Closing Recap

Wednesday, January 29, 2020

Equity Market Recap

·     U.S. stocks pulled back from earlier highs as Treasury prices climbed and yields resumed its downward momentum following Fed Chairman Powell’s press conference noting uncertainties. As expected (in a unanimous decision) the Fed kept its target interest rate unchanged at 1.50-1.75% while raises interest on excess reserves rate to 1.60%, 10 basis points above bottom of federal funds target range and repeats will continue to buy U.S. Treasury Bills at least into second quarter. Fed said to continue conducting term and overnight repo operations at least through April. The Fed also downgraded view of "strong rising in household spending" to "moderate. Recall the Fed lowered interest rates three times last year, taking the rate down from a post-recession high of nearly 2.5%. There were no major shocks to the commentary helping keep stocks afloat, led by better than anticipated earnings results from several Dow components (AAPL, DOW, and MCD), generally positive commentary from BA despite its big quarterly miss, while GS erased early gains after the company unveiled financial targets on its first-ever investor day. Updates on the coronavirus showed that it has killed 132 people and infected more than 6,000 on the mainland China and abroad in the latest update (U.S. cases still remain at five). For tomorrow, the World Health Organization will reconvene an emergency committee on Thursday to discuss whether the coronavirus constitutes a public health emergency, the organization said in a statement with the meeting planned to start at 1:30 pm Geneva time. As for tonight, another onslaught of earnings resumes with FB, MSFT and TSLA, as well as chip related names (CRUS, QRVO, LRCX, CREE), as the group looks to rebound after slumping today on weak outlooks from AMD and XLNX. Transports were mostly higher, led by better NSC earnings, while CHRW fell.

Commodities

·     Oil prices end mixed as WTI crude dipped 15c or 0.3% to settle at $53.33 per barrel, off the session lows of $52.81 per barrel after mixed weekly inventory data (API showed a drop in crude supplies while the EIA showed a larger build). At the same time, Brent prices rose 30c to settle at $59.81 while natural gas prices slide 3% to $1.88 mln btus. Despite ending lower, prices bounced off 3-month lows as markets reassessed the threat to demand from China’s coronavirus. Gold prices rose 60c to $1,570.40 an ounce, as futures closed ahead of the FOMC interest rate decision where the Fed as expected held rates steady.

Currencies & Treasuries

·     A generally quiet day for the U.S. dollar prior to the FOMC meeting, as the dollar index (DXY) extended its gains slightly too fresh 7-week highs, touching best levels of 98.18 despite slightly weaker economic data points. The euro, British Pound and Canadian dollar were all down slightly against the greenback, while the Japanese yen was little changed, paring back from earlier weekly losses. Treasury prices gained again, as the yield on the benchmark interest rate fell as much as 7 bps to 1.58% with the virus outbreak, mixed economic data and an FOMC meeting all helping keep investors on the defensive while stocks remained strong.

Economic Data

·     The U.S. trade deficit in goods jumped 8.5% in December as tensions with China eased and imports surged. The gap in goods climbed to $68.3 billion in the final month of 2019 from $63 billion in November, the government said Wednesday. Pending home sales fell 4.9% m/m vs est. up 0.5%; largest monthly percentage drop since May 2010.

Sector News Breakdown

Consumer

·     Retailers; LB shares rise on reports the Victoria’s Secret-owner CEO Leslie Wexner is in talks to step aside from the role and is exploring strategic alternatives for the lingerie brand, according to the WSJ today; OXM upgraded to buy from hold at Needham as see lowered 4Q expectations as achievable and believe the company’s positive momentum will continue in 2020; Needham also downgraded shares of CPRI and CAL to hold; in the mattress industry, Piper said following a wide variety of mattress industry meetings in Las Vegas, sentiment at the conference heading into the New Year is the most bullish they can recall (TPX, LEG, SNBR, Serta Simmons, Nectar)

·     Consumer Staples; BYND and YUM plan to expand a test of plant-based chicken nugget alternatives at 70 KHC locations in Charlotte, North Carolina and Nashville, Tennessee; the news offset earlier weakness in BYND after Tim Horton’s restaurants have stopped selling Beyond Meat products at its coffee and donut shops across two of Canada’s biggest provinces.

