Closing Recap

Wednesday, May 13, 2020

Equity Market Recap

·     U.S. stocks tumbled on Wednesday as a cautious outlook from hedge fund manager David Tepper, fears about a second wave of coronavirus infections and warnings from Federal Reserve Chairman Jerome Powell that the U.S. faces a "significantly worse" recession than any since World War II weighed on investor sentiment and boosted safe-haven bonds. Powell pushed back against the prospect the central bank would deploy negative interest rates in the U.S., but did not fully rule it out, which lifted Treasury prices and sent yields lower. Stocks were down more than 2% across the board, though the Russell 2000 SmallCap fell over 3%. Powell’s comments come as parts of the global economy are starting to reopen following a deep freeze aimed at curbing the spread of the virus. Leading U.S. infectious disease expert Anthony Fauci on Tuesday warned lawmakers that a premature lifting of lockdowns could lead to additional outbreaks of the deadly coronavirus, which caused panic selling. Today, comments by Hedge Fund Appaloosa Management founder David Tepper in a CNBC interview sunk stocks after saying 1999 was the only time that stocks were more overvalued then they are today. Tepper said valuations on some individual stocks on the NASDAQ are “nuts” while noting banks were “tough” investments, airlines were “difficult stocks” as long as the middle seat is open on planes while does say he thinks a bottom has been reached. The comments by Powell and Tepper, weaker economic data (PPI) and the rally in stocks over the last month (25% bounce from March lows) was enough to push stock markets lower for a second session.

Fed news Economic Data

·     Federal Reserve Chair Jerome Powell said the country could face an "extended period" of weak growth and stagnant incomes, pledged to use more Fed power as needed, and issued a call for more fiscal spending. The U.S. response to date "has been particularly swift and forceful," Powell said in a webcast…but notes the recovery may take some time to gather momentum," and be dictated by progress fighting the coronavirus pandemic, he said. The longer those health risks persist, Powell added, the more likely businesses will fail and households will be strapped for income in a downturn that he noted has fallen most heavily on those least able to cope. Powell also said the Fed is not looking at negative interest rates but did not fully rule out the option.

·     Producer price index (PPI) for April showed a greater decline of (-1.3%) vs. an expected decline of (-0.5%) for headline PPI and core prices (ex: food & energy) dropped (-0.3%) vs. est. (-0.1%) decline; YoY total prices dropped (-1.2%) vs. est. fall (-0.4%) and core prices unexpectedly dropped (-0.3%) vs. expected to rise +0.6%

Commodities

·     Oil prices bounced off earlier lows but still ended the day in negative territory as WTI crude dipped 49c or 1.9% to settle at $25.29 per barrel. Inventory data was mixed as the EIA weekly data showed an unexpected 700K barrel decline in crude the latest week, which compared to an estimate for a 4M barrel build even though weekly API data showed a large weekly build of 7.6M barrels. Also helping propel energy prices early were reports that Saudi Arabia and Russia said in a statement that they are committed to oil market stability and see signs of improving oil demand. The inventory data and statement helped offset OPEC slashing demand expectations again earlier, as they now expect global demand to contract by 9.07 million barrels per day, or 9.1%, in 2020, it said in a monthly report (last month, OPEC expected a contraction of 6.85 million bpd). Between the recent OPEC+ production buts, Saudi move on pricing, economies reopening all around the world (helping travel), and shrinking oil rigs, oil prices have managed to claw back over the last few weeks. Gold prices end higher by $9.60, or 0.6% to settle at $1,716.40 an ounce after Fed Chairman Powell signals more stimulus ahead in comments earlier.

Currencies & Treasuries

·     The U.S. dollar erased initial losses to trade higher (dollar index gained 0.25% midday) after Federal Reserve Chair Jerome Powell rejected the idea of using negative interest rates as a stimulative tool, but issued a gloomy note about economic growth. The dollar index slipped as low as 99.57 during the session before touching afternoon highs around 100.20. Powell said the Fed’s view on negative interest rates has not changed and it is not something policy makers are looking at. Treasury prices turned higher early afternoon following David Tepper’s cautious comments on the stock market, causing a bounce in safe-haven assets as yields dropped.

