Mid-Morning Look

Wednesday, March 18, 2020

U.S. equities, Treasuries and commodities simultaneously fell on Wednesday as investors and companies rush to raise cash in any manner they can to help deal with the massive economic disruption caused by the coronavirus pandemic. With the daily closures of retailers, auto plants, restaurants, casinos and sporting events, along with the reduced travel and closing of borders worldwide (weighing on hotels), the economic situation has become very dire in just a matter of two weeks. From record all-time highs for major U.S. stock averages in February to losses of more than 30% from those peaks, has investors heads spinning as the coronavirus cases rise daily (not topping 190K). Oil prices meanwhile dropped to their lowest levels in about 17-years, while Treasury yields have bounced off recent record lows. Among Washington’s virus relief plans/efforts they propose phase 1: $8.5B for R&D and vaccines, phase 2: $105B for sick leave, unemployment; phase 3: $850B-$1.2T for economic support and phase 4: $45B for federal agencies according to reports – ahead of President Trump speech at 11:30 AM this morning. While the efforts by the Fed and government are trying to ease market fears, liquidity remains the biggest concern with so many companies tapping credit lines to fund short term expenses, raising fears if the banks are capitalized well enough. Also, with liquidity draining from the credit market, anxiety is running high about how the most indebted companies will refinance at higher borrowing costs. Meanwhile, record equity volatility is putting a premium on those with safer balance sheets. According to Bespoke Investment, the S&P 500 has moved 4% or more for a record 7 straight days and is now on pace for its 8th. Citizens remain at home (some unable to work), while schools are closed around the country (and world), but people still have to pay rent, utilities, food and other fixed costs.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar index (DXY) tops the 100 level since April 2017, rising about 0.85% to highs above 100.70, gaining vs. all currencies, but biggest gains vs. British Pound. The British Pound plunges 2.3% to low of around 1.175 vs. the dollar, its lowest level since 1985 Investors have doubted the U.K. government’s response to the virus, which has contrasted with more immediate lockdown measures across Europe. Commodity prices falling broadly with a more than 10% drop in oil prices while safe haven gold also under siege. Treasury market’s fall as yields recover off recent record lows last week as investors sell anything they can to raise cash.

Economic Data

·     Housing Starts for February fell 1.5% to 1.599M from 1.624M annualized above the est. 1.50M; after rising 1.4% the prior month; single-family starts rose to 1072k; multifamily starts fell to 527k in Feb. Building permits fell (-5.5%) to 1.464M vs. 1.550M in Jan (est. 1.5M)

Sector Movers Today

·     Aerospace; BA shares fell below $100 for the first time since 2013, had its delivery outlook lowered at Bernstein, shifting MAX deliveries back slightly, reducing 787 and 777 rates, and applying a slower long-term ramp all due to the Coronavirus crisis that we expect will lead airlines to move more slowly in updating their fleets; TDG was downgraded to underperform from buy at Bank America and cut tgt to $300 from $730 saying FY20 and FY21 topline growth will likely be bound by decreased air travel demand due to the coronavirus outbreak

·     Financial Payments; PAYX was upgraded to equal-weight at Morgan Stanley citing push into the solid growth PEO market and more recent focus on margin expansion, and its exposure to the relatively more vulnerable SMB segment; separately, Citigroup downgraded PAYX to Neutral as prefer ADP over it while EPAM remains a top idea and might not need to lower estimates, believe the Genpact (G) sell-off is overdone and count CSGP among our top Buy ideas, believing the stock to be an early rebounded; Citigroup also downgraded SQ and FLT

·     More oil companies reducing capex/saving cash; COP reduces 2020 cap-ex by $700M and reducing planned buyback program – says to review capital and operating plans; WPX revises capital expenditure for the FY to $1.28B-$1.4B, cutting by $400M while maintains current oil production; ESTE reduces FY20 adjusted capital budget to $50M-$60M (from $160M-$170M) citing the recent drop in oil prices, and said it plans to run one rig into the Q2 and operated completion activity will be limited to three wells currently in progress; PE cuts 2020 capital budget to less than $1.0 billion from previous range of $1.6-$1.8 billion

·     Autos; industry coming off news yesterday that the UAW requested a two-week shutdown of GM, F and FCAU operations to safeguard its members; HMC to suspend North America production starting March 23^rd; TSLA was upgraded at Bank America with $500 tgt on valuation, though shares fell after the company appears to be under county order to close its Fremont plant; ORLY was added to conviction buy list, at Goldman Sachs and upgrade from neutral while cut tgt to $357 from $430 saying auto part retailers are one of the most defensive names in the hardlines space when there is a slower macro environment

·     Consumer Staples; in beverages, MNST and KO both downgraded at Morgan Stanley which also reduced its view on the beverage industry to in-line from attractive saying government mandated closures for businesses, and restrictions on public gatherings will hurt consumption; grocers UNFI, SPTN, SFM all upgraded to market perform from underperform at BMO Capital saying near-term grocery trends due to effects of the coronavirus are benefiting all grocers; APRN rises on hopes the online meal kit preparer will see a boost of business amid the closing of restaurants across large parts of the U.S.

·     Food sector; Bernstein tactically upgraded food names CAG, CPB, GIS, K and SJM to Market-Perform as expects a coronavirus-related sales lift and broader economic uncertainties to support stock valuations in the near term, but once plays out likely opportunity to become more negative as longer term structural pressures resume, and the sector tends to underperform; GIS reported a beat on quarterly earnings, while sales missed but raised its guidance for the year to up 6%-8% for EPS, topping prior view of up 3%-5%