Closing Recap

Friday, May 15, 2020

Equity Market Recap

·     U.S. stocks once again showing their resiliency, bouncing back from another round of negative economic data (retail sales, NY manufacturing and industrial production) and trade tension headlines between the U.S. and China, helped midday amid a spike in oil prices and a rebound in consumer staples. Treasury prices erased gains, as yields inched higher late day and the dollar rebounded. Despite the late morning rally, stocks still ended the week lower as Fed officials, and some well-respected hedge fund managers expressed caution about the quick recovery in the global economy still reeling from the coronavirus lockdown effects. Stocks managed to turn higher despite several negative headlines and data, including headlines that the Trump administration was moving to block shipments of semiconductors to China’s Huawei Technologies, a move that could ramp up trade tensions between Washington and Beijing. A tweet out of the Global Times followed shortly thereafter saying “based on what I know, if the US further blocks key technology supply to Huawei, China will activate the "unreliable entity list", restrict or investigate US companies such as Qualcomm, Cisco and Apple, and suspend the purchase of Boeing airplanes”. That took a toll on large cap trade related names (BA, AAPL) as well as semiconductor stocks. On the data front, more dismal news as April retail sales month-over-month came in at a record low of minus (-16.4%) vs. a minus (-12%) estimate while ex-autos number was minus (-17.2%) vs. the minus (-8.6% estimate). Factory production plummeted to the lowest on record during coronavirus-related shutdowns. On the COVID-19 situation, NY daily Covid deaths below 200 for fifth straight day (132 total) as deaths below 150 for the first time in seven weeks while President Trump said Federal government focusing on 14 potential coronavirus vaccines, seeking to narrow list further. US stocks ended better than Europe where the Stoxx Europe 600 closed up 0.5%, but lost 3.8% for the week; the FTSE 100 rose 1.0% but finished the week down 2.33%; the DAX’s 1.2% gain in today’s session left it 4.0% lower this week

Economic Data

·     Retail sales for April fell a greater-than-expected (-16.4%), vs. est. (-12%) and March reading down (-8.3%) while April retail sales ex-autos fell (-17.2%) vs. est. (-8.5%) and March (-4.0%) and lastly April retail sales ex-autos/gasoline fell (-16.2%) vs. est. (-7.6%)

·     NY Fed Empire State current business conditions index fell to reading -48.5 in May better than the consensus for negative -60 and last month’s negative -78.2 reading as the new orders index was -42.4 in May vs. -66.3 in April, prices paid index +4.1 in May vs. +5.8 in April, employment index at -6.1 in may vs -55.3 in April; 6-month biz conditions index +29.1 in May vs. +7.0 in April

·     Industrial Production for April fell a minus (-11.2%) vs. est. minus (-12.0%) and Capacity Utilization was reported at 64.9% vs. est. 63.8% (prior month 72.7%). U.S. factory production plummeted in April by the most in records as output slumped 13.7% from the prior month after a revised 5.5% decrease in March

·     Preliminary May Michigan Sentiment rose to 73.7 from 71.8 the prior month and above the 68 estimate; the current economic conditions index rose to 83.0 vs. 74.3 last month and the expectations index fell to 67.7 vs. 70.1 last month

·     Business Inventories for March fell (-0.2%) MoM in-line with estimates; business sales fell (-5.2%) in March after falling 0.5% the prior month

Commodities

·     Oil prices surged to end the week, with WTI crude rising $1.87 or 6% to settle at $29.43 per barrel, its best closing level in roughly a month, helped earlier after OPEC chief Barkindo said they are cautiously optimistic that the worst of the oil crisis is over and notes that they are rapidly cutting production. Also helping was signs of improved demand with China reporting increased refinery runs, while oversupply fears ease further as Baker Hughes reported the weekly oil rig count declined for a 9^th straight week

·     Gold prices end the week higher by $15.40 or 0.9% to settle at $1,756.30 an ounce, posting a weekly advance of around 2.5%, helped by safe-haven investment buying given the increased tensions between the U.S. and China on trade today and weaker economic data

Currencies & Treasuries

·     The U.S. dollar bounced off morning lows, as the dollar index ended around even on the day and up for the week despite another round of weak economic data. The British Pound dropped to its lowest for more than a month, after Britain and the European Union exchanged threats over a post-Brexit trade deal. British chief negotiator David Frost said on Friday the major obstacle to a deal was the EU’s demand to include a set of "novel and unbalanced" proposals on a so-called "level playing field" that would bind Britain to EU rules. The pound had been under pressure earlier on Friday after the British government reiterated its refusal to extend the Brexit transition period. The pound fell to $1.2115, its lowest since 3/26. Treasury prices ended lower, with yields bouncing off their lowest levels of the week with the 10-year at 0.64% as investors deal with the ongoing negative economic data and expectations of further stimulus from the Treasury.

