Closing Recap

Tuesday, November 24, 2020

Equity Market Recap

·     Stocks picking up steam into the Thanksgiving Day holiday as Wall Street continues to bet on a 2021 recovery! We’ve had the recovery trade, the vaccine trade, and now the transition trade in the White House – with the fiscal stimulus trade still waiting in the wings, all boosting stocks! It was record highs for the Dow Jones Industrial Average touching the 30,000 level for the first time (a 12,000-point rally from March lows), along with all-time bests for Transports and Russell 2000 Smallcaps while in the S&P, the energy index is the biggest percentage winner, followed by financials and industrials. The value/reopen, reflation rotation continues to accelerate as the last day before the initial PFE vaccine announcement (Nov 6^th and right after the election results) the QQQ is down 1.4% while the IWM is up 10.5%, (as of the close last night). For the month energy the top performing S&P sector up 24% (but still worst YTD down 37%).

·     Getting stocks moving overnight, President Trump said his aides would cooperate with President-elect Joe Biden’s transition to the White House, easing some concerns about a drawn-out period of uncertainty. Stocks got a boost Monday from positive trial results regarding a new coronavirus vaccine as well as a WSJ report that Joe Biden would pick former Fed Chief (and dove) Janet Yellen to be his Treasury secretary. Oil prices rise to best levels since March, continuing to recover on hopes for increased demand (above $45 per barrel). The recent action in global markets has been nothing short of astounding, rising in the face of surging global coronavirus cases in some cases – but the improved vaccine related news, coupled with expectations of a recovery into 2021 and its positive impact on earnings has offset any near-term fears.

·     The reopen trade leading markets again as travel, cruise, leisure, theme parks, energy, retail and restaurants, REITs among the biggest gainers, while defensive utilities, biotech, healthcare services having seen weakness along with large cap tech amid a rotation into cyclicals. Dow component Boeing (BA) is up over 50% MTD, a big part of the Dow outperformance, and has given a boost to airlines and aerospace suppliers as its Max 737 received flight approval. Sectors that have continued to fall the last few weeks on improving vaccine news include precious metals (gold names) on rotation into riskier assets, Covid-testing companies (QDEL, ABT, TMO, FLDM, ILMN), healthcare services and biotech along with a slight rotation out of the stay-at-home (and work-from-home) names that benefitted the most during the pandemic.

Economic Data

·     Consumer confidence index 96.1 vs. est. 98.0 and vs. October revised 101.4 (previous 100.9), while the present situation index 105.9 in Nov vs. Oct revised 106.2 (previous 104.6) and the expectations index 89.5 in Nov vs. Oct revised 98.2 (previous 98.4)

·     Richmond Fed composite manufacturing index +15 in Nov vs +29 in October as shipments index +20 in Nov vs +30 in Oct and services revenues index +13 in Nov vs. +19 in Oct

Commodities

·     Oil rose to its highest level since March (trading above $45 per barrel) as markets broadly rally on the start of the U.S. presidential transition process and with the demand outlook strengthening after a string of positive vaccine breakthroughs over the last 2-weeks. WTI crude rose $1.85 or 4.3% to settle at $44.91 per barrel ahead of weekly inventory data tomorrow morning from the EIA. The brighter outlook on the Covid vaccine front has supported prices while markets brace for OPEC+ meeting next week where it is expected to extend its production caps for three to as much as six-months in an attempt to balance the oil market.

·     Gold prices fall -$33.20 or 1.8% to settle at $1,804.60 an ounce, its lowest levels since the middle of July amid rotation out of the precious metal as investors look to riskier assets, as well as rotating into Bitcoin with prices nearing record highs, back above the $19,000 level today. The precious metal managed to hold above its 200-day moving average at $1,799.94, after two days of withering losses that has resulted in it tumbling 3.6% so far this week. Investors have reallocated the inflation (or currency deflation) hedge from Gold to Bitcoin over the last month, with Bitcoin prices surging above the $19,000 level today, (more than doubling over the last 6-months) – and closing in on its all-time peak of $19,783.06 reached in December of 2017.

Currencies & Treasuries

·     Despite the resounding rally in equities on Wall Street, Treasury prices and yields have remained stagnant in comparison, as the 10-year yield only rose 2 bps to about 0.88%. The U.S. Treasury sold $56B in 7-year notes at a yield of 0.657% vs. 0.657% when issued prior with the bid-to-cover (demand) at 2.37 as indirect bidders were awarded 65.4% of the auction and directs 15.12%. The dollar index (DXY) slipped vs. most currencies as the Canadian dollar two-week highs vs. dollar at 1.30 helped by jump in oil prices.

