Closing Recap

Thursday, April 16, 2020

Equity Market Recap

·     U.S. stocks finished mixed as technology and Staples were once again leaders, while financials, REITs and energy slipped as markets await word from President Trump later about word on the economy. The President tweeted late day that he is holding a 6:00 PM EST news conference at the White House to explain guidelines for opening up the economy again. Trump also said there may be a $2 trillion dollar infrastructure package. The headlines helped keep markets afloat as hopes remain the economy can get back on track after recent economic data this week showed the deep impact the coronavirus has had on businesses. Stocks pulled back midday after NY Governor Andrew Cuomo extended the state’s lockdown by another month and the U.K. extends its stay-at-home orders for three weeks, signs that the coronavirus pandemic isn’t ending anytime soon (though Trump comments late today could supersede). Investors once again rotated into Treasuries as yields fell to lowest levels in 2-weeks while gold erased gains as the dollar bounced and oil finished flat. U.S. economic data covering the past few weeks is showing just how much damage has been inflicted on U.S. businesses. Before the open, initial jobless claims, housing starts, and Philly Fed outlook all reflected the abrupt drop in economic activity as whole industries suffer from social distancing measures to stop the coronavirus from spreading. Tech has been buoyed by a handful of names including while earnings in healthcare has been strong thus far (JNJ, UNH, ABT), and banks were mixed today after various results (MS, BK, BLK). Stay at home tech beneficiaries advanced again (AMZN, NFLX, ATVI, EA, MSFT, ROKU, WORK).

Economic Data

·     Weekly jobless claims another dismal print, as they to 5.245 million individuals (vs. prior week 6.6M) filing first time unemployment vs. est. 5.5M while continuing claims were at 11.976M vs. est. 13.26M (form prior week 7.44M); the 4-week moving average rose to 5,508M from 4.267M (jobless claims now over 21 million in the last 4-weeks)

·     The Philly Fed Survey posted a negative reading of (-56.6) vs. est. (-32) – April prices paid fell to -9.3 vs 4.8, new orders fell to -70.9 vs -15.5, Employment fell to -46.7 vs 4.1 prior and shipments fell to -74.1 vs 0.2 last month; Prices received fell to -10.6 vs 6.8

·     Housing starts for March fell a greater (-22.3%) vs. est. (-18.7%) and prior month revised to down (-3.4%) from (-1.5%); building permits fell (-6.8%) in March vs. est. drop of (-10.7%)

Commodities

·     Oil prices end the day flat, holding steady around 18-year lows and settling under $20 per barrel for a second straight session ($19.87) while Brent inched higher 13c to $27.82 as prices remain pressured amid oversupply/low demand, along with a bleak outlook from OPEC and the IEA in recent days about the demand outlook. OPEC said it sees demand for its crude dropping to lowest in 30 years for 2020 as revised down to 92.8m b/d, from 99.7m in prior report – though yesterday IEA report was even lower at 90.5m b/d. Recent production cuts by global producers gave oil a brief bounce, but fears remain it can’t offset the lack of usage due to travel restrictions.

·     Gold prices reversed early afternoon, falling -$8.50 or 0.5% to settle at $1,731.70 an ounce (follows a 1.6% drop on Wednesday), turning lower as the dollar strengthened vs. rival currencies as the jobless claims data (though awful with 5.25M first time unemployment filings), was better than the prior week and estimates. The U.S. dollar has been attracting safe haven investment buying around the world with the euro and Pound falling. Reuters reported the Argentine peso fell to historic lows against the U.S. dollar.

Treasuries

·     U.S. Treasury prices advanced as yields slipped further as investors stay in safe-haven investments, as the 30-year yield falls to 2-week lows around 1.2% (down 5 bps), while the benchmark 10-year yield slipped 2 bps to 0.6% while the 2-year yield held at 0.2%. The weakness in the global economy, as well as the extreme measures taken by the Fed and Treasury to help support the U.S. economy that was forced to shut down to prevent spreading of the coronavirus pandemic has prompted ongoing buying in bond markets.

