Mid-Morning Look

Thursday, March 05, 2020

U.S. equities surrender much of yesterday’s sharp gains in another broad based, massively volatile trading session again with financials and transportation stocks among the hardest hit. Treasury prices resume upward momentum as yields crater back near record lows touched earlier in the week in the flight to safe haven assets, with gold jumping as well. Dow Transport plunge over 3.5% back near 52-week lows, led by a decline in airlines (UAL AAL, JBLU, ALK) after the IATA said the virus could hit the industry by $100B (well more than its previous estimate of roughly $30B), while the overall index drops. Overnight, California has declared a state of emergency following the death of an elderly woman near Sacramento, while U.S. coronavirus cases climbed to 160 across 17 states and fatalities reached 11. Much of yesterday’s political Biden induced bounce has disappeared in early trade. Its becomes a little concerning when moves of 2%-4% on a daily basis have become common place over the last two-weeks (with the volatility index surging) as investors and markets try to get a handle on just how big the economic impact can be to corporate America following the fallout from the virus on travel, production, employees. Citing the economic impact of the coronavirus outbreak, the IIF lowered its forecast for U.S. growth this year to 1.3%, down from 2% previously, and with the epicenter of weakness in the second quarter, and China to just shy of 4% from 5.9% previously. Global growth in 2020 could conceivably approach 1%, far below the 2.6% expansion in 2019 and the weakest since the financial crisis.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar gives back mush of yesterday gains as the buck drops below the 107 level against the Japanese yen; commodity prices mixed with safe haven gold rising amid rotation out of equities while oil and energy related stocks slide as the coronavirus epidemic showed no signs of slowing, with deaths mounting globally and though major OPEC producers agreed on deeper output cuts to bolster prices, they could not immediately secure Russian support for the decision; Treasury market’s rally as the 10-year yield plunging again as investors move make into Treasuries given plunging stocks – the 10-yr down 10 bps to 0.942% near lows of morning; the 2-yr yield down about 10 bps below 0.6% now; the 30-yr down 10bps below 1.6%

Economic Data

·     Weekly Jobless Claims fell 3K to 216K vs. est. 215K as the 4-week moving avg. rose to 213K in the week ending Feb. 29 from 209,750 prior and continuing claims rose 7k to 1.729m in the week

·     U.S. Q4 nonfarm productivity rose 1.2%, mostly in-line with the 1.3% estimate as unit labor costs rose 0.9% in 4Q vs. up 1.4% preliminary, output rose 2.4% in 4Q vs. up 2.5% preliminary

·     Factory Orders for December fell a greater -0.5% vs. est. -0.1%; New orders ex-trans fell 0.1% in Jan. after rising 0.6% the prior month; new orders ex-defense for Jan. rise 1.3% after falling 0.4% in Dec.; Durables orders for Jan. fell 0.2% after rising 2.8% in Dec.

·     The 30-year fixed mortgage rate for week ended today fell to 3.29% from 3.45%, Freddie Mac said, the lowest rate in survey history as 15-year rate avg 2.79%, down from 2.95% a week earlier and 5/1-year ARM rate avg 3.18%, down from 3.20% a week earlier

Sector Movers Today

·     Bank movers; financials and banks were hammered again, with shares of WFC touching it lowest levels since 2013 on plunging Treasury yields while the Federal Reserve issued an overhaul of Wall Street capital rules – shares of NTRS, CMA, MTB, SCHW, USB, CFG among banking names touching fresh 52-week lows as the ten-year Treasury yields dropped about 12 bps to 0.9%

·     Transports; airline stocks continue to lose altitude, as disruption caused by the coronavirus could cost global airlines more than $100 billion in lost revenues this year as carriers slash flights in response to the outbreak, the industry’s body IATA warned this morning; LUV said in recent days, experienced significant decline in customer demand, increase in cancellations; now estimates Q1 operating revenues to be negatively impacted in the range of $200M-$300M and now sees Q1 operating RASM to be in the range of down 2% to up 1% vs. prior view for increase of 3.5%-5.5%

