Closing Recap

Tuesday, March 24, 2020

Equity Market Recap

·     U.S. stocks posted strong returns on Tuesday, with the Dow rising as much as 11% late day as investors remain anxious about the $2 trillion stimulus package to help the economy they have been promised, but yet to see out of Washington as the two sides continue to squabble over details. President Trump also made several comments today trying to boost market sentiment including holding a call with financial institutions to discuss the coronavirus impact on the economy, discussing markets, the Fed and reopening (he mentioned he hopes to reopen the country by Easter), while coronavirus cases near 400K globally. Gold prices jumped nearly 6% for a second day, the dollar slipped and Treasury prices edged higher. There appears to be easing signs of liquidation stress in the financial markets (as of now) due to the several announcements and programs the Federal Reserve instituted over the last few weeks, including yesterday when the Fed said it would buy an unlimited number of Treasuries and mortgage-backed securities, starting with $125B every business day this week.

·     President Trump tweeted this morning “Our people want to return to work. They will practice Social Distancing and all else, and seniors will be watched over protectively & lovingly. We can do two things together. THE CURE CANNOT BE WORSE (by far) THAN THE PROBLEM! Congress MUST ACT NOW. We will come back strong!” The comment helped market sentiment on hopes that businesses may soon see the light at the end of the tunnel to re-open and function normally. Later in the afternoon, CNBC reported President Donald Trump and Vice President Mike Pence held a call to discuss the coronavirus impact on the economy. The call came earlier on Tuesday, before Trump said that he’d like to see the U.S. economy "reopen" by Easter, less than three weeks away. "We’re opening up this incredible country. Because we have to do that. I would love to have it open by Easter," Trump said.

·     Regarding the coronavirus Covid-19, reports this morning noted new cases and deaths dropped for two days in Italy. “It means it took Italy 43 days from first case to peak case and 12 days after implementing the strictest travel restrictions. Note 43 days was exactly the same amount of time as it took South Korea to reach its apex. And if such is the case, the U.S. would be 14 days behind Italy. However this afternoon, in its most recent tally, Italy reported it had 5,249 new coronavirus cases, vs, 4,789 Monday also has 743 new deaths from coronavirus vs 601 Monday (so not helping prior report of slowing cases) – the headlines took a little steam out of the market rally.

·     The latest tally of global COVID-19 cases (Johns Hopkins Case Tracker) is 398,107 (+36K from yesterday) with 17,454 death (+1,959). China: 81,591 cases (+95 prior) with 3,281 deaths (+7), Italy: 63,927 (+4,789)/6,077 (+601), U.S.: 46,805 (+5,844)/593 (+108), Spain: 39,676 (+6,587)/2,696 (+490) and Germany: 31,370 cases with 133 deaths.

·     Overseas markets very strong as Europe’s Stoxx 600 index gained 7.5%, its biggest gain since late-2008 while Germany’s DAX index jumped 10.1%, its biggest gain since 2008 followed by the UK FTSE 100 rising 7.5%, its biggest gain since 2008 along with 7% gains for France, Italy and Spain’s main indices. In Asia overnight, The Nikkei Index surged 1,204 points (7.13%) to move back above the 18,000 level, the Shanghai Index rose 62 points (2.3%) to close at 2,722 and the Hang Seng Index jumped 967 points (4.4%) to settle at 22,663.

Economic Data

·     U.S. March HIS Markit factory PMI at 49.2, the lowest since 2009 while the Markit services index falls to record low 39.1. Followed weak PMI data overseas overnight as the flash U.K. composite purchasing managers index fell in March to a survey low of 37.1 from 53 in February, and the services index plunged to a record low 35.7 from 53.2

·     New Home Sales data for Feb reported at down -4.4% to 765K which was still above estimates for down -1.8% to 750K after prior month upwardly revised to 800K from 764K; the median new home price rose 7.8% YoY to $345,900 and average selling price at $403,800

