Closing Recap

Friday, October 23, 2020

Equity Market Recap

·     U.S. stocks churned higher throughout the day, but major averages still ended the week slightly lower, snapping their 3-week winning streak heading into a busy couple of weeks. The week ahead sees another packed earnings calendar for markets (over 180 companies in the S&P expected to report – with AAPL, AMZN, FB, GOOGL, SBUX, TWTR all next Thursday), while a rising number of coronavirus cases and further restrictions being imposed in Europe remain a concern and of course hopes of a stimulus deal in Washington. Outside of stimulus and earnings, the focus will remain on politics as we enter the last full week of the campaign ahead of the Presidential election. On the central bank side, both the ECB and the Bank of Japan will be making their latest decisions, while the Q3 GDP readings are expected to set records for the pace of the quarterly expansion (ests around 32%). Small caps and value names outperform large cap as energy names climbed alongside financials while the Dow was hit as Intel (INTC) and American Express (AXP) both weighed on the market following earnings disappointments.

·     There were plenty of headlines out of Washington (Trump, Pelosi, Mnuchin, Meadows, Kudlow, Shelby) all weighing in on again on stimulus aid – but no deal again. Several members on both sides said this week they are getting closer to helping small businesses, individuals, and unemployment benefits but to no avail with the Presidential election looming. Treasury yields rose on the week while the dollar and oil slipped. Europe’s Stoxx 600 was down 1.4% the last 5-days, worst week in a month, while Britain’s FTSE 100 was down 1% and the German Dax loses 2% on the week, biggest weekly loss since Sept. 25. Market view at this point is for a possible blue sweep where Biden wins the presidency and the Democrats take the Senate would provide the most fiscal stimulus to the economy in 2021, or 2^nd a Biden presidency with a “Red” Senate.

·     Covid-19 update: The U.S. reported 71,671 cases on Thursday, according to Johns Hopkins University – the most in a single day since July 24. The highest tally recorded during the pandemic so far was 77,362 cases on July 16^th. Six states including Colorado, Indiana, Montana, Ohio, Oklahoma, and Utah reported the highest number of cases on a single day so far on Thursday, while 15-states reported more than 1,000 new cases and seven others reported more than 2,000. This excludes the massive jump in Covid cases in Europe again as the UK records 20,530 cases on Friday (21,242 the day before), while Italy reports a record 19,143 new coronavirus cases vs 16,079 Thursday.

Economic Data

·     IHS Markit October flash manufacturing PMI at 53.3 in-line with Sept while services sector flash PMI for October at 56.0 (consensus 54.6) vs 54.6 in september and at the highest since February 2019. Manufacturing sector flash PMI for October at 53.3 (consensus 53.4)

Commodities

·     Oil prices dropped on Friday, falling from earlier 7-week highs mid-week, with WTI crude down 79c or 1.94% to settle at $39.85 per barrel, posting a weekly decline of about 3% amid rising Libyan crude supply and demand concerns caused by surging coronavirus cases. Libya’s National Oil Corp (NOC) said it lifted force majeure on exports from key ports and output would reach 1 million barrels per day in four weeks (those headlines sunk prices). Adding to supply pressures, U.S. energy companies added five oil rigs to 287, its highest since May in latest Baker Hughes data. Gold prices end the session higher by 60c to $1,905.20 an ounce, and ended the week little changed, down less than -0.1%, rising the tail end of the week on the dollar decline. Natural gas prices slipped 1.2% to settle at $2.971 mln btus on small profit taking after weekly gains. 

Currencies & Treasuries

·     Treasury yields pulled back off highs, as the 10-year ended down slightly around 0.84% after touching highs above 0.87%, but still posted a strong week as yields reached their best levels since mid-June as Treasury prices fell. The U.S. dollar slumped on the week (dollar index down 1%), falling sharply vs. most rival currencies as hopes grew (only to end up disappointed) that Washington would deliver the $2 trillion + stimulus bill that markets have been anticipating. The euro firmed vs. the buck while Sterling pulled back from earlier gains. The safe-haven yen dipped following comments from house Speaker Nancy Pelosi that stimulus talks had made progress, though still ended the week with gains.

