Closing Recap

Wednesday, July 22, 2020

Equity Market Recap

·     U.S. stocks do what they know best these days, melt higher as the Dow Jones Industrial Average outperformed led by gains in Pfizer after the U.S. government agrees to pay $1.95B for 100M doses of potential vaccine to its and its partner (BNTX), while shares of IBM and KO extend yesterday gains after better earnings. Yesterday’s winners such as financials and energy lagged today in a bout of profit taking while technology was little changed ahead of MSFT and TSLA earnings tonight (Nasdaq still off yesterday’s intraday record high of 10,839).

·     Stimulus measure hopes continue to help keep this market higher with CNBC reporting late day that the GOP considers extending unemployment benefits at reduced level of $400 a month through December (down from the current $2,400 a month, or $600 a week, which expires next week – but would be a turnaround from recent comments that they were doing away with any extended benefit). What is not concerning to markets, at least for now, is the amount of company insiders that have been selling stocks recently, as CNBC noted (citing National Alliance) that insider selling to buying is a ratio of 5-1 – only seen two other times in this decade.

·     Overnight, stocks were lower after the U.S. government ordered China to close its consulate in Houston. The move comes a day after the DOJ also accused two Chinese hackers of working for the government to steal terabytes of data, including coronavirus research. China based ADR’s are under pressure (BIDU, BABA, HUYA, JD) following the increasing tensions. This afternoon, China’s embassy urged the U.S. to revoke its decision and vowed to respond.

·     Treasury prices extend recent gains, as the 10-year yield falls 1 bps to 0.59% (July low stands at 0.567% on 7/10), while the 2-yr yield steady at 0.14%. Precious metals add to gains with gold rising again, nearing its record highs of $1,891.90, which was in August 2011, while oil prices slipped, but off their worst levels, following bearish weekly inventory data. Earnings tonight outside f MSFT, TSLA include CMG (currently at record highs), LVS in gaming, and CSX in transports, and tomorrow results from airlines AAL, LUV as well as TWTR, AT&T in media.  

Economic Data

·     Existing Home Sales rose nearly 21% in June, the National Association of Realtors reported, occurred at a seasonally adjusted annual pace of 4.72 million. It was a major turnaround from May when sales activity dropped to the lowest level since July 2010. All four major regions nationwide experienced a pick-up in sales activity last month, the trade organization said

Commodities

·     Oil prices ended the day little changed, bouncing back from earlier declines following bearish weekly inventory data. WTI crude dipped 3c to settle at $41.90 per barrel while Brent slipped 3c to settle at $44.29 per barrel, moving back near four-month-highs reached yesterday. Prices slid initially on concerns over the latest US-China tensions and after the EIA reported a surprise weekly climb of 4.9 million barrels in U.S. crude inventories (vs. ests for a drawdown). But stocks turned higher, dragging oil prices with it despite the China issue, allowing risk appetite to return to commodity markets. Markets also overlooked last night’s API report that showed crude inventories rose by 7.54 million barrels last week,

·     Precious metals soar again, rising for a fourth consecutive session as safe-haven demand increases amid a weaker U.S. dollar and increasing U.S.-China tensions. Gold trades to fresh 9-year highs (best since Sept 2011) while silver marked its highest finish since September 2013. September silver added $1.59, or 7.4%, to settle at $23.144 an ounce while August gold jumped $21.20, or nearly 1.2%, to end at $1,865.10 an ounce.

Currencies & Treasuries

·     Treasury prices remain strong as yields extend recent declines, with the 10-year yield slipping below the 0.6% level and the 2-year steady around the 0.14% level as easing monetary conditions from the Fed and investors looking to some safe-haven investments amid the coronavirus fears keeps a bid in prices. The dollar extends its declines as the dollar index drops below the 95 level, led by declines in the buck vs. the euro which touched the 1.16 level since October 2018.

Sector News Breakdown

Consumer

·     Retailers; shares of KSS and M were under pressure after UBS downgraded both to sell and lowered tgts to $14 and $3 respectively saying COVID-19 is accelerating the shift to online shopping and data suggests the effect will persist after the pandemic ends – the firm initiated CROX, GIL, SHOO, and KTB at Neutral as favor brands over retailers but not buy rated as lack conviction these companies will be able to "Go It Alone" in the future – firm also initiated DECK and GOOS with buy ratings; BBY rises after saying quarter-to-date sales rose about 2.5%, buoyed by jump in online shopping while online sales jumped more than three-fold in the quarter through July 18 with overall sales up about 15% after it started reopening stores on June 15; OLLI preannounced comps of 40% and a nearly 700bp increase in EBIT margin