·     Richmond Fed Manufacturing Survey posted a surprise rise of 2, well above the expected reading for a decline of -13 as shipments rose to 13 after 1 the prior month and new order volume increased to 0 after -10 the prior month; order backlogs fell to -8 after -6 the prior month

Commodities

·     Oil prices advanced late session after turning negative midday, with Nymex crude rising 65c or 2.8% to settle at $24.01 per barrel, rising on hopes that President Trump will reopen the country hopefully by April as per his comments today, which could help spur demand. Gold prices made it a second straight day of massive gains, jumping nearly 6% or $93.20 an ounce, settling at $1,660.80 an ounce (after surged $83 or 5.6% to settle at $1,567.60 an ounce yesterday) in a bounce back after recent selling pressure. Much of last week declines in gold came on a dollar bounce and likely forced selling pressure to raise cash for margin calls, not to mention the incredible stimulus from the Fed being inflationary.

Currencies & Treasuries

·     The U.S. dollar was lower, but bounced finished off the worst levels, rising against the safe-haven Japanese yen which touched one-month highs of 111.63 earlier. The euro and British Pound gained against the buck after large losses last week. Treasury prices jumped late day as yields slipped off highs to 0.81% (off highs 0.89%). The U.S. Treasury sold $40B of 2-year notes at a yield of 0.398% vs. 0.39% pre-sale when issued, with the bid-to-cover (demand) at 2.36 vs. 2.45 prior and indirect bidders awarded 55.2% of the auction.

Sector News Breakdown

Consumer

·     Retailers; amidst being one of the worst performing sectors during the recent market sell-off as the virus impact forces store closures, retailers bounced on the day; LB shares jumped the most in 30-years after Melvin Capital 13G filing revealed a 5.1% stake in the company; Cowen downgraded shares of GIII and GES while upgraded ELY as they model NAm and Europe sales declines in the 50%-95% range in March-May periods; DECK was upgraded to Outperform from Neutral at Wedbush saying conversations with mgmt give them confidence that its business model should be able to weather the current global economic shock with notably less sales & earnings pressure than peers, supported by a solid balance sheet & compelling valuation; JWN was the latest retailer to suspend its dividend and pull guidance; AEO was downgraded at Davidson as believe amidst the COVID-19 outbreak, AEO is more exposed to brick and mortar with over 1,000 stores at the end of FY19, the company is not as geographically diverse

·     Consumer Staples & Restaurants; badly beaten up restaurant stocks, with many of them down over 50% the last few weeks due to store closures, saw another nice rebound today (BJRI, CAKE, CBRL, RRGB, TXRH, DRI, EAT, PLAY among them; defensive consumer staples/food (CLX, CHD, CPB, CAG) and grocers (KR, SPTN), names that have outperformed while broader stocks markets tumbled on coronavirus impact fears drastically underperformed markets today; KMB shares bounced after touching 52-week lows earlier today

·     Casino & Leisure movers; there have been several sectors hit very hard during this virus outbreak, shutting own travel, businesses and keeping people home from work, but among the hardest likely to be hit were cruise lines, airlines and leisure/gaming companies due to the lost revenue and time it will take for people to feel comfortable in large venues again – but those were among the best performing sectors today (RCL, CCL, WYNN, MGM)

·     Auto sector; GM said it draws down $16B from credit lines to stock up on cash while suspends year outlook; Ford (F) works with MMM to increase production of respirators and ventilators; in research, TSLA was upgraded to neutral from sell at UBS, while the firm downgraded Ford to sell with $4.30 tgt while Argus downgraded TSLA to hold as expect the coronavirus pandemic to have a negative impact on vehicle deliveries; KeyBanc upgraded auto supplier MGA to overweight with $40 tgt based on our comfort even in a 30% downside earnings scenario vs. our already heavily-cut estimates, while firm overall substantially lowering numbers across coverage to reflect our best assessment of the pandemic’s global outcome/forecasting 2020 LV production to decline 13% y/y (from -4%)