Coronavirus Update

·     New York today extended its close down policies until May 15th (from end of April) and announced 12,192 virus deaths in N.Y., up from 11,586. Italy said it had 525 deaths from coronavirus vs 578 Wednesday; reports 168,941 total coronavirus cases, 22,170 deaths; Italy reports 3,786 new coronavirus cases vs 2,667 Wednesday. NJ reports additional 4,391 cases, for 75,317 total as deaths rise over 300 for third straight day and schools stay closed til May 15^th.

Sector News Breakdown

Consumer

·     Retailers; BBBY Q4 came in slightly better than the pre-announcement but well below initial expectations prior to that; (EPS was 38c vs. est. 22c helped by lower tax; COST raised its dividend; LVMUY said 1Q revs -17% organic basis, fashion/leather organic sales -10%, says to further strengthen cost controls; retailers overall were mixed with apparel, footwear and department stores hoping to hear positive timeframes for the possible reopening of the economy

·     Consumer Staples; PFGC 13.5M share Spot Secondary priced at $22.50; in research, Credit Suisse upgraded SJM to neutral and THS to outperform while raising sales estimates above consensus for 10 of the 11 packaged food companies under coverage on rising sales growth; KHC upgraded to overweight at Wells Fargo saying work suggests its portfolio is far from as "off-trend" as bears claim, and internal savings can self-fund reinvestment; MNST reinstated buy and $70 tgt at Bank America based on a Price-to-earnings (P/E) multiple of 30.5x our 2021e EPS of $2.30; SAM was cut at MKM to hold from buy as believe every brand has played out and valuation already reflects best case scenario; food stocks GIS, K, CPB were higher

·     Restaurants; BLMN said off-premise sales, that include take-out and delivery, have nearly tripled since the beginning of March when many customers began staying at home as sales at Outback Steakhouse rose ~162%, at Carrabba’s Italian Grill surges ~114% and more than quintupled at Bonefish Grill/overall U.S. company-owned comp sales for Q1 fell -10.4%; JACK was upgraded to Buy from Neutral at BTIG as believe the fundamentals of the business do not justify the steep 45% decline in share price year-to-date/also believe the company has plenty of liquidity

·     Housing & Building Products; housing data (housing starts for March fell over 305) awful today hurting builders again early (LEN, KBH, TOL) while two analysts out with negative comments in building products sector: 1) Wells Fargo upgraded SHW given its exposure to defensively positioned end-markets and downgraded JELD 2) Baird downgraded shares of AMWD, DOOR, FBHS, JELD, MHK saying Q1 checks show softness ahead in R&R categories as impacts from COVID-19 and related consumer reactions weigh on the industry

·     Casino & Leisure movers; SunTrust lowered estimates for the RV OEMs (THO, WGO) following a series of discussions with industry contacts as now expect CY20 retail demand to decline 25-30% (vs. our -2% to flat assumption prior); CCL is considering cruising with less than full capacity and checking the temperature of passengers as preventative measures, according to Business Insider

Energy

·     Energy stocks remain pressured amid weaker demand for energy with travel restrictions in place, oversupply despite recent actions by OPEC+ to cut productions. OPEC said it sees demand for its crude dropping to lowest in 30 years for 2020 as revised down to 92.8m b/d, from 99.7m in prior report – though yesterday IEA report was even lower at 90.5m b/d; in stock news, COP to voluntarily curtail 225,000 gross barrels of oil per day, reduces 2020 cash uses by added $3B, cuts capex forecast and said its share buyback program was suspended. Major oil producers with operations around the world have cut their 2020 capital spending by more than 26%, or $60.5 billion, data compiled by Reuters showed, following a slump in crude prices.

·     Drilling, E&P sector; XEC expects a 55-60% reduction in its 2020 capital investment program from its original guidance of $1.25-$1.35B/also announced that is has curtailed approximately 30% of its volumes for the month of May due to weakness in realized prices; DO elected not to make the semiannual interest payment due in respect of its 5.70% Senior Notes due 2039 while also retained advisors to evaluate capital structure.