·     Consumer Staples; KO upgraded to overweight from equal-weight and raise tgt to $54 from $52 at Morgan Stanley after earnings as the stock’s recent underperformance and its outsized valuation discount vs. peers has become too pronounced; Morgan downgraded CL with the stock outperforming mega-cap peers by ~1,300 bps YTD, we believe improving underlying trends and CL’s defensive business mix are now priced in; SAFM shares dropped after Stephens said chicken producers have been unwilling to cut production in the face of lackluster demand

·     Autos; LAD reports better-than-expected Q2 EPS and revenue, helped by higher used car sales which jumped 23% amid easing coronavirus-led lockdowns and raised its dividend; Credit Suisse raised its tgt on Ford (F) to $7 from $6 saying potential Q2 beat could be a near term catalyst, while ups its tgt on GM to $34 from $33 as sees opportunity for in H2 on ramped production – though flags N.A. price as likely headwind for both Ford and GM in Q2 given sharp uptick in incentives used to keep retail sales afloat

·     Housing & Building Products; SUM beat 2Q20 expectations across the board driven by strong performance in aggregates and downstream product lines as business was deemed essential in the quarter; in the homebuilder sector, NVR reported quarterly results that lifted shares early; homebuilders advanced following a strong existing home sales report, showing that the economy at least in the housing sector is holding up well during the pandemic (PHM, DHI, TOL, LEN, KBH were among gainers – existing home sales jumped 20.7% in June

Energy

·     Energy stocks slipped after massive outperformance yesterday, with oil prices pulling back following bearish weekly inventory data out of both the API and EIA reports, leading to some modest profit taking in names like APA, DVN, OXY (which were among the top gainers in the S&P the day prior); in earnings, BKR reported positive free cash flow and operational results in Q2, despite a sharp decline in activity levels (adj income $104M) while revs fell -21% to $4.74B and maintained view that U.S. drilling and completion spend will be down over 50% for FY

·     Inventory data: the API overnight showed a surprise build of 7.54M barrels of oil for the week ending July 17, gasoline inventories showed a draw of 2M barrels, distillate inventories show a draw of 1.36M barrels and Cushing inventories show a build of 716K barrels. This morning, the EIA reported an unexpected build of 4.892M barrels of crude oil vs. a forecasted -2.2M barrel decline (bearish) while gasoline stockpiles fell -1.8M barrels vs. est. -1.5M barrels

·     Utilities & Solar; FE follow through weakness as KeyBanc downgraded shares after news of the arrest and charges of the Ohio House Speaker in connection with his activities related to HB-6, the bill that created subsidies for two Ohio nuclear plants currently owned by Energy Harbor

·     Refiners; Mizuho with quarterly preview as they downgraded HFC to neutral and trim estimates for the group on reduced crack spreads, update their NAV valuations for current data, and reduce our price targets across the board accordingly – but maintain an Overweight for the group saying they believe current valuations excessively discount the value of the refining business

·     MLPs; ENB, ET, OKE and PSXP downgraded to Equal-weight and CEQP and NGL to Underweight in MLPM space at Wells Fargo as they are getting more defensive driven by view that oil prices are likely to be pressured as the recovery in demand stagnates, U.S. producers reverse curtailments, and OPEC++ likely chooses to prioritize market share gains over oil prices and that most oil basins outside of the Permian will struggle under a sub $50/Bbl oil price environment

Financials

·     Bank movers; KEY shares reversed lower after mixed Q2 results as revs were $1.72B above the $1.59B estimate with Q2 EPS 16c; 2Q NIM on taxable-equivalent basis 2.76% vs. 3.06% YoY; FULT reported an EPS beat, but like other banks, falling net interest margins (2.81%); UCBI reports Q2 revenue decrease of 16.6% Y/Y to $116M and NIM of 3.42%, which was down 65 bps from Q1; NTRS the last of major trust banks to report, falls despite a top/bottom line beat

·     Brokers & Exchanges; Pershing Square Tontine Holdings (PSTH) 200M share IPO priced at $20.00; NDAQ beats Q2 profit estimates as more people took to trading from home and as the pandemic-driven market volatility also boosted trading volumes to record levels/said revenue at Nasdaq’s market services unit rose 22% to $276M; online trading brokers AMTD, IBKR report quarterly beats as daily trading figures soar following the stay-at-home measures due to the global pandemic, which has boosted trading volumes (AMTD said Q3 number of trades 213.9 million vs. 51.9 million YoY and 3Q net new client assets $32.8 billion, +68% YoY)

·     Consumer finance and lending; COF reported a larger than expected Q2 EPS loss on light revs ($6.6B vs. est. loss $6.82B) as provision for credit losses $4.25 billion vs. $1.34 billion YoY, net interest margin (NIM) 5.78% vs. 6.80% YoY and net interest income (NII) $5.46 billion, -5% YoY; NAVI 2Q core EPS 92c vs. est. 42c with 2Q FFELP net income $146 million, +11% YoY and 2Q consumer lending net income $87 million, +2.4% YoY

