Mid-Morning Look

Thursday, February 27, 2020

U.S. equities in freefall mode, with the S&P 500 six day rout topping 10%, while the Dow Jones Industrials plunges well below its 200-day MA which stood at 27,240 – hadn’t meaningfully broke below 200-day since early June 2019 – and the Nasdaq Comp breaches its 100-day MA of 8,814 (off record highs of 9,838 just a week ago). The list of companies warning that they won’t hit financials due to the impact of the coronavirus on production, travel, facilities grows by the day, with Dow component and software giant MSFT the most recent overnight. The airline industry in freefall mode along with cruise lines as many are breaking to 52-week lows, while energy names continue to get decimated as oil prices tumble to 17-month lows on slowing demand concerns. Places to hide have been sparse, though Treasury prices have risen to record highs as yields on the benchmark 10-year and 30-year yields hit record lows. Stocks failed to bounce after President Trump overnight tried to assuage markets about the fears, while comments in Germany and the EU about possible stimulus measures to help also having no effect as those markets continue to plunge. Goldman Sachs said U.S. companies will generate no earnings growth in 2020 if coronavirus becomes widespread as the firm revises their baseline eps estimates for U.S. cos are $165 in 2020 from $174 and $175 in 2021 from $183 which reflect severe decline in Chinese economic activity in q1, lower end-demand for US exporters. Dow Transports fell over 400 points to below the 9,500 level, lowest levels since January 2019. Fear dominating markets globally, with the CBOE Volatility index (VIX) rising to its best levels since December 2018 (above 33, up over 20%). A very ugly week thus far with the reports on rising cases of the virus outside of China (Iran, Italy, and South Korea) growing remains worrisome for major averages.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar tanks, falling -0.5% for the dollar index to below 98.50 (after touching 3-year highs a week ago as it neared the 100 level, plunging recently as yields have dropped sharply and expectations for Fed intervention (possibly cutting rates at the April FOMC meeting) has pressured the buck. The Canadian dollar slides to near 6-month low vs. the buck given the continued fallout in oil prices.

·     Commodity prices under pressure as oil falls to 17-month lows around $46.50 per barrel after closing at a 13-month low the day prior as more new coronavirus cases were reported outside China than within, adding to fears the world is on the brink of a pandemic that will take a hefty toll on growth.

·     Treasury market’s surging again as the 10-year yield down 8 bps to 1.2752% (hit record low of 1.2474% earlier) while the 30-year down 7bps to 1.749% (earlier record low 1.7434%) as Treasuries remain well bid with stocks sliding in flight to safety.

Economic Data

·     GDP second estimate for Q4 economy grew 2.1%, in-line with estimates after rising 2.1% in prior quarter; personal consumption rose 1.7% in 4Q (in-line with estimates) after rising 3.2% prior quarter while the GDP price index rose 1.3% in 4Q (vs. est. 1.4%) after rising 1.8% prior quarter; core PCE q/q rose 1.2% in 4Q (vs. est. 1.3%) after rising 2.1% prior quarter

·     Weekly Jobless Claims rose 8K to 219K, above the 212K estimate; the 4-week moving avg. rose to 209,750K from 209,250 prior week; prior week claims revised up to 211k from 210k; continuing claims fell 9k to 1.724m in the week ending Feb. 15

·     Durable Goods Orders fell (-0.2%), better than the expected decline of (-1.4%) while Durable goods new orders revised up to 2.9% for Dec. from 2.4%; new orders ex-trans. rose 0.9% in Jan. after 0.1% rise and new orders ex-defense rose 3.6% in Jan. after 1.9% fall

·     Pending Home Sales for January rise 5.2% MoM, topping the up 3% estimate as the Northeast, Midwest and South were all up while the West fell

Sector Movers Today

·     Transports; Dow Transports fall below the 9,500 level, lowest levels since January 2019 led by CAR and airlines with many hitting 52-week lows; airlines continue to feel the impact of the coronavirus on passengers, with JBLU this morning saying it will halt change and cancel fees for new flight bookings starting Thursday through March 11 for travel completed by June 1; Buckingham downgraded seven airlines (AAL, ALGT, ALK, JBLU, LUV, SAVE, DAL) on a demand impact from COVID-19 that likely proves far greater than investors appreciate based on data

