Closing Recap

Thursday, September 03, 2020

Equity Market Recap

·     It was bound to happen one of these days as U.S. stocks were pummeled on profit taking with the Nasdaq Composite and S&P 500 pulling back from record highs the day prior and the Dow dropping around 3% after topping the 29,000 level as a sharp pullback in 2020 technology winners led the selling deluge. The Nasdaq Composite dropped as much as 5.6%, its first decline in 5-days on profit taking in semiconductors (SOX plunges), software, opticals (CIEN guidance) and Internet (GOOGL, FB profit taking). There were only a handful of sectors hanging in today including energy, financials and “reopen” related sectors (though they slipped late day as stocks fell to session lows). Treasury yields tumbled along with stocks as investors fled back to safe-haven instruments. Economic data was better today with jobless claims, nonfarm productivity, and services data all topping economist expectations ahead of tomorrow’s nonfarm payroll report for August. In another story, the Trump administration said it is expecting to avoid a government shutdown at the end of the month, even as Democrats and Republicans are at an impasse over more stimulus funding to cushion the coronavirus pandemic. "We do believe that we’ll be able to get funding to avoid a shutdown," White House press secretary Kayleigh McEnany said. There really wasn’t much news behind the sell-off other than stocks have surged with investors chasing performance and a pullback/correction was overdue – whether selling pressure continues tomorrow remains the bigger question as every dip since March has been a buying opportunity to this point – will tomorrow be the same?

Economic Data

·     Weekly jobless claims fell to 881,000 from 1,011,000 the prior week (and below estimates 950K), while the insured unemployment rate fell to 9.1% from 9.9% prior week; continued claims fell to 13.254M from 14.492M prior week (est. 14.0M) and the 4-week moving average fell to 991,750 from 1,069,250 prior week (previous 1,068,000)

·     U.S. Q2 non-farm unit labor costs revised to +9.0%, below the 12% consensus while Q2 non-farm productivity revised to +10.1% vs. est. 7.5% (prior 7.3%); output fell 37.1% in 2Q after being down 38.9% preliminary; employee hours fell 42.9% in 2Q vs. down 43% preliminary

·     U.S. trade deficit for July widened to (-$63.6B) vs. June deficit (-$53.5B) and vs. est. (-$58.0B); U.S. July goods deficit $80.91B and services surplus $17.35B; July exports rose +8.1% vs. June +9.6% and imports rose +10.9% vs. June +4.6%

·     ISM U.S. Non-Manufacturing sector shows PMI 56.9 in august (vs. est. 57.0) and vs. 58.1 in July; business activity index 62.4 in august (consensus 65.0) vs. 67.2 in July; paid index 64.2 in august vs 57.6 in July and new orders index 56.8 in august vs. 67.7 in July

·     U.S. IHS Markit August final services PMI at 55.0 (vs flash 54.8) and Markit August final composite PMI at 54.6 (vs flash 54.7)

Commodities

·     Gold prices reversed to settle the day lower by -$6.90 or 0.4% at $1,937.80 an ounce, its lowest levels of the week and down from earlier highs of $1,956.60 an ounce. The decline coincided with steep declines among U.S. benchmark stock indexes and as the dollar extended its bounce after touching 2-year lows just two days ago behind better economic data. Markets also positioning ahead of tomorrows monthly nonfarm payroll jobs report. Oil prices slip but finish off their worst levels of the day, as WTI crude dips 14c to finish at $41.37 per barrel, while natural gas prices end little changed at $2.487 mln btus, erasing earlier gains as risk appetite eased with the broad market pullback.

Currencies & Treasuries

·     U.S. Treasury yields dropped as prices soared amid the pullback in U.S. stocks, as the 10-year yield touched 0.62%, just a week after hitting its best levels since June at 0.75%. Data showed weekly initial jobless claims fell less than expected last week but remained high as the coronavirus pandemic continued to weigh on the economy. The two-year yield slipped 1 bps to 0.12% the 30-year fell below its 50-day MA of 1.335%. The U.S. dollar was mixed with the dollar index (DXY) rising just above the 93 level before fading to finish flat around 92.80 as markets brace for tomorrows monthly nonfarm payroll report Friday morning. The Canadian dollar weakens to a one-week low at 1.3137 to the U.S. dollar. The Euro bounces back to flat vs. the dollar late day, highs of the day at 1.1853 (off lows 1.1789).

