Closing Recap

Tuesday, October 20, 2020

Equity Market Recap

·     U.S. stock markets have been at the mercy of Washington the last few weeks, plunging yesterday as hopes that a stimulus deal could materialize after weeks of failure once again failed to live up to the hype – but once again, with a self-proclaimed deadline for talks to conclude Tuesday by House Speaker Pelosi over the weekend, investors rallied markets on expectations they can hammer out a deal in the final hours. Pelosi said they had made progress with the administration on Covid-aid bill to address racial disparities, science-based efforts to tackle outbreak among other items and hoped for a possible covid-19 aid deal by end of Tuesday. Senate Republican leader Mitch McConnell said on Tuesday the U.S. Senate would consider a larger coronavirus package if a deal is reached between President Donald Trump and House Democratic Speaker Nancy Pelosi. We await news out of Washington tonight to see if a deal comes to fruition.

·     The Nasdaq Composite snapped its 5-day losing streak (longest since Aug 2019), while the Dow was propelled higher by better TRV earnings, as CAT hit all-time highs, and PG advanced near its all-time bests on results while component IBM revenues disappointed for Q3, sending those shares lower. Stocks were coming off their worst day in about a month. Major averages were boosted by financials following a good round of regional bank earnings (RF, CBSH, CMA, SNV) and technology again into earnings tonight from NFLX, SNAP and TXN. Economic data today was mostly better with existing home sales and building permits rising.

·     Outside of stimulus and earnings, rising COVID cases in the U.S. and Europe remain important. European Covid-19 cases still rising as Italy reports 10,874 new coronavirus cases vs 9,338 Monday, U.K. new virus cases rise by 21,331, from 18,804 the day before and the French health ministry reports 20,468 new confirmed coronavirus cases in past 24 hours, from 13,243. Also, we are also less than three weeks from the Presidential election with the next debate Thursday.

Economic Data

·     Housing permits for Sept rose +5.2% to 1.553M vs. est. 1.52M and Sept housing starts rose +1.9% to 1.415M below est. 1.457M; single-family permits +7.8% to 1.119 mln unit rate; multifamily -0.9% to 434,000 unit rate; September single-family starts +8.5% to 1.108 mln unit rate; multifamily -16.3% to 307,000 unit rate

Commodities

·     WTI crude oil settled up 63c, or 1.5% at 7-week-high $41.46, erasing earlier declines amid rising U.S. stock markets and increasing expectations that Washington is near to reaching a deal on a spending package to support American households and businesses amid coronavirus. Investors also await upcoming weekly reports on US oil inventories, first from trade group API at 4:30pm ET, then the official EIA report on Wednesday. Russian Energy Minister Alexander Novak said on Tuesday it was too early to discuss the future of the global oil output cuts deal by the OPEC+ group beyond December 2020. OPEC+ is scheduled to relax its output cuts further from Jan. 1. OPEC and its allies next meet on Nov. 30-Dec. 1. Gold prices rise $3.70 or 0.2% to settle at $1,915.40 an ounce – a big reversal from morning lows below $1,897, benefitting from a weaker dollar. Bitcoin prices topped the $12,000 level for the first time since early September.

Currencies & Treasuries

·     The U.S. dollar fell broadly; the Canadian dollar extends gains, touches a one-week high to the U.S. dollar as stocks rally, greenback broadly declines. The euro rose to its best levels in roughly a month above $1.1835 as the dollar fell broadly for a second day against peers with the election and stimulus talks remaining in focus. Treasury yields edged higher as the 10-year rose near the 0.8% level, up about 3 bps as prices slipped with investors rotated back into stocks. The dollar was little changed against the Japanese yen.

Sector News Breakdown

Consumer

·     Retailers; KSS lays out new strategy in its investor presentation saying active wear category to be at least 30% of business, and category’s sales up at 10% CAGR over past 3 years and growing to 20% of 2019 sales; Wells Fargo positive on LB, TPR and GOOS (raises numbers and targets for each to $45, $30 and $55 respectively)

·     Auto sector; GM said it is investing $2 bln to transition spring hill, Tennessee plant to build electric vehicles – confirming investments in 5 Michigan plants for future crossover and full-size pickup production. The Cadillac Lyriq will be the first EV produced at spring hill; production of the Cadillac xt6 and xt5 will continue at spring hill

·     Consumer Staples; ACI forecasts 2020 profit above estimates after Q2 beat as more people shop essentials during pandemic as guides FY20 adj EPS at $2.75-$2.85, above estimate of $2.23; Dow component PG boosts full year organic sales growth forecast to 4%-5%, up from a previous range of 2%-4% (est. 3.4%) and raises core eps growth +5% to +8%, from prior 3% to 7%; in tobacco, PM boosted a 5c EPS beat for Q3 and boosted year EPS view while Q3cigarette shipment volume fell -9.8% vs. -5.90% YoY and EU cigarette shipment volume -4.4%; MNST tgt raised to $90 at Guggenheim as expect a meaningful sequential organic sales improvement to +11% as consumer mobility has increased, while lowered ests; FIZZ upgraded to hold at Jefferies