·     Restaurants; Dow component MCD reports global comparable sales rose 5.9% in Q4 vs. +5.3% consensus, while comp sales were up 5.0% in the U.S. vs. +4.7% consensus, and increased 6.2% for the international segment; SBUX warned of a financial hit from the coronavirus outbreak in China on Tuesday evening noting it has already closed nearly half of the 4,292 stores it operates in China (quarter topped views and maintained year guidance at this time); EAT Q4 sales reported light of expectations, while comp sales at company-owned restaurants were up 1.5% vs. 1.9% consensus as a -1.4% drop in comps at Maggiano’s off a -2.8% decline in traffic dragged

·     Casino & Leisure movers; HOG was upgraded a KeyBanc saying while they believe HOG’s ongoing challenges are unlikely to abate NT, they view yesterday’s price action as more indicative of sentiment bottoming as estimates gravitate lower; RCL said it sees added 120c per share effect if restrictions persist due to the coronavirus; PENN announces a 36% stake in Barstool Sports through an investment of $163M in cash and convertible preferred stock.

Energy

·     Inventory data mixed: the API reported that U.S. crude supplies fell by -4.3M barrels for the week ended Jan. 24, showed a stockpile increase of 3.3M barrels for gasoline, while distillate stocks declined by about -141,000 barrels. EIA reported weekly energy inventory data shows Crude stockpiles rose a greater 3.55M barrels vs. est. for build of 1.29M barrels; Gasoline rose 1.20M barrels vs. est. for build of 1.581M barrels and Distillate fell -1.289M barrels compared to est. for draw of -950K barrels

·     E&P sector; CHK reports Q4 production averaged 476K-478K boe/day, including oil production of 125K-126K bbl/day, with estimated capex of $480M-$490M; HES with mixed quarter as EPS missed by 12c though revenues topped estimates; KOS plugs and abandons the Oldfield exploration well in the US Gulf of Mexico, following the completion of drilling operations as the well did not encounter commercial quantities of hydrocarbons; Eni (E) says it signed an agreement to collaborate on a project worth more than €600M ($660.9M)

·     Utilities & Solar; PCG said it entered into joinder agreements with additional holders of senior notes for the restructuring support agreement with noteholders announced last week; AEE was upgraded to overweight at Morgan Stanley and up tgt to $91 from $85 as see a long runway for above average earnings and rate base growth that is currently not reflected in the stock utilities just off all-time highs heading into the FOMC decision, as the UTY touched highs of 879.67, just off Monday record high of 879.88 as low yields keep the sector higher; shares of AEP, D, AEE, ES, FE among names at 52-week highs today

·     MLP sector; MMLP shares dropped after earnings and cutting its annual distribution to 25c/unit from $1, to improve its balance sheet; JPMorgan downgraded four MLPs, cutting BPMB, CNXM, GLP and OMP to Underweight from Neutral saying conversations with dedicated MLP investors continue to highlight distrust of the incentive misalignment created by incentive distribution rights, especially when MLPs with elevated yields continue to grow the distribution

Financials

·     Bank movers; GS rises after the company unveiled financial targets on its first-ever investor day saying it plans to grow consumer deposit balances to $125 billion or higher over 5 years, says transaction banking business can generate $1 billion in revenue over the same period/announces 3-year target of more than 13% return on equity, sets return on tangible equity target at 14%; TRMK shares slipped after Q4 EPS missed by 4c; U.S. exchange operator NDAQ quarterly profit topped estimates, led by strength in its non-trading businesses, including information services and market technology (revs from information services, Nasdaq’s biggest non-trading business, rose 3.7% to $194M)

