Closing Recap

Tuesday, April 21, 2020

Equity Market Recap

·     U.S. stocks ended lower, getting a small bounce (before breaking down again late day) following a detail of the deal to expand small business funding, as investors are dealing with oil volatility and global economic shutdowns due to the COVID-19 pandemic that has crippled economies and businesses. In today’s news out of Washington, the plan calls for $320B for PPP with $250B open for all lenders with $60B for banks with <$50B in assets, another $50B for SBA disaster relief, $2.1B for admin of SBA programs, $75B for hospitals and $25B for testing, including $11B for states according to reports. President Trump later called for the Senate and House to pass the plans, saying afterwards they will begin discussions on the next Legislative Initiative with fiscal relief to State/Local Governments for lost revenues from COVID 19, much needed infrastructure investments for bridges, tunnels, broadband, as well as tax incentives for restaurants, entertainment, sports, and payroll tax cuts to increase economic growth. Financials and tech stocks were the biggest drags in the S&P today, but there were very few places to hide on the day with gold, oil, stocks all falling broadly. Gold prices fell nearly 2%, while palladium dropped over 15% as investors raise cash amid the massive volatility in commodity markets and as the dollar surges vs. other currencies. Safe haven treasuries saw additional buying as yields fell to their lowest levels in over a month. The back-to-back decline for the S&P 500 was the first since the beginning of the month amid the fears heading into earnings season which sees CMG, NFLX, TXN, SNAP among those reporting tonight and results from BIIB, DAL, and AT&T tomorrow. Comments about software sales from IBM last night pressured the broader sector, while semi’s declined and biotech names pulled back from 52-week highs. Oil the big story again today as most active contracts (June) falls over 43%, while May expires at around $10 per barrel.

Coronavirus update:

·     New York Statewide coronavirus deaths rise by 481 on April 20, vs increase of 478 a day earlier according to Governor Cuomo but posted its 6^th declining day of total virus cases; the U.K. reports 823 new coronavirus deaths, total rises to 17,337; Italy death toll from coronavirus outbreak rises by 534 (vs 454 on Monday) to 24,648 while the total number of confirmed cases of coronavirus in Italy rises by 2,729 to 183,957.

Commodities

·     The oil picture was just as wild as yesterday’s action which saw expiring May WTI crude contracts move 300% to end down at over $-37 per barrel on Monday while the more actively traded June contract was down around $20 per barrel. Today, as the May contract closes out, it gained $47.64, moving 126% to settle at $10.01 per barrel while the June contract (which expires May 19^th) slides 43% to settle at $11.57 per barrel, but off earlier lows around $6.50. Dow Jones reported that OPEC debates possible May 10 meeting to discuss deeper production cuts in an effort to help plunging prices. The Texas Railroad Commission did not recommend oil production cuts in today’s meeting after the May contract closed in negative territory at -$37.63 for the first time ever on Monday. The Commission is taking a wait-and-see approach as two of the three commissioners wanted legal advice before deciding. Natural gas prices rise 5.7% to $1.82 and falling from 6-week highs. More than 2 million June U.S. crude contracts trade on Tuesday, biggest one day for contract in history, CME says. June gold slides -$23.40 or 1.4% to settle at $1,687.80 an ounce while palladium prices are down around 10% (fell more than 16% earlier) as investors look to raise cash and as the dollar was broadly higher vs. rival currencies.

Currencies & Treasuries

·     The U.S. dollar was notably higher vs. nearly all major currencies, with the dollar index moving and holding back above the 100 level, rising over 0.3%. Gains were most pronounced against the British Pound, New Zealand and Aussie dollar and solidly higher vs. the yen, euro and Canadian buck. The 10-year Treasury note yield fell -3bps to 0.575%, while the 2-year note rate was below 0.2% as bonds continued to see haven inflows as oil futures sold off again on Tuesday. The weakness in commodity markets spilled over into U.S. equities as investors assessed the implications for global demand with crude trading at its lowest levels in years.

Economic Data

·     Existing Home Sales for March fall 8.5% to 5.27M rate vs. the 5.25M estimate; March inventory of homes for sale 1.50 mln units, 3.4 months’ worth; the median home price for existing homes $280,600, +8.0% from March 2019

Sector News Breakdown

Consumer

·     Consumer Staples; KO tops Q1 profit estimates on strength in its Latin America business, marking its fifth straight beat and said it expects sequential improvement in the back half of 2020, even as it forecasts a material hit to current-quarter results due to the coronavirus outbreak; BYND shares jump after SBUX will debut its products on its menu in China on Wednesday, marking Beyond Meat’s entry into the Chinese market; SJM said that EPS for FY 20 will exceed the high end of the prior guidance of $8.10-$8.30 because of strong sales growth and operating leverage in 4Q/said demand has begun to moderate in April after a period of "stock-up" shopping; LNDC upgraded to buy at Roth Capital citing turnaround and cost out programs; SFM was upgraded at Oppenheimer as still view the group an attractive defensive place to hide given the uncertainty associated with the coronavirus pandemic and a strengthening fundamental (DG, WMT, COST also top picks); in tobacco, PM forecasts Q2 EPS well below estimates, accounting for declines in consumption, including duty-free sales due to travel restrictions, and expects an adverse impact on its full-year results due to self-isolation and lock-down measures; USFD said affiliates of KKR have agreed to purchase $500 million in newly issued convertible preferred stock of US Foods