·     Utilities & Solar; AWK upgraded to buy at Goldman Sachs on superior growth potential (8.3% EPS CAGR), highest beta-adjusted returns among regulated utilities and favorable ESG position.

Financials

·     Bank movers; MS posted better Q1 trading revs of $2.20B, up 29% YoY and above estimates of $1.77B, but overall revs of $9.49B missed estimates and EPS of $1.10 was down from $1.39 YoY/said profit fell 30% in the quarter; BK Q1 EPS of $1.05 beats expectations of 88c on better revs of $4.1B citing increased fee revenue, as well as higher transaction volumes/said quarterly provisions for loan losses at $169M; KEY Q1 EPS missed (12c vs. est. 18c) on weaker fees ($477M vs. $573M est.) while NII, expenses and provision were better (provision $359M); BLK Q1 EPS beat ($6.60 vs. $6.36) on better revenues ($3.71B) and tax while expenses were largely inline/LT inflows of -$18.7B were driven by the -$31B of index institutional outflows in quarter

·     Business Development sector; ARCC, ORCC, TSLX upgraded to outperform at Raymond James given a recent pullback in the BDC space, saying the fundamentals at each of these BDCs remain strong and do not believe any of these companies are experiencing liquidity issues

·     REITs; data center REITs COR, DLR, EQIX all downgraded at Raymond James and lowering estimates on CoreSite, as they are trading at or above where their levels before the COVID-19 crisis – says are hard-pressed to see upside to our price targets while they are trading at or above historic averages (notes not a fundamental call); INVH downgraded at Morgan Stanley saying SFR REITs have lower turnover rates than apartments and coupled with an outsized growth opportunity to scale, means SFRs can trade at premiums to apartments; Compass Point cut net operating income ests for retail strip owners (KIM, TCO, RPT, KRG, REG) amid uncertainty over when the economy will re-open from the coronavirus-related business shutdown.

·     Mortgage/consumer finance; AGNC upgraded to outperform from market perform with $13.50 tgt at JMP Securities as view as the leading pure play agency mortgage backed security focused mortgage real estate investment trust and notes the shares are down 35% since December 31

·     Payments and Spending; SQ was downgraded at Raymond James to underperform from market perform as believe there is a significant disconnect between the recent performance of the stock (down just 4% YTD vs S&P 500 -15%, +700 bps vs peers since 2/21) and the underlying fundamentals of the business; MA was cut to neutral from buy at Guggenheim as expect cross-border-related revenue (33% of MA’s total net revenue in ’19) to see significant headwinds and domestic volumes/revenue (both U.S. and international) to be pressured

Healthcare

·     Pharma movers; LLY, CNC, REGN touch 52-week highs today in Pharma/Biotech; SNGX said it has executed an agreement for the exclusive worldwide license of CoVaccine HT™, a novel vaccine adjuvant, from BTG Specialty Pharm, a division of BSX for the fields of SARS-CoV-2, the cause of COVID-19 and pandemic flu; in cannabis sector, TLRY was downgraded to underperform and $5 tgt at Jefferies saying the name is up >100% relative to the broader sector while upgraded CGC to hold as firm refreshed cannabis numbers broadly to reflect potential impacts of COVID-19, recent updates at specific names, and cash pressures

·     Biotech movers; RCUS rises after Bloomberg reported late yesterday that GILD is in discussions regarding a potential stake or partnership, though noted a deal has not been finalized and does not provide additional details https://bloom.bg/2VaMQ74 ; DVAX enters into a collaboration with Sinovac Biotech to develop a vaccine to prevent Covid-19; MRTX initiated buy at Goldman Sachs and $151 tgt as see multiple value-driving events in 2H20 across the portfolio including key asset MRTX849, a KRASG12C inhibitor; REGN said the U.S. FDA has accepted for priority review a new BLA for REGN-EB3, an investigational triple antibody cocktail treatment for Ebola