Sector News Breakdown

Consumer

·     Retailers; NKE warns of financial hit in Q4 as only 5% to 40% of Nike-owned stores are open globally/product shipments to wholesale customers have slowed resulting in lower wholesale revenue and higher inventory; VFC EPS of 10c missed by 3c on lower sales $2.1B (est. $2.3b) and gross margin decreased 150 basis points to 53.1%, primarily driven by elevated promotional activity to clear excess inventory; GOOS downgraded to underperform at Bank America given outlook for significant y/y declines in N. America & Europe revenue on restrained international tourism; DDS 1Q release provides EPS loss of $(6.93) well worse than estimates due to a material gross margin (GM) decline, partly offset by better sales and cost control; PRPL 10.79M share Secondary priced at $10.50; WMT, TGT, LOW, HD, BBY, FL among earnings next week in retail

·     Restaurants; YUM, QSR were both upgraded to buy from hold at Stifel to reflect their increased appetite for investing in fast food companies with durable business models that they expect to show improving consolidated operating performance; DENN Q1 EPS above consensus on preannounced SSS growth while Q2 to-date suggests a relatively protracted recovery

·     Housing & Building Products; Wayfair (W) downgraded to sell from neutral at Citigroup citing concerns about valuation, profitability and post-pandemic sales trends/says the stock is “overvalued” following its 800% gain since a mid-March intraday low of $21.70; homebuilders KBH, PHM downgraded to sector weight from overweight at KeyBanc based on: 1) less comfort in a 2H20 COVID-19 recovery despite sustained government stimulus, which 2) creates a higher threshold for a compelling risk to return outcome, 3) with transition from book valuation to earnings less clear, in our view.; Piper raised Q1 and Q2 comp estimates (and lowering EPS estimates) on HD ahead of earnings next week as industry work suggests sales strength for both names with continuation into May

Energy

·     Energy stocks outperformed early behind strong oil prices and a rebound in beaten up sectors heading into the weekend; BP downgraded at Morgan Stanley to Underweight from Equal Weight, saying the company’s capital spending budget likely will be materially too low to defend its dividend over the medium term; the Baker Hughes (BKR) weekly rig count showed the total rig count fell -35 rigs to 339 as the oil rig count fell for a 9th straight week, down -34 to 258 and gas rigs down -1 to 79 as miscellaneous rigs unchanged at 2.

·     Utilities & Solar; Barclay’s upgraded shares PCG tgt to $15), CMS (tgt to $65) and PNM (tgt to $44) to Overweight from Equal Weight saying regardless of which benchmark or comparison is used – treasuries, corporate bonds, sector price-to-earnings ratios or dividend sustainability – the same conclusion can be drawn: utilities are mispriced on a relative basis as upgraded the North America Power and Utilities sector to Positive from Neutral.

Financials

·     Busy morning in research at BMO Capital as they upgraded shares of GS, DFS, ALLY, CIT, and RM to outperform from market perform saying these five deep-value stocks offer upside ranging from +45% to +150%, after falling in absolute terms by between -25% and -70% year-to-date. The firm also recommends FIG investors shift away from defensive subsectors (like payment technology and alternative asset management) and toward credit-sensitive subsectors as they downgraded PYPL, APO, and SLM to market perform

·     Credit card monthly metrics; SYF reports April net charge-off rate 4.61% vs. 5.08% last month and April 30-plus day delinquencies 2.47% vs. 2.65% last month; COF April credit card delinquency rate of 3.58% falls 11 basis points from 3.69% in March while net charge-off rate of 4.93% falls from 5.06% in March; ADS April card services delinquency rate declines to 5.6% from 6.9% in March and compares with 4.9% in April 2019/net charge-off rate of 7.3% increases from 6.9% in March and 7.1% in April 2019; BAC April credit card delinquency rate was 1.55% vs. 1.58% in March and the net charge-off rate of 2.81% creeps up vs. 2.78% in March; AXP net write-off rate 2.7% vs. 2.8% last month and 30 days past due loans 1.7% vs. 1.7% last month

