Closing Recap

Friday, March 20, 2020

Equity Market Recap

·     U.S. stocks end lower, with major averages selling off into weekend amid fears headlines will show another significant spike in coronavirus cases and deaths as countries go on lockdown around the world in hopes to contain the outbreak from spreading further. All three stock benchmarks posted their worst weekly declines since the 2008 financial crisis as business and personal activity came to a halt this week, including today New York mandating that all non-essential workers in the city were to stay home starting next week. Oil prices gave back a big portion of yesterday’s gains as energy stocks endured another rough week of returns. Hopes returned briefly this week as central banks rolled out their most substantial stimulus measures since the 2008 financial crisis this week (Fed and ECB with QE measures of over $700B, cutting rates and adding liquidity to markets to avoid a freeze in credit markets) and the government announced various measures to help small businesses and employees that are most directly affected by the mandatory lockdowns. The U.S. dollar posted gains of nearly 4% on the week, rising against all major currencies, while gold dropped 2% on the week and oil prices plunged 29% as commodities felt the impact of the virus as well. Several of the hardest hit industries such as airlines, autos, cruise lines, casinos, restaurants and retailers saw bounces earlier today before giving back some of those gains into the bell.

Coronavirus updates

·     U.S. CDC reports its count of 15,268 cases of new coronavirus as of previous day at 4:00 PM vs. previous report of 10,491 cases on March 19^th. COVID-19 is surging in Spain, where there were 199 deaths within 24 hours. Spain has nearly 20,000 confirmed cases of coronavirus, surpassing Iran’s latest figures to become the third-highest in the world behind Italy and China. German coronavirus cases rise to 18,607 from 15,218. Italy reports 47,021 total coronavirus cases from 41,035 and record 627 coronavirus deaths, leading to 4,032 total.

Commodities

·     Oil price ended the day and week lower, as Nymex crude dropped -$2.69 or 10.6% lower (near worst levels of the day) and end the week with a 29% decline, as traders position into the long weekend following a 24% bounce yesterday, its biggest one day jump ever. Prices have been sunk by surging global supply (though many companies the last 2-weeks cutting cap-ex and production due to price decline and rig counts fell this week as per Baker Hughes) and plunging demand due to the impact of the coronavirus on travel and industries, coupled with the escalating price war between Saudi Arabia and Russia after Saudi flooded the market with oil, punishing prices in response. The WSJ reported that U.S. oil cuts could lead to Saudi-Russian ceasefire on prices later this year; U.S. shale companies complained to OPEC about falling oil prices. Gold prices end the day higher by $5.30 or 0.4% to settle at $1,484.60 an ounce (well off earlier highs above $1,519 an ounce), but for the week logged a loss of just over 2% following the surge in the U.S. dollar.

Currencies & Treasuries

·     Treasury prices resumed strength as Treasury yields sold-off all session, with the 10-year yield taking another leg lower in the afternoon, falling over 21 bps to 0.93% (overnight highs 1.11% though range of 1.27% high on 3/18 and low of 0.62% on 3/16). The dollar index (DXY) dipped earlier to lows around 101 before recovering around 102.50, near best levels since April 2017. The rebound in the buck came as profit taking ensued in the British Pound, which rose over 3% earlier (highs 1.1934) before giving back gains to around 1.1625 late afternoon (after having posted massive gains over the last two weeks). The euro and Japanese yen slipped vs. the buck which saw a near 4% spike on the week. Bitcoin prices rise today above $6,900, highs of the week and off lows $3,914 last Friday (but still down from levels above $8,000 last week).

Economic Data and News

·     The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced a coordinated action to further enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements

·     The Fed approved the expansion of the Money Market Mutual Fund Liquidity Facility to include municipal securities. Steve Mnuchin noted that this will create additional liquidity to support the states and municipalities.

·     President Trump said today the Education Dept wont enforce standard test requirements; says student loan payments can be suspended for 60-days; waive interest on Fed student loans

·     Existing-home sales for February rose 6.5% at 5.77M vs. est. 5.51M while January was revised to 5.42M vs. est. 5.46M; there were 3.1 months’ supply in Feb. vs. 3.1 in January; median home price rose 8% from last year to $270,100

