Closing Recap

Thursday, October 08, 2020

Equity Market Recap

·     U.S. stocks settle higher as the battle in Washington for additional coronavirus stimulus aid continued again today, pushing major averages up and down by the headline though major averages finished higher. Two days after calling off U.S. stimulus negotiations, President Donald Trump said talks with Congress have re-started over further COVID-19 relief and that there was a good chance a deal could be reached. The comments followed a tweet from him late Tuesday that Congress should quickly extend $25 billion in new payroll assistance to U.S. passenger airlines while also urged Congress to approve the $135 billion payroll protection program for small businesses – which sent markets surging yesterday. However, House speaker Pelosi said this afternoon that there would be no additional federal aid for U.S. airlines without a more comprehensive COVID-19 relief package, adding that she was hopeful for a larger deal "because it has to be done. These type of headlines dominated a day that also saw jobless claims remain stubbornly high, transportation stocks touch another record level, energy stocks bouncing on a spike in oil prices and strength in financials, buoyed by an M&A deal in the asset manager space as Morgan Stanley agreed to acquire Eaton Vance in a $7B deal. Oil prices rose after OPEC Secretary General Barkindo said the worst was over for the oil market, following a price and demand collapse this year. In stock news, IBM rose on plans to separate one of its businesses, vaccine names jumped (REGN, LLY, JNJ) on more positive updates, and retailers saw gains. COVID-19 cases continue to rise, especially in in Europe as the UK reports 17,540 new cases of covid-19, compared to 14,162 on Wednesday while Italy reports 4,458 new coronavirus cases vs 3,678 Wednesday (first time above 4,000 cases since April). France says number of confirmed cases up by 18,129 over 24 hours, versus +18,746 on Wednesday. In the U.S., NY city to close 61 more public schools, bringing total to 169 amid uptick in cases.

Economic Data

·     U.S. initial jobless claims fell 9,000 to 840,000 in early October from 849,000 (and vs. estimate of 820K) and continuing jobless claims dropped 1 million to 10.98 million in late September (vs. est. 11.4M); the 4-week moving average fell to 857,000 oct 3 week from 870,250 prior week; US insured unemployment rate fell to 7.5% from 8.2% prior week

Commodities

·     Oil prices bounced as WTI crude gained $1.24 or 3.1% to settle at $41.10 per barrel while Brent climbed $1.35 or 3.22% to $43.34 per barrel, helped as OPEC Secretary General Mohammad Barkindo said the worst was over for the oil market, following a price and demand collapse this year due to the coronavirus pandemic. Also helping matters, reports that Saudi Arabia is considering canceling OPEC plans for an oil output hike early next year, according to senior Saudi oil advisers, as Covid-19 cases in many parts of the world rise and the expected return of Libyan crude threatens to swell global supplies. In April, the 13-member, Saudi-led Organization of the Petroleum Exporting Countries and 10 Russia-led producers agreed to carry out record production cuts of 9.7 million barrels a day. Hurricane shuts 62% of U.S. gulf natural output and shuts 91.5% of US Gulf crude oil production – the BSEE reported today.

·     Gold prices edged higher, rising $4.30 or 0.2% to settle at $1,895.10 an ounce as markets remain uncertain about additional stimulus measures and the overall presidential election. Gold prices rebounded off their lowest levels in over a week (but remain up over 20% this year) amid government and central bank stimulus worldwide to revive economies.

Currencies & Treasuries

·     U.S. Treasury yields retreat from earlier highs as the 3, 5, 7 and 20-yr yields dropped to session lows mid-afternoon (with many falling from 4-month highs earlier this week) as market trading continues to be dominated by COVID stimulus talk uncertainty as well as digesting several Fed speaker comments, with consensus being from them that fiscal stimulus is needed to prevent a further weakening of the U.S. economy. The U.S. treasury sold $23B in 30-year bonds with the high yield for the auction 1.578%, higher than what market expected at the bid deadline. The bid-to-cover ratio, a measure of demand, was at 2.29, slightly lower than 2.31 last month. The U.S. dollar was mixed to little changed most of the day following the jobless claims data.

