Closing Recap

Friday, October 16, 2020

Equity Market Recap

·     Stock gains petered out in the final hour of trading in a bout of profit taking, but major averages still closed out the week with solid gains, erasing losses earlier in the week following strong retail sales data, an improving sentiment reading along with positive headlines from PFE on its Covid vaccine. Safe-haven and defensive assets slid following the spike in U.S. stocks, with Treasury yields inching higher as prices fall, the dollar slips, and gold prices were little changed. Wall Street snapped its three-day losing streak, helped as Pfizer said it expects to provide safety data and file for authorization of the vaccine as soon as a safety milestone is achieved in the third week of November. Trading this week has been dominated by news about more federal aid (stimulus) to help businesses and households. Yesterday, President Trump said he is willing to raise his offer of $1.8T for a COVID-19 relief deal, which helped major averages recover after Thursday’s early declines, and the rally spilled over heading into the weekend. However, Senator McConnell has been resolute stating that nearly all Senate Republicans favor a much smaller $500B aid bill – though markets clinging to hopes of a “bigger” deal. Markets dismissed the rising Covid cases and its potential impact as markets continue to bake in a Democratic sweep in the upcoming election (which would likely garner even larger stimulus aid payments), generating upside euphoric momentum with tech leading gains daily.

·     Sector movers included transports one of the few market weak spots (after Dow Transports hit record highs several times this week) as truckers under pressure following disappointing earnings results from JBHT and MRTN and rail KSU also misses. Industrials higher as Dow component BA rises on its 737 MAX deemed safe to fly by the top European aviation regulator while CAT was upgraded to buy and street high $220 tgt at Wells Fargo. Solar stocks extending gains on positive analyst comments noting the sector outperforms under assumption Democratic White House.

·     In Europe, the Stoxx 600 rises 1.3% on day for its best session in 3-weeks but falls 0.8% for the week (first weekly decline in three), while Europe’s Stoxx 600 banks rise 1.8%, biggest one-day percentage gain in 10 days. Rising virus cases in Europe threatening reopen as Italy registered 10,010 new coronavirus infections over the past 24 hours, the health ministry said on Friday, the highest daily tally since the start of the country’s outbreak and up from the previous record of 8,804 posted on Thursday. UK records 15,650 cases on Friday down from 18,980 on Thursday. French health ministry reports 25,086 new confirmed coronavirus cases in past 24 hours, after record 30,621 on Thursday.

Economic Data

·     Retail sales for September much stronger than expected, rising 1.9% easily topping to 0.7% estimate and above August at 0.6%; retail sales ex-autos rise 1.5%, above the 0.5% estimate and retail sales ex-autos/gasoline rise 1.5% vs. est. 0.5%

·     Industrial production for Sept fell an unexpected -0.6% vs. est. +0.5% (Aug was up 0.4%), while U.S. Sept capacity utilization rate fell to 71.5% from August 72% and below consensus 71.9%; Sept manufacturing output -0.3% vs. est. up 0.7%

·     Business Inventories for August rose 0.3% vs. est. 0.4% and above the July 0.1% reading

·     University of Michigan sentiment prelim for Oct 81.2 above consensus 80.5 and final Sept 80.4 while survey of consumers expectations index prelim oct 78.8 vs. final Sept 75.6 and consumers current conditions index prelim oct 84.9 (consensus 88.5) vs. final Sept 87.8

Commodities

·     Oil prices slipped 8c to $40.88 per barrel, slipping on concerns that a spike in COVID-19 cases in the US and Europe will continue to drag on demand, but still finished the week with a modest 0.7% advance. Prices got a boost mid-week on bullish inventory data. December gold prices slip -$2.50 to settle at $1,906.40 an ounce, finishing the week lower by about 1% as the dollar advanced and stocks recovered. U.S. wheat futures surged to their highest prices in nearly six years on Friday as dry weather in key growing regions around the world fueled supply concerns, while corn touched a 14-month high on prospects for hefty sales to China.