Energy

·     More oil companies cutting cap-ex, making changes in response to lower global demand for oil; CVX announces 20% cut to capex, lowering by $4B to $16B while expects 2020 production to be roughly flat relative to 2019 and suspends $5B annual share repurchase program suspended after repurchasing $1.75B of shares during Q1; SU cut its 2020 capex and production outlook and suspends share buybacks for the year, as sees spending lower by C$1.5B (a decrease of 26% compared to the midpoint of the previous forecast, while lower its 2020 production outlook by ~7% to 740K-780K boe/day; LPI reduced its 2020 capital budget 36% to $290M from $450M and said Feb. 26 guidance can no longer be relied upon; expects ~$90m in free cash flow, excluding non-budgeted acquisitions, for 2020; PDS guidance for the year missed the lowest analyst estimate as sees FY capital expenditure C$48M, down from prior C$95M view; SLB cuts 2020 capex by 30%, sees rapid slowdown in oilfield activity

·     Refiner sector; group has been pressured and Raymond James downgraded DK, MPC, and PBF today saying while the global outlook and response to the COVID-19 crisis changes by the minute, one thing is clear: Refining margins will suffer for the foreseeable future. Even very wide crude discounts coming from the Saudi-Russia price war are unlikely to offset the near-term crushing blows of collapsing gasoline/jet demand (said expect global refiners to cut throughput meaningfully – nearly ~10M bpd base case – in response to lower cracks); PSX cuts its 2020 consolidated capital spending to $3.1B and suspends share buyback while secures new $1B, 364-day term loan facility

Financials

·     Bank movers; Goldman Sachs readjusted its capital market ratings changes following the prospect of a deep recession and uncertainty over downside risks compounded by liquidity challenges as they upgraded stocks with more resilient earnings such as BK (upgraded to buy) and ICE (added to conviction buy list) or those with significantly discounted valuations such as APO, KKR, LPLA (added to CL), while also upgraded MKTX to neutral from sell saying it is uniquely positioned to benefit from a sustained volatility in credit markets – on the flip side they recommend avoiding shares of JHG as well as TROW and RJF (both downgraded to sell) saying revenue, margin and earnings declines amid deteriorating markets and risks of rising outflows are not captured and also cuts NTRS rating– overall, trims 2020 EPS estimates for alternative managers by 27%, traditional managers by 24%, retail brokers by 15%, and trust banks by 12%

·     Mortgage finance; NYMT said it doesn’t expect to fund future margin calls; received margin calls from repurchase agreement financing counterparties over the past week after the turmoil in the financial markets resulting from the global coronavirus pandemic; IVR enters into forbearance talks with its financing counterparties after being unable to meet margin calls yesterday/to preserve liquidity, Invesco Mortgage will delay the payment of its previously announced dividend

·     Consumer finance; MA suspends annual outlook in response to COVID-19, even as "long-term fundamentals of our business remain strong as notes the deterioration in cross-border, switched volume and switched transaction metrics, despite service line revenues holding up "reasonably well/sees 1Q net rev. growth in low single digits, sees currency impact as 2% headwind

Healthcare

·     Pharma & Biotech movers; MIST shares plunge as the primary endpoint miss in intranasal etripamil Phase 3 NODE-301 trial in paroxysmal supraventricular tachycardia comes as a disappointment, prompting a downgrade at Oppenheimer; NVAX rises after saying its NanoFlu treatment for seasonal flu achieved all primary endpoints in a phase 3 trial for adults 65 an older/NanoFlu was well tolerated and had a safety profile comparable to Fluzone Quadrivalent; CTMX rises after saying it and a collaboration agreement with Astellas Pharma aimed at the discovery, research, development and commercialization of novel T-cell engaging bispecific antibodies targeting CD3 and tumor cell surface antigens for the treatment of cancer (Wedbush upgraded shares on news); PRVL said the FDA granted Fast Track Designation for PR006 to slow the progression of frontotemporal dementia with a GRN mutation; GILD said its remdesivir granted orphan designation by the FDA as treatment of COVID-19; MYL shares fell after FDA warns of some Epipen auto injector errors

