Closing Recap

Thursday, October 01, 2020

Equity Market Recap

·     It was a strong start to the new month and quarter, as investors appear happy to put September declines behind them as gains were led by the usual winners such as technology stocks while energy (also as usual) is the top decliner with oil prices tumbling over 3.7%. Stocks pared gains late afternoon after U.S. House Speaker Pelosi, Treasury’s Mnuchin spoke by phone at 1 P.M. and discussed further clarifications on amounts and language on coronavirus aid (stimulus deal) but distance on key areas remain. Earlier today the White House said they would raise their stimulus package aid to $1.6 trillion but is still below the $2.2T Democrats proposed on Tuesday. While markets continue to hope and wish for more fiscal aid, investors got back to buying mega cap as the likes of AMZN, FB and NFLX along with semiconductors (after better STM revenue) helped propel those sectors higher. Retailers and discretionary names also among top S&P gainers while consumer staples were active on mixed earnings (PEPE, CAG, STZ). Economic data helped rally markets on Wednesday but was more of a mixed picture today as jobless claims improve (but remains stubbornly high) on in-line inflation readings while manufacturing data was mixed and construction spending higher. The IPO calendar continues to be active with more issues expected to price tonight: ASO 15.6M share IPO expected range $15-$17, CCCC 8.82M share IPO range $16-$18, IMNM 2.5M shares IPO range $11-$13 and ONCR 5.8M share IPO range $14-$16 after what has already been a big week of new issues (PLTR, ASAN, BQ, LUNG). Oil prices tumbled and gold rallied a day ahead of the monthly nonfarm payroll report where 850K nonfarm payroll jobs are expected to be added, 850K added private jobs and 35K manufacturing with unemployment rate expected to dip to 8.2% from 8.4% prior and average hourly earnings to rise 0.2%.

Economic Data

·     US jobless claims fell to 837,000 in the latest 26 week vs. est. 850,000 while prior week revised to 873,000 from prior 870,000; US continued claims fell to 11.767M vs. est. 12.225M and prior week 12.747M; jobless claims 4-wk avg fell to 867,250 in latest week from 879,000 prior week; US insured unemployment rate fell to 8.1% from 8.7% prior week

·     U.S. overall and Core price indices both rose +0.3% in August vs July’s +0.4% while personal spending growth slowed to +1.0% from July +1.5% (est. 0.8%) and real consumer spending growth also slowed to +0.7% from July +1.1%; Personal savings rate also decreased in August to 14.1% from July 17.7%

·     IHS Markit September final manufacturing PMI at 53.2 (vs flash 53.5), sector final output index for September at 53.1 vs flash reading 53.3 and final august 52.7 and final new orders index for September at 53.6 vs flash reading 54.0 and final august 54.

·     ISM U.S. manufacturing activity index 55.4 in September below the consensus est. 56.3 as prices paid index 62.8 vs. est. 58.6 and 59.5 in august, New Orders falls to 60.2 in September from 67.6 in august and the employment index rises to 49.6 in September vs46.4 in august

·     Construction Spending for August rise +1.4% above the 0.8% estimate and above the 0.7% rise in July; Aug private construction spending +1.9%, public spending +0.1%

Commodities & Currencies

·     Oil prices were pummeled on the day, with WTI crude falling -$1.50 or 3.73% to $38.72 per barrel, its lowest levels in about 2-weeks (but off lows of down 5% for WTI and Brent -6%) as rising coronavirus cases weigh on expectations of weaker fuel demand. Headlines that that Libya’s oil output has risen to 270,000 barrels per day as the OPEC member ramps up export activity following the easing of a blockade by eastern forces also did not help sentiment.

·     December gold advanced $20.80 or 1.1% to settle at $1,916.30 an ounce (2-week highs), getting a boost after the dollar slipped and on renewed hopes for a U.S. stimulus package that could help ease the economic pain from the coronavirus, possibly stimulating inflation. The U.S. dollar fell to a more than one week low versus rivals as U.S. manufacturing activity unexpectedly slowed in September as new orders retreated. Treasury prices edged lower initially after economic data, but the 10-year yield slipped back below the 0.7% level, staying in its tight range.

