Closing Recap

Friday, February 28, 2020

Equity Market Recap

·     No place to hide for U.S. stocks which endured another day of intense selling pressure, as major averages posted their worst weekly decline since the financial crisis more than a decade ago, on increasing investor unrest about the potential economic fallout from the coronavirus epidemic. No sector was immune to the downward draft in stocks, with commodity prices such as oil (down over 4% on day and 16% for week) and gold also tumbling on the day (down over 4%) with Treasury prices the only safe haven (with the 10-year yield touching a record low of 1.11%). Stocks got a boost late day after Federal Reserve Chair Jerome Powell said "the fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” Major U.S. averages fell well below key technical levels in a week that saw the Dow Industrials fall over 4,000 points and had 95% of the S&P 500 fall more than 10% from its highs (as per DJ data). Stocks ended the week down for a 7^th straight session with the S&P and NASDAQ now more than 13% off their record closing highs just a week ago. The number of new reported coronavirus cases in China continues to decline, but South Korea’s case total jumped above 2,300, along with jumps in other countries as well (Italy, Iran and new countries as well). The CBOE Volatility index (VIX) traded to an intraday high of 49.48 (off levels of around 15 a little more than a week ago). Travel stocks, leisure names, restaurants, hotels were among the hardest hit on the virus, with energy down on oil and banks on low rates. European markets were crushed on the day and week as Europe’s Stoxx 600 dropped -12.2% for week, its worst week since 2008 financial crisis while Italy’s stock market was down -11.3% for week, worst week since 2011 (follows rising number of virus cases) and Germany’s DAX sliding –12.4% for the week, and the UK’s FTSE 100 down -11.1%, solely on the heels of coronavirus outbreak concerns.

Commodities

·     Oil prices plunged Friday as the selloff driven by coronavirus fears accelerated. WTI crude dropped -$2.33 or 4.9% to settle at $44.76 per barrel a 14-month low as demand shrinks further and Brent crude dropped below $50 a barrel for the first time in 2 1/2 years. Nymex crude oil ended with a 16% weekly decline, its biggest one-week drop since the 2008 financial crises. Prices have been weighed down in the past few weeks on weaker demand from China due to the coronavirus, but fears of a wider outbreak have stoked a further slide in crude prices and a selloff in the world’s equities markets. Gold prices were no safe-haven today amid plunging US stocks, with April gold sliding -$75.80 or 4.6% to settle at $1,566.70 an ounce in its biggest one-day percentage decline since at least 2013, and falling from 7-year highs of $1,688.66 an ounce earlier this week. The main explanation for the mass exodus in gold was likely forced selling by investors to cover losses in other asset classes.

Currencies

·     The U.S. dollar was lower on the day and week, plunging against the Japanese yen in flight to safety trade – down 1.5% to the 108 level, off earlier lows 107.56 (and down from levels above 112 just a week ago), but overall the dollar down slightly vs. other currencies (rising vs. oil leveraged currencies such as the Russian ruble and Canadian dollar). The dollar slipped the last few days on rising expectations that the FOMC may cut rates to help soften the economic impact on the economy, which has pulled the buck back from 3-year highs this week. 

Bond Market

·     Treasury market’s close out the day (and week) with big gains, with yields setting new record lows on a daily basis in a flight to safety as stocks were pummeled on the week. The benchmark 10-year yield fell to a new record, as low as 1.11% down over 12 bps on the day and over 20 bps for the week. The two-year Treasury yield fell below 1% for first time since 2016 (2-yr yield down as much as 16 bps to 0.88%), on growing expectations the Fed could act with a rate cut possibly as soon as March to help offset the economic impact of the coronavirus globally. The 30-year yield fell to a record low of 1.65%, falling as much as 10 bps. The 5-year yield fell to 0.89% its lowest level since May 2013.

Sector News Breakdown

Consumer

·     Retailers; BIG shares plunge reported 4Q adjusted EPS below expectations, driven by soft comps and gross margin saying recent trends have slowed, prompting soft 1Q and 2020 guidance, a reduction in the SOTF remodeling program, and a postponement of next week’s analyst day (downgraded to underweight at JPM); FL reported Q4 profit of $1.63, topping ests by a nickel though Q4 comp sales fall more than Street expectations (-1.6% vs. est. -1%); DG was upgraded to buy at Jefferies as thorough review of DG’s key initiatives and proprietary TAM analysis implies DG offers 1-3%+ EBIT upside vs. consensus’ F20-21 estimates; FTCH shares rise as beats street estimates for Q4 revenue, posts smaller-than-expected loss in the quarter and sees GMV to grow to $3.00-$3.10B in FY 2020, well above estimates of $2.81B

·     Consumer Staples; CLX shares have had a big rally in recent days amid expectations for high demand of its hand sanitizers, cleaning products; LNDC announced it is exploring strategic alternatives for its weak vegetable bag and tray business; BYND shares plunge after mixed Q4 results as sales of $98.5M beat the $80M estimate with in-line gross margins of 34%, but represented a sequential decline from last quarter’s gross margin of 35.6% due to short-term disruptions related to capacity expansion at two co-manufacturers.