·     Media and Leisure movers; LYV continues to decline as concerns continued to grow over the impact the coronavirus would have on the company’s business; same concerns hitting theme parks, ticket, concert and events names as well such as MSG, MSGN, SEAS, SIX, MTN among them on fears of lower attendance in the future on travel bans, less attendees at events; lodging and hotel stocks also pressured with MAR, HST at 52-week lows, another brutal day for the cruise line industry (CCL, NCLH, RCL) after CCL said its second “Princess” cruise ship, the Grand Princess, diverted a ship bound for Ensenada, Mexico after a previous passenger on the vessel was reported to have died of coronavirus

·     Semiconductors; SWKS was upgraded to buy at Canaccord but lower tgt to $125 saying it looks well positioned to grow faster than the broader semi market for the next several years due to more complex smartphone mix among Chinese OEMs requiring integrated RF solutions, growing IoT opportunities, and the ramping 5G market opportunities; MRVL outperforms for the quarter, and also announced extended partnerships with NOK and Samsung for 5G radio access networks; SLAB and MPWR were both upgraded to buy at Needham calling them attractive entry points after shares declined on growing investor concerns about the potential impact from supply chain

Stock GAINERS

·     CODX +23%; said that both domestic and international demand has surged for its novel coronavirus detection kits in recent weeks leading to increased product shipments, following the FDA change in policy on February 29

·     DGX +1%; touched fresh 52-week highs after earlier announced it will launch a coronavirus (COVID-19) test service

·     KR +2%; 52-week highs after Q4 adj EPS of 57c tops estimates by two cents on slightly better sales of $28.89B (up +2.9% YoY) while Q4 Identical-store sales excluding fuel +2% was in-line

·     MRVL +9%; outperforms for the quarter, and also announced extended partnerships with NOK and Samsung for 5G radio access networks/April quarter revenue guidance slightly ahead of est

Stock LAGGARDS

·     AAL -7%; airline stocks continue to lose altitude, as disruption caused by the coronavirus could cost global airlines more than $100 billion in lost revenues this year said the IATA

·     BA -4%; falls to its lowest levels since 2017 on slowing demand/travel fears

·     CCL -7%; another brutal day for the cruise line industry (CCL, NCLH, RCL) after CCL said its second “Princess” cruise ship, the Grand Princess, diverted a ship bound for Ensenada, Mexico after a previous passenger on the vessel was reported to have died of coronavirus

·     DCI -4% on lower guidance – Q4 eps 50c vs. est. 48c; lowers year EPS view to $2.05-$2.19 from $2.21-$2.37 (est. $2.25) and sales to down (-3%-7%) vs. prior view down -2% to up 4%

·     GWRE -14%; reported strong 2Q FY20 results, beating estimates on revenue and EPS. However, GWRE provided 3Q guidance that was below consensus and lowered its full year outlook, citing a faster transition by carriers to cloud-based subscription models

·     LUV -2%; estimates Q1 operating revenues to be negatively impacted in the range of $200M-$300M and now sees Q1 operating RASM to be in the range of down 2% to up 1% vs. prior view for increase of 3.5%-5.5%

·     MEET -9%; shares declined after German broadcaster ProSiebenSat.1 Media SE and private-equity firm General Atlantic LLC agreed to pay $6.30 a share in cash to acquire the company (which was a 7.6% discount to yesterday’s closing price)

·     MPC -9%; after reports that Seven & I Holdings, the Japanese company that controls 7-Eleven, dropped its effort to buy Marathon’s Speedway gas stations, according to Bloomberg

·     WFC -5%; and touching it lowest levels since 2013 as banks still getting crushed on plunging Treasury yields while the Federal Reserve issued an overhaul of Wall Street capital rules