Sector News Breakdown

Consumer

·     Retailers; KSS suspends dividend and buybacks, withdraws Q1 & FY20 guidance; confirms to close all stores nationwide through at least April 1^st; LULU, ROST, ULTA were all upgraded to buy from neutral at Citigroup saying believe it is time to take some swings on companies where long term earnings power is intact that we believe are going to come out of this even stronger on the other side; HIBB mixed quarter as Q4 adj EPS missed on better revenue; OLLI was downgraded to hold from buy at Loop Capital and slashed tgt to $33 (prefers DG or FIVE after missed consensus expectations for the second time in the past three quarters; NKE upgraded to buy at Banc America saying as believes current global athletic momentum favors Nike in both footwear and apparel; ROST closes all its stores (following suits of many other retailers this week); SFIX closes two distribution centers; GME downgraded at Wedbush given the significant headwinds that GameStop faces from coronavirus and the challenging current-gen video game retail marketplace; KeyBanc upgraded DLTR to overweight and downgraded BBBY as turnaround / reorg the market is hoping for is not going to happen in this kind of retail market; TGT said raising pay by $2 an hour for workers until at least May 2nd

·     Consumer Staples; MO Chairman and CEO Howard Willard has contracted the coronavirus and is taking temporary leave and Vice Chairman and CFO William Gifford will assume his duties; COTY said it sees 3Q net revenues to decline roughly 20% like-for-like, with a meaningful impact on profit; in beverages, TAP upgraded at Jefferies predicated on contraction in on-premise now reasonably discounted in shares at <8x EV/EBITDA and new CMO driving improvement in big brands; PEP, STZ, TAP and MNST were all upgraded at Guggenheim; TSN and SAFM both upgraded at JPMorgan as it observes enough meat flying off retail shelves to more than offset the drops in the foodservice business; KO shares 52-week lows today in the Dow

·     Restaurants; BLMN dropped after saying it has a cash position of over $400 million after drawing down substantially all of its revolving credit facility, while suspended the quarterly cash dividend; withdraws guidance for 2020; SHAK was downgraded to neutral from buy at Goldman Sachs as believe traffic is likely to weaken in the core of the business beyond current investor expectations, while upgraded DRI to neutral as were encouraged to hear that off premise was growing 20% wow as a potential offset to the 70%-plus nationwide declines they are seeing today in dine-in traffic

·     Casino & Leisure movers; casino stocks were among the top gainers in the S&P early (MGM, WYNN) as the demolished group trying to recover as the industry faces a halt of business in Las Vegas for the next few weeks; SEAS was upgraded to neutral at Citigroup though cut its tgt to $9 from $27 as expect it will require an additional $50M of liquidity, but may be able to increase its revolver capacity by an additional $227 million based on 10-K commentary; in cruise lines, CCL jumps as Q1 adj EPS 22c on revs $4.8B vs. est. 13c and $4.61B; though warned advanced bookings for the remainder of the year are meaningfully lower than the prior year; privately held AirBnB said

·     Auto sector; TSLA said late Thursday it will temporarily halt production at its Fremont, Calif., auto factory and its solar-panel factory in Buffalo, N.Y., amid efforts to limit the spread of the novel coronavirus; UBER was upgraded to overweight with $41 tgt at Wells Fargo as think shares are attractively priced and value remains tied to growth trends that will play out long after coronavirus-driven disruptions have subsided; trade groups representing the U.S. auto industry are urging top lawmakers to consider several forms of tax relief and to delay the USMCA trade agreements start date amid the coronavirus fallout.

Energy

·     Energy stocks have been beaten down to levels not seen in years for many majors, services, equipment and E&P names given the weekly plunge that saw prices drop to lowest levels since 2002 before bouncing since as the industry has been pummeled with bad news after bad news. Prices have been sunk by surging global supply (though many companies the last 2-weeks cutting cap-ex and production due to price decline) and plunging demand due to the impact of the coronavirus on travel and industries, coupled with the escalating price war between Saudi Arabia and Russia after Saudi flooded the market with oil, punishing prices in response to Russia not agreeing to a production cut a few weeks back at the OPEC+ meeting.

·     Oil stock news; many analysts continue to adjust models (estimates, targets and ratings) in response to recent market actions; today, Wells Fargo upgraded MUR to overweight as believe can navigate in this turbulent market while downgraded OXY to underweight to reflect what we see as going concern risks (with a 2020E Debt/EBITDA ratio approaching 7.0x) as debt is trading as distressed levels; Baker Hughes weekly rig count showed total rigs fell to 722 rigs

Financials

·     Banks; fears of liquidity issues and credit market disruption due to the heavy need of companies to access credit lines/cash to stabilize businesses putting pressures on banks at this time in a week where several large cap banks halted stock buybacks to make cash available; tax preparers HRB and INTU fell after the IRS said it was pushing back its deadline to file tax returns to July 15.