·     Insurance; FAF was charged on Wednesday by New York’s top financial regulator with exposing millions of documents with sensitive consumer information, in the regulator’s first cybersecurity enforcement case; WRB reported 2Q earnings which were in line with the preannouncement

Healthcare

·     Pharma movers; BNTX and PFE rise after the U.S. gov’t placed an initial order of 100 million doses for $1.95 billion and can acquire up to 500 million additional doses/the two remain on track to begin an anticipated Phase 2b/3 safety and efficacy trial later this month; OGEN said the National Institutes of Health-created stabilized pre-fusion spike protein licensed by the company has generated neutralizing antibodies in mice during immunization against SARS-CoV-2

·     Biotech movers; BIIB reported a Q2 EPS beat helped by higher sales from its multiple sclerosis treatment, Tecfidera while also raised its 2020 adjusted profit forecast to between $34-$36 per share, from between $31.50-$33.50 prior; KNSA 5.953M share Secondary priced at $21.00

·     Medical equipment and devices; BDX said it received FDA approval for a pre-market approval supplement for an expanded version of its BD Onclarity HPV Assay; BSX announced it has received U.S. FDA approval for the WATCHMAN FLX Left Atrial Appendage Closure Device; ISRG delivered a strong beat against COVID-conservative estimates in Q2, with both system sales ($261M actual vs. $126M estimate) as well as procedure volume (-19% Y/Y actual, vs. -29% Y/Y estimate) well ahead of consensus projections; TMO posted a beat on top/bottom line for Q2

·     Healthcare services and providers; in hospital sector, HCA posted a Q2 revenue beat of $11.07B vs. est. $10.3B and better Ebitda of $2.67B (up 16% YoY) while noting Q2 same facility equivalent admissions -12.8% vs. +2.60% YoY; HCSG posted Q2 EPS 31c on revs $452M vs. est. 26c and $449.4M; OPCH 18M share Secondary priced at $12.50; IQV boosted full year profit forecast to $6.10-$6.30 from $5.75 to $6.10 (est. $5.88) after Q2 EPS topped views

Industrials & Materials

·     Transports; in rails, CNI posted an adjusted 2Q EPS beat relative to street estimates while Cowen said recent record grain volumes are set to continue with sustained demand and CNI purchasing 1 500 new grain cars next year, while CP also posted better earnings and revs for Q2; HTLD 3.261M share Spot Secondary priced at $20.50; KNX reported a Q2 EPS beat and slightly better revs of $1.06B; in airlines UAL said travel demand would remain suppressed until there is a widely accepted treatment or vaccine for COVID-19 as expects Q3 consolidated system capacity to fall 65% and expects average daily cash burn of $25M in Q3 vs. $40M a day in Q2 – follows massive quarterly loss for Q2 which was not unexpected

Technology, Media & Telecom

·     Internet; SPOT and Universal Music Group unveiled a multi-year global license agreement that further aligns the companies’ efforts to foster groundbreaking new features providing value for artists and great experiences for music fans; social media stocks slipped after SNAP Q2 daily active users were 238M, below the est. 239M while not providing Q3 view after posting in-line Q2 EPS loss and slightly better revs; TWTR reports tomorrow morning

·     Semiconductors; TXN similar to recent pre-announcements from industry peers, delivered better-than-feared Jun Q results and Sep Q outlook – reported a strong JunQ and guided SepQ well above consensus at up 5% q/q (below seasonal trends of up ~8% q/q); ON was upgraded to buy from neutral at B Riley following the TXN beat and raise as upside shows analog strength in auto and industrial; TER reported a strong Q2 beat along with upward guidance for Q3 as said sees Q3 adjusted EPS $1.01-$1.17 on revenue $745M-$805M vs. est. 64c/$603.16M; AMD shares outperform, trading to all-time record highs after yesterday’s announcement of new Ryzen 4000 and Athlon 3000 processors with built-in Radeon graphics

·     Software movers; CHKP rises to a record high after better Q2 results, reports Q2 adj EPS of $1.58, topped the est. of $1.44 on better revs $506M (est. $488M) saying sales increased across multiple categories, including cloud, endpoint and network security; WORK files EU antitrust complaint against MSFT accusing of violating EU competition law by tying its Teams collaboration software to its widely used Microsoft Office productivity-software suite; JAMF priced its 18M share IPO at $26, significantly higher than the $17-$19 range announced last week, raising about $468 million; MSFT earnings tonight

·     Hardware, Media & Telecom movers; NWSA was upgraded to neutral at JPMorgan following a period of underperformance saying while shares don’t screen particularly cheap at ~14x our F2021 EBITDA, they are mindful that only about $1.5b of market cap is currently being attributed to News Corp’s assets excluding REA; IBM was upgraded to buy from hold with $155 tgt at Argus noting the hybrid cloud business, benefiting from last year’s Redhat acquisition, is accelerating.