Sector News Breakdown

Consumer

·     Retailers; SIG reports smaller-than-expected Q2 loss, beats revenue estimates as shoppers bought more jewelry online – Same-store sales were down 31.3% in Q2, even with e-commerce growth of 72.1% while brick-and-mortar sales improved sequentially; FIVE reported better Q2 results on the top and bottom line and signaled a strong start to Q3 while comps were +6% for the period that stores were open in 2Q and so far in 3Q QTD comps are also running +6%; MIK reported comparable sales jumped 12.0% in FQ2 at stores that were open and through the e-commerce channel while e-commerce sales alone surged 353.1% during the quarter and gross margin came in at 33.8% topping views; PVH revenue and earnings per share were above expectations in 2Q, led by strength in International and digital, as well as strong expense controls; in sporting goods, SPWH reported blowout 2Q results with sales growing 80% year over year and EPS up 485% as both sales and EPS easily exceeded expectations (follows strong results from DKS recently); GCO posted smaller Q2 EPS loss on better sales lifting shares early

·     Auto sector; after surging its first day following its 5-1 stock split, TSLA shares tumble a 3^rd day following recent news Tuesday it entered into an equity distribution pact seeing aggregate sales proceeds of up to $5.0B; NIO deliveries grew 104.1% to 3,965 vehicles in August; said the company delivered 21,667 vehicles YTD, +109.9% YoY; GM and HMC sign a non-binding memorandum of understanding toward establishing a North American automotive alliance; CPRT reported better than expected fiscal 4Q20 results, beating on sales, margins and earnings as sales upside was driven by both Service revenues and Vehicle sales

·     Consumer Staples; CPB Q4 beat on sales (organic +12%) and GM (35.6% vs. est. 34%) but was offset by increased marketing and R&D – 1Q21 outlook is solid with Net Sales +5-7% (cons +LSD), EBIT 6-9% (cons +LSD), and EPS +13-18% (cons +LDD); BYND was initiated with an outperform and $160 tgt at Baird; in tobacco, JUUL is planning additional layoffs and likely to exit as many as 11 countries in Europe and Asia/limiting operations to the US, UK, and Canada; Cowen said new CDC youth survey data shows tobacco past month use jumped 1.9x b/w 2017-2019 to 36.5% but continue to forecast accelerating cigarette volume declines resuming in 2021 as view negative for JUUL, neutral for BATS and a positive for TPB

·     Leisure and Gaming; cruise lines (CCL, RCL) rise after Italy-based Costa Cruises is resuming initial sailings from Italian ports beginning Sept. 6, and will be followed by a second Carnival Corporation brand, Germany-based AIDA Cruises, resuming on Nov. 1 with Canary Island voyages; rest of leisure space including theme parks, casinos were mixed with mkt pullback

Energy

·     Energy stock movers: sector was one of the better performing sectors as investors piled out of outperforming tech stocks and into some of the most unloved sectors such as energy and financials. Oil fell further after the deepest drop since July as concerns mount over OPEC supply and fuel demand as well as a rebound in the dollar weighed on commodity prices. Not much in way of stock news though WLL was upgraded by two analysts (Cowen and KeyBanc) saying with only $425M of debt and is well positioned for M&A in the Bakken.

Financials

·     Bank movers; financials outperformed broader markets with gains in brokers and mixed in large cap and regional banks; JPM was upgraded to Buy at Deutsche bank on general more positive outlook on banks in the near term (also upgraded BAC to buy) as well as preference for higher quality/higher return banks and an attractive valuation; BANC was raised to Buy from Neutral at Davidson with a price target of $13.50

·     Exchanges, brokers; TW reported average daily volume for Aug. of $747.1 billion, average daily volume in mortgages in U.S. government bonds $87.4 billion and average daily volume in European government bonds $22.2 billion; CBOE said August adv across its four options exchanges up 13% from August 2019 and equities total adv across its four equities exchanges up 7% from august 2019

·     Consumer & Mortgage finance and payments; SQ pulling back sharply from all-time record highs the day prior; RKT fell after its first earnings report as a public company after saying market share gains likely won’t be consistent and gain-on-sales margins will normalize at a lower level; PYPL another name pulling back sharply from record highs the day prior

Healthcare

·     Pharma movers; LLY upgraded to Overweight with $176 tgt at Morgan Stanley and raise tgt to $17, bullish on prospects for Phase 3 diabetes asset tirzepatide and note that LLY shares offer Alzheimer’s optionality; SNY and GSK have started the Phase 1/2 clinical trial for their COVID-19 adjuvanted recombinant protein-based vaccine candidate