Healthcare

·     Pharma movers; SAVA shares plunge after a Phase 2b study of PTI-125, its lead investigational drug, failed to meet its primary endpoint in patients with Alzheimer’s disease; TGTX 6M share Spot Secondary priced at $18.00; BMY gets FDA approval for Pomalyst for patients w/AIDS-related Kaposi sarcoma whose disease has become resistant to highly active antiretroviral therapy; in cannabis sector, ACB rises as posted better-than-expected revenue amid cost-cutting efforts, and as sales jump (Q3 revs C$75.5M vs. est. C$66.7M) as consumers stockpiled cannabis ahead of lockdowns/sold 12,729 kg of cannabis in Q3 (TLRY, CRON, CGC active)

·     Biotech movers; BPMC received an FDA complete response letter related to its NDA of avapritinib for the treatment of adults with unresectable or metastatic fourth-line gastrointestinal stromal tumor (GIST); SRNE surges more than 200% after co’s covid-19 antibody candidate shows positive results in preclinical studies; SRPT rises after analysts say results of Sarepta’s gene therapy looks to have better safety profile in early trials than PFE; CLVS gets FDA approval of Rubraca for the treatment patients with BRCA1/2-mutant recurrent, metastatic castrate-resistant prostate cancer

·     Medical equipment and devices; ABT slips after the FDA said late yesterday that early data about Abbott’s speedy coronavirus test suggested it could produce potentially inaccurate results, particularly by failing to detect people who have the illness; HOLX was granted FDA emergency use authorization for its second molecular test for covid-19; CODX follows up with more weakness after mixed earnings report last night (shares dropped 5% Thursday on negative short call report from Hindenburg Research)

·     Healthcare services and providers; CAH, MCK both upgraded to buy from neutral at UBS stating that the companies can outperform the current FY21 and FY22 consensus estimates by up to 6% citing channel checks, market data, and recent results from Cardinal Health as well as ABC pointing to higher sustainable generic margins and improving sales mix; LH was upgraded to buy from neutral and raise tgt to $186 from $158 at Mizuho saying only a small percentage of companies can say they are part of the COVID-19 solution and LH is one of those

Technology, Media & Telecom

·     Internet; Loop Capital updated framework for understanding and evaluating the COVID-19 related disruption on the worldwide digital advertising markets, excluding China saying based on trends reported across the various platforms, it appears the industry hit trough levels in late-March at about an 11% YoY decline – updates estimates and price targets for the following stocks, in order of preference: SNAP, PINS, FB, TWTR, GOOGL; WIX upgraded at Raymond James to outperform saying while adoption of DIY platforms has been increasing gradually the last few years, we believe COVID-19 is driving a step function in DIY platform; FTCH shares tumble after the online luxury retailer reported mostly in line results with prior announcement but warned the COVID-19 pandemic could delay its Fall-Winter 2020 collections due to production shutdowns and as fewer sellers are able to sell on its marketplace (downgraded at BTIG); FB buying Giphy for $400 million as reported by Axios https://bit.ly/2WwzToO

·     Semiconductors; industry pressured after headlines the Trump administration moved to block shipments of semiconductors to China’s Huawei Technologies. Morgan Stanley noted a H Silicon ban would likely be most negative for the foundry supply chain (notably, equipment stocks such as AMAT, KLAC and LRCX) and companies that have maintained high shipments to Huawei under the de minimis exception (MU, QRVO, TXN); AMAT posted good F2Q results, but declined to provide formal F3Q guidance amid pandemic uncertainty though said sees F3Q (JulQ) up q/q and further strength into F4Q as the company sees true end-market supply/demand returning towards the end of C2020E (noted record backlog for its semis/services businesses moving into the JulQ, with strength in data center/PC); TSM confirmed plans to build a $12B chip factory in Arizona as the U.S. tries to wrestle global supply chains back from China

·     Software movers; NEWR rises as posts Q4 revenue of $160M topping the $153M est and a 21% increase compared with $132M YoY as more customers opted for its cloud-based services over the last two months/guides Q1 revs $158M-$160M vs. est. $159.5M; NLOK reported a good F4Q, as revenue, margins, and EPS significantly exceeded consensus as experienced a slightly positive net impact from COVID-19 on its overall business

·     Media & Telecom movers; GLOB reported better than expected results with revenue and EPS of $192M and $0.64, respectively, ahead of consensus of $190M and $0.62, respectively, as enterprises continued to invest in digital projects; DIS pulls the plug on Frozen Broadway show; DIS rises after FL Governor earlier said he would consider reopening plans for amusement parks located in the state.

·     Hardware & Component news; AAPL slips after its biggest supplier Foxconn Technology Group, posted a 90% year-over-year decline in the Q1 after it shut down plants in China for weeks during that period due to the coronavirus as well as falling on China trade tensions; SSYS March quarter was essentially as anticipated and said for June quarter trends, management stated it is too early to say if the June quarter will be the trough revenue quarter