Sector News Breakdown

Consumer

·     Retailers; UAA shares extend losses after missed earnings results on Monday; TCS shares tumble after the company reported preliminary numbers for Q4 comp store sales to fall 3.6% and said expects net sales to fall 4.7% to $241.M (below est. $250M), while guiding the year revs below views as well; PGTI shares rise after Q1 beat and a positive outlook for orders

·     Consumer Staples; UNFI shares rise after preannounced meaningfully better than expected Q3 results (Q3 Ebitda $222M topped the $166M est.) and put the company well on track to exceed prior guidance of 2020 adj. EBITDA in the $520-$560 million range (prompting an upgrade at Wells Fargo after results); IPAR upgraded to neutral at Davidson as Q1 earnings topped estimates despite missing on sales noting with distribution channels starting to reopen, the strong balance sheet, and the stock’s 43% decline YTD thinks downside limited from here; BG was upgraded to outperform at Baird noting the company has undergone a significant turnaround and portfolio optimization process, unlocking substantial value

·     Restaurants; PBPB falls after Q1 results as comp sales fell (-10.1%) and posted an earnings shortfall; ARCO warns systemwide Q1 comparable sales fell 4.5% in Q1, with a 10.9% increase for the first two months and a 33.5% drop in March and warns for Q2; CAKE was resumed with an underperform rating at Stephens noting the chain’s mall-centric footprint is a risk; restaurants in general weaker following Fauci warning yesterday of opening up too soon and Fed Chairman Powell comber comments as well today

·     Casino & Leisure movers; SIX said it’s launching a new guest reservation system that will allow parks to manage daily attendance levels and avoid overcrowding in accordance with CDC social distancing recommendations; in cruise lines, NCLH was downgraded to equal weight, tgt $14, liquidity is sufficient, but path out remains choppy at Wells Fargo; LVS ended its plans to open an integrated resort (IR) casino in Japan amid the coronavirus crisis; RCL launched a private offering of $3.3 billion in senior secured notes due 2023 and 2025; UBER announces proposed $750 million senior notes offering; LYFT priced its $650M 1.5% 5-yr convertible notes offering

Energy

·     Energy stocks pummeled amid the broad market pullback midday as OPEC again slashed its forecast for global oil demand this year as the coronavirus outbreak causes a global recession, although it said record supply cuts by the group and other producers were already helping rebalance the market. Inventory data was mixed as the EIA weekly energy inventory data showed crude inventories fell -745K barrels vs. est. for build of 4.0M barrels; Gasoline inventories fell -3.5M barrels vs. est. for draw of -2.5M barrels and Distillate stockpiles rose 3.5M barrels vs. est. for build of 3.0M barrels. The API reported that U.S. crude supplies rose by 7.6M barrels for the week ended May 8, showed gasoline stockpiles edged down by 1.9M barrels, while distillate inventories climbed by 4.7M barrels.

·     Stocks news; oil drillers VAL, NE downgraded to Underperform (at Credit Suisse on near-term liquidity concerns, which they think will lead to some form of debt restructuring as early as 2H20. VAL & NE’s front-end bonds trade below 10% of par, so the credit markets already look to have priced this in. All offshore drillers in our coverage face a heavy cash burn outlook in 2020-21; OKE was downgraded at UBS, TRP cut at BMO Capital and XEL cut to underweight at Morgan Stanley

Healthcare

·     Biotech and Pharma movers; BLUE and partner BMY announced they received a Refusal to File letter from the FDA regarding the BLA for idecabtagene vicleucel for patients with heavily pre-treated relapsed and refractory multiple myeloma, which was submitted in March 2020; MYL shares rally after saying Tuesday it struck a deal to license GILD’s remdesivir, a therapy that may treat patients with Covid-19/under terms of the agreement, Mylan has the right to manufacture and distribute remdesivir in 127 low- and middle-income countries; ALC reported 1Q20 results that surpassed adjusted expectations across product segments as revenue of $1.822B beat the $1.689B estimate; VNDA reports pact with the FDA on resubmission of the application for HETLIOZ® for treatment of patients with Smith-Magenis Syndrome; GNCA reports data on GEN-011, its T-cell therapy designed to improve current limitations of TIL therapy in treating cancers