Sector News Breakdown

Consumer

·     Retailers; more than a third of Americans plan to spend less on holiday shopping in 2020 year over year, compared with 18% who aimed to cut back last year, according to a survey of 2,000 people by credit-card provider Discover; BBY reported Enterprise comparable sales +23% vs est. +13.8%, adj EPS $2.06 vs est. $1.72, rev $11.85B vs. est. $10.98B, and U.S. comp sales, international comps, all beat their respective estimates (but issued no formal holiday guidance); DKS Q3 adj EPS $2.01 on revs $2.41B, both topping estimates ($1.05 on $2.23B), as same-store sales rose over 23% and e-commerce sales rose 95%, and the company names current President Lauren Hobart as their new CEO effective Feb 1 following Ed Stack stepping down; TIF Q3 EPS $1.11 on rev $1.01B, both beating estimates, comp sales +1%, and the company guides Q4 comp sales to decline mid-single digits; MOV Q3 EPS 70c on revs $169.86M vs estimated 48c on $142M

·     Apparel retail stores: BURL reported Q3 adj EPS 29c on revs $1.67B (ests. 16c on $1.54B), and comparable sales fell 11.1% in Q3, narrower than the estimated -16.3% decline after rebounding in Sept and Oct following a weak August with depressed back-to-school demand, though the company warns of a slow start to Q4 as MTD Nov comp sales have declined in the low double digits YoY; URBN posted Q3 EPS 78c, a record profit for the company that tops est. 44c, on revs $969.6M vs. est. $924.2M, driven by +17% sales increase at its Free People brand, and same store sales were flat vs. est. -4.2% decline; ANF Q3 adj EPS 76c bested expectations of a breakeven quarter on sales $819.7M that also beat expected $739.4M; CHS Q3 EPS loss (48c) on Q3 sales $351.4M (misses est. $375M), comp sales -24.1%

·     Discount stores; DLTR Q3 EPS $1.39 on sales $6.18B vs. est. $1.16 on $6.13B, comp sales +6.4% (est. +6.6%), same store sales +5.1%, gross profit margin 31.2% (est. 30.2%); UBS raised their price target on FIVE to $160 from $125, saying the company will need to demonstrate favorable comps in next week’s earnings report despite online holiday shopping limiting retail traffic to reinforce they are deserving of the significant premium

·     Auto sector; electrical vehicle (EV) euphoria has pushed several names significantly higher the last 2-weeks, as TSLA trades new record highs on positive analyst comments, but group as whole an astounding run (AYRO, BLNK, FSR, LI, NIO, NKLA, SBE SOLO among most active names); OpCo upgraded ORLY to Outperform with a $555 pt increasingly optimistic that aftermarket auto parts should emerge as a “relative bright spot” within discretionary; SPI spikes as its all-electric zero emission shuttle bus will serve the Santa Cruz trolley, replacing their existing wooden trolleys and helping to promote the City’s sustainability goals

·     Housing & Building Products; UBS raised their tgt on RH to $450 from $380 on strong home furnishing demand as believe it was even stronger at the higher end of the market, which likely uniquely benefitted RH; homebuilders (LEN, TOL, DHI), which have been strong gainers on the year amid record low mortgage rates have seen profit taking in recent days in sector rotation

·     Consumer Staples; HRL raised its quarterly dividend by 5% to 24.5c/share and posts a 3% fall in Q4 net sales to $2.4B, missing est. $2.59B as Organic net sales fell 4%, and profit dropped 8.2% to $234.4M as the most recent Covid-19 surge has created uncertainty in labor availability, customer demand, and raw material markets; MKC confirms reports that it is buying hot sauce maker Cholula for $800M in cash; SJM reports organic sales rose 4.0% in FQ2 to top consensus +2.6% driven by elevated at-home consumption, as revenue in US coffee, US consumer foods, and international/away from home topped their respective estimates, and the company sees full-year sales rising 1-2% and EPS of $8.55-$8.85 vs. $8.20-$8.60 prior and $8.64 consensus; ULTA was downgraded at Jefferies to Hold with a $300 pt from Buy on a more balanced risk-reward given softer near-term spending expectations following their holiday survey of consumers and degrative margin impact as consumers shift to online spending

·     Leisure and Gaming; Stifel raises estimates on theme park names (SIX, SEAS, FUN) saying they see plenty of upside to amusement park names heading into 2021 as believe visitation/spending patterns across the amusement park sector should continue to accelerate from current levels; casinos and gaming, along with lodging and hotels also benefit from the reopen trade as investors pile into names down on the year amid hopes of the economic recovery to grow

