Closing Recap

Monday, March 30, 2020

Equity Market Recap

·     U.S. stocks were broadly higher, led by strong gains in tech as the Nasdaq Composite climbs over 3%, while SmallCaps lagged in comparison as investors and portfolio managers position themselves into the quarter end. The Dow gained over 3% led behind MSFT (up 7%) after the company said it saw a 775% increase in cloud services demand, 220% increase in Skype minutes while JNJ shares jumped 8% after announcing lead COVID-19 vaccine candidate expected to begin trials by September, over $1B dedicated to vaccine development. Energy stocks lagged again, falling after WTI crude fell touched 18-year lows, dipping below $20 per barrel as demand remains weak due to coronavirus. Healthcare companies helped pave the move higher today as the White House extended its social-distancing guidelines through the end of April as President Trump, who had said that he hoped to ease some restrictions by Easter to limit the economic damage listened to health advisers as Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases said U.S. deaths from coronavirus could reach 200,000 with millions of cases. Sectors most leveraged to the impact of the coronavirus “social distancing” and business closures that rallied last week were among the biggest losers as well today including restaurants, casinos, airlines, hotels and cruise lines). The first notable impact to economic data today as the Dallas Fed Manufacturing for March plunged to down -70, worse than the est for down -10 (prior month was up 1.2). The dollar gained across the board, while Treasuries slipped late day after the stock move higher.

Commodities

·     Oil prices tumbled again, with QTI crude sliding $1.42, or 6.6% to settle at a fresh 18-year low of $20.09 per barrel (off earlier lows of $19.27) as coronavirus lockdowns continued throughout the world’s largest economies, leaving the market overwhelmed by cratering demand and a ballooning supply. Gold prices for June settlement declined -$10.90, or 0.7% to settle at $1,643.20 an ounce pressured as U.S. benchmark stock indexes climbed and the dollar rebounded after falling nearly 4% last week in a bout of profit taking.

Currencies & Treasuries

·     The U.S. dollar advanced after falling around 4% last week from prior 3-year highs in what has been a volatile few weeks for global currencies; the buck gained over 1% vs. the euro earlier (dropped around lows 1.101 (off overnight highs 1.163), while the safe haven yen slipped given the rebound is broader stock averages and out of defensive/safe haven assets. Treasury prices reversed gains late day as stocks crept higher, with the 10-year yield still rising about 2 bps on the day to 0.69%, but well off earlier lows of 0.596%.

Sector News Breakdown

Consumer

·     Retailers; retailer ROST, TJX, NKE, ULTA, GOOS, SKX were all upgraded to overweight at Wells Fargo while the firm downgraded ASC, CPRI, GPS, FTCH, DBI while slashing estimates to account for prolonged store closures and a weaker consumer in both the US and Europe/believe it will be shorter in duration than past recessions, setting the group up for a strong 2021 recover; ENR downgraded to Hold and remove from Franchise Pick list at Jefferies saying near-term headwinds likely to lead to a cut (or withdrawal) of ENR’s FY20 guide; among companies pulling guidance due to coronavirus impact uncertainty: SHOO (also suspends dividend and buyback), LZB (furlough 70% of workforce, slash pay for mgmt); KSS (cuts cap-ex, suspends buyback)

·     Consumer Staples; PG, KMB both upgraded to Buy at Jefferies while adjust estimates across staples coverage and lower EPS ests by an average of 5% to reflect the demand impact from COVID-19, FX and more benign commodities/favor HPC over Beverages given the tailwinds from pantry-loading/defensive portfolios; MDLZ was upgraded to buy at Stifel as find the pullback in the shares quite intriguing for a best-in-class Consumer Staples business that has experienced an acceleration in growth; CALM posted a Q4 EP and sales beat

