Closing Recap

Monday, April 13, 2020

Equity Market Recap

·     U.S. stocks end Monday mixed, paring some of last week’s strong gains (S&P rose over 12% on the abbreviated 4-day work week), as markets await the start of earnings season tomorrow morning with big banks JPMorgan and Wells expected- tech however pushed the NASDAQ higher, led by primarily by large caps (AMZN, NFLX, TSLA). Meanwhile, concerns remain about the impact of the coronavirus related economic shutdowns that has crippled businesses and individuals during this pandemic. Six states in the U.S. Northeast (NY, NJ, PA, CT, RI, DE) took the first tentative steps toward reopening their economies by forming a regional panel to develop a strategy for the gradual lifting of restrictions aimed at stanching the coronavirus pandemic. The number of COVID-19 cases around the world rose to 1.87 million on Monday, while the number of fatalities rose to 116.052 and concerns remain about when things can return to normal. There were no major economic data points today, while oil prices reversed gains of as much as 5% to end the day lower by 1%. Several Fed speakers out with comments: Fed’s Vice Chair Clarida said was confident the economy will recover and Fed can unwind steps, will keep rates near zero until economy back on track. Fed’s Kashkari said it is hard to see V-shaped recovery happening. The Fed’s Quarles said there are good reasons to be optimistic about economic outlook, Fed loans to Main Street facility probably 2-3 weeks out; May need to examine ongoing oversight of non-banks. Lastly, the Fed’s Mester said they are likely not done, not that concerned about growth in Fed’s balance sheet; my view is that it will be something in-between V, U-shaped recovery.

Commodities

·     Oil prices erase gains as WTI crude settles lower -35c or 1.54% to $22.41 per barrel (off earlier highs of $24.74), while Brent rises 26c to $31.74. Prices erased early gains following a record deal among oil producers to cut the rise in supply, a muted impact on the market as the coronavirus pandemic hammers demand. OPEC+ members agreed this weekend to cut output by 9.7 million barrels per day (bpd) in May and June, representing about 10% of global supply. In addition, several other countries will reduce output as well, in an estimated total cut of about 19.5 million bpd. Note worldwide fuel consumption is down roughly 30% because of the COVID-19 pandemic that has shrunk travel and energy demand. Gold prices reverse earlier losses, rising $8.60 or 0.5% to settle at $1,761.40 an ounce (had hit lows of $1,724.20 an ounce earlier).

Currencies & Treasuries

·     The U.S. dollar was mixed vs. most rival currencies, falling drops more than -0.8% to 107.50 against the Japanese yen, its lowest levels in about 2-weeks and off overnight highs of 108.54 as stocks slide and adds to losses last week given the Fed stimulus in recent weeks. The euro dipped vs. the dollar (though note European stocks markets were closed for holiday), while the British Pound and Canadian dollar posted advances vs. the buck. Treasury market’s dipped as yields inch higher amid no major economic data on the day, as the 10-year was 0.73% (trading in between 0.71% low and 0.75% highs).

Coronavirus update

·     The U.S. CDC reported 29,145 new coronavirus cases as of yesterday as total now 554,849 cases versus 525,704 in previous report on April 12 and reports 1,456 new deaths due to coronavirus as of yesterday; total now 21,942 deaths versus 20,486 in previous report on April 12. Today, New York statewide coronavirus deaths rise by 671 on April 12, vs increase of 758 a day earlier – Governor Cuomo said as death toll rises to 10,056 from 9,385 day prior. New York reports 195,031 virus cases, up from 188,694. Italy reports fewest new coronavirus cases since April 7 as reports 3,153 new virus cases; has 566 deaths from coronavirus vs 431 Sunday; reports 159,516 total coronavirus cases, 20,465 deaths. Coming into the day, the number of cases of COVID-19 around the world rose to 1.86 million on Monday, while the number of fatalities rose to 114,331, according to aggregated data from Johns Hopkins. At least 435,074 people around the world have recovered from the novel coronavirus that has sickened people in 185 countries.

