Mid-Morning Look

Wednesday, April 01, 2020

U.S. equities are starting the second quarter the same way they ended Q1, sharply lower, as markets remain on edge after President Trump said in a press briefing that the US faces a “very, very painful two weeks,” and that the death toll in the US could rise to 240,000 (currently around 4,000 deaths and total cases nearing 200K). The move in U.S. markets follows weakness in global markets overnight after closing out the worst quarter since the financial crisis on Tuesday. The Dow notched its worst first quarter on record, according to Dow Jones Market Data, down 23.2%, while the S&P 500 retreated 20% and the NASDAQ 14.2%. Investors return to haven investing, driving the dollar higher against the euro (but down vs. the yen) and sending the 10-year Treasury yield down below the 0.6% level. It’s a new day but same scenario as businesses around the world at a near standstill with many closed, employees out of work or furloughed and people fearful about the future, with social distancing in effect in the U.S. at least throughout the remainder of the month having a massive impact on the economy.

Treasuries, Currencies and Commodities

·     In currency markets, the U.S. dollar fell to 2-week lows against the Japanese yen as investors flee for safe haven assets (gold and Treasury prices also higher today); oil prices remain pressured on surging supply and lack of demand with WTI crude trying to hold the $20 per barrel level. Treasury yields narrowed as increasing worries about the coronavirus pandemic in the US prompted more investors to shift capital into the safest assets. The yield on the 10-year Treasury down to 0.591% from 0.691% on Tuesday as markets remain concerned after President Trump said in a press briefing that the US faces a “very, very painful two weeks”

Economic Data

·     Jobs data came in better than expected as ADP said private payroll data showed a loss of -27K jobs in March, better than the expected decline of -150K jobs which comes ahead of this week’s nonfarm payroll report on Friday (estimate for -100K loss nonfarm and -123K private)

·     ISM Manufacturing for March reported at 49.1 which is above the 44.5 estimate but down from 50.1 last month; Production fell to 47.7 vs 50.3 last month while new orders fell to 42.2 vs 49.8 MoM (the lowest level March 2009) and employment fell to 43.8 vs 46.9; prices paid markedly fell to 37.4 vs 45.9 last month

·     Construction spending fell (-1.3%) vs. estimate for rise of 0.6% for Feb, below prior month of 1.8%; Private construction fell 1.2% in Feb and Private residential construction fell 0.6%

Sector Movers Today

·     Bank movers; shares of large cap banks (BAC, C, JPM, WFC) remain weak as Treasury yields slip with investors ditching equities to seek safe haven assets such as bonds and as the spread between short- and long-term interest rates shrinks, banks earn less from loans and investments; KBW Inc. today slashed 2020 EPS estimates for the median big banks by 58%, and by 50% for 2021, after accounting for the firm’s expectations for a U.S. recession, along with rising unemployment, low interest rates and an increase in loan losses; several UK banks announced suspension of their dividends, following the behest of the Bank of England last week; USB was upgraded to outperform at Oppenheimer as believe that the ~40% declines YTD discount something far worse than a few quarters of weak earnings and thus would buy the dip

·     Telecom sector; AT downgraded to neutral at JPMorgan and cuts tgt to $35 from $38 saying its media and communications unit will take a hit as social distancing increases to prevent coronavirus spread and potential for weakness in small-and-medium customer base rises; Goldman Sachs with a bevy of changes as they add VZ to the Conviction List citing stable/growing EPS and FCF an attractive dividend yield (4.5%) and a strong balance sheet, downgraded Intelsat (I) to sell with 50c tgt calling it the most levered company in coverage while also facing persistent pressures to revenue and EBITDA and negative FCF; firm also downgraded CTL to sell as sees the company’s EBITDA declining 4% annually in 2020-2021 owing to intensifying pressures in its Business segment, removed both ATUS and CMCSA from its conviction buy list w $42 tgt –

