Closing Recap

Wednesday, July 08, 2020

Equity Market Recap

·     U.S. stock markets end higher in another volatile trading session as high-flying tech stocks such as Apple, Amazon, Facebook, and Nvidia pushed the Nasdaq Composite higher by around 1.4%, erasing some of yesterday’s declines. Safe haven assets advanced as gold traded to its best levels in 9-years while Treasury yields climbed and the dollar slipped. U.S. stocks continue to push higher as investors weigh the economic recovery from the coronavirus against the surging cases in the U.S. over the last week (cases topped 50k in the US for four consecutive days heading into today). Some positive sentiment boosted markets late after Dow component DIS said its theme parks are preparing for a phased reopening with significant reduction in capacity beginning July 11 (Magic Kingdom, Animal Kingdom 7/11 with Epcot, Hollywood Studios on 7/15) – the headlines helped lift some of the hardest hit pandemic sectors (leisure, casinos, theme parks). Markets have primarily focused on the economic reopenings, better data, Fed monetary easing intervention and hopes of an additional stimulus provided by the government to push markets higher – giving the technology sector a “tailwind”. Earnings season is right around the corner, with big banks out next week, and while no one is expecting strong quarterly results (profits are expected to plunge 44%, according to FactSet), investors are looking to the future clearly and giving a pass to the quarter. Stocks slipped briefly mid-morning after the head of the NY Fed’s Markets Group said in a statement that “we have slowed the pace of [corporate bond] purchases, from about $300 million per day to a bit under $200 million a day". Those headlines had little to no effect late day. In one of the more eye-opening stats of the day that has seen the Nasdaq Composite see multiple record-highs this week: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Facebook (FB) – now make up a record 18% share of the S&P 500 Index’s capitalization.

Commodities

·     Oil prices climbed back near 4-month highs around $41 per barrel (settled at $40.90, up 28c) despite weekly inventory data showing an unexpected weekly build of 5.65M barrels (bearish) vs. estimate draw of -3.25M barrels, as a weaker dollar and a further push into riskier assets helped buoy prices. For the most part, oil prices have held above $40 all week, even despite rising inventory data and signs that US states are pulling back on some reopenings, raising concern for slowing demand. Helping offset the bearish crude oil build today was the largest draw to gasoline inventories since early March, as implied demand gradually recovers. Gold prices jumped, moving back to fresh 2011 highs, as August gold rose $10.70 or 0.6% to settle at $1,820.60 an ounce for its 4^th straight session gain, helped as the dollar slipped again.

Currencies & Treasuries

·     The U.S. dollar slumped all day, ending lower vs. almost all major counterparts currencies and down about 0.5% vs. a bucket of currencies to below 96.50 for the dollar index (DXY). The Canadian dollar rose to 2-week highs above $1.35 vs. the buck while the euro jumped 0.5% to above 1.33 vs. the greenback. Treasury prices were little changed, with the 10-year staying low at 0.65% after the U.S. sold $29 billion worth of 10-year notes for the lowest high yield on record on Wednesday, indicating strong demand for the safe-haven securities despite a flood of new issuance to fund economic stimulus in response to the coronavirus pandemic.

Corona virus:

·     Total U.S. coronavirus cases top 3 million today; Arizona virus cases increase 3.3% vs. prior 7-day avg of 4.1%, current hospitalizations rise by 65 to record high of 3,421 total Tuesday and adult ICU beds in use by all patients at record high of 91% as of Tuesday, up from 90% prior day; Florida Covid-19 cases rise 4.7% vs. previous 7-day avg. 5%; New York covid-19 cases rise 0.2%, in line with 7-day avg. 0.2%. U.S. CDC reports 932 new deaths due to coronavirus as of yesterday; total deaths now 131,065 vs 130,133 in previous report on July 7 and reports 50,304 new coronavirus cases as of yesterday; total cases now 2,982,900 vs 2,932,596 prior. California reports 11,694 new virus cases, biggest daily jump. Tennessee coronavirus cases rise by 2,472 to 55,986 total on Wednesday, biggest daily increase since pandemic started.

Sector News Breakdown

Consumer

·     Retailers; LEVI reported Q2 EP and revenue that topped estimates but the company warned margins will be under pressure for the rest of the year as it tries to sell excess inventory left behind due to COVID-19 related temporary store closures; KSS was upgraded to Buy at Bank America saying as we move further into the reopening phase, think investors will begin to differentiate between business models and says KSS has already shown superior reopening trends vs. peers and we expect its off-mall positioning will drive outperformance; VSTO was downgraded at B Riley citing concerns over a potential downbeat outlook from management and likely volatility as the presidential election nears; SWBI tgt raised to $28 and reiterate buy at Lakestreet saying strong demand for firearms and outdoor products bodes well for SWBI