·     Restaurants; PLAY was upgraded to Outperform and raising our price target to $26, which implies approximately 50% upside at BMO as now more comfortable looking to PLAY’s EBITDA potential, which should at least approach, if not return to, pre-pandemic levels

·     Leisure and Gaming; BC was upgraded to Overweight at JPMorgan and up tgt to $79 from $68 as see the recent acceleration in boat sales (=COVID-19 beneficiary) leading to lean channel inventories with restocking demand driving a positive inflection; DKNG two block trades of 1.7 mln shares each at $42.75 and $42.15, amid lock-up expiry

Energy

·     Energy stock movers; XOM, RDS active on reports Nigeria’s government says it has reimbursed $3B to oil companies including Exxon Mobil and Royal Dutch Shell, moving closer to clearing operating expense arrears owed since 2010; natural gas prices jump early to above $2.92, its highest closing price since Jan. 29, 2019 (COG, RRC, SWN leveraged to at gas)

·     E&P sector; PXD is said to be in talks to acquire PE in an all-stock deal that may be finalized by the end of the month, The Wall Street Journal reported, citing people familiar with the matter https://on.wsj.com/3dKRwZ1 ; in solar FSLR tgt raised to $100 from $91 at JMP Sec as believe FSLR is finishing 2020 in the best position – competitively, financially, and politically – that the company has enjoyed in years (solar ETF TAN is trading at its highest price since May 2011 as sector has been big beneficiary of expected Democratic White House as The Biden campaign has announced aggressive plans to ramp up renewable energy production)

Financials

·     Bank movers; Bloomberg reported that GS reached a long-awaited pact with the US Justice Department to pay over $2B for its role in Malaysia’s 1MDB scandal, and overall penalties paid to the Justice Dept, Malaysia, and other agencies may reach $5B; UBS reported Q3 net income $2.1B (+99% YoY) vs. est. $1.5B, and pre-tax profit rose 92% to $2.6B, including a 268% increase in its investment bank. The bank also reported loan loss provisions of $89M (vs $168 in Q1, $272 in Q2), and it plans to pay its delayed 2019 dividend in November after pausing it in April, and additionally set aside $1.5B for share buybacks, which are expected to resume in 2021;

·     Regional banks; CBSH reported Q3 EPS $1.11 (est. 70c), Q3 Net loan charge-offs $7.6M ($8.4M in Q2), and Q3 net interest income $215.96M ($203.5M in Q2); RF reported Q3 EPS 52c on revs $1.64B vs. est. 33c / $1.49B, NII $988M (vs $960M est) and Q3 net interest margin 3.13% vs. 3.44% a year ago; ZION reported Q3 EPS $1.01, beating the 88c est, provision for credit losses $55M (vs $168M in Q2, $10M in Q3 2019), and deposits $67.1B (+20% YoY); CMA reported beats with Q3 EPS $1.44 (+80% vs Q2) vs est 84c on $211M net income (+87% vs Q2) and provision for credit losses of $5M (vs $138 in Q2); SNV reported Q3 adj EPS 89c on revs $492.4M vs. est. 52c and $469.67M; BXS, SFBS, TBK, MBWM, PEBO, PFBC, WASH also all post EPS that beat ests

·     Insurance; TRV reported third-quarter profit that more than doubled YoY ($827M / $3.23 per share in 2020 vs $396M / $1.50 per share in 2019) on rev $8.28B (+3% YoY), helped by higher premiums, lower costs and an increase in returns from non-fixed income investments. Travelers also recorded a one-time gain of about $403 million after PCG emerged from bankruptcy; Net written premium rose 3% to $7.77B, and pretax catastrophe losses totaled $397M, well above the 10-year Q3 average

·     Consumer Finance; SYF reported Q3 EPS 63c on NII $3.45B, missing the 70c, $3.49B estimates. Separately, Sam’s club and Synchrony extended their strategic credit card program collaboration with a multi-year agreement; ACIW rises after activist investor Starboard Value boosted its stake to 9%, according to a regulatory filing Monday

·     REITs; PLD reported Q3 EPS 40c (est. 31c) and Q3 FFO 90c (est. 73c) on sales $1.08B (est. $955.3M), and raises its FY guidance to profit per share in the range of $2.20-$2.24 from $2.06-$2.18 range, which had previously been raised in July; ELS reported Q3 Normalized FFO 55c and Q3 EPS 28c on rev $285M; Credit Suisse downgraded RESI to Neutral after shares jumped following buyout news yesterday, and raises their price target from $11 to the purchase price of $13.50; Compass Point initiates Buy ratings on NRZ ($11 pt) and COOP ($30 pt)