Sector News Breakdown

Consumer

·     Retailers; COST sales momentum continued in Sept. w/ US comps +16.7% (ex-gas) and total company comps up +16.9% (ex-gas, FX); TPR added to catalyst call ideas at Deutsche Bank with $21 tgt; Jefferies maintain a constructive view of Toy companies (MAT, HAS) seeing Q3 reports driven by continued strong sell-through trends and closing of retail inventory gaps exiting; HELE posted a Q2 EPS and sales beat saying trends remain strong in many of its categories while shares fell as its CFO departed; overall consumer stocks were slightly higher in retail; GME surges after announces multi-year strategic partnership with MSFT

·     Housing & Building Products; JPMorgan added PHM to focus list while upgraded MDC, CCS to overweight saying despite our universe up 38% YTD (S&P: +6%), led by an impressive rebound in demand following the early days of the pandemic, and believe the builders have a solid amount of additional upside potential left in the tank over the next 15 months, as raise estimates and price targets; in building products, Deutsche bank upgraded VMC and MLM to buy from hold with tgts of $183 (from $134) and $311 (from $230) respectively saying the market is starting to increasingly capitalize a recovery in the longer cycle/non-resi construction end markets in 2021

·     Restaurants; MCD reported Q3 same-store sales that were better than expected and said it was raising its dividend by 3% – said same-store sales for the quarter fell (-2.2%) from a year ago, better than the expected decline of (-5%) and U.S. same-store sales grew 4.6%; DPZ shares fell as Q3 EPS missed ($2.49 vs. $2.78) and said Q3 domestic comp sales rose 17.5% to top the 13.9% consensus mark and international comp sales increased 6.2% during the quarter vs. 1.9% consensus, but operating margin came in at 16.8% of sales vs. 17.4% a year ago and 18.1% est.

·     Leisure and Gaming; in towables (THO, WGO, CWH), initial August total RV registrations increased +17% YoY, with towables increasing +17% YoY & motorized increasing +19% YoY. July total RV registrations were revised up to a +37% YoY increase (from +32%) with towables +37% YoY and motorized +39% YoY; MGM proposes to offer $500 million in senior debt due 2028; CCL said its unable to provide a guidance numbers due to the uncertainty of when cruises will restart for the full fleet, but provided some general business updates; HOG rises after Wedbush + call earlier, adding it to its "Best Ideas List," signaling it is among their top picks. Though the stock is up more than 92% from its lows in the spring, it is still down 22% year-to-date.

Energy

·     Energy stock movers; the energy complex really got a boost after OPEC Secretary General Mohammad Barkindo said earlier the worst was over for the oil market; in utilities & Solar; after several days of gains in the solar space, several stocks pulled back in a bout of profit taking (CSIQ, ENPH, SEDG); DTE among top gainers in the S&P 500, rising after being upgraded at JPM as the firm noted Bloomberg reported that DTE is considering a sale of its non-utility businesses, – said even if the midstream asset were not actively divested or sold in the near term, they believe investors mostly did not view a separation as on the table, and media reports indicating this as a real possibility should still serve as a catalyst to unlock value; FCEL initiated Overweight at JPM saying near-term catalysts include major projects with XOM and TM

Financials

·     Asset managers; sector very active today after MS to acquire EV in cash-and-stock deal with equity value of about $7 billion as Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833x of Morgan Stanley common stock, for a total consideration of $56.50 per share https://on.mktw.net/30GZDk4 (shares of other asset managers such as TROW, IVZ, BEN, JHG were also active in sympathy (note MS just completed acquisition of ETFC recently)

·     Bank movers; Citi (C) downgraded to Neutral from Overweight with an unchanged price target of $57.50 at JPMorgan after the Federal Reserve and Office of the Comptroller of the Currency announced consent orders against the company and its lead U.S. bank; Wells Fargo upgraded Midcap banks ASB, UMPQ to overweight, and upgraded TBK to equal weight with top picks BANC, FHN and SNV; SBNY was initiated overweight and $120 tgt at Piper citing an attractive entry point, company should continue to grow well above industry averages and think NYC will continue to be one of the most economically vibrant cities; FHN was upgraded to buy at Jefferies with $12 tgt as see an oppty following the July 1 close of the merger with IBERIABANK; NTB upgraded to buy at Goldman finding the bank is well positioned to offset margin compression with a few idiosyncratic tools enabling 17-17.5% ROTCE over the next few years while maintaining attractive capital return profiles