Currencies & Treasuries

·     The U.S. dollar edged lower vs. most currencies, but still ended the week higher by roughly 0.6%, its best weekly return since late September. The buck dipped on Friday after strong retail sales data helped assuage concerns about the health of the U.S. consumer. The Japanese yen The British Pound erased early gains to trade slightly higher on the day in a choppy session on Friday, after British Prime Minister Boris Johnson told businesses to get ready for a no-deal Brexit. Treasury prices edged higher with the 10-year holding above the 0.7% level most of the week.

Sector News Breakdown

Consumer

·     Retailers; general retail space got a strong retail sales data reading this morning rising 1.9% and topping the 0.7% estimate, boosting sentiment for the space; VFC shares dipped early despite an earnings beat on higher sales of $2.61B (beat ests but down 23% YoY) as digital revenue +44% vs. +15% YoY; COST was upgraded to buy from hold and new tgt up at $435, CHWY also assumed a buy rating at Jefferies and raise tgt to $100

·     Auto sector; Ford Motor (F) and its joint ventures, Changan Ford, JMC and Ford Lio-Ho, sold 164,352 vehicles in China in Q3, representing rise of 25.4% Y/Y and 3.6% Q/Q; NKLA shares slumped after Bloomberg noted its CEO said the startup can go it alone – could revert to ‘base plan’ without GM and planned pickup will be abandoned without manufacturing partner; HTZ rises after the car-rental company secures debtor-in-possession financing totaling $1.65 bln from some of company’s pre-petition first-lien lenders

·     Housing & Building Products; group has been very strong heading into earnings season, BTIG today raised 2020 and 2021 estimates for our building products distribution and installation coverage ahead of 3Q20 earnings (BLDR, IBP, BLD), and also raising estimates and tgt for several homebuilders (DHI, MTH, TMHC, GRBK) as monthly builder survey suggest business has remained robust in September. Our 3Q EPS ests increase by +3% on average for the builders

·     Consumer Staples; JPMorgan downgraded CLX and KMB to neutral in consumer products saying they will likely print solid numbers but we see both stocks trading close to fair value after the strong run, while across the sector, think sales growth and margins for most companies peaked this past quarter, and therefore narrow our top picks to three names (PG, REYN and ELF); in restaurants, TACO declines despite quarterly beat on EPS/sales & systemwide comps rising 4.1%

Energy

·     Energy stock movers; oil services slip as SLB reported a 3c EPS beat for Q3 but revenue slumps 38% to $5.26B, missing estimates of $5.38B ahead of HAL earnings on Monday; SLB’s North America revenue declined 2% and international revenue fell 1% sequentially as posts Q3 net loss of $82M and records charges of $350M; GPOR on Oct. 15 started a 30-day grace period, during which it will defer making interest payments related to 6% senior unsecured notes due 2024; BKR weekly rig count rises for a 4^th straight week as 12 oil rigs were added in the latest week, biggest rise since January 

·     Pipelines and MLPs; HESM upgraded to Buy from Neutral with a total 12-month return estimate of ~35% and raise our target price to $22 from $17 at Citigroup; Zenith Energy U.S. LP agreed to buy oil- storage facilities in California from PAA, including three terminals in the Los Angeles metro area and 50 miles

·     Solar sector; has been massive outperformer in recent weeks amid rising investor expectations to the potential clean energy infrastructure spend and federal renewable mandate legislation that may be passed in a scenario of a Biden win and Senate sweep; SEDG upgraded to neutral from sell and raise tgt to $283 from $142 at Goldman Sachs saying that SolarEdge’s strong balance sheet has proven to be attractive against this uncertain global macro backdrop, while downgraded MAXN to sell from neutral with $15 tgt as see heightened downside risk in the near-term given the aforementioned margin/pricing/FCF concerns; FSLR downgraded to Neutral from Buy at bank America with $88 tgt saying after the latest run-up, sees the stock as being more fairly valued at its current level