·     Casino & Leisure movers; in gaming, NY Post reported casino regulators are delaying a review of the casino industry merger between ERI and CZR in a development that is seen raising the odds that the deal is ultimately scuttled as Vegas stays dark for the near future; GLPI reached agreements to acquire real estate assets of the Tropicana Las Vegas hotel and casino and the land from PENN for $337.5M; in lodging, RBC downgraded MAR, HLT to sector perform saying they are incrementally concerned that some owners will struggle to deal with the sharp decline in lodging demand, while Jefferies upgraded HST, SHO to buy as maintaining the impact of a 15% decline in RevPAR for 1Q20, a decline of 70%-75% in 2Q20, down 30-35% in 3Q20 and down 5% to flat in 4Q but believe the most conservative balance sheets should be owned across the cycle

·     Auto sector; two analyst calls for the beaten up sector as APTV, ALV, LEA were downgraded at Evercore ISI while prefers MGA saying the group is expected to move through a distinct five stages of grief and recovery over the next 18 months; Morgan Stanley upgraded APTV (only overweight) and MGA to EW while downgraded AXL, BWA, LEA, and TEN

Energy

·     Energy stocks with another dreadful day of returns, as the sector suffered following another early collapse in energy prices, with WTI crude falling below $20 per barrel as coronavirus lockdowns continued throughout the world’s largest economies, leaving the market overwhelmed by cratering demand and a ballooning supply; DVN cut its capital expenditure forecast for the full year to $1B from prior view $1.75B-$1.85B; in refiners, PSX was upgraded to Outperform at RBC Capital saying 2020 is shaping up to be the most dislocated petroleum market in decades, and Phillips 66’s extensive" logistics and marketing network has historically allowed them to take advantage of dislocations better than peer; utility stocks advanced early as Treasury yields resumed downward momentum

Financials

·     Bank movers; European banks dropped (CS, DB, UBS) to pace a broader sector retreat after the chief regulator for the region recommended no dividend payments be made until the autumn; ABN Amro (AAVMY) the first to do so, saying will not pay interim dividend in August while said expects to record a loss in Q1; JEF  announced that Jefferies Group CFO Peg Broadbent has died from coronavirus complications; MS said to have won U.S. antitrust approval for its $13B acquisition of ETFC, Bloomberg reported late Friday; in investment mgmt, KBW Inc. upgraded HLNE to MP and downgraded BAM to MP as FRE estimates declined modestly largely due to do an expected deceleration in the timing of new fundraising, coupled with modest management fee sensitivity to market value adjustments

·     REITs; RWT delays the payment date for its previously declared 32c stock dividend for Q1 to June 12 from the original date of March 30; TCO said this weekend that “Landlord’s obligation to pay its lenders, utility companies, insurance companies and the like, to ensure the safety and security of the building and maintain the appropriate level of operations, remains; CDR slashes dividend to 1c from 5c and cuts its cap-ex spending

·     Finance and Lending services; mortgage lending names ESNT, MTG, OCN, NRZ, RDN decline along with homebuilders (MHO, TOL, LGIH, MTH) as the extension of coronavirus restrictions until the end of April may be adding to investors’ worries about unemployment, which may in turn be pushing down housing-related stocks 

Healthcare

·     Pharma movers; JNJ announces lead vaccine candidate for covid-19/expects to initiate phase 1 human clinical studies Covid-19 vaccine candidate by September 2020 at latest/to commit over $1B to vaccine research & development; on the heels of the U.S. Department of Health and Human Services acceptance of 30M doses of hydroxychloroquine from NVS and 1M doses of chloroquine from BAYRY, the FDA has signed off on Emergency Use Authorization of the meds to treat COVID-19; AXSM slides as phase III trial in treatment resistant depression on AXS-05 did not reach statistical significance on the Week 6 primary endpoint on Montgomery-Åsberg Depression Rating Scale; AZN said that trials for its diabetes drug Farxiga in patients with chronic kidney disease were stopped early based on its determination of overwhelming efficacy

·     Biotech movers; AMGN was upgraded to Outperform from Market Perform with a $255 price target at Raymond James saying the company already provided conservative guidance for 2020 during the Q4 earnings call, and disruption from virus should not be outsized relative to peers