Healthcare

·     Pharma movers; AZN’s vaccine trial in the United States is expected to resume as early as this week after the U.S. Food and Drug Administration completed its review of a serious illness, Reuters reported; APTX announced positive Phase 2 data for NYX-783 in PTSD saying top-line data from its study demonstrated statistically significant and clinically meaningful efficacy results and a favorable adverse event and tolerability profile; CARA and drug maker Vifor Pharma sign license agreement for vaccine to treat chronic kidney disease-associated skin irritation in U.S. dialysis market; BLU 15.555M share Spot Secondary priced at $2.25

·     Biotech movers; MRNA CEO said the U.S. could authorize emergency use of its experimental COVID-19 vaccine in December, if the company gets positive interim results in November from a large clinical trial; ACOR said it will receive a $15 million milestone payment from a BIIB unit based on net sales of Fampyra; biotech (IBB) overall weak again falling for 4^th time in 5-days

·     Healthcare services and providers; IQV rose after reported 3Q results this am, with revenue ($2.786B vs. $2.75B cons), adj EBITDA ($604M vs. $573M cons) and EPS ($1.63 vs. $1.52 cons), each coming ahead of street consensus and above the top-end of the company’s guidance range

Industrials & Materials

·     Industrial & Machinery; PNR shares rise to its best level in about 6-years as helped better-than-expected Q3 revenue and profit, helped by higher sales of swimming pool lighting and cleaning products; DOV posted beat and raise quarter lifting shares; CAT shares touched a record high today, rising over 2% as it tops its Jan 2018 closing high of $170.89

·     Transports; overall Dow Transports again not far off record highs, continuing to outperform with airlines playing catch-up; XPO announces recruitment effort to fill 15,000 job openings in North America by November 15; in rails, CP missed Street estimates for quarterly profit, hurt by lower freight volumes during the COVID-19 pandemic and said it expects at least mid-single-digit adjusted earnings growth in 2020; US trucking volumes rose 6.7% in September but remained below year-ago levels on continued weakness in industrial freight, the American Trucking Associations says. The industry group’s seasonally adjusted for-hire truck tonnage index climbed to 115.1 last month from 107.9 in August

·     Aerospace & Defense; aerospace suppliers pressured after HXL reported a 3Q20 adjusted operating loss of $0.29, a meaningful miss vs. estimate loss of $0.07, due to weaker sales in aerospace, including deeper de-stocking impacts; LMT reported Q3 EPS miss by 4c and sales rose 8.7% YoY to $16.5B, topping views of $16.11B and cash flow declined -24% YoY to $1.88B

·     Metals & Materials; BHP reports a 7.2% rise in quarterly iron ore production, supported by stable demand from China, while keeping its full-year iron ore forecast unchanged; VALE reports a strong increase in Q3 iron ore production, due in part to restarts at mines that previously faced regulatory and coronavirus-related concerns; in steel space, STLD reported lower profit and sales for Q3, but reflected improved auto and strong construction demand; in paper and containerboard CCK reported 3Q adjusted EPS ~25% above its guidance, raised its 2020 adjusted EPS and free cash flow guidance and announced its intention to start paying a quarterly dividend of at least $0.20/share beginning in 1Q21; gold prices rose lifting miners (NEM, GOLD)

Technology, Media & Telecom

·     Internet; GOOGL was formally charged by The Justice Department formally with antitrust violations Tuesday, the first major action against Big Tech for its staggering market power and values; NFLX and SNAP each expected to report earnings after the close tonight with high expectations for both as each seen as beneficiaries of Covid-19/stay at home

·     Semiconductors; Hynix confirms to purchase INTC’s NAND flash-memory manufacturing business for ~$9.0B in all cash transaction (MU and WDC moved yesterday on speculation); EMKR reports prelim Q4 rev of $33.5M, above its prior forecast of $29M-$31M and est. $30M as sees robust order book for cable TV products extending through the March 2021 quarter; TXN earnings results expected tonight after the close

·     Software movers; WDAY was upgraded to Overweight at Piper based on several catalysts that could drive a reacceleration in subscription growth next year after bottoming in the second half of this year in the mid-teens; FTNT upgraded to buy from neutral with $150 tgt at Goldman Sachs based on conversations with industry participants and industry trends this quarter, believe large enterprise headwinds may be abating sooner than anticipated

·     Hardware & Component news; IBM reported results were somewhat weaker than preannounced numbers as revenue declined for a third straight quarter and as EPS benefitted from an unexpected $0.21 boost from a lower tax rate, and currency was likely more favorable than most expected; CDNS reported another beat and raise quarter and saw operating margins expand; LOGI upgraded to overweight from neutral at JPMorgan and raise tgt to $100 from $70 after posted F2Q21 results materially above consensus expectations with broad strength across the portfolio exceeding $1B in quarterly revenues for the first time and raised guidance