Sector News Breakdown

Consumer

·     Auto movers; Ford (F) said Q1 vehicle wholesales were down 21% from a year ago, largely as a result of lower production and demand related to the coronavirus in a broad co update; in suppliers, KeyBanc said those who should relatively outperform through the COVID-19 environment amid low leverage and FCF resilience and be best-positioned in the early recovery MGA and BWA (which they upgraded), those with unique earnings growth levers post-COVID, strong track records and only modest (<2 qtrs.) covenant risk (APTV, LEA) and those possessing the highest risk/reward, deeper value characteristics over the next 3 years (DAN, MTOR); TSLA notable stand out to the upside, rising over 10% (more than $275 point bounce off the March 18th lows of $350)

·     Retail sector; shares of KSS, PVH, JWN, CPRI were all down over sharply on the day after a massive surge in retail shares last week; BURL said it looks to raise $1 bln of capital and provides COVID-19-related business update/commences private offering of $700 mln 5-yr convertible notes and $300 mln 5-yr high yield deal for general corp purposes; Macy’s (M) hired Lazard to explore options for improving its finances after the company lost most of its revenues as it shut down all its stores as a result of Covid-19; SprucePoint noted they find it extremely troubling that a new Risk Factor in WDFC 10-Q talks about potential receivable write-offs. We see they sell into large and financially strong retailers like TGT WMT, DG, DLTR, AZO, ORLY, AAP; NLS adds to Thursday 56% gains after CEO Jim Barr says he expect sales to remain strong even after the stay-at-home orders expire.

·     Consumer Staples; in food space, Smithfield Foods warned the U.S. is "perilously close to the edge in terms of our meat supply," according to CEO Kenneth Sullivan, which announced the closing of his company’s Sioux Falls processing facility (account for 4-5% of U.S. pork production); TAP, STZ shares were weak/Evercore/ISI said beer production not resuming in Mexico

·     Homebuilders and housing sector hit very hard on the day with more than 10% declines for KBH, LGIH, CCS, TMHC and weakness in others as fears of the lost jobs, closed business will roll into housing market with possible business closures, rising foreclosures – Susquehanna cuts price target on several companies, citing slowing sales pace and deliveries across the sector, due to the coronavirus pandemic and says recovery expected in the second half of 2021 as builders act defensively due to liquidity and cash flow concerns (PHM, DHI, TMHC, LEN, KBH)

·     Restaurants; sector was generally weaker with broader markets as we head into earnings season; DNKN was upgraded to Outperform at Credit Suisse with a $67 target price noting shares have has underperformed since the market selloff, down 23.5% YTD relative to the S&P 500 -13.5%, and is now trading near valuation lows on FY21 "fresh" consensus estimates

·     Casino & Leisure movers; CCL, RCL, NCLH shares slide on CDC order saying cruise ships may be banned from sailing in US waters until July, according to an order issued by the CDC on Thursday. That ban could be lifted earlier if the CDC or HHS determine cruises or COVID-19 are no longer a major health risk; AMC is in talks to hire law firm Weil Gotshal & Manges to explore a potential Chapter 11 filing, The NY Post has learned https://on.mktw.net/3b8gAaw

Energy

·     Energy stocks active given the OPEC+ production cuts agreed upon this weekend (was formalized). OPEC+ countries sign agreement to cut oil production by 9.7M bpd for May and June, effective on May 1^st. The U.S., Canada and Brazil to cut upwards of 3.7M barrels per day while Mexico to cut 100k bpd (Saudi Arabia had wanted them to cut by 350k bpd, US pledged to cut more in order to get to deal) – the news helped keep oil prices higher early; in stocks news, PXD got a boost from the bounce in oil, while PXD was also upgraded to hold at SunTrust saying it continues to pull levers to ensure a pristine balance sheet that should eventually payoff

·     Oil services; BKR approved a plan that will result in restructuring, impairment, and other charges of approximately $1.8 billion, of which approximately $1.5 billion will be recorded in the first quarter of 2020/announces plan to reduce 2020 net capital expenditures by over 20% versus 2019 net capital expenditures; SLB, HAL both downgraded to Equal Weight at Wells Fargo to account for more challenging risk/reward heading into EPS

Financials

·     Bank movers; earnings center focus this week, which are expected to be weak as several big banks are expected this week including JPM, WFC tomorrow and BAC, Citi, GS, PNC, USB results expected Wednesday and BK, KEY Thursday; PYPL and INTU were both granted approval to be lenders for the Paycheck Protection Program