·     Consumer Staples; SMPL shares jump to over four-month high after reports better-than-expected Q3 EPS and revenue, helped by an acquisition and easing of lockdown restrictions while also said it sees FY20 adjusted EBITDA of $145M-$150M vs. est. $146.2M and EPS 86c-90c vs. est. 75c; MO was downgraded to Equal Weight from Overweight at Barclay’s and cut its tgt to $43 from $50 saying the company is 100% U.S.-exposed and continues to lose market share

·     Housing & Building Products; homebuilder TMHC reported June net sales orders and average sales pace per community-the best sales month in the company’s history – ending June with a 94% increase in net sales orders YoY for a total of 1,715 and finished Q2 with net sales orders up approximately 23% YoY; MHK shares resume weakness as Deutsche Bank citing a recent lawsuit filed on behalf of the Public Employees’ Retirement System of Mississippi, which included testimony from numerous witnesses who either worked directly or with partners of the co

·     Auto, Casino & Leisure movers; as COVID-19 cases continue to grow across the U.S. and states taking additional measures by slowing reopen processes and mandating masks in some states for all outdoor activities, shares of casinos (WYNN, MGM) and theme parks (SIX) remain pressured; in the auto sector; NKLA shares rebound after JPMorgan upgraded to overweight and $45 tgt following the 40% in July month-to-date (S&P 500 up 1.5%)

Energy

·     Inventory data: the API showed a build of 2.05M barrels of oil for the week ending July 3, gasoline inventories show a draw of 1.83M barrels, distillate inventories show a draw of 847K barrels, and Cushing inventories show a build of 2.22M barrels. EIA inventory data mixed (bearish oil, bullish gasoline): Crude oil inventories with a surprise build of 5.65M barrels vs. estimate draw of -3.25M barrels; Gasoline stockpiles fell a surprise -4.83M barrels vs. estimate build 550K barrels; Distillate stockpiles rose a greater 3.135M barrels vs. estimate build 287K barrels

·     Oil equipment and drilling; FTI said it was awarded a "major contract" – which the company values at more than $1B – for engineering, procurement and construction of a new hydrocracking complex for the Assiut National Oil Processing refinery in Egypt; Morgan Stanley downgraded HP Equal-weight and NBR to underweight as feels should be selective in space; also downgraded RIG in drilling saying the bull case on land rigs is lacking, in their view

·      Oil refiners; Morgan Stanley lowers its U.S. refining and marketing industry view to "in-line" from "attractive", says demand recovery continues but with increasing risk and downgraded shares of both HFC and VL while lowering tgts for the group (PSX, VLO, HFC, DK, PBF). Adds resurgence of domestic COVID-19 cases risks a stall or reversal of demand recovery, which when combined with elevated inventories and a still recovering export market may hinder recovery of refining margins

·     Power/Utility; CLNE shares surged after forming a partnership initiative with CVX – Craig Hallum noted the "adopt-a-port" at the Ports of Los Angeles and Long Beach saying this is part of Chevron’s plan to increase the use of renewables with it supplying renewable natural gas (RNG) to CLNE and also providing funding to subsidize the cost of new RNG-powered trucks with CLNE running the program and fueling the trucks at its stations. Views this as significant as it should help spur more adoption, is a positive for CLNE’s RIN/LCFS business

Financials

·     Bank movers; earnings season starts next week for large cap and regional banks; trust banks with a positive mention at Jefferies as BK and NTRS both upgraded to buy from hold, while STT remains top pick saying the 2Q market rip (stocks + bonds) leads them to upward EPS revisions, led by higher asset servicing and asset mgmt. fees; in consumer spending/finance, shares of PYPL and SQ extend gains setting new record highs while AXP was downgraded to neutral from buy with $105 tgt at Citigroup

·     Insurance; NGHC shares jumped after ALL agreed to acquire the insurer for approximately $4B in cash, or $34.50 per share/the transaction is expected to close in early 2021, subject to regulatory approvals and other customary closing conditions https://bit.ly/2CjqhGA ; KKR agreed to buy retirement and life insurance company Global Atlantic Financial Group Ltd., which had a book value of about $4.4 billion as of March 31 https://on.mktw.net/2DiVoCp

·     Services; rating agencies strong, with SPGI touching 52-week highs after being upgraded and added to the conviction buy list with $397 tgt at Goldman Sachs as they believe S&P’ non-ratings businesses to deliver mid-to-high single digit average annual revenue growth over the next three years due to the sticky and subscription-based nature of revenue streams. Stifel also positive on rating agencies (MCO, SPGI) saying debt issuance was particularly strong in 2Q20, very similar to 1Q20, which leads them to believe SPGI and MCO will raise their 2020 debt issuance forecasts and their individual respective earnings guidance ranges