·     Services, Medical equipment and devices; VREX shares slide after JPMorgan downgraded to neutral and street low $25 tgt noting while the medical segment revenues benefited from pandemic-related demand, they are cautious regarding the mix shift within the segment, weighing on margins; CRL was upgraded to Buy at UBS and raise tgt to $200 from $177 as expect the COVID-19 impact to be less than feared and see robust underlying growth together with an improving margin outlook

Industrials & Materials

·     Industrial & Machinery; HON CEO said today that he sees lower demand env’t for a while and discards a “V” shaped recovery, noting the company was “much more challenged” in April on plant closings; CAT said April North American 3-monhts machine sales -27% vs. +13% YoY, while APAC rolling 3-months machine sales -17% vs. +4% YoY and April LatAm rolling 3-months machine sales -28% vs. +20% YoY; GE shares slid to lowest levels since 2009 as concerns remain about the lack of demand in the aviation industry

·     Transports; Dow Transports slide below the 50-day support level of 7,933, led by declines in car rental CAR and airlines again (UAL, DAL, AAL), which follows yesterday warning by BA CEO that air traffic levels will not be back to 100% by September. They won’t even be back to 25%; Baltic exchange’s main sea freight index falls about 8% to 398 points; in airlines, ALGT was upgraded at Raymond James to outperform saying while they do not expect a faster demand recovery of any one particular region (within the U.S.), Allegiant’s network and leisure customer base fit well with our expectation of domestic/leisure recovering faster (firm downgraded SAVE to market perform in airline space); separately, ALGT posts lower-than-expected Q1 revenue, but says will reduce 2020 cash outflow by $375M

·     Metals & Materials; KeyBanc downgraded steel producers STLD and RS to equal-weight on valuation saying post recent analysis, they reduce EPS estimates on the carbon steel sector via materially weaker near-term U.S. demand. While the group has ample liquidity, MT’s recent equity raise casts a shadow over the group; KeyBanc noted Pulp and Paper Products Council (PPPC) released preliminary N.A. printing & writing paper statistics for April/uncoated freesheet shipments fell a substantial 33%, such that shipments are down 12% YTD (IP, PKG, UFS among names leveraged to this data)

Technology, Media & Telecom

·     Internet; JD was upgraded from Neutral to Buy and raise PT from $37 to $58 at Mizuho based on significant opportunities in online pharmacy and pull-forward effects in essentials from COVID-19/TAM for both segments is substantial at 8.5tn RMB but with a low online penetration/expect online penetration to increase from 5% to 20% in five years, creating an opportunity; AMZN announces new Fire HD 8, Fire HD 8 Plus, Fire HD 8 Kids Edition while the company also made several moves that signal shipping times are returning to normal after weeks of delays

·     Semiconductors; the Philly semi index (SOX) shares fell over 2.5% with weakness nearly across the board after David Tepper commented about high valuation in the NASDAQ; NVDA tgt raised to $340 from $311 at Wedbush saying that the company’s upcoming GPU Technology Conference could serve as a positive catalyst

·     Media & Telecom movers; CMCSA, VIAC, DIS among names active after the WSJ reported large advertisers like GM, PEP and GIS are seeking to take advantage of options that became available May 1 to cancel up to 50% of third-quarter TV spending, negative news for owners of cable network; EGHT reported solid FQ4 results, though revenue guidance for FQ1, and particularly the full year, was below prior expectations, creating after-hours pressure; Garter said worldwide IT spending is projected to decline 8% to $3.4 trillion this year due to the effect of Covid-

·     Software, Hardware & Component news; CSCO expected to report earnings after the close tonight; INFN was maintained Sell at Citi after the co announced stronger than expected sales but lower profits and noted gross margin of 28.3% was meaningfully below consensus of 32.3% citing an early pull-in of a large subsea contract that spanned 19 countries; SNX rises as increased liquidity without raising additional capital/believe our strong balance sheet will enhance our ability to successfully navigate through this challenging market backdrop; guides Q2 EPS $0-$1.00 vs. est. ($3.94); CYBR beat Wall Street’s earnings expectations but Q2 revs ($95M-$105M vs. est. $109.7M) and profit disappoint while withdrew its full-year guidance