·     Housing, Home Retail & Building Products; Wayfair (W) shares fell as reported a larger than expected Q4 EPS loss while its active customer count rose 33.9% to 20.3M in Q4 and orders delivered rose 27.1% to 11.2M. The average order size fell to $226 from $227; BBBY announced a strategic restructuring program as part of the next phase of its work to rebuild the foundation of the business and create a sustainable, durable business model; restructuring program includes a reorganization and simplification of its field operations, significant reduction in management positions across the business, and outsourcing of several functions; homebuilders (LEN, KBH) plunged as well on economic growth fears, falling despite the plunge in Treasury yields

Energy

·     Energy stocks again getting pummeled on plunging oil prices on fears of lower demand given the impact of the coronavirus on travel (personal and corporate) as crude oil extends fall, down as much as 5% to below $45 per barrel; the weakness coupled with mixed earnings results in the sector, as GPOR plunges after Q4 EPS miss hit by lower production and commodity prices and expects 2020 avg. daily gas output of 1,100-1,150 mln cubic feet equivalent, the midpoint of which is 18.2% lower than 2019 output; other earnings results included OXY as reported core 4Q19 EPS that was $0.06 below consensus on weaker oil & gas earnings; EOG with an earnings beat and plans more production in 2020; GDI replaces XEC in the S&P 500 index while XEC replaces CHK in the S&P MidCap 400 index; RRC and SWN both with better earnings in net gas; Baker Hughes weekly rig count fell -1 to 790, oil rigs fell -1 to 678 and gas rigs unchanged at 110

·     Refiners; Piper with a note as they downgraded VLO, PBF to neutral from overweight and upgraded HFC to overweight sees HFC as the most advantaged among inland peers, while PSX, MPC top picks saying the coronavirus epidemic and certain fuel regulations have added significant uncertainty to 2020 refining margins and demand expectations.

·     Utilities & Solar; AES shares dropped sharply after Q4 earnings estimates beat but missed revenue expectations by a wide mark ($2,43B vs. est. $2.69B)/on an unadjusted basis, AES reports a $78M Q4 loss compared to a $128M profit in the prior-year quarter; EIX shares drop after Q4 EPS missed and said it now sees $4.9B in liabilities from 2017-18 fires, up from prior view of $4.7B in fire liabilities; PCG falls as California’s utilities regulator proposes $2.14B fine for its role in causing the devastating 2017 and 2018 wildfires in Northern California; NI was upgraded to outperform at Credit Suisse

Financials

·     Bank movers; shares of U.S. banks drop among the most of S&P sectors, led by big banks (JPM, C, WFC, BAC) as well as regional banks as U.S. Treasury yields broadly drop across the curve, with the two-year treasury yield sliding below 1% for first time since 2016, pressuring the profit margin on loans banks make (2-yr yield down 14 bps to 0.91%); in exchanges, CBOE was upgraded to neutral at Bank America

Healthcare

·     Pharma movers; ALT surges after saying it has completed design and synthesis of a single-dose, intranasal coronavirus vaccine/says it is now advancing vaccine towards animal testing and manufacturing; MYL shares plunge in generics sector as Q4 EPS topped views, but sales missed estimates sending shares to 52-week lows

·     Biotech movers; FTSV shares jumped after Bloomberg reported GILD has approached cancer therapy company with a takeover offer, according to people; said the both are discussing a number of options, including a partnership https://on.mktw.net/2vr0uJl ; SGMO shares jump after entered a partnership with BIIB to develop gene therapies for diseases attacking the brain and central nervous system (SGMO to get $125M in cash and a $225M equity investment, plus up to $2.37B in development milestones/royalties); BHVN said it received FDA approval for its oral CGRP NURTEC

·     Medical equipment and devices; Needham said they think that MASI is the least vulnerable to a COVID-19 pandemic since it has limited exposure to China, moderate exposure to Europe, could actually see increased demand from COVID-19, and has the strongest balance sheet…in contrast, they think that IVC and MMSI are most vulnerable to a COVID-19 pandemic given their geographic exposure, products, and balance sheets; ACAD revenue of $9.4M grew 35% Y/Y was solidly ahead of our $8.1M estimate on continued strength in ProFound AI. AEBITDA; ATEC announced an agreement to acquire EOS imaging, SA, for a purchase price of up to $88M; IRTC a positive name in the med equipment space after Q4 results mixed as sales beat

