Closing Recap

Friday, July 24, 2020

Equity Market Recap

·     U.S. stocks decline throughout the day, closing the busy earnings week on a sour note as the S&P 500 index posted its first back-to-back daily decline in over a month (6/9-6/11), while the Nasdaq dropped for a second day as well, falling to intraday lows of 10,217 (well off Wednesday intraday record high of 10,839) before paring those losses. The Nasdaq Composite posted its first back-to-back session declines in over 2-months (May 12-13th) – while hasn’t seen a 3-day losing streak since March (3/5-3/9) – so Monday will be interesting. Stock futures dropped overnight (following Asia lower) as U.S.-China tensions heightened after China retaliated by ordering the U.S. to close its consulate in the southwestern city of Chengdu, a day after Washington forced Beijing to leave its mission in Houston. The weakness rolled into morning trading along with a sharp decline in technology/semiconductors after Dow component Intel (INTC) plunged following an unexpected production delay that sent Wall Street analysts bailing on the stocks (more than 6 downgrades). This week was busy with earnings – but next week even more in terms of pure volume, along with a heavy hitting day of results on Thursday July 30th with AAPL, AMZN and GOOGL set to report. Gold futures topped the $1,900 an ounce level before settling just below that level, but still set a new all-time high, while oil rose and the dollar sunk (again).

·     In regards to stimulus, Senate Majority Leader Mitch McConnell said Thursday that U.S. Senate Republicans will unveil their proposal next week for a fresh round of coronavirus aid, including more direct payments to Americans and a partial extension of enhanced unemployment benefits. He added that the administration has requested additional time to review the fine details of the proposal. U.S. unemployment benefits expire next week. Also, Fed policy makers will meet next week, although expectations are low for any surprises. On the virus front, the CDC reported 1,113 new deaths due to coronavirus as of yesterday; total now 143,868 deaths vs 142,755 in previous report and reported 72,219 new coronavirus cases as of yesterday; total now 4,024,492 cases vs 3,952,273 in previous report on July 23.

Economic Data

·     US June New Home Sales rose 13.8% to 776K annual rate, above the 700K estimate with strength in the Northeast which rose 89.7%; us June new home supply 4.7 months’ worth at current pace vs. May 5.5 months and the median sale price $329,200, +5.6% from June 2019 ($311,800)

·     IHS Markit July flash composite PMI was at 50.0 (vs 47.9 in June) while the IHS Markit July flash services PMI at 49.6 (vs 47.9 in June)

Commodities

·     Oil prices recovered, settling higher by 22c or 0.54% at $41.29 per barrel, while Brent was up 3c to $43.34 per barrel, swinging between gains and losses as deteriorating U.S.-China relations cast doubt over the demand recovery, but European economic data showed a return to growth. Crude managed a second weekly gain as the news of euro-area growth added to confidence already buoyed by a stimulus agreed on Tuesday.

·     Gold prices advanced for a 6^th consecutive session, up $7.50 or 0.4% to settle at $1,897.50 an ounce and closing above its 2011 all-time highs. The weakness in the dollar (falling to lowest levels since Sept 2018) as well as nervousness around the coronavirus and its impact on global economies has helped fuel the surge in precious metals again this week (silver prices to 6-year highs this week, though slipped late in the week).

Currencies & Treasuries

·     The U.S. dollar fell to 4-month lows against the safe haven Japanese yen (below 105.80), while the euro advanced to a near 2-year high against the buck following stronger EU PMI flash manufacturing data overnight. Risk appetite disappeared today following several fresh concerns including the delay in the stimulus package bill, a spike in virus cases, and ramping U.S.-China tensions. The buck posted its worst weekly performance in more than four months against a basket of currencies.

·     U.S. Treasury yields slipped modestly again on Friday, with the 10-yr little changed at 0.575%, the 2-yr holding 0.14% and the 30-yr down about 1 bps to 1.23% as stocks slipped ahead of next week’s Federal Reserve meeting. The 10-year yield remains at the low-end of a 4-month trading range as markets await another potential round of fiscal aid from Washington to fight the economic fallout from the coronavirus pandemic. The U.S. Treasury will offer $141 billion of two-, five- and seven-year notes next week.