·     Asset managers; LAZ said preliminary assets under management as of March 31, 2020 totaled approximately $193.0 billion. The month’s AUM included market depreciation of $28.6 billion; foreign exchange depreciation of $2.6 billion and net outflows of $2.6 billion; APAM reported March AUM totaled $95.2 billion. Separate accounts accounted for $50.8 billion of total firm AUM, while Artisan Funds and Artisan Global Funds accounted for $44.4 billion; TROW preliminary assets under management of $1.01T at the end of March declines from $1.15T at Feb. 29, 2020. Client transfers from mutual funds to other portfolios, including trusts and separate accounts, were $0.7B in March 2020 and $4.4B for the quarter-ended March 31, 2020.

·     Information services: Wells Fargo reduces estimates and prices targets for CLGX, EFX, FICO, and TRU to reflect firms base case assumptions that economic headwinds continue for 4 quarters. These should negatively impact credit card and auto loan issuance and software sales and implementation cycles, partially offset by higher refi-driven mortgage originations.

·     REITs; data center REITS DLR and COR downgraded at Baird to neutral noting DLR was top idea to start the year but with stock’s outperformance, with one third of co’s annualized base rent set to roll over during 2020/2021 and continued pressure on embedded market rents for legacy product, he doesn’t expect the premium to widen further; Commercial Mortgage REITs CLNC, XAN downgraded to market perform at Raymond James and reducing estimates and price targets for commercial mortgage REITs as impacts from COVID-19 include loan extensions, future funding commitments, lower new originations, higher expenses, little gain on sale income; AMH said it has collected ~86% of April rent as of April 9, 2020, which is in excess of 95% of historic collections for the same timeframe

Healthcare

·     Pharma movers; AZN, MRK said the FDA approved the kinase inhibitor KOSELUGO (selumetinib) for the treatment of pediatric patients two years of age and older with neurofibromatosis type 1 who have symptomatic, inoperable plexiform Neurofibromas; RDHL provides update from its investigational drug’s covid-19 compassionate use program

·     Biotech movers; ALNY shares rose after BX invests $2 billion in the company through a combination of equity and debt to help co-develop its pipeline/ investment includes $1 billion to buy 50% of the royalties and commercial milestones of inclisiran, up to $150M to develop Vutrisiran and ALN-AGT and provide term loan of up to $750M and $100M of new issued stock; ATHX announced that the FDA has signed off on a pivotal Phase 2/3 clinical trial, MACOVIA, evaluating MultiStem therapy in COVID-19 patients with moderate-to-severe acute respiratory distress syndrome; BCRX begins clinical trial with Galidesivir for covid-19; GILD reported data from the first 53 patients on compassionate use who were moderate/severe (with SpO2<94%, or need for O2, and 75% were men over 60 with comorbidities) and the majority showed clinical improvement; NXTC falls after decides to temporarily delay starting the NC318 combination clinical trial and Phase 1 portion of a Phase 1/2 NC410 trial amid COVID-19

·     Medical equipment and devices; DXCM will be joining the NASDAQ-100 Index, NASDAQ-100 Equal Weighted Index and NASDAQ-100 Ex-Tech Sector Index beginning April 20 (replaces AAL); MTD said Q1 sales declined 4% and sees Q1 EPS below guidance while withdraws guidance on COVID-19 impact; SYK was downgraded at Barclays’s to underweight saying the market is not appreciating the severity and likely duration of revenue declines amid the coronavirus outbreak; NTRA sees prelim Q4 revs $89M-$91M vs. est. $79.5M and withdraws 2020 outlook; DHR provided preliminary 1Q results, expecting revenue growth of 3% and non-GAAP core revenue growth of 4.5%, noting positive results in each of the company’s three reporting segments, though saw a meaningful slowdown in the later part of the quarter

·     Healthcare services and providers; WORX jumps as announces first installment of purchase order for 48 million covid-19 rapid testing units over twenty-four weeks at $35 million dollars per week; CTSO rises after CytoSorb received Emergency Use Authorization (EUA) for its blood purification technology to use in patients with Covid-19 infection from the FDA