Energy

·     Energy stock movers: what a move higher its been for energy stocks, among the top sector performers over the last month or so as the rotation into economically sensitive sectors grows on vaccine optimism. Oil prices trade at its highest level since March, as shares of oil companies surge amid growing confidence in the prospect of a reopening economy, with the demand outlook strengthening after a string of positive vaccine breakthroughs. Four of yesterday’s top five gainers on the S&P 500 were in the oil and gas sector (APA, OXY, FANG, EOG) as the group extends gains again today. Solar stocks saw strength in transition of power in White House to Biden, seen as a beneficiary with his positive stance on industry (FSLR, SPWR, SEDG)

Financials

·     Bank movers; what can you say, as financials continue to push higher on rebound in economic recovery sentiment with no pullback over the last few weeks; WFC upgraded to outperform from underperform at Raymond James as headwinds stemming from the account opening scandal that broke more than four years ago begin to rescind; large cap banks and regional banks surging; in insurance; CB upgraded to strong buy at Raymond James on the heels of the strongest commercial pricing environment in at least 15 years saying commercial P&C rates in the U.S. increased 6.3% in 3Q20, and rates have been increasing/ accelerating for the past 6 quarters; in consumer Finance; PYPL positive mention at Guggenheim saying they think Venmo can eventually generate $3B in annual revenue in ’23E – over 3x more than our ’21 estimate

Healthcare

·     Cannabis sector; stocks jump (ACBCGC, CRON, APHA, TLRY) following news of Trump finally approving the start of the formal transition process to President-elect Joe Biden. Biden’s presidency is expected to support decriminalization of marijuana, and several states recently legalized the use of recreational marijuana (as of Monday’s close, MJ is up 26.5% this month)

·     Biotech movers; MRNA shares active as the European Union has reached a deal for the supply of 160 mln doses of its COVID-19 vaccine candidate, the head of the European Commission said on Tuesday; MBIO announces positive opinion from the European medicines agency on orphan drug designation for its lentiviral gene therapy for the treatment of x-linked severe combined immunodeficiency; DBVT slides as announces that Dr. Hugh Sampson has decided to step down from his role as Chief Scientific Officer, effective December 1, 2020, to return to his research program at the Jaffe Food Allergy Institute at Mount Sinai.

·     MedTech and Equipment; Agilent (A) Q4 beat 98c on $1.48B (+6% core) vs. consensus 93c on $1.401B while Q1/FY21 guidance light – issued FY21 guidance with revenue of $5.6B – $5.7B (+4%-6% core growth) and adj. EPS of $3.57-$3.67; ALGN tgt raised to $525 at Piper saying highlights from ALGN’s biennial investor day included strong November commentary, a reiteration of LRP targets established by management 2.5 years ago, and growing evidence the digitization of orthodontics is driving Invisalign adoption; MDT said its profit fell for Q2 as revenue slid due to continued declines in medical procedures amid the Covid-19 pandemic.

Industrials & Materials

·     Industrial & Machinery; GE upgraded to Outperform from Perform at Oppenheimer and raised the tgt to $12 saying operationally, GE has clearly set a positive direction with broadening momentum, on diligent and better-focused restructuring and cultural decentralization and accountability taking hold; in engineering space, Jacobs (J) with better-than-expected Q4 revenue and profit, helped by higher sales in its people and places solutions unit, though midpoint of guidance misses (sees FY21 adj. EPS $5.20-$6.00 vs. est. $5.81); PCAR downgraded to hold from buy and cut tgt to $96 from $108 at Deutsche Bank; TITN better-than-expected FQ3 results with strength across the business, and raised its full-year revenue and EPS guidance; DY slides after profit for Q3 rose as expenses fell, while revenue declined, as Contract revenues were $810.3M, down from $884.1M YoY and fell 9.4% on an organic basis

·     Airlines; (AAL, DAL, JBLU, LUV, UAL) industry receives some downbeat forecasts as the IATA said in its updated industry outlook that the collapse in international air travel and a patchy recovery in domestic flying is expected to leave the global airline industry with a net loss of $118.5B in 2020, far deeper than the main trade group’s estimate in June for a $84.3B deficit. The global airline industry is forecast to lose another $38.7B next year even if new Covid-19 vaccines and testing help reopen more borders – it forecast a billion more flyers in 2021 compared with this year, but weak pricing would still leave revenues at $459B, down 45% from last year

