Mid-Morning Look

Tuesday, April 21, 2020

U.S. equities are on track for their first back-to-back daily losses since the beginning of the month, with the Dow at one point logging a 1,000 point decline the last two days, driven lower by financials (JPM, AXP) on falling yields, tech (IBM) after earnings, while energy (XOM) holding steady despite the mass disruption in the energy complex that has seen historic price swings in the expiring May futures contract. President Donald Trump said earlier his administration is working on a plan to make money available to the oil industry to prevent the loss of jobs after prices plunged below zero. Amid the stock and commodity weakness, Treasuries are still responding positively as the U.S. 10-Year Treasury yield drops to about 0.55%, hitting its lowest level since March 9, the day it fell to a record low at 0.3180%. The Nasdaq Composite underperforms, falling ahead of earnings results from NFLX, TXN later tonight and as sales figures for IBM underwhelms investors last night. Between the volatility in oil markets, preparation for disrupted earnings results this quarter, the recent round of awful economic data and of course the ongoing closure of retailers, sporting events, schools and businesses, investors have more on their plates than they can handle at this point…but markets have held up well of late amid the Fed and Treasury intervention to help keep the economy afloat.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar is little changed despite the massive swings in stock and commodity markets with lone piece of economic data in-line with estimates. Commodity prices very volatile as gold remains lower, but well off earlier lows, while May oil futures (expire today) rebound after yesterday’s plunge while June contract down. Dow Jones reported that OPEC debates possible May 10 meeting to discuss deeper production cuts. Treasury market’s rally as yields falling across the board again, as the 10-year yield breaks below its recent trading range, down at 0.56% after holding the 0.6% over the last week.

Economic Data

·     Existing Home Sales for March fall 8.5% to 5.27M rate vs. the 5.25M estimate; March inventory of homes for sale 1.50 mln units, 3.4 months’ worth; the median home price for existing homes $280,600, +8.0% from March 2019

Sector Movers Today

·     Consumer Staples; KO tops Q1 profit estimates on strength in its Latin America business, marking its fifth straight beat and said it expects sequential improvement in the back half of 2020, even as it forecasts a material hit to current-quarter results due to the coronavirus outbreak; BYND shares jump after SBUX will debut its products on its menu in China on Wednesday, marking Beyond Meat’s entry into the Chinese market; SJM said that EPS for FY 20 will exceed the high end of the prior guidance of $8.10-$8.30 because of strong sales growth and operating leverage in 4Q/said demand has begun to moderate in April after a period of “stock-up” shopping; LNDC upgraded to buy at Roth Capital citing turnaround and cost out programs; SFM was upgraded at Oppenheimer as still view the group an attractive defensive place to hide given the uncertainty associated with the coronavirus pandemic and a strengthening fundamental (DG, WMT, COST also top picks); in tobacco, PM forecasts Q2 EPS well below estimates, accounting for declines in consumption, including duty-free sales due to travel restrictions, and expects an adverse impact on its full-year results due to self-isolation and lock-down measures

·     Bank movers; TSC among top gainers in the banking space after Q1 EPS topped views and posts strong revenue growth; NTRS shares fell initially after results, while KBW Inc. said better revs and a lower tax rate helped offset jump in provision for credit losses to $61M vs. zero last year; ZION core trends included better expense dynamics, decent loan growth, and modest margin pressure as per RBC Capital after earnings; other bank movers on earnings included BXS, FFBC, PNFP, RBB while broader banking names remain pressured on plunging Treasury yields; CMA Q1 provision for credit losses of $411M compares with $8M in Q4 2019 and a reversals of $13M in Q1 2019 and loans increased over $3B in the 2H of March to support customers’ borrowing needs