·     Restaurants; DRI 7.83M share secondary priced at $58.50 and said same-store sales quarter-to-date (through April 19) were down (44.7%) and comps have improved by an average of 5.0% per week from (75%) in the weeks of March 22/29 to (65.2%) and (60.0%) in the two most recent; Longbow said channel checks at QSR’s Burger King same-store sales remained down 25-30% through the end of March as comps recovered only modestly to down ~25% to date in April.

·     Casino & Leisure movers; STAY shares rose after the WSJ reports it has attracted investment from two of the biggest real-estate investors, Blackstone Group Inc. and Starwood Capital Group, which have each acquired equity positions, according to filings https://on.wsj.com/2XUH4Zg ; Hyatt (H) discontinues share buybacks, suspends quarterly dividend and enters into bridge facility credit pact; GOLF was downgraded at Compass Point and decreasing EBITDA expectations for 2020-2021 due to GOLF eliminating guidance related to Covid-19

Energy

·     Energy stocks remain top story given massive volatility in the commodity markets. Today the United States Oil Fund LP (USO) plunged after a trading halt following the fund’s announcement that it had issued all of its remaining registered shares. USO holds U.S. crude futures, and the fund has plummeted as oil prices have fallen drastically. In an SEC filing, United States Commodity Funds (USCF), which issues USO, said it had temporarily suspended the ability for authorized purchasers – or market makers for ETFs – to create new baskets of shares for the ETF. USCF had previously filed on Monday to register an additional 4 billion shares with the SEC, but that registration is not yet in effect, the firm said. However, USO will continue to trade, and authorized purchasers will be able to redeem existing USO shares.

·     Refiners; PSXP, VLO were both downgraded to hold rating at Jefferies and cut refining forecasts due to weaker anticipated 1Q results & deteriorated cracks saying COVID market structure view (including 2Q/3Q op. rates 40%/20% below normal) is unchanged & supported by EIA data

Financials

·     Bank movers; TSC among top gainers in the banking space after Q1 EPS topped views and posts strong revenue growth; NTRS shares fell initially after results, while KBW Inc. said better revs and a lower tax rate helped offset jump in provision for credit losses to $61M vs. zero last year; ZION core trends included better expense dynamics, decent loan growth, and modest margin pressure as per RBC Capital after earnings; other bank movers on earnings included BXS, FFBC, PNFP, RBB while broader banking names remain pressured on plunging Treasury yields; CMA Q1 provision for credit losses of $411M compares with $8M in Q4 2019 and a reversals of $13M in Q1 2019 and loans increased over $3B in the 2H of March to support customers’ borrowing needs; FITB EPS miss entirely due to higher provision expense while posts stronger NII; CIT drops on large provisions miss of $469M vs. $80M estimate with NIM shortfall down -27 bps QoQ

·     Insurance; Property and casualty insurer TRV reported Q1 core EPS $2.62 vs. est. $2.82 as Q1 pretax catastrophe losses were $333M vs. $193M a year ago and Q1 net written premiums of $7.35B rose 4% YoY/net realized investment losses in the current quarter were -$98M pretax

·     Consumer finance and lending; SYF Q1 EPS missed estimates by a wide margin while Q1 net interest income fell 8% Y/Y to $3.89B, mainly due to the Walmart consumer portfolio sale and Q1 provision for credit losses of $1.68B increased from $859M a year ago; ALLY was downgraded to Neutral from Buy at BTIG after reported 1Q20 adjusted loss per share of $0.44 largely driven by ~$624M in increased allowance for loan losses (ALL) due to the impact of COVID-19; CACC falls as delays its Q1 report and notes the COVID-19 outbreak has adversely impacted its business; in mortgage finance, NRZ, OCN, COOP active after the federal agency that oversees Fannie Mae and Freddie Mac limits mortgage servicers’ advance obligations for loans in forbearance to 4-months

Healthcare

·     Pharma movers; LLY was downgraded to neutral at UBS saying their buy thesis had been predicated on Trulicity strength despite competition from Rybelsus (Novo), Tirzepatide (TZP) P3 success for multiple indications, op. margin expansion driven by multiple new drug launches with-in existing franchises has played out or priced in; MNK slides after New York State charged the company with insurance fraud for misrepresenting the safety and efficacy of its opioid drugs, leading to medically unnecessary prescriptions.