·     Media movers; IHRT was downgraded to reduce at JPMorgan with $8 tgt from $21 as see economic headwinds from COVID-19 creating a challenged operating environment for the company – exacerbated by its debt load; GCI said it is suspending its quarterly dividend, in an effort to preserve liquidity during the disruption caused by the COVID-19 pandemic and is looking to cut expenses by an additional $100M-$125M through job cuts and furloughs; MSG said its board of directors had approved the spinoff of its sports and entertainment businesses which is expected to be completed in mid-April & said construction of MSG Sphere suspended in Vegas; MTCH said it expects Q1 results to be around the low-end of the prior guide, with sequential revenue growth in Q2 challenging but still likely up YoY

·     Medical equipment and devices; SWAV was downgraded to underperform at Oppenheimer as expectations on the incremental utility of IVL are misplaced and recent field checks continue to paint a tough picture for a number of companies in the space; ISRG cut to underperform as well at Oppenheimer with $365 tgt saying rapid proliferation in benign cases is driven more by aggressive marketing rather than true clinical utility; BSX was upgraded to buy at Goldman Sachs while downgraded VAR (to neutral) and SYK (to sell) saying major supply (hospital constraints) and demand (patient risk aversion) headwinds will likely peak during 2Q20, followed by modest but persistent impacts from recession and demand side headwinds

·     REITs; a lot of stress in the REIT sector today with the first of the month rolling around and fears many companies can’t or won’t be able to pay monthly bills due to forced store closures as well as fears in apartment REITs with people losing their jobs; Morgan Stanley downgraded ESS today saying rent growth is highly correlated to job growth, with an R^2 of 73%, and their economists forecast job growth declining YoY to -8.5% in 2Q20 and -4.3% in 4Q20; Morgan also cut UDR rating saying secular growth story remains, but a negative job growth shock leads to near-term underperformance; mall REITs have been hit hard (SPG, SKT, MAC, TCO) and office building REITs also pressured (SLG, ARE, EQC, CLI, VNO); mortgage REITS slide after AGNC said that tangible net book value per share was about $12.35-$13.25, below some analysts’ estimates, though leverage and liquidity levels have returned to recent norms

Stock GAINERS

·     IFRX +55%; after saying dosing is underway in a randomized clinical trial in Netherlands evaluating its experimental drug, IFX-1, in patients with severe COVID-19-induced pneumonia

·     KR +3%; after saying comp sales surged about 30% in March as consumers cleared off shelves in preparation for a lockdown due to the coronavirus pandemic, and the grocer said it had borrowed $1 billion to boost its liquidity.

·     MNK +6%; after receiving approval from Therapeutic Products Directorate of Health Canada to conduct a clinical study, in collaboration with Novoteris LLC, evaluating inhaled nitric oxide therapy for treatment of COVID-19 patients

·     NVAX +6%; rises after enters deal with Emergent BioSolutions Inc. to produce its seasonal influenza vaccine, NanoFlu

·     TTWO +3%; video game names seeing increased volatility the last few weeks with people stuck home due to social distancing requirements (ATVI, EA)

Stock LAGGARDS

·     BB -16%; reported mixed 4Q results, with revenue/EPS of $291mn/9c vs. consensus’$295mn/4c with Bofa saying the core IoT segment sales disappointed at $127mn vs. their $155mn estimate, and the Licensing revenues once again drove the strength at $108mn vs. consensus’ $84mn

·     HP -10%; among top decliners in the energy sector in the S&P amid more fears and concerns of slowing global demand

·     LW -12%; after Q3 adjusted EPS missed estimates (77c vs. est. 93c) and has withdrawn its financial outlook for fiscal year 2020 for net sales growth and for Adjusted EBITDA including unconsolidated joint ventures

·     M -7%; after being removed from the S&P 500 index and will join the S&P SmallCap 600 and Otis Worldwide Corp. and Carrier Global Corp. will join the S&P 500 (Otis replacing Raytheon which is being acquired by UTX and Carrier replacing Macy’s)