Mid-Morning Look

Thursday, March 26, 2020

U.S. equities off to a very strong start on the day, gaining traction from the $2 trillion stimulus plan passed by the Senate yesterday, with the House expected to approve today/tomorrow to help small businesses, corporations and out of work employees, as well as receiving support from the ongoing liquidity measures the Fed has enacted the last few weeks to backstop the economy and credit markets (mirrored by other central banks as well). Fed Chairman Powell today said in an interviews: only limit to emergency lending authorities is how much Treasury will backstop it; the Fed is required to get full security for its loans; the Fed can continue to make loans to support the flow of credit to households and businesses.; the Fed is prepared to spend an unprecedented amount and will continue to step in aggressively. These comments have helped put markets at ease for the time being though the impact from loss of lives, revenue for people and businesses around the world is being felt. The other top story today was the weekly jobless claims data, posting an astounding 3.28 million people filing for first time claims, far above the 1.7M estimate and trumps the highest on record of 695K in 1982). The number was a sharp reminder of the impact the COVID-19 virus is having on everyday lives, but was not necessarily a surprise given the forced business closures mandated by several States.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar index is lower for the 4^th day in a row after touching 3-year highs of 102.99 on 3/20 – breaching the 100 level to the downside as the euro rises to 1.095 and GBP 1.195 (off 3/20 lows of 1.14) – and falls sharply vs. Japanese yen as well -1.3% to 109.75. Commodity prices surging with the broader equity market as gold erases yesterday losses to resume its upward momentum while gold prices remain weak. Treasury market’s not nearly as volatile as stocks or currencies, as the 10-year yield remains around 0.8% for a third day.

Economic Data

·     Weekly jobless claims surged an unprecedented 3.28M, nearly double the 1.7M estimate (compares to last week was 281K when it rose 70K) – the 4-week moving avg rose to 998,250 in latest week from 232,500 prior week (previous 232,250); continued claims rose to 1.803M in latest week from 1.702M prior week (prev 1.701M) – prior to today, the highest weekly rise in jobless claims was 695,000 seen back in October 1982

·     GDP for Q4 was unchanged at 2.1% and compared to the second est. of 2.1% after rising the similar amount in prior quarter; personal consumption rose 1.8% in 4Q after rising 3.2% prior quarter (and was above the 1.7% estimate); Core PCE QoQ rose 1.3% vs. est. 1.2%

·     International trade for February in goods dropped -9.1% to (-$59.9B) narrower than the (-$63.8B) consensus and prior revised month of (-$65.9B); exports rose 0.5% or +$0.7B MoM to $136.5B while monthly imports fell -2.6% or -$5.3B MoM to $196.4B

Sector Movers Today

·     Consumer Staples; BYND was downgraded to sell from neutral at Goldman Sachs citing the dimmer outlook for food-service traffic growth while the firm upgraded NTR to buy and both INGR and HRL to neutral from sell in the agriculture space in light of recent market volatility that has dislocated several stocks; food stocks SYY, PFGC both upgraded to buy at Jefferies after stress tests for liquidity risk and view the recent 40%+ share losses as an attractive entry point for SYY, PFGC and USFD; PG was upgraded to buy at Argus as see investors allocating a higher percentage of their spending to maintaining a safe, healthy home

·     Semiconductors; MU a bright spot for semiconductors after reported revenue at the high end of the reported range for February, and still managed to deliver some slight upside for May despite some impact from the virus on the handset markets (prompted upgrade to buy at Bank America with $60 tgt); AMBA was upgraded to buy at Stifel as believe the stock has reached an attractive risk-reward level in the current environment (currently trading at 4.1x net cash/sh and 3.8x price-to-tangible book value; IDCC sees Q1 revs $73M-$76M from prior view $73M-$75M; INTC upgraded at Bernstein (follows upgrade at Argus day prior) noting the valuation looks more attractive after a recent sell-off; Jefferies lowered semiconductor estimates for 2H20 and 2021 EPS by 10-20% across our coverage due to COVID-19 (said AMD, AVGO, LSCC, NVDA, INTC and XLNX would exhibit the least amount of negative operating leverage during a downturn)

·     Software movers; TWLO was downgraded to neutral at Goldman Sachs and cut tgt to $105 from $140 saying the company’s revenues are more at risk from COVID-19 since they are mostly transactional and are reliant on usage; NOW was upgraded to buy at Mizuho saying having declined 26% from its high five weeks ago, we find the risk/reward attractive; WORK shares rise after its CEO tweeted that the company had added 7K net new paid customers halfway through Q1 and said by Tuesday of this week, that number crossed the 9,000 mark

·     Chemicals; RBC Capital downgraded shares of HUN saying its now-greater exposure to autos, appliances, and other discretionary items could see weaker demand as uncertainty increases, while raised RPM to outperform as see it as a relative winner given the recent market selloff; KeyBanc initiated on the group (AXTA, DD, EMN, FMC, HUN at overweight) and 8 at Sector Weight (ALB, CE, CTVA, DOW, LTHM, LYB, OLN, WLK) saying the OW rated names have the deepest balance sheet to withstand a recession and valuations already priced at worst case; FUL reported in-line quarterly EPS while saying sees Q2 revenue down 5%-15% YoY

·     Refiners; Goldman Sachs downgraded CVI to sell from neutral citing its leverage to Brent-WTI amid declining U.S. production and sees higher risk to CVI’s dividend (ests CVI reduces dividend to 40c from 80c), while firm upgraded PBF to neutral from sell after share weakness; Jefferies upgraded five refiners (VLO, PSX, PSXP, HFC, HEP) to buy though cut ests due to anticipated demand destruction amid proliferating COVID-19 responses (but says with a return to more normal conditions in 2021, strong balance sheets, & deep liquidity positions, find many attractive opportunities)

Stock GAINERS

·     DFS, COF, SYF +16%; rise again as consumer finance stocks benefiting from stimulus package backstops – as Federal Reserve is attempting to ease consumer loan credit markets

·     DVAX +%; after they and CEPI announce collaboration to support global effort to develop a vaccine for coronavirus

·     LH +10%; extend recent gains as companies instrumental in performing COVID-19 tests each day (providing potential revenue tailwind)

·     MU +4%; reported revenue at the high end of the reported range for February, and still managed to deliver some slight upside for May despite some impact from the virus

·     SCVL +16%; posted Q4 EPS/sales/margins above views while withdrawing guidance as Wedbush noted digital trends amidst store closures are encouraging

·     SIG +24%; shares outperformed in retail after reported Q4 adj EPS $3.67 vs. est. $3.50 and comp sales rising 2.3% vs. est. 1.1%

·     THC +15%; hospitals higher in general, Raymond James said the sector a major beneficiary of the legislation with more than a $100B in additional funding outside of the status quo. Congress delays the 2% Medicare sequester through the end of the year

·     WORK +13%; after its CEO tweeted that the company had added 7K net new paid customers halfway through Q1 and said by Tuesday of this week, that number crossed the 9,000 mark

Stock LAGGARDS

·     CAKE -8%; co sent a letter notifying landlords that its restaurants won’t pay rent for month of April after business slowed due to the coronavirus pandemic

·     FRT -5%; as mall, strip center REITs reeling from concerns of tenants possibly not making rent; recall CAKE said it won’t be able to pay rent for the month (REG, SPG also lower)

·     VIAC -2%; Bernstein lowers tgts for several names to street lows (VIAC to $10, AMCX to $21, DISCA to $15) saying there’s “not much left for equity holders” amid the fallout