·     Biotech movers; after touching 52-week highs on Monday (IBB), biotech stocks fell broadly, pulling back in mass market pullback; VXRT rises after co announces positive preclinical data from vaccine candidates to treat COVID-19; says several of the vaccine candidates were seen generating immune responses in all tested animals after a single dose; CARA announces pivotal trial of Korsuva injection in hemodialysis patients with moderate-to-severe chronic kidney disease-associated pruritus met its primary endpoint and a key secondary goal

·     Healthcare services and providers; LH rises after saying it received an Emergency Use Authorization from the U.S. FDA that permits nasal swab specimens to be collected at home using the company’s Covid-19 collection kit; CRL was downgraded to hold at Jefferies saying channel checks reveal incremental COVID-related challenges, particularly in RMS; in hospitals, HCA reported lower than expected earnings, suspends dividend and withdraws guidance

Industrials & Materials

·     Industrial & Machinery; EMR lowered its outlook while saying was confident about cost controls and posted adjusted EPS of 89c, topping midpoint of guidance of 81c while revenue by segment: Automation Solutions -10%; Commercial & Residential Solutions -7%; DOV reported a larger Q1 profit, citing benefits from productivity initiatives and recent debt refinancing while revs were in-line with estimates at $1.66B, but down YoY

·     Transports; The U.S. Treasury Department disbursed $2.9B in aid to U.S. passenger airlines, as part of $25B in funds earmarked for payroll costs. Major airlines must repay 30% of the funds in low-interest loans and grant Treasury warrants equal to 10% of the loan amount (AAL, DAL, UAL); in research, Susquehanna upgraded LUV to positive citing the carrier’s “solid balance sheet” going into the crisis and its favorable travel mix, while downgraded AAL, JBLU to neutral from positive, noting balance sheet concerns for AAL and a tougher fundamental backdrop for JBLU; in cargo airlines, AAWW upgraded to positive, expecting a constructive backdrop for commercial cargo charter demand, as belly capacity is unlikely to return for some time

·     Metals & Materials; CLF announces additional offering of $555.2M of 9.875% senior secured notes due 2025 at 99% of their principal amount in an offering; NEM, GOLD shares slip along with drop in gold prices; STLD Q1 EPS 88c on sales of $2.6B, topping analysts’ expectation of 79c and $2.56B and said it is still too early to determine the full scope of the negative impact COVID-19 will cause; VTNR was downgraded at BMO saying given likely volume and pricing weakness in the sulfate TiO2 market, VNTR’s earnings will see pressure that likely prevents them from being cash flow positive in the next few years

Technology, Media & Telecom

·     Hardware; AAPL shares active after a report in the Nikkei said the company has told several of its suppliers that it plans to make about 213 million iPhones though March 2021, up 4% from the same period a year ago; Nomura today said they believe Apple reduced its iPhone 11/SE order volumes by ~20% for F3Q…but believes is shifting orders into F4Q rather than reducing them; IBM shares slip as reported a drop in Q1 revenue and pulled its full-year earnings outlook, while said was committed to maintaining dividend/Software revs declined 8% at constant currency ex-Red Hat/revs dipped -3.6% organically and were $200M below updated consensus estimates; WATT rises after announces receiving FCC certification for its new WattUp over-the-air wireless charging transmitter; FLIR adds to yesterday gains (rose 14% Monday) after reports yesterday AMZN has begun to deploy thermal cameras at its warehouses and Whole Foods locations to screen workers for elevated temperatures

·     Internet; NFLX in the spotlight ahead of earnings tonight, as shares have surged in recent weeks to 52-week highs on expectations of rising sub numbers with people forced to stay at home due to the coronavirus pandemic; CVNA positive mention at Wells Fargo, raising tgt to $95 as its beginning to look past the short term damage in favor of a potential 2H recovery and LT opportunities/near-term liquidity and financing fears are easing

·     Semiconductors; broad weakness in the semiconductor sector early, taking the Nasdaq Composite lower in turn; Citi names MRVL its top semi pick due to the resilience of 5G networking demand and believes there will likely be a focus on long-term recovery including 5G in the 4th phase of the US stimulus package (replaces NVDA as top pick); TXN earnings results tonight after the close

·     Software movers; sector among hardest hit this morning in the tech space with AYX, CRM, SPLK, WORK, WDAY, NOW, OKTA, ZUO, ZEN all dropping amid weaker sales from IBM overnight as Bernstein said on IBM this morning "investors are likely to focus on Software, which declined 8% at cc ex-Red Hat, and has close to 100% marginal contribution, pressuring EPS"; SAP announced co-CEO Jennifer Morgan will be leaving the software giant this month, leaving Christian Klein in control/said a significant percentage of new business was postponed in March, as Q1 adjusted operating profit edged 1% higher; internet security names fall as Cowen cuts tgts on several (CYBR, FTNT, PFPT) warning of “less net new deal activity” in 1H of 2020 due to the pandemic