·     Medical equipment, devices and services; DGX, LH shares active after CNBC reported two large US private labs say they could soon process 300,000 coronavirus tests per week; TDOC announced it experienced a 50% increase in week-over-week visit volumes the week of March 9th due to the coronavirus with total medical visits for the week reaching ~100k; in managed care, CI was upgraded to strong buy at Raymond James and adding it as Analyst Current Favorite as think that CI is uniquely positioned among its managed-care peers with 70% of its lives in an ASO model and nearly 40% of earnings from its PBM

Industrials & Materials

·     Transports; overall transport index outperformed on hopes the bailout/stimulus deal will help the industry; the IATA said today that airlines (AAL, DAL, LUV, UAL) could lose $252B in 2020 sales due to the virus and that carriers will run out of cash before any recovery comes amid fallout from the coronavirus pandemic; rental cars rally a second day (CAR, HTZ) as well as airlines after getting crushed over the last few weeks on travel restrictions

·     Metals & Materials; steel sector active as KeyBanc materially reduced EPS estimates and price targets across the carbon steel group on stronger deflation (steel, scrap, oil) and materially weaker near-term U.S. demand via the COVID-19, but upgraded STLD to Overweight on and said sector sentiment is likely to bottom with Chinese steel prices, global demand, and oil in late 2Q20; gold miners extend gains with gold surging a second day (AEM, AUY, NEM, GOLD)

Technology, Media & Telecom

·     Internet; group rallied along with broader markets; TWTR said while the near-term financial impact of this pandemic is rapidly evolving and difficult to measure, based on current visibility, the company expects Q1 revenue to be down slightly on a year-over-year basis; SPOT upgraded to market perform at Bernstein citing valuation with shares down more than 25% from a January high saying it isn’t "perfectly insulated" from the impact of the coronavirus or a recession, but doesn’t think that "current conditions will significantly alter the growth of streaming music

·     Semiconductors; INTC suspends stock buybacks; MLNX shares advanced after a report from DealReporter said China’s State Administration for Market Regulation’s Antimonopoly Bureau has recently finalized remedy negotiations with NVDA regarding its proposed acquisition of the company; NVDA was upgraded to buy from hold at Needham saying investors should favor companies with superior balance sheets and robust free cash flow in an uncertain economic time; Goldman Sachs made a few changes in space, upgrading shares of INTC and XLNX while downgraded TXN KeyBanc said they believe near-term demand for DRAM, NAND, and HDD remains relatively strong, with DRAM pricing likely to move meaningfully higher in C2Q based on contract price trends – but anticipate further supply chain disruption and demand erosion as COVID-19 disrupts global economies prompting estimate cuts for MU, WDC, STX and SIMO; AMAT withdrew 2Q guide on Covid 19 concerns which is similar to LRCX and others as well

·     Software movers; broad rebound in the software sector with overall market; NOW was upgraded to overweight and $330 tgt at Wells Fargo as believe its broad applicability and deep understanding of automation, management, and improvement of enterprise workflows offer a long organic runway for the company as a "platform of platforms"; CMCM shares declined following weaker Q4 results as posted EPS loss vs. 81c profit a year ago and revs falling 56% YoY; TEAM was added as top pick at Oppenheimer saying it offers a combination of characteristics that attractively positions it to weather near-term disruption, as well as exit the downturn as a more strategic vendor

·     Media & Telecom movers; LYV shares rally after Citigroup upgraded to neutral from sell after shares have fallen over 50% in the last month and given the sharp decline in LYV’s share price, valuation is increasingly attractive (though warn COVID-19 uncertainty is apt to remain an overhang on LYV’s equity); CMCSA launched a four-part $4B deft offering as warned could see material adverse impact in near term due to virus; also its NBC unit has a $1B schedule hole to fill as the Olympics was postponed to 2021