·     Healthcare services and providers; GKOS shares plunged over 30% after 2020 forecasts missed expectations and JPMorgan downgraded to neutral from overweight and cut his PT to $55 from $65, saying the guidance was disappointing as competition stifles growth; ADUS shares dropped as postpones Q4 earnings report, 10-K filing

Industrials & Materials

·     Industrial & Machinery; EMR said it expects the coronavirus to reduce FQ2 sales by $100M-$150M, more than its estimate of $75M-$100M just two weeks ago; SPR said after earnings Plans to slowly ramp BA’s 737 Max output in 2020 and Boeing to provide $225m cash to Spirit Aero to support work; MMM shares rally as company making protective masks; waste stocks WM, RSG and WCN all upgraded to outperform at Oppenheimer as expect waste fundamentals to outperform industrial benchmarks on the strength of pricing discipline, margin resiliency, healthy FCF generation and opportunistic M&A

·     Transports; Dow Transports fell as much as 3% to 9,127 level (record highs Jan 17, 2020 of 11,359), to its lowest levels since January of last year (had hit lows of around 8,635 in Dec ’18) – nearly all components lower again today, with rails this time underperforming (CSX, KSU); airlines tried to bounce on Thursday, but

·     Metals & Materials; NUE, X reportedly raise prices for steel sheet products by $40/st in a bid to capitalize on tight supplies, even as the coronavirus hurts the outlook for metal demand, as per Cowen; chemicals WLK and LYB were both upgraded at JPMorgan; CDXS shares declined after a miss on top and bottom line for Q4 while guided Q1 revs $78M-$82M below the $82.5M est.; gold miners got hammered given the more than 3% decline in gold prices

Technology, Media & Telecom

·     Internet; IQ shares slip despite forecasting quarterly revenue above consensus estimates as company owner BIDU warns Q1 revenue could drop as much as 13% due to the outbreak (though IQ said people staying at home has benefited it, leading to a big traffic spike as total subscribing members rose to 106.9M in 2019, vs. 87.4M in 2018

·     Semiconductors; not much in particular news in the space that was extremely volatile, with the Philly semi index (SOX) briefly breaking below its 200-day MA of 1,625 earlier (lows 1,605) before jumping back to highs of 1,715 late morning as several names were mixed in the group after having plunged from record highs of 1,983.70 on February 14^th

·     Software movers; ADSK reported strong F4Q results for revenue and free cash flow but also reported FY21 revenue growth a touch below expectations and sees FY20 EPS $4.21-$4.44 vs. est. $4.41 (while FCF guidance was better) as shares slipped; WDAY with beat & raise as Q4 subscription rev growth of +24.7% was ahead of consensus at +23% with current billings also ahead at +20.5% y/y and margins also better at 11.9%; VMW mixed results as healthy bookings were overshadowed by a top-line miss with a mix shift and execution as culprits for the softness according to Wedbush

·     Media & Telecom movers; CBB amends its pact with Brookfield Infrastructure and institutional partners to increase consideration payable to $12.50 per share in cash from $10.50 per share as the deal is now valued at about $2.745 billion, including debt; EB shares slide as forecasts Q1 revs between $84M-$88M below est. $90.2M and lower year rev view (RBC downgrades to sector-perform saying waiting to see a clear path to sustained 15% to 20% topline growth); TTD rises as reports Q4 revenue and profit above est. and sees Q1, full-year rev above est. prompting Wells Fargo to upgrade to outperform saying TTD is exclusive demand-side platform for Michael Bloomberg’s U.S. presidential campaign, which could be a growth catalyst in 2020; DIS shares slide after Tokyo Disney said it will close for two weeks starting Saturday as a precaution to prevent the spread of the coronavirus

·     Hardware & Component news; PSTG reported Q4 results that beat consensus on both top and bottom line driven by solid execution and growth from its expanding product and subscription services portfolio while guidance implies a relatively stable demand environment with 20% bookings growth and 16% revenue growth; DELL fell on in-line earning and said it expects Q1 to be sequentially below Q4 (guidance did not include any impact of the coronavirus on its business)

·     Optical sector, shares of AAOI shares slip after posting smaller Q4 EPS loss on better revs for Q4, but guided Q1 revs $43M-$47M below est. $50.1M and sees a larger 1Q adjusted loss per share of (34c-41c) vs. est. loss (21c); NPTN shares rise after Q4 results beat with revenues and margins comfortably exceeding consensus expectations.