Financials

·     Bank movers; FCNCA and CIT jointly announced today that they have entered into a definitive agreement under which the companies will combine in an all-stock merger of equals https://on.mktw.net/2H7G7X2 ; CFG missed on higher provisions; in trust banks, BK Q3 EPS beat by 4c on slight revenue miss and said looks forward to recommencing share buybacks as soon as possible; STT revenue fell a little more than 4% but topped analysts’ consensus estimate, while net income fell to $555M from $583M a year ago while assets under custody rose 11% YoY; in exchanges, CBOE signed an agreement to acquire BIDS Trading, a registered broker-dealer and the operator of the BIDS Alternative Trading System (ATS), the largest block-trading ATS by volume1 in the U.S. (terms of the deal were not disclosed)

·     Consumer Finance; SQ tgt raised to $240 from $200 at RBC as believe SQ could be further along in building a platform for financial services than investors realize, which suggests a larger L-T monetization opportunity than originally expected; AXP tgt to $115 from $100 at Oppenheimer saying based on analysis heading into 3Q, net charge-offs and delinquency rates suggest better than expected results in 3Q20 vs. consensus

·     REITs; UBS initiated PLD, DRE, EQR, and O with buys as launched coverage on Industrial, Multifamily, Office, and Triple Net Lease Retail US REITs, while we have a Sell on SRC and Neutrals on ARE, BXP, and AVB based on the view that COVID-19 has accelerated many trends that were already playing out across the global REIT sector, with some changes likely to have a lasting structural impact; FRT was downgraded to hold from buy at Jefferies saying continued retailer challenges in ’21 push through fundamentals further out; in healthcare REITs, WELL and PEAK both downgraded to neutral from buy at Mizuho

Healthcare

·     Pharma movers; PFE said its COVID-19 vaccine candidate could be ready for an emergency-use application by late November (PFE is developing the vaccine with BNTX); GLPG reported that GLPG1972 failed to meet its endpoints in a phase II osteoarthritis study, showing no significant difference vs placebo in any treatment; ZGNX presents New Data for FINTEPLA(R) in Dravet Syndrome at CNS 2020 which showed substantial seizure reductions were maintained in patients treated with FINTEPLA(R) for up to two years

·     Biotech movers; ALGS 10M share IPO priced at $15.00; REGN and SNY said the European Medicines Agency’s Committee for Medicinal Products for Human Use recommended expanded approval of Dupixent to treat children with severe atopic dermatitis; PRAX 10M share IPO priced at $19.00; RPRX 17.3M share Secondary priced at $42.00; TARS 5.5M share IPO priced at $16.00

·     Services, Labs; DGX and LH receive positive CMS announcement as updated reimbursement levels for COVID PCR testing removes the uncertainty around pricing. Effective 1/1/21, Medicare will reimburse for COVID testing at $75 from current rate of $100 and will pay an additional $25, rounding reimbursement to, $100 for labs that will process the tests in less than two days; Politico reported midday that The Trump administration is set to announce later today a deal with CVS and WBA to administer a future Covid-19 vaccine to seniors and health care staff in long-term care facilities.

·     MedTech and Equipment; ISRG falls as Q3 EPS and revs topped consensus, while shipped 195 da Vinci systems in 3Q20, down -29% vs. 3Q19 (275) but up 10% vs. 2Q20 (178) – Opco also noted the co anticipates the oncoming onslaught from MDT’s HUGO system in the near future; SWAV presented results from the DISRUPT CAD III trial, which examined the use of coronary IVL in severely calcified lesion which Opco said didn’t live up to the hype while Canaccord raised its tgt to $87 from $60 saying results showed that the trial met both its primary safety and effectiveness endpoints following treatment with SWAV’s C2 Coronary IVL catheter; BSX shares fell yesterday Boston’s Acurate neo valve at its investor day (gen-1, not neo2) failed to show non-inferiority to MDTs Evolut valve; EAR 7.85M share IPO priced at $18.00

