Mid-Morning Look

Tuesday, January 28, 2020

U.S. equities in rally mode, boosted by a better batch of economic data as Fed Manufacturing, Consumer Confidence and Durable Goods Orders all coming in well above consensus expectations, as well as mixed earnings results ahead of an important night of earnings in tech (AAPL, AMD). Stocks partially recover after two sessions of heavy selling pressure, a day after the Dow Jones Industrials and S&P 500 index each posted their biggest declines since Oct. 2, while the Nasdaq Composite ended at 9,139.31, down 175.60 points or 1.9% for its biggest-one day fall since Aug. 23^rd, as investors weigh the potential impact of the current virus outbreak against a backdrop of corporate earnings. Dow components MMM and PFE each post disappointing earnings results, but the main index higher anyway. For the moment, markets seeing a recovery in some of the hardest hit sectors on virus impact fears (energy, casinos, transports) ahead of the busiest week in terms of S&P 500 components posting earnings.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar posting early gains vs. most currencies, boosted by stronger economic data while safe haven currencies (yen, krona) pullback after recent rally; Commodity prices are mixed as gold pulls back from 6-year closing highs while oil prices volatile in early trading, trying to snap recent pullback to 3-month lows on demand fears given virus impact in China. Treasury market’s reverse earlier gains, sliding mid-morning after yields touched lowest levels of morning at 1.568% for the 10-year, but now up to 1.64% as stocks rally and safe-haven assets pullback from recent gains

Economic Data

·     Durable Goods Orders for December rise 2.4%, well above the 0.3% estimate and posted its largest gain since Aug. 2018; Durable goods new orders revised down to -3.1% for Nov. from -2.1%, while new orders ex-trans. fell 0.1% in Dec. after 0.4% fall

·     S&P CoreLogic Case-Shiller National Home Price index rose 3.54% y/y in Nov. after rising 3.25% in prior month ; the S&P/Case-Shiller 20-city NSA index at 218.68 after 218.42 in Oct.; the 20-city SA index rose 0.48% m/m in Nov. after rising 0.46% the prior month

·     Consumer Confidence for January reported at 131.6, topping the est. 128.0 (prior month revised to 128.2 fro, 126.5); the expectations index 102.5 in January vs. Dec revised 100.0 while the present situation index 175.3 in January vs. Dec revised 170.5

·     Richmond Fed Manufacturing for January a significant beat, reported at up 20 vs. est. for down -3 (and prior month -5); Shipments rose to 29 after -6 the prior month and new order volume increased to 13 after -13 the prior month

Sector Movers Today

·     Hardware & Component news; JNPR shares fall after reporting slightly better Q4 results but issued a below consensus earnings guide for Q1 due to OpEx and a 1% revenue growth guide; XRX rises after beats Q4 estimates and guides upside FY20 EPS of $3.60-3.70 versus the $3.51 consensus and reported Q4 gross margin was 41.6% versus the 40% last year; the UK said Huawei to have a limited role in 5g and says Huawei new restrictions should be placed on the use of high risk vendors in the UK’s 5g; DDD was downgraded to neutral from overweight at Piper and $12 tgt citing disappointing channel checks, increasing competition, a lack of positive catalysts this year, and the limited upside in the current valuation; FFIV reported better-than-expected quarterly profit, helped by customer demand for its software solutions and related services but analysts cut tgt citing concerns about slowing software growth and weaker product revenue

·     Restaurants; PBPB shares rise after activist 180 Degree Capital Corp reported a 6.0% holding in the company and may propose a strategic review or sale process, according to a new 13D filing; LK small bounce back after recent China virus fears hit stock, as Morgan Stanley lifts its price target to $42 from $27 as estimates the value of the Luckin Tea franchise stores is $15 per share; MCD expected to report earnings tomorrow morning, with SBUX tonight; WING was upgraded to buy from neutral at Northcoast with $122 tgt

·     Housing & Building Products; homebuilder PHM the second homebuilder to report better earnings and revenues in as many days (DHI beat Monday), while backlog rose 18% YoY to $4.5B though net orders slipped -11% YoY to up 33%; in furniture retail, WSM upgraded to outperform at Oppenheimer saying the worst now appears behind WSM as operating margins seem to have at least stabilized

·     Retailers; Telsey Advisory downgraded FL to market perform from outperform and cuts PT by $8 to $42, saying softness in apparel, which accounts for about 20% of sales, and increased competition from DKS in premium footwear offset positives; ADDYY was upgraded to outperform at Telsey as believe ADS-DE, along with NKE, is among the few companies with leading, differentiated, and high-quality business models that can command a premium valuation; GRMN upgraded to neutral at Credit Suisse and raise tgt to $100 from $73 saying headwinds for ADS-B sales in the Aviation segment are less severe than previously expected

Stock GAINERS

·     CLSD +5%; and BHC said Phase 3 study, called the Peachtree Study, showed that about half of the patients taking the treatment had an improvement in visual acuity

·     DLPH +61%; after agreeing to be acquired by BWA in an all-stock deal valued at $3.3B with DLPH shareholders to get 0.4534 shares of BWA for each DLPH share held/BWA also announced a share buyback program of up to $1B https://on.mktw.net/2O3N8so

·     GGG +7%; reported an 8c 4Q19 operating EPS beat on broadly better than expected results while 2020 organic sales growth guidance was in-line with consensus expectations

·     LAUR +16%; after the company stated that it is exploring strategic alternatives for each of its businesses to unlock shareholder value/said have been discussing the likelihood of the company being sold in pieces to return cash to shareholders since 2Q18

·     NUE +3%; steel producers got a boost after NUE topped Q4 results (EPS 21c beat on higher revs) saying inventory destocking ended and sees demand improving after a tough year

·     PCG +3%; was upgraded to buy at Mizuho saying they are getting “fired up” about PG&E as the AB-1054, June 30, 2020 deadline approaches

·     PII +5%; mixed results as EPS topped views for Q4 but sales missed ($1.74B vs. $1.76B) while sales of its off-road vehicles and snowmobiles grew 7% to $1.14 billion from a year ago

·     XLRN +50%; after its Sotatercept achieves primary and secondary endpoints in Phase 2 PAH trial, as well as meaningful functional improvements

·     XRX +4%; after beats Q4 estimates and guides upside FY20 EPS of $3.60-3.70 versus the $3.51 consensus and reported Q4 gross margin was 41.6% versus the 40% last year

Stock LAGGARDS

·     HOG -2%; after reporting Q4 EPS of 20c, missing the 25c estimate saying retail-level sales of its motorcycles fell in the fourth quarter, reflecting lower demand in the U.S.

·     JNPR -5%; after reporting slightly better Q4 results but issued a below consensus earnings guide for Q1 due to OpEx and a 1% revenue growth guide

·     LRN 9%; shares stumbled after in-line results overshadowed by weaker Q1 revenue outlook as guided Q3 revs $252M-$255M vs. est. $255.8M

·     MKC -2%; shares slumped on mixed results for Q4 and guided year EPS $5.20-$5.30m, below the $5.56 estimate saying business expenses and a projected higher tax rate will likely offset gains from its underlying business performance

·     MMM -4%; as Q4 profit fell 28% due to restructuring and litigation charges with earnings missing estimates while also said to cut 1,500 jobs globally to reduce costs

·     PFE -3%; misses Q4 profit estimates for the first time in at least two years and posts a 9% drop in Q4 revenue, hurt by intense competition for its pain treatment Lyrica that lost patent protection