Mid-Morning Look

Tuesday, February 04, 2020

U.S. equities in a broad based rally, with technology, financials, industrials and healthcare among the top gainers, while defensive sectors underperform as stocks bounce for a second consecutive session following solid gains in Europe and Asia overnight. Signals of improving factory activity in major economies around the world helped boost sentiment earlier along with stimulus from China into its economy for a second straight day to combat the shock to its economy from the coronavirus outbreak. Several trending stories for markets today include: 1) Democrats stumble after the Iowa caucus results not expected til later today, delayed due to technical difficulties citing “inconsistencies” in precinct reporting (New Hampshire voting a week from today); 2) the Iowa voting fumble a boost for President Trump ahead of his State of the Union speech this evening; 3) China confirms 425 deaths and 20,348 infections on the coronavirus, while Hong Kong reports first fatality linked to the deadly respiratory-focused virus; 4) GOOGL declines amid slowing revenue growth, but TSLA at it again, touching $900 per share as momentum continues markedly higher; 5) Asia markets with a boost as China added more stimulus to its economy, adding another 500B yuan ($71.2B) of liquidity via reverse repo agreements into the financial system, in addition to the $143B injection seen Monday; 6) oil prices look to rebound a day after WTI crude and Brent slumped more than 20% from its recent peak levels (defined as a bear market); 7) and of course the steady barrage of earnings results this week – with 90 S&P companies expected (DIS tonight).

Treasuries, Currencies and Commodities

·     In currency markets, the dollar edging to morning highs, as safe-haven currencies (yen) slide while the British Pound bounced off overnight lows (had breached below the $1.30 level); commodity prices drop, led by a steep decline in gold prices while oil prices rebound slightly off recent 20% lows off peak highs. Treasury market’s slide as the ongoing rotation out of defensive assets and save haven investments continue with stocks jumping on the open. Treasury yields at highs with 10-yr near 1.6% up about 7 bps (off lows 1.515%).

Economic Data

·     Factory Goods Orders for December rose 1.8%, topping the 1.2% estimate while November orders were revised down to -1.2%, from -0.7% previously; new orders ex-trans rose 0.6% in Dec. after rising 0.2% the prior month and new orders ex-defense for Dec. fell 0.6% after rising 0.1%. Durables orders for Dec. rose 2.4% after falling 3.1% in November and nondurables shipments for Dec. rose 1.1% after rising 0.7% in November.

Sector Movers Today

·     Consumer Staples; CLX lifts low end of 2020 profit forecast range on lower input costs after a Q3 profit beat; ELF was upgraded to overweight at Piper as believe the brand has gained and will continue to gain share over the foreseeable future despite a tepid beauty backdrop; DEO was downgraded at Argus noting it is facing challenges in the alcoholic beverage market amid changing consumer tastes, rising costs, and the impact of tariffs; WW upgraded to buy at Goldman Sachs with $48 tgt as think the company’s efforts are driving interest higher, and we expect subscriber growth to accelerate to +14% in 2020

·     Casino & Leisure movers; Casino operators with interests in Macau such as WYNN, MLCO, LVS, MGM volatile after officials in Macau said they will ask casinos to close for half a month as part of efforts to contain the coronavirus outbreak; RRR upgraded to buy at SunTrust with $30 tgt as see upside from a strong core Locals outlook, $500M+ of excess monetizable land, and a new tribal contract potentially moving out of litigation; cruise lines bouncing early after a bright outlook for RCL after its quarterly results; PENN rises after Ron Baron lauds the company’s acquisition of Barstool Sports during a CNBC interview

·     Metals & Materials; ATI posts Q4 EPS and sales beat, helping shares bounce off 6-month lows; lithium producers surging (ALB, SQM, LTHM), moving in sympathy with gains related to TSLA and the bullish outlook for the company as well as Panasonic saying its business turned profitable in Q4 as Tesla’s battery output helped push that division into the black; with China adding additional monetary stimulus to its banking system the last two days, markets have rebounded and commodity stocks highly leveraged to the country have rebounded (copper, steel names)

·     Industrial & Machinery; ETN Q4 miss as adjusted earnings of $1.37, represents a decrease of 6% over Q4’18, while expect organic revenues for 2020 to be between down 1 percent and up 1 percent versus 2019; KMT shares fall as quarterly miss was driven by a weaker top-line mostly in infrastructure and slightly lower margin performance; RBC beats Q4 expectations and provides FY20 outlook that had the mid-point above estimates; EMR Q1 EPS just top views on in-line revenue while boosts year adjusted EPS view on higher operating cash flow

Stock GAINERS

·     ALB +7%; as lithium related producers surging (SQM, LTHM), moving in sympathy with gains related to TSLA and the bullish outlook for the company as well as Panasonic saying its business turned profitable in Q4 as Tesla’s battery output helped push that division into the black

·     CLX +4%; lifts low end of 2020 profit forecast range on lower input costs after a Q3 profit beat

·     EBAY +1%; after activist investor Starboard Value L.P. disclosed a letter it wrote to the e-commerce site’s board saying the company was “deeply undervalued”

·     HP +4%; Q1 results helped boost the equipment company as Q1 earnings surpassed consensus and was higher YoY along with better than expected revenues

·     PENN +8%; rises after Ron Baron lauds the company’s acquisition of Barstool Sports during a CNBC interview

·     RL +6%; topped its holiday-quarter revenue estimates helped by demand for its winter wear in Europe and North America (revs $1.75B vs. $1.72B est.)

·     TCO +7%; as Bloomberg reported SPG had held talks with the company, but said to have stalled amid volatility

·     TSLA +12%; rallied for a sixth day, with shares topping $900 per share (up as much as 16% after its incredible run yesterday that saw the stock skyrocket 20%)

·     UAL +4%; as transportation stocks rebound after falling of late on coronavirus impact fears

·     WORK +6%; initiated outperform and $25 tgt at RBC as believe Slack is the leader in this space from both a brand and feature

Stock LAGGARDS

·     CNC -4%; its health benefits ratio worsened to 88.4% in Q4 from 86.8% a year earlier and missed estimates of 87.6% (Q4 medical costs rose nearly 17% to $15.2B)

·     GOOGL -3%; reports mixed 4Q results with total FX-neutral revenue growth of 19% driven by Google Properties growth of 18% y/y offset by weaker hardware revenues

·     NEM -3%; as gold miners decline as gold prices tumble over $20 from recent multi-year highs

·     WAT 3%; slides as Q4 top/bottom line beat views, but issued a lower outlook for Q1 and FY20

·     WYNN ; Casino operators with interests in Macau such as WYNN, MLCO, LVS, MGM volatile after officials in Macau said they will ask casinos to close for half a month as part of efforts to contain the coronavirus outbreak