·     Consumer Finance; SQ has purchased ~4,709 bitcoins at $50M, representing ~1% of company’s total assets at the end of 2Q20; Wells Fargo raised Q3 estimates for all the card issuers by 10-33% and well above consensus, reflecting lower provision – said COF is the most levered to a recovery among the issuers while AXP has the most balanced risk/reward and prefers MA vs. Visa (V); PYPL raising estimates and PT to $230 at KeyBank as ecosystem growth and FinApp initiatives could extend growth runway next year; GDOT tgt raised to $70 from $62 as believe that GDOT is the most likely strategic buyer of Netspend given the company’s sizable prepaid card business and the presence of a banking license

Healthcare

·     Pharma movers; PFE announces positive phase 3 top-line results for once-weekly investigational long-acting human growth hormone to treat children with growth hormone deficiency as results demonstrated improved treatment burden with once-weekly injection; BHC reported Q2 revenue declined 23% YoY and sees Q3 revenue to decline approximately 3% compared to q3 of 2019; ALKS 3831 FDA Advisory Committee briefing documents seen as encouraging by Mizuho for the product’s potential approval for treating schizophrenia and bipolar I disorder; JNJ announced the European commission approved an advance purchase agreement in which its Janssen unit will supply 200 million doses of its covid-19 vaccine candidate to EU member states; JAZZ reported positive results for its narcolepsy drug Xywav in a phase 3 study in the sleep disorder idiopathic hypersomnia.

·     Biotech movers; REGN and LLY rise after President Trump in a video on Twitter said REGN and LLY’s COVID-19 medications were "incredible the way it worked," adding he will make it free for Americans to use. Trump received REGN’s experimental antibody COVID-19 cocktail therapy this weekend and wants the treatment given emergency approval; GILD signs agreement to sell up to 500K courses of its antiviral drug remdesivir to Europe to treat COVID-19 patients; MRNA with an agreement for a commitment of up to $56M from the Defense Advanced Research Projects Agency; CYTK and AMGN shares fell after a pivotal phase III study of Omecamtiv Mecarbil in patients with heart failure met its primary composite endpoint but missed its secondary endpoint; SWTX 4.9M share Secondary priced at $51.00; AZYO opened at $17.32 after pricing its IPO at $17 per share; ICPT slides after a report that the FDA is investigating a potential safety signal related to Ocaliva (obeticholic acid), specifically, the risk of liver injury

·     MedTech and Equipment; MDT was upgraded to buy at Stifel ahead of its October 14th Analyst Day, which they think will be a positive stock catalyst, as raises tgt to $125 from $110; XENT, IART, GKOS, TMDX were all downgraded at JPMorgan in medical devices citing rally in shares; CDNA reported preliminary 3Q20 revenue of ~$53.0M, well above consensus of $45.0M, driven by testing revenue while AlloSure and AlloMap volume for the quarter was ~21,800; ATEC reports Q3 preliminary revenue of $40.7M-$41.1M vs. consensus of $30.98M; said U.S. revenue of $39.7M-$40M, rose 31-43% YoY; FLDM to offer millions of Advanta covid-19 tests at low cost to U.S. colleges and universities; EXAS assumed buy and $140 tgt at BTIG

Industrials & Materials

·     Industrials, Materials & Machinery; AYI posted a top and bottom line Q4 beat, though fell on a YoY basis while Q4 gross profit margin was flat YoY at 42.1%; AUY announces strong third quarter preliminary operating results and increases 2020 production guidance while raises annual dividend; in Chemicals; PPG guided Q3 EPS to be between $1.90-$1.94 vs. $1.67 YoY and anticipates that sales volumes will be down about 5%, which is below the lower-end of the previously communicated guidance range of down 6% to 11%; in