Sector News Breakdown

Consumer

·     Auto sector; TSLA cut the starting price of Chinese-made Model 3 sedan by ~8% to 249,900 yuan ($36,805.21), after accounting for local subsidies – TSLA’s China website; LAD 3.18M share Secondary priced at $220.00; Ford (F) CFO Tim Stone leaving automaker after 15 months on the job. Ford names John Lawler as CFO; TM said division sales for September were 172,370 units, up 14.3% on a volume basis and up 16.2% overall; NKLA surged a second day despite the lack of new details on the GM partnership and potential stake still uncertain; GM said Q3 U.S. sales fell nearly 10% from the prior-year period, but the decrease was narrower than the 34% decline in Q2; FCAU posted a 10% drop in Q3 U.S. sales, but the decline was slimmer than the 39% decrease it posted in Q2; Ford Motor Co. (F) is expected to release its Q3 sales Friday, and numbers from TSLA are also expected in the coming days.

·     Housing & Building Products; homebuilders; ZG tgt raised to $140 from $115 at Deutsche Bank as values the Zillow Homes segment now at $49 per share versus $25 previously, based on a $450M market capitalization, while Jefferies said ZG’s position as the dominant U.S online real estate portal allows it to capitalize on increasing housing demand; home furnishing retailer’s BBBY rises after swinging to a quarterly profit and posts first quarterly same-store sales growth in about 3 years of 6%, driven by ~89% growth from its digital channels (WSM, HOME comps)

·     Consumer Staples: PEP reported results that beat estimates and grew since last year driven by strength in snacks. Q3 eps $1.66 on revs $18.09B vs $1.56 / $17.19B in Q3 2019 and guides FY organic rev growth to ~4% and core eps to $5.50, above the $5.37 consensus; STZ reported Q2 eps $2.76 on revs $2.26B vs. est. $2.51 / $2.19B and they do not provide FY21 guidance due to uncertainty surrounding the pandemic; CAG posts Q2 EPS 70c on $2.68B rev vs. est. 57c / $2.61B and ups its quarterly dividend to 27.5c from 21.25c as comp sales rose 15%, which was a decrease from last quarter’s 31.5% growth; AVO 8M share IPO priced at $12.00; SBH removed from the Midcap 400 and added to the S&P Smallcap 600 index

·     Leisure and Gaming; Macau gaming revenue down 90% in September, marking a sixth straight months of abysmal growth in the Macau sector due to the pandemic. Gaming revenue in Macau fell 90.0% in September to 2.21B patacas ($280M) as the pace of recovery was slower than anticipated (WYNN, MLCO, LVS, MGM) – YTD Macau GGR is down 82.5% to 38.61 patacas ($4.84B); DKNG was initiated outperform and $70 tgt at Needham; in theme parks, FUN guides Q3 revs $85M-$90M vs. rest. $119M (watch other theme parks SIX, SEAS); CCL cancelled cruises from all U.S. homeports except Miami & port Canaveral for November and December

·     Retailers and Services; retailers in general outperform with ETSY, LB, GPS, UAA, TJX among the top gainers in the S&P most of the day; HMHC said it is cutting about 525 jobs, or 22% of its workforce, as part of a restructuring aimed at accelerating the education and publishing company’s digital transformation; GPS announces new hiring efforts to support digitally-led business, as the company acquired 3.5M new customers through its online channels in Q2; AMZN price target raised to a street high of $4,500 at Pivotal research today

Energy

·     Macro news; energy stocks pummeled along with a precipitous drop in oil prices with a challenged demand outlook weighed against a potential U.S. stimulus package. Prices declined despite a drop in American crude and distillate inventories in a report by the EIA Wednesday. Reuters reported that Libya’s oil output has risen to 270,000 barrels per day as the OPEC member ramps up export activity following the easing of a blockade by eastern forces, a Libyan oil source told Reuters on Thursday.