·     Transports; KNX, WERN and SNDR downgraded in trucking sector at Citigroup while upgraded LTL carrier ARCB after flagging our initial concerns about euphoric 2021 estimates several weeks ago – think that it will be difficult for shares to shrug off peak-cycle fears in the coming months as data turns from excellent to simply good; rail price tgts raised at RBC Capital saying CP preferred name in space as up tgt to $C506 and also raise tgt prices on CNI, UNP, NSC, CSX as view the valuation lift as a function of solid performance during the pandemic in which margins mostly held up despite volume volatility, and reflecting higher multiples in the market as a whole; XPO defended at Truist saying weakness yesterday in response to Blackstone stepping away from possible purchase of XPO’s European Logistics business in an overreaction

·     Aerospace & Defense; BA has been a big boost to the Dow Jones and S&P over the last week after getting recent approval for resumption of its Max 737 flights (has also boosted the entire supplier sector – SPR, AYI, HAYN, RTX, TGI, MOG) – today, European regulators give draft approval to BA’s 737 MAX, paving the way for a formal flight clearance in January after an almost two-year ban; HWM upgraded to buy at Argus saying after enduring its worst quarter of the pandemic, the outlook is brighter; AER upgraded to buy at Bank America with $47 tgt with the management turning optimistic that the worst for the company may be in the past; GE warned employees that more job cuts are coming to its jet-engine business because of the pandemic’s impact on commercial air travel even with the promise of a vaccine on the horizon, DJ reported; LORL announces special dividend of $1.50

·     Metals & Materials; copper related stocks FCX, RIO, BHP rise as copper prices rise on optimism over COVID-19 vaccines, expected robust demand in top consumer China and a weaker dollar; GSM reported Q3 adjusted loss of (14c) vs. (10c) the year prior and lower sales falling over 45% to $262M, as COVID-19 pandemic hammered demand for its product; TS upgraded to buy from neutral at Bank America with $18.50 tgt; Jefferies upgraded GLNCY and ANFGF to buy from hold and reiterate FCX and FM as top picks in group as forecast copper demand in renewable energy to increase from 991kt in 2020 to 1.9mt in 2030 in our base case and to 6.4mt in our bull case. As for EVs, each require ~83kg of copper on avg, ~4x vs. ICE; in packaging, AMCR and SLGN downgraded and upgraded OI and UFS upgraded at Bank America; gold prices tumble further on rotation into riskier assets, sending gold miners lower (AEM, AUY, GOLD, NEM) as development of COVID-19 vaccines drives investors to riskier assets; X shares rise over 20% after GLJ Research earlier said steel reflation trade is solidly back in play – upgrading shares of both CLF and X

Technology, Media & Telecom

·     Semiconductors; sector ended higher after early underperformance; AMBA posted strong results/guidance as it is benefiting from the auto recovery and is seeing troughing demand in its IP security business – Q3 revs narrowly beat on slightly better guidance; ADI posted a top and bottom line beat for Q4 and better rev outlook for Q1 ($1.5B v. est. $1.42B); DIOD init coverage buy with $84 tgt at Truist as expect DIOD to out-grow the semi industry

·     Software movers; PLAN posted Q3 adj EPS loss (5c) was narrower than the expected (10c) loss on revs $114.9M vs. est. $109.7M, and the company sees Q4 rev $118.5-119.5M (est. $118.42M) and increases FY adj operating margin to (-9)-(-10)% from (-11)-(-12)%, while raising FY21 sales guidance to $444-445M from $437-439M (est. $438.6M); KeyBanc initiated ORCL, NOW, MSFT, HUBS, CRM, OKTA and WDAY at OW, and WORK at Sector-Weight in enterprise and cloud; in data analytics and monitoring, they initiated SPLK at OW and AYX, DDOG, and NEWR at SW; they also initiated OW ratings on OKTA and PANW and SW ratings on FTNT and CHKP in internet security; SPLK acquired Flowmill, a cloud network observability company with expertise in network performance monitoring, and the acquisition is expected to close in Q4; Bank of America upgraded YNDX to Buy with a $80 pt; TWOU was initiated at EW with a $39 pt at Morgan Stanley; ZI registering 4.5 mln shares of class a common stock

·     Hardware & Component news; NTNX reported a higher-than-expected revenue driven by a 10% y-o-y rise in Annual Contract Value (ACV) billings and posted a smaller-than-feared Q1 loss of 44 cents on rev of $312.8 mln; tonight earnings in the PC and storage sectors with results from DELL, HPQ and PSTG all expected