Healthcare

·     Pharma & Biotech movers; Biotech movers; BIIB rises after the company submits marketing application to FDA for its Alzheimer’s disease drug, aducanumab and also requested for a priority review for aducanumab which is jointly developed by co, Eisai Co Ltd (next milestone will be the notice of FDA acceptance, expected within 60 days – 9/8); CNCE receives FDA Breakthrough Therapy Designation for CTP-543 for the treatment of Alopecia Areata, a type of hair loss; AKRO 5.23M share Secondary priced at $36.00; ASND 4.225M share Secondary priced at $142.00; ETNB 2.6M share Secondary priced at $27.50; VIR 7.14M share Secondary priced at $42.00; GILD announced the initiation of a Phase 1a clinical study to evaluate an investigational inhaled solution of our antiviral for the treatment of COVID-19:

·     Medical equipment and devices; XENT shares jump after Bloomberg reported MDT has made an offer for the smaller medical device maker, saying XENT board is reviewing the offer with its advisers https://bloom.bg/3gHwlXZ ; GNMK prelim Q2 update featured revenues that beat the Street by ~+28%, driven by strength in COVID-19 test sales and instrument placements (2Q20 revenues of $40.1M, 118% y/y (vs. consensus of $31.4M, 71%)

·     Healthcare services and providers; WBA said to partner with VillageMD to set up 500-700 primary health care clinics in more than 30 U.S. markets in the next five years/will invest $1 bln in equity and convertible debt in VillageMD over next 3 years; ONEM tgt was raised to $38 from $20 at Citigroup; mask making stocks APT, AHPI, LAKE extend gains as NJ masks are now required in the state outdoors when social distancing isn’t possible.

Industrials & Materials

·     Industrial & Transports; CAT was upgraded to neutral at Bank America with $135 tgt saying its dealer survey shows demand growth; MSM posted Q4 adj EPS $1.40 on sales $835M vs. est. $1.16 and $824.9M and said balance sheet remains strong, have ample room under debt covenants; in transports, airlines again sliding (AAL, UAL), while trucker price tgts were raised at Citigroup for JBHT (opened + catalyst watch call on shares), ODFL, WERN, KNX, CHRW saying its most recent survey showed improvement in both the rate outlook and demand outlook

·     Metals & Materials; AA better guidance as issues smaller prelim Q2 EPS loss to (8c)-0c on revs $2.1B-$2.18B better than the estimate loss of (54c) and $2.09B and expects Q2 production at its mining and refining locations to increase 5% and 2%, respectively QoQ; RIO upgraded to Sector Perform at RBC Capital saying with a more balanced view on iron ore markets and slower decline in price forecasts, see little impetus to sell with positive macro tailwinds and sector valuation dynamics, combined with an attractive 2020 dividend yield.

·     Aerospace & Defense sector; Bloomberg reported that LHX CEO warns of defense supply-chain risk if virus worsens saying some parts are made only by companies reeling from lockdowns; SPR was downgraded at Bernstein to market perform and cut tgt to $26 from $40 due to a more negative trajectory for the return of global travel and more near-term pressure from Airbus and Boeing customers to defer deliveries; LDOS has been awarded a prime contract by the U.S. Customs and Border Protection’s Office of Field Operations and Cargo Conveyance Security with a ~total value of $379M; in gov’t IT services, Raymond James downgraded BAH and CAI to market perform while upgraded MMS to strong buy to reflect decelerating fundamentals in the intermediate term and potentially meaningful re-rating of defense centric service stocks lower from near historically high valuations.

Technology, Media & Telecom

·     Internet; WIX tgt raised to $325 from $235 at Guggenheim noting the 70% gain since reporting earnings on 5/14 is justified, driven by the accelerated migration of traditional small businesses from Main Street to the web due to shelter-in-place restrictions across the country; AMZN erases all its losses yesterday after WMT Prime competitor news hit shares initially; TWTR, SNAP, PINS all showed strength today, as the social media names severely outperformed on speculation TWTR considering subscription offering; TWOU and CHGG advance further as online education names benefit from schools potentially going online this fall; SNAP 52-week highs on potential TikTok ban in social media; SPOT sets new record highs

·     Semiconductors; NVDA shares another day, another record high pacing gains in the; semiconductor index which also touched another record high; SYNA mentioned positively by several analysts (upgraded at Rosenblatt to buy) after agrees to acquire rights to AVGO’s wireless IoT connectivity business for about $250M

·     Hardware and Software movers; FSCT guides Q2 revenue outlook to $78M-$82M, above consensus of $74.8M as anticipates revenue from sales of one-year term-based licenses to be more than 35% of all license revs; HUBS was downgraded to neutral at Mizuho as believe near-term headwinds should drive a sharp deceleration in revenue growth from 32% in 2019 to ~20% in 2020 and 2021; SGH reported slightly better Q3 results but better guidance as Q4 sales $290M-$310M vs. est. $294.2M and EPS 70c-86c vs. est. 77c