Industrials & Materials

·     Industrial & Machinery; NAV shares rose after CNBC reported that Volkswagen’s Traton is very close to a deal to acquire what it does not own of the Navistar for $44.50 per share (NAV later confirmed that an offer of $44.50 has support of its two largest shareholders); in machinery, AGCO upgraded to buy from neutral and raise tgt to $95 from $70 at Citigroup and see it as our best SMID idea over the next 12 months given improving global ag markets and near-record wide valuation discount to DE; CAT upgraded to Overweight from Equal Weight and raise tgt to $220 from $160 at Wells Fargo as expects earnings to substantially improve beginning in 2021 due to anticipated revenue growth from global growth acceleration

·     Transports; truckers get a disappointing report from JBHT as earnings of $1.18 missed the $1.27 estimate on revs $2.47B topping the $2.36B view while saying Q3 intermodal revenue fell -2.3% YoY to $1.21B; MRTN with mixed results as EPS beat but revs of $216M missed; Barclays upgraded their transport sector view to Neutral from Negative as well as upgrade WERN to Overweight and both NSC and HTLD to Equal Weight saying this year has been challenging on several fronts, but investment process remains grounded in fundamentals, which have clearly recovered ahead of previously bearish expectations

·     Aerospace & Defense; Dow component BA shares rise as Europe’s top aviation regulator reiterates changes to 737 MAX have made the jet safe to fly in the region before end-2020 – the executive director of the European Union Aviation Safety Agency (EASA), in an interview with Bloomberg News, said the agency was performing final document reviews ahead of a draft airworthiness directive it expects to issue next month; the U.S. has reportedly made an offer to the EU to remove a host of tariffs if Airbus repaid European governments billions of dollars in aid, but retaliation is also in the cards after the most recent WTO ruling; Truist with potential downside into earnings in ATRO (Sell), CUB (Buy), ROLL (Sell), SPR (Sell), TGI (Sell), WWD (Sell)

·     Metals & Materials; paper stocks active WRK, PKG, IP as North American containerboard box shipments, a key demand gauge rose 8.8% in September to 34.9 billion square feet from 32.0 Bsf a year ago, according to the Fibre Box Association/September box shipments increased 1.7% from the prior month’s 34.3 Bsf and YTD, shipments were 300.5 Bsf, up 2.2% from 294.2 Bsf a year ago; in steel, CMC downgraded to neutral from buy at Bank America with $24 tgt citing a more cautious outlook for non-residential business; GLNCY CEO said that the company is talking with carmakers and battery makers about nickel – a key component in electric vehicle batteries

Technology, Media & Telecom

·     Semiconductors; a strong group with many analysts positive into earnings season; AMD estimates and tgt raised to $92 from $84 as believe fundamentals remain strong for the firm as checks on Gaming and Data Center suggest modest upside to numbers; Oppenheimer positive on NVDA as see a beat/raise set up for most semiconductor companies led by auto, industrial, gaming, and smartphone as remain stock selective, favoring structural growth to lead recovery (NVDA, MRVL, and MPWR top picks); TXN tgt raised to $175 from $155 at Bank America ahead of earnings next week and Opco sees a beat and raise set-up

·     Software movers; FSLY added to yesterday declines (after weak guidance) after filed to sell 6.37M shares of Class A common stock for holders; TDC announced the departure of Chief Revenue Officer Scott Brown to become CEO of a private company and said it expects Q3 recurring revenue to exceed the $359-361M guidance provided in August.

·     Hardware & Component news; FLEX was upgraded to outperform and raise tgt to $16 from $12 at RBC Capital as believe the market is underappreciating FLEX’s 100% ownership interest of NEXTracker, the world’s largest solar tracking company; HPE said it expects FY 2021 adj. eps to be in the range of $1.56 per share to $1.76, up 10% on-year at the mid-point, sees adj operating profit growth to be ~15-20% year-over-year for FY21 and outlined a priorities to stabilize its core businesses, double down on growth areas and accelerate its pivot to as-a-service