·     Asset managers and services, ADP posted mixed Q2 results that beat on EPS and missed on revenue while lowered its FY revenue growth forecast from 6-7% to 6% and EPS growth from 14-16% to 12-14%; shares of TROW surge to 52-week highs after Q4 EPS/rev beat as advisory fees rise 13.6% YoY to $1.34B; EVR shares jump on its Q4 beat ($2.72/$668.5M vs. est. $2.36/$581M); IVZ shares slipped as Q4 EPS missed by 6c while revs beat as Q4 marked by $14B of long-term net outflows; MKTX posts Q4 EPS/revs beat

·     Insurance; PFG Q4 EPS $1.41 vs. est. $1.39 while delivered $17.3 billion of positive net cash flow in 2019, leading to record AUM of $735 billion; 52-week highs for MMC, AON posted Q4 EPS of 62c, missing the estimate by a dime while gross and net premiums written increased 10.1% and 9.3%, respectively

·     Consumer finance and lending; MA Q4 adjusted EPS of $1.96 beats the average analyst estimate of $1.87 and jumps from $1.55 in the year-ago quarter/for the year, expects net revenue growth in the low teens, operating expense growth at the high end of high single digits, and effective tax rate of 17%-18%; SC shares rose after better Q4 results and news it plans to buy back up to $1B of shares of its common stock through a so-called modified Dutch auction tender offer; PYPL expected to report earnings tonight

·     REITs; JPMorgan upgraded shares of BXMT and ABR as anticipate solid results across the mortgage REIT sector (for both residential and commercial names). Among Resi MREITs, strong MBS price performance and tighter spreads imply gains in Agency portfolios, while a supportive macroeconomic landscape should remain a tailwind for credit-sensitive strategies.

Healthcare

·     Pharma and Biotech movers; DNLI 7.83M share Secondary priced at $23.00; HEPA said its drug candidate, CRV431, prevented experimentally induced liver fibrosis to a greater extent than other leading non-alcoholic steatohepatitis, or NASH, drug candidates; ICPT announces the completion of enrollment in a Phase 3 clinical trial, REVERSE, evaluating obeticholic acid (OCA) in NASH patients with compensated cirrhosis; SBPH shares fall after stopping development of HBV treatment citing death trial

·     Medical equipment and devices; SYK reported a high-quality 4Q according to Raymond James with a modest beat on the top and bottom line relative to consensus estimates and 4Q organic cc revenue growth of 8.0% > 7.7% co was balanced across business units and geographies; ARAY rises after Q2 results showed a $11M beat on gross orders and a ~$1M beat on revenue; UTHR shares jumped midday as Sandoz denied request for prelim injunction against the company

·     Healthcare services and providers; in managed care, ANTM posted in-line quarterly EPS and revenue while said benefit expense ratio, a measure of medical costs that measures % of premiums paid out for claims, worsened to 89% from 86.8% last year

Industrials & Materials

·     Industrial & Materials; GE was upgraded to buy at Bank America post quarterly eps/rev beat saying the company’s Q4 Industrial free cash flow was better than his forecast and, its 2020 guidance for Industrial free cash flow of $2B-$4B excluding Biopharma was materially higher than his prior forecast of $0.7B adjusted for timing of the Biopharma sale; IR reported Q4 EPS miss and revs mostly in-line while says the deal with GDI remains on track; in chemicals, DOW among the top gainers in the Dow Jones Industrial average as earnings fell for quarter but topped estimates