·     Medical equipment and devices; ABT shares advanced after Q1 EPS of 65c and sales $7.73B topped estimates of 61c and $7.4B while 1Q international nutrition sales rose +4.6% and suspended guidance for year

·     Healthcare services and providers; RAD reported wider-than-expected loss in Q4 revs of $5.73B topped last year $5.38B and above est. $5.57B/Pharmacy revs were $1.8B, up 23.1% YoY/saw comparable front-end sales rise 33% in March due to increased demand for personal care, paper products and increases in 30-day prescription count

Industrials & Materials

·     Industrial & Machinery; AME withdrew full-year 2020 financial guidance and said overall sales in the Q1 will be down approximately 6.5%, and the company expects adjusted diluted earnings per share to be within its original guidance range on higher margins; SunTrust said they expect 1Q20 earnings will be one of the more downbeat ever seen, especially for the commercial aero sector

·     Transports; Dow Transports underperform broader markets, falling below 7,900 level earlier (well off Feb highs above 11,000) as CAR top decliner after HTZ said overnight it was seeking coronavirus related bailout; airlines lower across the board as UAL said it is cutting May capacity by 90%, and expects similar reductions in June – “while we have not yet finalized changes to our schedule for July and August, we expect demand to remain suppressed for the remainder of 2020 and likely into next year”; GBX down after idling production, announcing layoffs

·     Metals & Materials; FCX was upgraded to overweight from equal-weight with $10 tgt at Barclay’s while downgrade gold miners GOLD and NEM to EW from OW after rally in shares, but gold miners remain strong given the surge in gold; in paper/wood sector, RBC Capital lowered ests and tgts on several names (CLW, IP, UFS, LPX, PCH, RYN) as firm said heading into Q120 earnings, lower 58% of our Q1 EBITDA estimates and 92% of our 2020 EBITDA estimates primarily to reflect the expected impact of COVID-19 on demand across commodity markets

Technology, Media & Telecom

·     Internet; NFLX tgt raised to $490 at Goldman Sachs ahead of earnings next week, as expect to report 1Q results well above guidance, with over 10mn net subscriber additions, and provide initial guidance for 2Q ahead of consensus, even accounting for management conservatism; TWTR was downgraded to neutral at JPMorgan citing the social-media company’s risks to revenue as a result of a weakening ad environment; for EBAY activist Starboard has withdrawn its nomination of director candidates for election at eBay’s 2020 Annual Meeting of Stockholders following the hiring of new CEO Iannone; AKAM, NFLX, AMZN 52-week highs today

·     Semiconductors; TSM reported solid Quarter and guidance while maintained cap-ex and dividend and guided 2020 to mid to high teens growth (all better and better than feared); XLNX said it Xilinx(R) Versal(TM) adaptive compute acceleration platform will be utilized by Samsung; CREE announces offering of $500M of convertible senior notes

·     Software movers; video gamers EA, ATVI touch 52-week highs today; PLAN was downgraded to neutral from buy at Rosenblatt saying industry checks indicate a challenging sales environment for software vendors that are not related to the work-from-home (WFM) trend; PCTY was downgraded to hold from buy at Stifel following the recent rebound in the stock, up 45% since the March lows (vs. IGV up ~23% for the same time period) and now trading at ~9x our newly revised CY21E revenue estimate

·     Hardware & Component news; CIEN downgraded to equal-weight from overweight at Morgan Stanley given disruptions in installation capabilities and potential for more volatility in SP spend; ZM shares active after the WSJ reported VZ is buying Blue Jeans Network video conferencing (competitor) for less than $500M; GPRO guided Q1 prelim revs $119M, down 51% YoY which was below the prior view of $140M-$160M and said it plans to lay off more than 20% of staff; ROKU surges a second day after Berenberg said the streaming-video platform is attractively positioned from the proliferation of streaming content, and a shift in television advertising revenues from linear to digital services