·     Energy stock movers; VLO, HAL, HES, NOV, APA, MPC among top S&P decliners as energy continues to underperform; CPE shares rise after signing overriding royalty interest transaction with private investment vehicle managed by Kimmeridge Energy, generating $140 mln – has also issued $300 mln of principal value second lien secured notes to Kimmeridge; DVN was upgraded to buy at Truist given the upside they forecast as a standalone and materially more post-merger including one of the most consistent future shareholder return plans; CVE was downgraded to Underweight at JPMorgan; in refiners, VLO downgraded to Sell at Goldman Sachs citing concern about global refining fundamentals weighing on the company’s margins given capacity additions, unfavorable crude differentials and lower refining utilization rates;

·     Utilities & Solar; DTE tgt cut to $122 from $129 at Mizuho while increasing our estimates for DTE after the MPSC approved constructive rate cases for both the electric and gas utilities; SPI shares fell after 2.964M share registered direct offering priced at $5.40

Financials

·     Bank movers: sector was weak after the Federal Reserve Board said it will extend for an additional quarter several measures to ensure that large banks maintain a high level of capital resilience. For the fourth quarter of this year, large banks-those with more than $100B in total assets-will be prohibited from making share repurchases. Additionally, dividend payments will be capped and tied to a formula based on recent income (watch BAC, C, JPM, PNC, USB, WFC); SCHW and AMTD merger deal set to close October 6th

·     Insurance: AEL shares surge after the WSJ reported ATH offered $36 a share in cash on Sept. 8, according to a letter sent to American Equity’s CEO that was viewed by The Wall Street Journal and would value it at more than $3 billion. https://on.wsj.com/2HEsRcC (the deal was later confirmed by the company); ALL said it sees 3q restructuring and other charges, corp. to cut about 3,800 jobs; expects to incur restructuring charge of $50 mln to $60 mln, pre-tax, to be recognized in q4, any remaining charges to be recognized in h1 2021; GNW falls after it and China Oceanwide Holdings announced that Oceanwide has reached a general agreement with Hony Capital on the key commercial terms and conditions of its $1.8B offshore financing plan to complete the acquisition of Genworth.

·     REITs; CLI said it will be suspending its common dividend for Q3 and Q4 of this year and intends to revisit the resumption of the dividend in Q1 2021; Berenberg initiates Buy ratings on AMH ($38 pt), UMH ($19), INVH (32), ELS ($73), and SUI ($170), who also upsized their public offering of 8M shares at $139.50; PEI received notice from the NYSE about non-compliance with the listing standards of a 30-day trading average over $1 and now have 6 months to regain compliance, and they report improving traffic in their shopping centers as the weather cools

Healthcare

·     Pharma movers; PFE said the FDA has granted Fast Track designation to its investigational gene therapy candidate (PF-06939926) being developed to treat Duchenne muscular dystrophy (DMD); SLDB surges after the FDA lifted clinical hold on co’s early-to-mid-stage trial of its experimental gene therapy for Duchenne muscular dystrophy (DMD) – shares of competitor SRPT were active following the reports; MESO remains halted pending statement on FDA review of Ryoncil; ZSAN slides after receiving a discipline review letter from the FDA in connection with the Qtrypta 505(b)(2) New Drug Application (NDA); in the cannabis sector: CGC details initial plans to launch THC-infused cannabis beverages in U.S. next summer through Acreage Holdings; group also gets a boost after New Jersey governor Murphy said strongly supporting N.J. referendum on marijuana (ACB, TLRY active)

·     Biotech movers; BEAM 5M share Secondary priced at $23.50; SELB downgraded to Neutral at Mizuho following the release of the COMPARE Phase 2 trial data which failed to meet its primary endpoint of demonstrating superiority vs. competitor Krystexxa (HZNP), as well a dearth of catalysts in the next six months; AMAG spikes after confirming prior reports to be acquired by Covis Group – price tag $13.75 per share in $647M deal

·     MedTech and Equipment; MDT active as the WSJ reported the U.S. Department of Justice is investigating if acquisitions by the company limited competition in ventilator manufacturing; Citigroup upgraded BAX to buy from neutral with $94 tgt as the stock pullback the risk/reward has become more compelling, no change to our $94 TP and downgraded SILK to neutral from buy despite believing in the long-term story citing its valuation; SNN provided a preliminary revenue update on its business saying it sees 3Q20 organic revenue decline of 4% (which is above ests and GSCO est. of down -6.7%); LUNG 10M share IPO priced at $19.00; CDNA announced the release of the final local coverage determination by Palmetto MolDx for AlloSure Heart; QDEL rises as guided Q3 revenue $475M-$477M vs. est. $394.2M