·     Medical equipment and devices; ABT unveiled a coronavirus test that can tell if someone is infected in as little as five minutes, and is so small and portable it can be used in almost any health-care setting; EW has temporarily suspended new enrollment in its active pivotal studies of transcatheter mitral and tricuspid therapies citing urgent COVID-19 responses around the globe; said enrollment will resume after consulting with each investigator and hospital after COVID-19 pressures subside; MDT announced positive results from a 331-subject pivotal clinical trial, SPYRAL HTN-OFF MED, evaluating Breakthrough Device-tagged Symplicity Spyral Renal Denervation System in patients with uncontrolled high blood pressure who were not taking antihypertensive medications

·     Healthcare services and providers; OMI jumps after the medical supplies distributor affirmed its 2020 guidance for earnings and predicted double-digit earnings growth beyond this year; drug distributors and services were among the best gains in the S&P with strong returns from MCK, ABC and CAH as well as CI

Industrials & Materials

·     Waste sector; RSG was upgraded to overweight at JPMorgan as think solid waste should be a core holding in a portfolio as waste companies generate steady margins and positive FCF even in a market downturn; SRCL was also upgrade at Baird in waste space citing Friday’s disclosure that Saddle Point Management has taken a stake in SRCL, as firm now believes the strategic changes needed to "Make Stericycle Great Again" will be pursued

·     Aerospace & Defense; NOC was upgraded to outperform from market perform at Bernstein and cut tgt to $386 from $438 as has a positive view of the company’s long-term position, with high exposure to Department of Defense budget growth areas.

·     Transports; airlines (AAL, DAL, UAL) and cruise lines (CCL, NCLH, RCL) giving back much of its recent rallies, back under significant pressure as markets focus on the impact of the coronavirus on travel and business, with President Trump extending his “social distancing” timeframe to April 30^th over the weekend – another lost month of revenues for the hard hit industries

·     Metals & Materials; steel stocks saw outperformance with gains in NUE, STLD and CMC, while industrial metals such as copper (FCX) and aluminum (AA) fell; IP strikes a deal to sell its Brazilian corrugated packaging business to Klabin S.A. for $330M Brazilian reals, with R$280 million to be paid at closing and R$50 million one year.

Technology, Media & Telecom

·     Internet; GOOGL was upgraded to outperform at BMO Capital with an unchanged $1,400 price target as sees the company among the mega-cap beneficiaries upon a rebound given its greater exposure to large enterprises, the demand for its YouTube Subscription businesses; ETSY estimates for ’20/’21 GMS and EBITDA at Morgan Staley and cut tgt to $30 and now model -4%/+15% ’20/’21 core GMS growth/yet, ETSY does not appear to be pricing in this economic scenario with the stock having outperformed the S&P by 800 bps YTD

·     Semiconductors; ASML lowers guidance as now expects Q1 revenue between 2.4B-2.5B euros ($2.67B-$2.78B) compared with previous guidance of EUR3.1B-EU3.3B and gross margin to be between 45% and 46%, lower than its previous expectation of between 46% and 47%

·     Software movers; MSFT rises after saying this weekend it sees 775% jump in cloud services demand during coronavirus outbreak; video game names ATVI, EA, TTWO among early gainers as well following stay at home orders around the globe – increased playing; ADSK shares among the top gainers in the S&P 500 today

·     Media & Telecom movers; TGNA said it received four unsolicited acquisition proposals in recent weeks and "engaged substantially" with two of them/said those two parties made proposals shortly before the recent market dislocation due to the Covid-19 pandemic and both told Tegna they’re ending talks; CRTO upgraded to outperform at BMO saying it’s not a call about fundamentals but about valuation of tangible assets (mostly cash) versus the current stock price (at $7.87, CRTO is trading below Tangible Book Value/share of $9.81 – $6.48 of cash); VIAC withdrew its prior FY20 outlook due to the coronavirus (tgt cut to $20 from $50 at Needham)