·     E&P sector; APA said losses widened in Q4 as operating expenses ballooned, due primarily to higher impairment charges/said expenses more than doubled to $4.73B from $2.1B in the year-ago quarter and recorded impairments of $2.7B in the quarter; CLR falls after Q4 earnings beat on higher revs but 2020 oil production guidance was 8.5% below consensus (guided to 198-201kbd for FY20 oil volumes, which is roughly flat with 2019, down vs 4Q19, and well off consensus at 217kbd) and 2020 capex guidance was 2.9% below consensus; QEP plunges as quarterly EPS and revenues miss estimates; WLL Q4 results top consensus but warns Q1 production impacted by severe weather conditions, associated electric submersible pump failures on multiple wells

·     Software movers; MSFT a shot across the bow for software names after warning it does not expect to meet Q3 More Personal Computing guidance due to impact of coronavirus; SPT a bright spot as reported a solid first quarter post IPO with ARR at $118M vs. $111M estimate as well as billings growth of 32% y/y vs. KeyBanc 22% estimate and 3Q19 at 35%; ESTC beat in billings + FY raise to 56% y/y growth helping offset CRO transition; PLAN plunges despite posting Q4 beats and an issues an in-line Q1 forecast – R&D expenses increased 58% to $20.4M

·     Media & Telecom movers; DISCA shares fall as beats street est for Q4 adj profit and posts rev in line with estimates though reports higher operating costs in Q4 due to higher content spend and marketing and personnel expenses (said invested between $300M-$400M in 2019 to develop new streaming services, which weighed on the company’s profitability); WPP shares slumped after forecasting flat comparable sales in 2020 and reporting a sharper-than-forecast drop in profit in Q4; GCI said it plans to continue tapping a source of cash a number of newspaper companies grappling with difficult conditions have leaned on: real estate; CCI reported messy 4Q results due to its decision to restate financials and consequently revised down 2020 AFFO/share guidance by 0.21c

Stock GAINERS

·     APT +61%; plays on the virus continue to gain traction including shares of vaccine makers MRNA, NVAX, VIR (which was downgraded at Baird on near-term upside that fails to reflect the material pipeline), GILD as well as suppliers/equipment names (CODX, APT, LAKE)

·     GCAP +66%; after INTL agrees to acquire the company in an all-cash deal representing ~$236M in equity value, paying $6.00 per share in cash

·     GILD +6%; as announced it would start two late-stage trials to test its experimental antiviral drug, remdesivir, in patients with cases of illness caused by coronavirus

·     SQ 6%; impressive 4Q results, exceeding expectations on the top/bottom line driven by a combination of strong GPV trends and notable strength within Cash App and Capital

·     TDOC +23%; reported better than expected 4Q19 revenues, and management provided revenue guidance above consensus expectations

·     ZM +8%; as continues to benefit from virus – Bernstein yesterday noted the video conferencing company is seeing a surge in downloads amid coronavirus panic – had noted “both MAUs and DAUs have spiked substantially this year. As of Feb 24, MAUs grew to 12.92 million, up 21% since Dec. 31st. DAUs of 5.02 million are up 45% in the same period”

Stock LAGGARDS

·     BUD -8%; after warning its operating profit was hit by $170M and its revenue was dented by $285M over two months from the impact of the COVID-19 disease

·     CLR -17%; after Q4 EPS beat on higher revs but 2020 oil production guidance was 8.5% below consensus (guided to 198-201kbd for FY20 oil volumes, which is roughly flat with 2019, down vs 4Q19, and well off consensus at 217kbd) and 2020 capex guidance was 2.9% below consensus

·     CROX -18%; following a weak sales forecast, hurt by coronavirus outbreak as sees FY sales growth range between 8% and 12%, compared with analysts’ est. of a 12.4% rise

·     MED -7%; after guidance disappointed Wall Street, and resulted in Jefferies downgrading the stock to hold from buy (guided full-year revenue $715M-$745M below Jeff est. $798M)

·     MSFT -4%; a shot across the bow for software names after warning it does not expect to meet Q3 More Personal Computing guidance due to impact of coronavirus

·     NTNX -27%; posted better Q2 EPS and sales while subscription grew to 79% of billings, up 6 points q/q (vs. the previous quarter at +2 points mix shift), but falls on weaker Q1 rev guidance

·     RCL -11%; in freefall mode with the rest of cruise lines and airlines and hotels as investors bail on fears the impact on operations from the virus will take longer than expected to rebound

·     TSLA -13%; fall in weak auto market as registrations of new Tesla’s in China plunged 46% last month as the coronavirus outbreak impacts, Bloomberg reports

·     WPP -15%; after forecasting flat comparable sales in 2020 and reporting a sharper-than-forecast drop in profit in Q4

·     ZGNX -16%; as the FDA PDUFA target action date for Fintepla for the treatment of seizures associated with Dravet syndrome has been extended by three months to June 25