Sector News Breakdown

Consumer

·     Retailers; SKX tgt price raised by several analyst today as sales in China increased 11.5% for Skechers during the quarter, including an ~43% increase in e-commerce sales; toy retailer MAT reported s smaller than expected Q2 EPS loss of 26c and revs of $732M topped views, sending shares higher overnight before pulling back this morning

·     Consumer Staples; in the beverage sector, SAM reported 42% revenue growth (300 bps ahead of Cowen forecast) and an impressive EPS beat on the quarter driven by outsized growth in Truly and raises 2020 EPS to $11.70-$12.70 from $10.70-$11.70; Wells Fargo raised estimates for food retailers (KR, ACI, DLTR, DG, BJ) as a likely difficult fall/winter should drive stronger for longer food at home demand

·     Restaurants; BJRI reports a slight comparable sales beat with a -57.2% mark for Q2 vs. -58.4% consensus. Adjusted EBITDA came in at -$13.7M vs. -$22.2M consensus; BLMN posted a smaller than expected loss of (74c) vs. est. ($1.12) while revs of $578.5M missed the $592M estimate and said combined U.S. comparable restaurant sales in Q2 down 39.4%; TACO shares outperform following its quarterly results

·     Lodging; SunTrust upgraded shares of RLJ in the space this morning, but downgraded DRH, H, HST , and SHO to sell ahead of upcoming earnings for the group (WH Tuesday, PEB, HST on Thursday) saying primary the driver of their downgrade is the belief in a slower than originally anticipated US RevPAR recovery, with urban business and group-centric hotels unfortunately being in the cross hairs of the worst of the pain.

Energy

·     Energy stocks held up better than other sectors, but not much in way of news outside of a handful of earnings results, ahead of a big week of E&P earnings coming up (includes XOM, COP, CVX in majors); SLB slashes 21,000 jobs maid cost cutting efforts and said it expects total Q3 revs to be flat sequentially, with slight uptick in international and flat to low single digits decline in N. America and expect ebitda, operating income to grow and respective margins to expand during Q3 vs. Q2; the weekly Baker Hughes (BKR) rig count showed the weekly oil rig count rose 1 to 181 (first weekly rise for oil rigs since March 13^th), while gas rigs fell -3 to 68 as total count at 251 (12^th straight week of declining rigs)

·     Utilities & Solar; FE said the company is in discussions with U.S. Department of Justice lawyers and will fully cooperate with subpoenas it received in connection to federal racketeering probe over an Ohio law to bail out nuclear reactors; EXC downgraded to Underperform at Mizuho based on a growing likelihood that Exelon will issue equity to bolster its balance sheet

Financials

·     Bank movers; GS has agreed to a $3.9 billion settlement with the government over the multibillion-dollar 1MDB scandal. The deal includes a $2.5 billion cash payout by Goldman and a guarantee by the bank to return at least $1.4 billion in assets linked to 1MDB bonds; JPM was upgraded to buy from neutral at Goldman Sachs with $116 tgt as believe JPM is well positioned to defend short-term returns and sustain its dividend over the next several quarters, as well as having the highest longer term return profile of the large banks; FCFS downgraded to neutral from outperform at Wedbush saying headwinds tied to economic stagnation in SE states of major significance to the company due to the effects of rising cases of COVID-19 are persisting

·     Consumer finance and lending; AXP Q2 revenues both missed consensus views ($7.68B vs. est. $8.13B), while 2Q consolidated provisions for losses rose to $1.6B, up from $861M a year ago, primarily driven by reserve build of $628M; AGNC and NLY were both upgraded to buy from hold ahead of next week’s earnings results, anticipating that the mortgage REITs will generate about 20% total returns through mid-2021 at Deutsche Bank; QFIN and LX drops this week after reports that China is likely to lower the interest rate ceiling protected by law on loans offered by individuals and companies without a lending license from the current 24% to a proposed level of four times the one-year loan prime rate

·     Services; RPAY announced that it had taken its next step toward increasing its focus on business-to-business (B2B) payments with the acquisition of cPayPlus, an accounts payable automation provider with industry concentrations in automotive, property management and field services