·     Insurance; RBC Capital downgraded a handful of insurers (AEL, ATH, EQH, LNC, PRU, RGA, UNM to Sector Perform to reflect macroeconomic impacts, reflecting the challenging interest rate and spread environment/expect annuity sales to remain under pressure over the next several quarters before stabilizing into 2021

·     Consumer finance and lending; seeing mortgage REITs active (MFA, NLY, AGNC, TWO) after the New York Fed last night said it was planning to buy $32B in MBS today to help smooth functioning of the agency MBS market/which is part of the Fed’s recently-announced QE, which included $200B of MBS buys

Healthcare

·     Pharma movers; MYL shares active on headlines has restarted production of hydroxychloroquine sulfate tablets at its West Virginia facility in order to meet COVID-19-related demand, although it is not formerly approved for this use; LXRX falls after saying it will shut down two long-term outcomes trials, SCORED and SOLOIST, designed support the use of Zynquista (sotagliflozin) for chronic kidney disease and heart failure citing dim prospects of a near-term partnership to provide funding and uncertainties related to the COVID-19 outbreak

·     Biotech movers; GILD was upgraded to overweight from neutral at Piper and raise tgt to $90 from $70 as believe remdesivir will be approved by the FDA very soon, which should lead to continued outperformance; MRNA, INO shares were active after CBS “60 Minutes” promoted a Sunday night episode on development of vaccines for Covid-19

·     Medical equipment and devices; GNMK shares jumped in reaction to the FDA’s issuance of Emergency Use Authorization for its qualitative (yes or no answer) ePlex SARS-CoV-2 Test; OSUR said it is actively engaged with several labs and researchers to demonstrate the effectiveness of its existing medical devices for coronavirus sample collection

·     Healthcare services and providers; SDC shares active saying it is one of the largest 3D printing manufacturers in the U.S., and as a result has opened its manufacturing facility to partner with medical supply companies and health organizations to increase production of medical supplies necessary to combat the COVID-19 pandemic; CAH was upgraded to buy from underperform at Bank America noting an undemanding valuation and added that drug distributors are one of the subgroups we see as best positioned to manage through the COVID-19 outbreak; UNH was upgraded to buy from hold at Deutsche Bank after pullback in shares

Industrials & Materials

·     Industrial & Machinery; MTZ announced $150M share buyback last night and says ends quarter with about $900M in liquidity; FLR said it received a notice from the NYSE indicating that the company is not in compliance with listing as a result of its failure to timely file its Annual Report on Form 10-K for the year ended December 31, 2019 with the SEC; CNHI announces two week suspension of its assembly operations in Europe in response to the COVID-19

·     Transports; car rental stocks HTZ and CAR shares bounce after asking the Treasury Department to include their industry in federal plans to rescue travel companies ravaged by the coronavirus; in airlines, HA said it expects March revenue to down at least 25% from a year ago, and April revenue to be down over 50%, as a result of reduced demand related to the COVID-19 pandemic; in truckers, ARCB and ODFL both upgraded at Stifel; airlines rallied behind UAL as Bloomberg reported Apollo buys part of $2B loan from group of banks

·     Metals & Materials; U.S. Steel (X) said it sees Q1 adj Ebitda $30M vs. est. $43.1M and Q1 EPS loss about 80c vs. est. loss (89c) – follows better guidance from NUE yesterday in steel sector; RPM said it sees Q3 results at the higher end of prior guidance

Technology, Media & Telecom

·     Internet; SNAP was upgraded to Overweight at Wells Fargo noting shares are down nearly 44% this year, creating an attractive entry point for long-term investors with limited exposure to small and medium businesses and lower international exposure

·     Semiconductors; LRCX was upgraded to buy at Mizuho calling it the #1 supplier of etch equipment, the largest WFE segment, which should benefit from the move to 96-layer NAND and 7nm logic with higher aspect ratios; SYNA downgraded to underweight at JPM and trimming near term estimates and cutting our assigned multiple closer to historical averages to reflect the near term COVID-19 headwinds, and uncertainty around future integrated touch business in 2021

·     Software movers; CRWD shares jump after reported a very strong quarter, as total ARR growth of 92% Y/Y beat the Street’s +79% estimate and also initiated FY21 revenue guidance that was better than expected, while reiterating non-GAAP operating income breakeven by F4Q21; SAP was upgraded to overweight at Morgan Stanley as believe will continue to benefit from its restructuring programme in FY20 and we think it still has considerable flexibility on cost; ORCL was upgraded to overweight at JPMorgan with the stock essentially flat lining since mid-June 2015 through yesterday, while the IGV index returned ~90%, MSFT returned >200%, CRM returned >85% and WDAY returned ~60%