Sector News Breakdown

Consumer

·     Retailers; UAA tgt raised to $20 from $15 at Raymond James as believe the company is reaching the latter stages of a multiyear restructuring process and will return to growth in 2021 and beyond; MAT rises as results came in solidly above expectations, helped by low inventories exiting 2Q20, and sustained POS momentum throughout 3Q into the holiday’s (was upgraded at Davidson to buy); CRI posts Q3 adj profit of $1.96 topping view of $1.57 driven by curtailed spending and growth in e-commerce sales (no outlook provided)

·     Auto sector; UBER and LYFT shares slip early as the two ride hailing companies must classify their drivers in California as employees, a state appeals court ruled Thursday. The two had appealed a San Francisco Superior Court judge’s August decision that called for the ride-hailing services to immediately comply with the law; GNTX outperforms after earnings in auto suppliers; TSLA shares fell after China’s market regulator says TSLA to recall 29,193 Model S and Model X vehicles in the country, as well as another 19,249 Model S vehicles

·     Consumer Staples; SAM reported 3Q EPS ahead of consensus ests, despite softer volume due to supply constraints, driven almost entirely by lower ad expenses while provided strong FY20 guidance that implies a meaningful acceleration in 4Q ships (tgts raised by several analysts including Cowen to $1,250)

·     Restaurants; BLMN posted a Q3 loss and lower revenue as the restaurant business continued to face challenges during the Covid-19 pandemic as revs fell over 20% to $771M (though the loss was smaller than expected and revs beat), while comp sales fell -12.8%; BJRI another decliner on earnings despite smaller loss and beat on revs of $198M (comps fell over -305); SBUX ests raised at Keybanc ahead of earnings next Thursday saying higher comp sales growth assumptions incorporate the Company’s most recent disclosures for July/ August; TACO shares rise after filing overnight showed Director Levi buys 67,400 shares between 10/20-22 @ $7.49

Energy

·     E&P sector; PXD and EOG both upgraded to overweight at Piper as discuss the recent M&A trend, the upcoming election and update models for our oil-weighted coverage universe ahead of 3Q20 earnings season; CXO and PE both downgraded at Stephens while name PXD its best idea; in equipment, BOOM shares jumped following its Q3 results while energy names in general outperformed for a second consecutive session; the Baker Hughes (BKR) weekly rig count showed U.S. gas rig count down 1 to 73, U.S. total rig count 287 and U.S. oil rig count up 6 to 211

·     Utilities & Solar; Solar stocks (SPWR, SEDG, FSLR, CSIQ, JKS) mostly higher after Joe Biden went over plans on clean energy talking about his plan for a transition to a more climate-friendly economy in the final presidential debate on Thursday night; in utilities, DTE was upgraded to buy at Argus saying its underlying business fundamentals remain strong; DUK active after CNBC’s David Faber said appears NEE has "moved on" from a pursuit of a takeover of Duke

Financials

·     Bank movers; sector looked to add to recent gains on improving Treasury yields and a strong of better earnings in regional banks this week; WFC is exploring a sale of its asset management business, Reuters reported, saying the arm, which managed $578B as of the end of June, could fetch more than $3B in a sale; FHN 3Q adj EPS of 35c beat the 21c estimate on better revs $1.36B; SIVB strong quarter with robust balance sheet growth, very strong core fees and gains, and a reserve release due to improved economic forecasts; BANC reported EPS of $0.24 which was$0.09 above the $0.15 Street consensus as a lower tax rate contributed to the beat

·     Insurance; AIG agreed to settle a tax shelter lawsuit related to the entering of sham transactions designed to generate bogus foreign tax credits, Acting U.S. Attorney Audrey Strauss in Manhattan said on Friday – AIG agreed to the disallowance of more than $400 million in foreign tax credits and the imposition of a 10% tax penalty, Strauss said.