·     Restaurants; DRI 7.83M share secondary priced at $58.50 and said same-store sales quarter-to-date (through April 19) were down (44.7%) and comps have improved by an average of 5.0% per week from (75%) in the weeks of March 22/29 to (65.2%) and (60.0%) in the two most recent; Longbow said channel checks at QSR’s Burger King same-store sales remained down 25-30% through the end of March as comps recovered only modestly to down ~25% to date in April

·     Healthcare services and providers; LH rises after saying it received an Emergency Use Authorization from the U.S. FDA that permits nasal swab specimens to be collected at home using the company’s Covid-19 collection kit; CRL was downgraded to hold at Jefferies saying channel checks reveal incremental COVID-related challenges, particularly in RMS; in hospitals, HCA reported lower than expected earnings, suspends dividend and withdraws guidance

·     Semiconductors; broad weakness in the semiconductor sector early, taking the Nasdaq Composite lower in turn; Citi names MRVL its top semi pick due to the resilience of 5G networking demand and believes there will likely be a focus on long-term recovery including 5G in the 4th phase of the US stimulus package (replaces NVDA as top pick); TXN earnings results tonight after the close

·     Energy stocks remain top story given massive volatility in the commodity markets. Today the United States Oil Fund LP (USO) plunged after a trading halt following the fund’s announcement that it had issued all of its remaining registered shares. USO holds U.S. crude futures, and the fund has plummeted as oil prices have fallen drastically. In an SEC filing, United States Commodity Funds (USCF), which issues USO, said it had temporarily suspended the ability for authorized purchasers – or market makers for ETFs – to create new baskets of shares for the ETF. USCF had previously filed on Monday to register an additional 4 billion shares with the SEC, but that registration is not yet in effect, the firm said. However, USO will continue to trade, and authorized purchasers will be able to redeem existing USO shares

Stock GAINERS

·     BYND +11%; as SBUX will debut the company’s products on its menu in China on Wednesday, marking Beyond Meat’s entry into the Chinese market

·     FLIR +10%; adds to yesterday gains (rose 14% Monday) after reports yesterday AMZN has begun to deploy thermal cameras at its warehouses and Whole Foods locations to screen workers for elevated temperatures

·     LH +2%; received an Emergency Use Authorization from the U.S. FDA that permits nasal swab specimens to be collected at home using the company’s Covid-19 collection kit

·     STAY +4%; as WSJ reports it has attracted investment from two of the biggest real-estate investors, Blackstone Group Inc. and Starwood Capital Group, which have each acquired equity positions recently, according to public filings https://on.wsj.com/2XUH4Zg

·     VXRT +39% after co announces positive preclinical data from vaccine candidates to treat COVID-19; says several of the vaccine candidates were seen generating immune responses in all tested animals after a single dose

·     WATT +182%; after announces receiving FCC certification for its new WattUp over-the-air wireless charging transmitter.

Stock LAGGARDS

·     CACC -10%; as delays its Q1 report and notes the COVID-19 outbreak has adversely impacted its business

·     CIT -6% following large provisions miss of $469M vs. $80M estimate with NIM shortfall down -27 bps QoQ (one of many banks with much larger provisions for credit losses)

·     IBM -5%; reported a drop in Q1 revenue and pulled its full-year earnings outlook, while said was committed to maintaining dividend/Software revs declined 8% at constant currency ex-Red Hat

·     NTRS -5%; shares fell initially after results, while KBW Inc. said better revs and a lower tax rate helped offset jump in provision for credit losses to $61M vs. zero last year

·     SAP -2%; announced co-CEO Jennifer Morgan will be leaving the software giant this month, leaving Christian Klein in control/said a significant percentage of new business was postponed in March, as Q1 adjusted operating profit edged 1% higher

·     TRV ; reported Q1 core EPS $2.62 vs. est. $2.82 and reported COVID-19 related losses of $86M pre-tax, while catastrophe losses rose to $333M from $193M YoY/Q1 net interest income fell 8% Y/Y to $3.89B and Q1 provision for credit losses of $1.68B increased from $859M YoY