping complex

·     Utilities & Solar; in solar CSIQ Q1 earnings and revenues easily exceed expectations, and the company maintains its full-year module shipments outlook/Q1 total module shipments jumped 41% Y/Y to 2.2 GW, in line with company guidance of 2.15-2.25 GW, and Q1 GM was 27%; utilities meanwhile were broadly higher early, paced by gains in AEE, AEP, WEC, and ES

Financials

·     Bank movers; after two incredible back to back performances for banks and insurance stocks, the sector took a mini-breather today; SBNY was upgraded to outperform with $127 tgt at Wedbush owing to the defensive positioning of its loan portfolio which should perform well during the economic downturn, its liability sensitive balance sheet should enable the NIM to be flat with an upward bias over the next couple quarters, and its growth is above peers’ as it further expands on the West Coast; USB said it sees 2q net interest income stable with 1q and says loan growth will offset lower NIM in 2q while saying spend activity starting to increase

·     Consumer finance and lending; ALLY upgraded to Overweight and raise PT to $26 from $23 at Morgan Stanley saying a recovering economy should lift Ally’s fundamentals with more jobs, more driving, and more auto sales; WU said the decline in transactions for its consumer-to-consumer business related to the COVID-19 pandemic improved to 21% for the month of April vs. the 30% drop in late March

·     REIT movers; SLG was upgraded to Equal-weight while lower PT to $44 from $78 at Morgan Stanley noting the stock is down 50% YTD versus the office group down 30% and REITs down 21%, and today is pricing in more fundamental deterioration at negative 0.5% LT growth versus peer average of positive 0.25%; VNO was downgraded to underweight and cut tgt to $36 from $68 saying it is pricing less fundamental deterioration at positive 0.75% LT growth versus peer average of 0.25%; BXP said in months of April and May company signed approximately 870,000 square feet of new leases and renewals

Healthcare

·     Pharma & Biotech movers; ALXN rises as reached a settlement in principle with AMGN in the Soliris IPR challenge as Cowen noted most investors assumed ALXN’s patents would fall, but think an agreement that preserves some of the term is an upside surprise; ARNA 5.5M share Secondary priced at $50.00; ARGX 2.584M share Secondary priced at $205.00; PHAS rises as reported the acceptance of an IND for PB1046 in COVID patients and the initiation of a potentially pivotal program.

·     Medical equipment and devices; ABMD hosted its 1st investor meeting since ‘15/with the stock down ~55% from its ‘18 highs, the emphasis of the meeting was on ways that growth could reaccelerate, highlighting a plethora of new clinical data that has been submitted/under review and details about its upcoming product pipeline; in services, Dow component and managed care giant UNH touched a fresh record high this morning; MOH announces proposed offering of $800 million of senior notes due 2028

Industrials & Materials

·     Aerospace & Defense; BA said it has resumed production of the 737 MAX at the Renton, Wash., factory and that the 737 program began building airplanes at a low rate; shares of aircraft supplier SPR rises initially on the BA news before slipping (BA halted 737 MAX production in January/the jet was grounded in March 2019 after a second fatal 737 MAX crash in five months); HEI was downgraded at SunTrust to hold noting shares have surged 70% from the March bottom (Aero peers +56%, S&P +24%) and is now down only 8.5% YTD vs its aero peers -27%; TGI posted Q4 EPS and revenue beats, sending shares higher along with positive news from Boeing about resuming production on 737 Max

·     Industrial & Machinery; DE was upgraded to Outperform at William Blair based on belief that the co should double its earnings over the next 2-3 years driven by: 1) a recovery in regional end-mkts, 2) benefits from lower cost structure and ongoing programs such as Wirtgen synergies, 3) replacement demand driven by an aging fleet and new product cycles; and 4) AgTech upgrades; GE said that negative free ash flow was likely in 2020 and sees negative Q2 cash flow in the $3.5B-$4.5B range

Technology, Media & Telecom

·     Internet; TWTR and FB pressured in social media sector on reports President Donald Trump will sign an executive order on social media companies today after he threatened to shut down websites he accused of stifling conservative voices; separately TWTR pressured after Silver lake files to sell 24.1M in shares; SABR slips initially after the travel co said its April and May month-to-date bookings have remained severely depressed amid the coronavirus crisis/have seen modest initial signs of recovery, but our gross air bookings remain down approximately 90% YoY

·     Semiconductors; index strong yesterday on raised guidance by MU (shares slipped today following analyst downgrades); QCOM was upgraded to overweight with a $105 price target at KeyBanc as they expect the Company to benefit from recent export restrictions targeted at HiSilicon. With Huawei unable to procure new silicon internally, we expect QCOM’s Snapdragon chipset will be designed into its flagship 2021 smartphones; COHR reported mixed Q2 results with revenues well below consensus estimates but Non-GAAP EPS above consensus/lower than expected revenue numbers came from a $30-$35M top line COVID impact during the quarter; SMTC reported a solid beat and raise quarter, sending shares higher

·     Software movers; WDAY Q1 subs rev came in $11M ahead of consensus and total revs $17M better while non-GAAP EPS were 5c below while lowered its FY21 subs guide to 18.5%-19.2% from 21.3%-21.8% growth due to deal impact from COVID; BILL upgraded to Overweight at Piper given the risk-reward has turned favorable; ADSK reported better-than-expected F1Q results with good subscription revenue growth driven by resilient renewal activity though FY21 guidance was lowered more than expected; COUP was downgraded at Wedbush; earnings tonight from CRM, VEEV, VMW, ZS, OKTA in the software sector

·     Media & Telecom movers; DIS downgraded to underperform at Imperial Capital with $105 tgt noting the stock has risen too far too fast on the (possibly premature) excitement around theme parks re-opening – advising investors to take profits; Wells Fargo lowered ests for cable space as they see cord cutting as a secular trend that will kick into high gear after COVID/CMCSA remains top cable pick as we believe its offensive stance in maintaining customer touchpoints will allow it to lower churn on more profitable broadband product

·     Hardware & Component news; BOX posted better than expected F1Q21 print, with positive developments on both growth/cash flow prospects while lowers year rev view, but raised year EPS and operating margins; NTAP slips as posted F4Q20 report with sales near expectations, EPS a bit above, and coupled with a weaker than expected outlook; NTNX shares slipped as posted a beat for its April quarter results, but withheld July quarter guidance citing the lack of predictability in its subscription business for refraining from forecasting; HPQ shares tumble as Q2 results were weaker than anticipated, guided Q3 EPS below consensus (midpoint of $0.42 vs. $0.47), and did not provide full-year guidance