Industrials & Materials

·     Transports; JBLU rises after the U.S. Treasury agreed to extend loans of up to $1.14B until March 26, as the airline drew down $115M of the loan on Tuesday and issued warrants to the Treasury to purchase 1.21M shares as part of the CARES Act agreement; UAL also agreed to a deal with the Treasury under the CARES Act for a loan of up to $5.17B; LUV announced it obtained another $94.3M from the Treasury for payroll support, bringing its total government support to $3.35B, and it issued warrants for the Treasury to purchase up to 2.68M shares; AAL and UAL will go forward with a more than 32,000 job cuts after lawmakers were unable to agree on a broad coronavirus-relief package; UBS raises targets on U.S. airlines (AAL to $10 from $9, ALK to $40 from $31, DAL to $34 from $21, JBLU to $13 from $9, LUV to $48 from $41, UAL to $36 from $25) on optimism around more government stimulus, relatively fewer liquidity concerns, slow improvement in passenger demand, and vaccine news flow

·     Aerospace & Defense; BA shares rise after Federal Aviation Administration (FAA) chief Dickson conducted a 737 MAX test flight, a milestone for BA that is on quest to bring its aircraft back to service saying "I like what I saw on the flight" at a news conference following – but said that the process was not completed and he was not ready to give the jet a clean bill of health; TXT downgraded to Market Perform at Cowen and trim tgt from $39 to $38 as prefer GD amongst value, defense/biz jet hybrids with a better biz jet story; LHX upgraded to buy from neutral with $226 tgt at UBS as prior view was predicated on ambitious investor expectations, accounting post-merger that was less understood on an apples-to-apples basis with defense peers; RYCEY plans to raise £2B ($2.6B) by selling shares to existing investors and plans to raise at least £1B by selling bonds, and it may increase borrowing by up to £2B.

·     Metals & Materials; PAAS upgraded to buy from hold at Deutsche Bank; FCX added to catalyst Call list as a near-term BUY idea at Deutsche Bank into the 3Q20 result scheduled to be released on Oct 2 driven by higher realized pricing and volumes; AXTA shares jumped in chemical space after the Financial Times reports Nippon Paint will look for acquisitions after combining with Wuthelam Holdings https://bit.ly/30omj8q ; lithium related names active (PLL, ALB, SQM) after TSLA said that some Model 3 cars made in China would now come with lithium iron phosphate batteries, rather than previously used nickel-cobalt-manganese cells

Technology, Media & Telecom

·     Semiconductors; STM led semiconductors after posting prelim Q3 revs above the business outlook provided on July 23 as Q3 net revenues are $2.67B, up 27.8% sequentially (consensus: $2.47B) and vs. prior outlook was $2.45B; Cowen raised tgt prices on QCOM to $150 from $130 as see the largest near-term opportunity for QCOM in smartphone as Oppo, Vivo and Xiaomi will likely replace Huawei chips with QCOM; raised tgt on QRVO to $165 and SWKS to $155 saying Qorvo will go from earning $6 in 2019 to easily hitting $9 in 2022 and $10 is very much in play and Skyworks will go from earning just under $6 in 2020 to over $8 in 2022 due to Huawei reduction in China OEM and QRVO base station dominance

·     Software movers; SAIL will replace SBH in the S&P Midcap 400 index and was upgraded to overweight at Morgan Stanley with $50 tgt as see growing Cloud adoption driving accelerated share gains for SailPoint, with potential multiple expansion from higher mix of recurring SaaS revenue; CRM CEO Marc Benioff said on Jim Cramer’s Mad Money the company is stepping in on the COVID-19 effort by adapting its software for vaccine distribution; WDAY upgraded to buy from neutral at Citigroup and raise tgt to $265 calling it the leader in enterprise cloud human capital mgmt software and is now entering the middle stages of scaling a cloud financial suite