·     Transports; Transport index touches all-time record highs for a second day; airlines (AAL, DAL, UAL) are moving higher after House Speaker Pelosi spoke with Treasury Secretary Mnuchin by phone Wednesday night about a potential standalone bill for $25B in aid to airlines; Credit Suisse raises truckers KNX, CHRW, WERN, SNDR estimates and tgts given continued strength in demand and tight capacity, noting that the Market Demand Index has reached historical highs, while dry van spot rates are tracking up 34% y/y in the most recent week; The Baltic Exchange’s main sea freight index fell as Capesize rates slumped as the overall index, was down 74 points, or 3.6%, at 1,970 points (EGLE, DSX, GNK, SB) – airlines slumped late morning after House Speaker Pelosi said there is no standalone airline assistance without larger bill

·     Materials; BLL was upgraded to outperform from market perform at BMO Capital and raise tgt to $107 from $70 after investor day saying they are impressive growth as global demand continues to improve; Starboard’s Jeff Smith pitches CTVA at active-passive conference saying he believes Corteva’s estimated $1.9 bln profit improvement is "achievable" and that despite its positive outlook, it should be a lot more profitable than it is

·     Lithium producers active; ALB, SQM, LTHM and PLL slipped after recent strong run: data and analytics company Global Data said lithium demand is expected to more than double by 2024, as the production of electric vehicle batteries is set for substantial growth, as demand is forecast to rise at a 25.5% compound annual growth rate to 117,400 tons in 2024 from 47,300 tons in 2020

Technology, Media & Telecom

·     Semiconductors; AMD unveils the new Ryzen 5000 series processors based on the Zen 3 CPU microarchitecture/the lineup starts with the $299 Ryzen 5 5600X, which includes six cores, 12 threads, 3.7 GHz base frequency with boost up to 4.6, and 35MB total cache; TSM reports September revenue of NT$127.59B (+3.8% M/M, +24.9% Y/Y); YTD sales were up 29.9% y/y to NT$977.72B; IMOS reports Q3 revenue of $196.4M (+5.3% Y/Y) vs. consensus of $198.69M; UMC reports 34.2% jump in September sales and Jan-to-Sept sales soar 23.6%; ON shares got a positive mention by activist investor Starboard saying it trades at a discount to its peers, can improve its multiple with consistent execution; AMBA outperforms after Rosenblatt raises tgt to $65 as believe the company’s y/y revenue growth will improve for the next 5 quarters

·     Software movers; OKTA tgt raised by several analysts after hosted Showcase event yesterday, where the co. unveiled a slew of improvements for its Okta Advanced Server Access product, and enhanced automation capabilities for its Customer Identity segment; Morgan Stanley estimate under a bull case for MSFT, a Game Pass Installed base of 135 million yielding ~$4 billion FCF in 2025. A WACC of 7.2% supports an EV of $78 billion; SNOW initiated an underperform and $214 tgt at Jefferies citing concern on its valuation; PAYC shares hit record high as Opco ups tgt to street high $405 as new customer acquisition strength continues

·     Media & Telecom movers; FOXA tgt raised to $32 from $29.50 at Guggenheim reflecting stronger than previously expected Q1 FY21 advertising market and also taking into account shift in timing of operating expense recognition to later in the year; in broadcasting, GTN guides Q3 revenue $590M-$600M above consensus $546.43M, but does not provide guidance for full year 2020; ANGI shares slip, giving back some of the recent gains fueled by Yippit data after IAC Sept monthly trends – while this is not a negative there was more hype recently – 3Q ANGI revenue +10% y/y vs. 2Q’s +9%, which is in line with Street estimates; FUBO opens at $11 in debut on the NYSE after its IPO priced at $10 per share

·     Hardware & Component news; IBM shares jump after saying to separate the managed infra services unit of its Global Technology Services division into a new public company while issues Q3 EPS and revenues of $17.6B and EPS of $2.58 which were both mostly in-line with ests; in comm space, NPTN was downgraded to neutral from overweight at JPMorgan and cut tgt to $7 from $12 despite the reset in the share price following the escalation of the restrictions on shipping to Huawei as think the medium-term opportunity is now murkier; ANET upgraded to OW from neutral at JPMorgan and up tgt to $275 from $255 heading into 2021 as we expect them to turn the corner on growth; ROKU tgt raised to $255 from $190 at Needham saying health crisis is growing Roku’s installed base, generating more revenue and driving higher monetization as advertising demands