Healthcare

·     Pharma movers; sector remained in focus as President Donald Trump signed an executive orders on lowering drug prices this afternoon after Politico reported that the proposal to eliminate rebates from seniors drug plans won’t be among them. Mizuho noted this morning that the orders will likely create an overhang for drug stocks, but it is especially positive for healthcare insurers CI, UNH and CVS given their PBM (pharmacy benefit manager) businesses; AZN’s Breztri Aerosphere has been approved in the US for the maintenance treatment of patients with chronic obstructive pulmonary disease (COPD); ITOS 10.586M share IPO priced at $19.00; NRIX 11M share IPO priced at $19.00

·     Biotech movers; SRPT receives fast track designation for srp-9001 micro-dystrophin gene therapy for the treatment of Duchenne muscular dystrophy (DMD); ANNX 14.75M share IPO priced at $17.00; INZY 7M share IPO priced at $16.00; CVM announced that it has concluded animal experiments using its Leaps Covid 19 conjugate that provide the basis for moving forward into animal challenge studies with live virus SARS-CoV-2; PTE rises after saying its skin regeneration treatment, SkinTE, plus standard of care showed positive results in trial evaluating treatment of diabetic foot ulcers; MRNA falls a second day after losing its patent case yesterday against ABUS, arguing that its patent for the technology used to deliver messenger RNA to a patients’ cells was unpatentable – patent judge found that Moderna had not shown that the claims in the patent were unpatentable

·     Medical equipment and devices; EW shares rose as reported Q2 results that beat consensus on both the top and bottom-lines primarily due to better-than-expected TAVR sales as well as the firm’s Q2 guidance range of $700-900M (TAVR led the charge in Q2, delivering over $100M in upside vs. the Street)

·     Healthcare services and providers; EHTH shares came under pressure as reported strong 2Q20 results that were above consensus and raised its guidance for the year – but increased churn weighed on the shares – as a result of higher churn, the company reported a decline in LTV by 4% y/y and expects a 10% decline in 4Q20

Industrials & Materials

·     Industrial & Machinery; HON Q2 profit estimates beat amid cost controls and higher demand for its warehouse automation equipment saying it saved $500M in Q2 costs – firm raised its 2020 cost savings target to a range of $1.4B-$1.6B from prior $1.1B-$1.3B; Dow Transports were down modestly as airlines (ALK, AAL, LUV) slide a day after disappointing earnings from the group while CAR rallies following a positive analyst call at Deutsche bank; metals and materials lagged given the rising tensions between the U.S. and China.

Technology, Media & Telecom

·     Semiconductors; INTC was downgraded by several Wall Street analysts after the chip maker posted good results and guidance, though the headline for a delay in the launch of 7nm CPU products, a significant concern given long delays at the 10nm node, weighed heavily on shares; AMD rises in reaction to INTC’s announced product delay (7nm shifting by six months), allowing AMD to work toward a 3nm product in/around the same time frame as Intel’s 7nm; SWKS nicely beat both EPS and revenue expectations for Q2 and Q3 guidance driven by the mobile business, which saw strong traction in China with domestic brands (tgt prices raised by analysts); overall semi index rebounded off lows, led by gains in AMD, TSM

·     Software movers; Cowen raised its tgt on ZEN (to $110 from $100) as expect upside to Street’s 13% billings growth in 2Q and we are well above at 20%, SAP (to $150 from $122) after pre-announced a modest beat and maintained guide and NOW (to $465 from $365) as partner work didn’t get overly negative in 1Q so we’re not seeing the same kind of 2Q bounce back; ECOM rises after acquires analytics firm BlueBoard to help brands accelerate growth across retailer websites and marketplaces

·     Media & Telecom movers; Dow component VZ reported a Q2 revenue beat ($30.4B vs. est. $29.95B) while total wireless service revenue of $15.9B fell -1.7% YoY and said Q2 total wireless retail postpaid churn of 0.78%, and retail postpaid phone churn of 0.58%; ENT receives court approval for "first day" motions to support business operations as obtains interim approval to access $30 million of its $80 million debtor-in-possession financing; CMCSA and SBGI announce multi-year content carriage agreement

·     Hardware & Component news; XRX was downgraded from Neutral to Underweight at JPMorgan saying the company faces secular challenges, disruption from COVID-19 and its ability to execute M&A seems constrained for now, so the equity story lacks catalysts