·     Biotech movers; NVAX rises early after saying positive early-stage data for COVID-19 vaccine candidate in healthy adults aged 18-59 was published in the peer-reviewed New England Journal of Medicine; AKBA shares tumble after a pair of Phase 3 trials evaluating vadadustat as a treatment of anemia due to chronic kidney disease (CKD) in adult patients not on dialysis failed to meet a closely-watched safety target despite meeting goals measuring effectiveness (shares of rival FGEN rose in reaction); MDGL has exceeded the originally targeted enrollment of 700 patients in its trial of resmetirom in patients with NASH and fibrosis that is diagnosed using non-invasive assessments; AGTC will provide a management update on its planned Phase 2/3 X-Linked Retinitis Pigmentosa (XLRP) clinical trial design, a re-analysis of dose Groups 2 and 4 data, and new preliminary visual sensitivity data from Group 5 on September 9, 2020

·     Healthcare services and providers; PDCO reported better than consensus revenue and operating margin for F1Q21 and had solid results in both Dental and Animal Health business lines, while the operating margin benefited from aggressive cost-cutting early on in the pandemic; Stifel said checks indicate that SDC will implement a price increase in coming weeks though do not expect the price increase to have a material impact on 4Q20 results – but tailwind for ‘21/’22; FLGT and New York City Health and Hospitals will provide COVID-19 testing to hundreds of thousands of students across 1600 locations as they return to school in September

·     MedTech and Equipment; CRY announced the acquisition of private Ascyrus Medical and its novel, AMDS aortic arch remodeling device; CMS released its Hospital Inpatient Prospective Payment Systems (IPPS) final rule for FY21 and Guggenheim said the picture is a positive one overall, in their view, with Medicare payment rates to hospitals forecast to rise 2.6% (vs. 3.0% proposed), consistent with the increase we saw in FY20. Guggenheim noted the one notable exception is ABMD’s Impella, which will finally see its reimbursement rate come down after several years of proposed cuts ultimately being reversed by CMS in its final rule

Industrials & Materials

·     Transports: United States railroads fell 19.5% to 898,227 carloads in August while intermodal volumes recorded 3% growth through consumer-centric product transports. On combined basis down 5.8% YoY (CSX, NSC, UNP); ODFL said qtrly revenue per day increased 1.3% and LTL revenue per hundredweight decreased 0.9%; airlines (AAL, DAL, UAL, LUV) benefit given the bounce in re-open, pandemic related names bouncing

Technology, Media & Telecom

·     Semiconductors; Philly semiconductor index (SOX) tumbled as much as 6%, falling from record highs the day prior in what was a broad based tech sell-off that saw all the big winners of 2020 come under pressure with no relief bounce; declines were led by SWKS, QRVO, AMD, MRVL, ahead of AVGO earnings after the close, and equipment stocks also tumble (AMAT, LRCX, KLAC); index also hit after the Chinese government prepared broad support for so-called third-generation semiconductors for five years through 202, Bloomberg News reported

·     Software movers: CRWD shares fell after 184% YTD rally heading into earnings, falling despite stronger than expected FQ2 results from the top down, guided FQ3 ahead, and increased its outlook for the year while delivered an 8% beat on ARR, 6% upside on revenue, and substantially better than expected operating income and FCF; SMAR Q2 revs and billings metrics were better than consensus estimates for both the July and October Qs and October billings guidance for ~26% y/y growth is improved from the 22% y/y reported in the July Q, though remains far below the 58% y/y growth of the January Q and 30% y/y in the April Q; ZUO falls after reporting slightly in-line to better Q2 results on top and bottom line but issued a disappointing Q3 revenue outlook of $73M-$75M vs. est. $75.5M; GWRE reported F4 results ($244M/$0.83) that were well ahead of consensus ($208.9M/$0.45) and ARR of $514M also topped Street estimates of $506M; MDB tgt raised by a few analysts after delivered a strong F2Q print, beating conservative guidance, with all key metrics above management’s targets and street estimates

·     Hardware & Component news; PD shares plunged as posted in-line Q2 revenue and guidance, but shares dropped on billings disappointment as growth was weaker at 7% YoY exacerbated by more extensive co-terming of deals and by more favorable payment terms for the most impacted customers according to one analyst; CIEN shares tumble as Q3 EPS and revenue topped consensus but guided Q4 revenue $800M-$840M, well below the $994.4M estimate and said saw greater than expected COVID impacts late in Q3 (optical stocks INFN, LITE, IIVI, NPTN, IPHI, HLIT among names active in sympathy)