Mid-Morning Look

Thursday, March 19, 2020

U.S. equities recovering from early losses, gaining traction for the first time in about a week as investors scoop up heavily beaten stocks awaiting steep government stimulus action to help prop up market sentiment, while central banks around the world continue to provide aid, flooding markets with low rates, liquidity and purchases of assets to help stabilize markets. Overnight, the European Central Bank (ECB) announced a massive stimulus plan in the form of a 750 billion-euro ($818 billion) bond repurchase program which will include government and private-sector bonds as well as commercial paper in a bid to calm markets roiled by the virus outbreak (move comes as market borrowing costs for heavily indebted Italy rose). That news has followed several Federal Reserve banking actions over the last 2-weeks (150 bps interest rate cut by the Fed over the last two-weeks, a $700B QE program and boosted Repo operations as well all in an effort to provide much needed liquidity). The Dow remains lower early, while energy bounces after oil touched 17-year lows yesterday, but technology shares leading the market higher early.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar resumes its upward momentum, with the dollar index (DXY) hitting highs of 102.37 (best levels since April 2017) in flight to the buck out of other currencies; the euro is down another 1% at the 1.08 level (nearing its 52-week low of 1.0778 on Feb 20th), while the dollar jumps vs. the Japanese yen, rising 1.8% or about 200 bps to 110.10; the British Pound partially recovers after falling as much as 5% vs. the buck yesterday. Commodity prices rebounding along with equities as oil prices recover off 17-year lows and gold resumes upward momentum. Treasury market’s rally as the 10-yr yield tumbles near session lows, down over 10 bps to 1.08% as Treasury prices gains simultaneously with bounce in stocks (recall both fell yesterday along with commodity prices).

Economic Data

·     Weekly Jobless Claims jump to 281K vs. est. 220K and above prior unrevised total of 211K; continuing claims reported at 1.701M vs. est. 1.738M (last week revised lower to 1.699M); the 4-week moving average rose to 232,250 mar 14 week from 215,750 prior week (previous 214,000)

·     The current account deficit narrowed to (-$109.86B) from (-$125.4B) prior quarter and compared to estimate of (-108.6B); the balance of goods and services deficit narrowed to $139.9B compared to $158.4B prior quarter

Sector Movers Today

·     Consumer Staples; EL was downgraded to underweight from overweight at JPMorgan after saying the duration of international travel restrictions, widespread store closures and the potential for a global recession will negatively impact sales for longer than we had anticipated; CLX was downgraded at Credit Suisse on valuation (hitting 52-week highs day prior); APRN posts its 4th straight day of gains after rising 148%, 71% and 67% the last 3 sessions on hopes for the online meal kit preparer will see a boost of business amid the closing of restaurants; BYND was downgraded to underperform and tgt cut to $50 at Bank America saying significant exposure” to the foodservice category spells trouble

·     REITs; Mortgage/Residential REITs (NLY, AGNC, TWO, MFA) have been slammed this week, predominantly related to investor concerns about potential funding risk, particularly for the companies with mortgage credit assets funded with short-term recourse debt according to reports from both RBC Capital and KBW Inc. – RBC also notes likely driven by the mandatory redemptions of two 2x leveraged mortgage REIT exchange-traded notes (MORL and MRRL

·     Medical equipment and devices; BMRA shares jump after saying it begins shipping samples of 10 minute test for COVID-19 virus exposure; BAX upgraded to buy from hold and raise tgt to $95 from $87 at Stifel as see it as a core holding in today’s turbulent COVID-19 MedTech environment given its highly-diversified and stable portfolio comprised of medically essential products; EXAS suspends field sales visits amid COVID-19 disruption/says is working to facilitate use of online care for patients to access Cologuard, its at-home colon cancer screening test

·     Transports; airlines tumble early again (AAL, UAL, JBLU, DAL) leading the Dow Transport index to lows (off 52-week highs 11,359 on January 17th – and all-time highs 11,623 September 2018); AAL disclosed that it entered into a credit pact for $1B senior secured delayed draw term loan credit facility for general corporate uses (says it has ~$8.4B of total available liquidity, consisting of $4.2B in unrestricted cash and short-term investments, $3.2B in undrawn capacity)

·     Autos; Ford (F) suspended its dividend and withdrew guidance as it takes action to address effects of coronavirus pandemic/offers new-car customers six-month payment relief/says $15.4B of added cash on balance sheet; UBER said it expects $6B cash on hand at year end with $2B revolver – and also says NY doesn’t seem to be pursuing AB5-type rule; HOG to temporarily idle Pennsylvania, Wisconsin plants amid pandemic; ALV tapped $500M from its revolving credit facility of $1.1B, to pay down existing short-term debt and for general corporate purposes

Stock GAINERS

·     GES +36%; retailer posted better-than-expected earnings results, but like several other companies, withdrew guidance due to market uncertainty

·     ICPT +11%; after ICER releases draft evidence report on obeticholic acid for nonalcoholic steatohepatitis (NASH) that Raymond James said was net supportive, and expects company to benefit from pricing draft

·     NUE +8%; after guided Q1 EPS 95c-$1.00 vs. est. 88c saying order rates, backlogs and utilization rates at its steel mills have remained strong well into March.

·     UBER +28%; after saying expects $6B cash on hand at year end with $2B revolver – and also says NY doesn’t seem to be pursuing AB5-type rule

·     WORK +9%; said that from February 1, 2020 to March 18, 2020, the company added approximately 7,000 new paid customers; says in each of the Q3 and Q4 of the fiscal year ended January 31, 2020, Slack added approximately 5,000 new paid customers per quarter

Stock LAGGARDS

·     CARG -; suspended its 2020 guidance providing dealers a 50% rate reduction on all marketplace subscription billings in April for all of our paying customers

·     F -5%; suspended its dividend and withdrew guidance as it takes action to address effects of coronavirus pandemic

·     HOG -9%; to temporarily idle Pennsylvania, Wisconsin plants amid pandemic

·     TWO -10%; as mortgage finance/REITs plunge (NLY, MFA, AGNC) related to investor concerns about potential funding risk, particularly for the companies with mortgage credit assets funded with short-term recourse debt

·     UAL -15; along with further declines in airlines (AAL, DAL, HA), leading the Dow Transport index to lows (off 52-week highs 11,359 on January 17th – and all-time highs 11,623 September 2018)