·     Consumer Finance; AXP shares fell after EPS of $1.30 misses by 3c and revs of $8.75B slightly above est. $8.65B (though revs fell 20% due primarily to declines in card member spending amid the pandemic) – Provisions for credit losses declined to $665 million from $879 million; COF a different story as earnings for the quarter easily topped consensus as earned $2.4 billion, or $5.06 a share, in the quarter, and sales rose to $7.4 billion from $6.7 billion a year ago

Healthcare

·     Pharma movers; big week of earnings for large cap next week with MRK, LLY, PFE results due; AKBA presents positive clinical data from a global late-stage study of its anemia treatment vadadustat; PHAS slips as discontinues trial testing drug for hospitalized COVID-19 patients who are at high risk of acute respiratory distress syndrome

·     Biotech movers; GILD announced that the U.S. FDA has approved the antiviral drug Veklury (remdesivir) for the treatment of patients with COVID-19 requiring hospitalization (also helping futures); CVAC said its potential Covid vaccine candidate CVnCoV, produced immune cells called neutralizing antibodies and activated T-cells in hamsters and mice; SLDB and RARE enter into a license agreement to develop and commercialize new gene therapies to treat DMD

·     Healthcare services and providers; EHTH posted a smaller than expected Q3 loss but guides FY GAAP EPS $2.91-$3.47 and revs $630-$670Mm vs. est. $655Mm, bit below the midpoint of guidance $3.33 and $655M; NXGN positively surprised with low single-digit organic growth in F2Q21 (as EPS and revs beat), despite ongoing headwinds associated with COVID-19 outbreak

Industrials & Materials

·     Materials, Industrial & Machinery; ITW just the latest in a very strong industrial sector to touch record highs, with shares jumping after better-than-expected Q3 EPS and revs amid a strong rebound in demand in its businesses, following easing of coronavirus-led lockdowns (said expects 2020 organic rev to decline 11.0%-11.5% vs. ests around -16%); CLF Q3 revs and Ebitda topped consensus views helping metals

·     Transports; airlines (UAL, DAL, AAL, JBLU) closed out the week stronger on hopes of additional stimulus aid, but the industry continues to wait; USX shares tumbled after reporting Q3 EPS and revs below consensus; railcars active on earnings as GBX posted lower-than-expected Q4 EPS, as railcar deliveries fall about 30% to 5,100 units compared with a year earlier and said its backlog at the end of Q4 shrinks to $2.4 bln, from $2.7 bln as of Q3 end

Technology, Media & Telecom

·     Internet; big week coming up for large cap internet as four major names report Thursday oct 29^th (AMZN, FB, GOOGL, TWTR) – which follows blowout results from SNAP earlier this week; BMO Capital raised its price tgts on GOOGL to $1,900, AMZN to $3,800, FB to $275, and TWTR to $45 saying they like GOOGL most into the Q as it has the worst sentiment and investors know travel is still bad; and #2 preference in this group, AMZN, while remain Market Perform on FB (targeting headwinds and safety and security spending risk) and TWTR (and we are cautious into the print)

·     Semiconductors; INTC dropped over 10% overnight after mostly in-line results, pulled lower after saying data centric revenue was down -10% Y/Y overall with DCG down -7% Y/Y to $5.9B, below the $6.22B consensus; STX shares slipped after Q1 results beat profit estimates but missed on revenue, reporting a 10% Y/Y decline to $2.31B, slightly missing estimates

·     Software movers; CTXS downgraded at Morgan Stanley saying despite a string of beats & raises on rev/EPS in recent qtrs., slower progress on cloud creates debate on the durability of LT growth which has weighed on shares; MANH shares fell after Q20 reflected upside across every key metric while RPO is the best proxy for new cloud demand and the company significantly exceeded our expectations but issued a lower 2021 outlook

·     Hardware & Component news; FFIV and MSI both upgraded to buy; CDN space pressured today after LLNW reported a mixed quarter, with revenue in line and AEBITDA below, however, the company lowered its full year revenue and profit forecast (shares fell over 20%) while FSLY downgraded to underweight at Piper saying fundamentals and risks are not appropriately reflected in the stock at these levels (shares of AKAM fell in reaction)