·     Aerospace and defense; BA posts big quarterly loss and cut its plans for 787 production rate while doubles projected cost of 737 MAX grounding to $18.4 billion and Q4 operating cash flow ($2.22B), free cash flow ($2.67B); TXT rises as Q4 beats, and raises revenue guidance to approximately $14B, up from $13.6B and sees year EPS in a range of $3.50 to $3.70 as sales by segment was: Aviation +11%; Bell +16%; Textron Systems +16%; Industrial -8%; SWK agreed to acquire Boeing supplier Consolidated Aerospace Manufacturing LLC for up to $1.5 billion, contingent on the Boeing 737 MAX returning to service and on the aerospace giant meeting certain production goals; GD Q4 EPS topped views, rising more than 14% from the year ago period as Aerospace backlog grew during the Q4 to $13.3B, up 17.4% – strength in Aerospace +8.4% and Combat Systems +13.1% segments

·     Transports; overall index higher after better earnings results from NSC, ALK offset weakness in airlines and CHRW miss; mixed as trucker soft after CHRW Q4 profit mark misses the consensus estimate by a wide margin as lower prices across transportation lines factored in during the quarter, while announced the acquisition of RRTS Prime Distribution Services business for $225M; KNX also mixed results as Q4 EPS beat and revs missed with mixed guidance as well; in rails, NSC Q4 operating revenue matched expectations, while total carloads were down 9.0% for the quarter vs. -7.8% consensus expectation and revs per carload was up 2.0% (though recorded a 21% drop in coal revenue); in airlines, AAL is canceling some flights to China for more than a month amid concerns about the coronavirus, CNBC reported

Technology, Media & Telecom

·     Hardware and Components; AAPL December quarter results were driven mainly by upside to iPhone, while service growth disappointed (grew at 17% vs. consensus at 20%) – Q1 beat handily on revenues and EPS as iPhone revenues grew +8% YoY vs. consensus at -1%, driving more than the entirety of a $3B+ revenue beat and stronger GMs, along with better guidance; CMTL agrees to acquire GILT in a cash and stock transaction for $10.25 per share (70% cash/30% stock) in deal valued at $532.5M; GLW Q4 profit, revenue beat expectations as company benefited from environmental technologies, specialty materials and life sciences

·     Internet; FB was upgraded to strong buy from outperform at Raymond James and raise tgt to $270 from $230) ahead of 4Q19 earnings as they expect 4Q19 revenue/EPS upside as our checks point to solid growth and believe guidance for mid-to-high single digit deceleration vs. 3Q was likely conservative; EBAY shares slip early after providing an outlook that was below views, underlining concerns over its growth prospects as gross merchandise volume fell 5% YoY (4^th straight decline); FB earnings expected tonight after the close

·     Semiconductors; AMD shares decline after guiding Q1 revenue of $1.8B, plus or minus $50M which missed the $1.86B estimate due to decreasing demand from console-makers such as Sony and Microsoft, but overall beat Q4 EPS/revs view and forecast 2020 rev growth above views; XLNX also disappoints in the chip sector as reported in-line DecQ rev/EPS of $723.5M/$0.64 (consensus $731M/$0.60), but guided to a weaker MarQ rev of $765M (consensus $825M), noting weaker 5G base station infrastructure; MXIM Q3 adjusted EPS topped views and guides stronger upcoming quarter; MTSI shares also rose following its quarterly beat

·     Media & Telecom movers; Intelsat (I) shares dropped sharply for a second session after a bipartisan Senate bill proposes limiting the payout to companies looking to monetize C-band spectrum/the bill would set up a $6B fund to pay expenses and incentives to vacate the bands, while C-Band Alliance (led by Intelsat and including SES has said the airwaves could be worth up to $77B and calls for spectrum holders to receive "fair value."; shares of U.S. wireless carrier AT reported Q4 revenue that misses estimates, impacted by 6.1% drop in entertainment segment’s revenue, which includes DirecTV, while reports better-than-expected sign ups in monthly paying customers and beats profit est.; LEE said it will acquire Berkshire Hathaway’s BH Media Group’s publications and The Buffalo News for $140M in cash; Berkshire Hathaway, though, is providing $576M in long-term financing to Lee at a 9% annual rate; MTCH announced long-time CEO Ginsberg is planning to step down from her role in March due to personal reasons