Industrials & Materials

·     Industrial & Machinery; GE announced strategic debt issuance to fund an immediate tender for GE bonds maturing through 2024; ETN was downgraded to neutral at JPMorgan as see less upside potential for diversified industrials from here, especially for ETN (down 13% YTD, in line with the S&P 500) given its outsized exposure to later cycle US construction; CAT was downgraded to underperform at Bank America noting energy and mining stocks are signaling another severe capital spending downturn in two of CAT’s most important end market (also downgraded URI, OSK, HEES, CNHI as well in conjunction with call on machinery names; DE was downgraded at Baird to neutral saying the rapidly changing environment points to pressure on its earnings that could be greater than in prior downturns

·     Transports; FDX was upgraded to buy at Bank America noting shares are trading at 13.6x, above the bottom of its 12.5x-18.5x historical range, and we target closer to its midpoint after recently lowering F20 by 20% and F21 by 14%; JBHT earnings expected tomorrow night in trucking sector; airlines active as the U.S. Treasury worked out a formula for compensation from the airline industry as 30c of every $1 in grant money would be in the form of low-interest loans w/equity warrants worth 10% of the loan value while the other 70% does not need to be paid back, according to various reports (Reuters)

·     Aerospace & Defense; SPR weak on two cautious analyst notes after being downgraded to neutral at Bank America noting about 50% of sales and more than half of operating profit are related to the BA 737 program/majority of SPR sales are related to commercial aerospace. Meanwhile, Bernstein cut its tgt to $40, down from $87 on a worse free cash flow outlook in 2020 and beyond due to lower Boeing/Airbus delivery forecasts/commercial aero uncertainty; HXL was downgraded at Cowen saying the severity of likely aero OE production rate cuts renders the stock "dead money" at best, at least until a lower EPS bound can be established

Technology, Media & Telecom

·     Internet; EBAY announced that the Company’s Board of Directors has appointed Jamie Iannone as CEO, effective April 27, 2020 (most recently was COO of Walmart eCommerce); GRUB shares slide after saying it experienced a decrease in orders the last couple weeks of March, particularly in its corporate business, and now expects first-quarter daily average grubs (DAGs) to be "up flattish" from a year ago; NFLX and AMZN shares outperform as TV watching figures continue to rise given the “stay at home” social distancing

·     Semiconductors; NVDA was downgraded to hold from buy at Needham and cut tgt to $300 while lowers gaming estimates in FY21 to reflect the impact from the coronavirus and potential delay in next-gen GPU/says NVDA’s next generation GPU could be delayed few months because of the COVID-19 pandemic; TXN was downgraded to underweight at Morgan Stanley noting it has performed in line with semis and well above some analog and MCU peers, posing greater risk to negative news still ahead; NXPI was downgraded at Evercore/ISI; MU was downgraded to neutral at Goldman Sachs from buy as they reduce out-quarter DRAM bit growth and NAND pricing assumptions for COVID-19 and cut normalized EPS from $6.70 to $4.85 (firm also assumed STX with a sell and WDC a neutral; IPHI upgraded at Morgan Stanley as believe has a good chance to beat and raise through a global recession, as the company’s physical layer solutions continue to inflect, particularly in cloud, which we see driving 25% growth despite macro weakness

·     Software movers; OKTA was raised to overweight at BMO Capital as believe that global secular trends for WFH will serve to increase demand for Okta’s solutions; Rosenblatt upgraded three Internet security stocks including ZS, PANW and QLYS to buy from neutral

·     Media & Telecom movers; CHTR was upgraded to overweight from equal-weight at Morgan Stanley as they see value across the capital structure at Charter as the debt and equity offer investors three compelling attributes (minimal risk to estimates, core business benefiting from work from home, and healthy buyback paired with liquidity; DIS plans to stop paying wages to 43,000 workers in about a week while allowing them to keep their benefits for up to a year; DISH has cut staff and is re-evaluating its business amid the coronavirus outbreak, Reuters said; PUBGY cuts proposed dividend in half and plans EU500M cost savings in advertising sector

·     Hardware & Component news; DELL was downgraded to neutral at Goldman Sachs believe that near term headwinds to Core DELL segments combined with high leverage offset what they continue to see as an attractive deleveraging story longer term, while the firm upgraded DDOG to buy as believe digital transformation initiatives are likely to accelerate, given new realities around remote work, and we see DDOG as a key beneficiary.