Closing Recap

Monday, September 14, 2020

Equity Market Recap

·     It was a strong start to the week for U.S. averages, recovering from selling pressure the last two weeks as profit taking, and valuation concerns dragged down some of the biggest YTD winners, with big gains in tech, small caps, retailers, financials and biotech. Vaccine news and a surge in M&A activity helped propel stocks on Monday after drug maker AZN resumed its British clinical trials of its COVID-19 vaccine along (though Reuters noted late day its COVID-19 vaccine trial remains on hold in the United States pending a U.S. investigation), while PFE/BNTX to expand their Phase 3 pivotal COVID-19 vaccine trial to about 44,000 participants. Several deals in tech and biotech also buoyed sentiment. In tech, ORCL beat MSFT in the battle for the U.S. arm of TikTok with a deal structured as a partnership rather than an outright sale.

·     Sector movers; market strength was broad based (outside of energy weakness), with REITs and financials among the top performers, along with retailers and discretionary names as economic related “reopen” trade hopes helped boost names along with theme parks, restaurants and leisure related sectors. Semiconductors were among the top gainers in tech as the Philly semiconductor index rises over 1.5%, back above its 50-day MA earlier of 2,152, led by gains in NVDA (buys chip designer Arm for $40B from Japan’s SoftBank Group Corp.) and MU (upgraded to buy at Goldman). Biotech space was on fire, fueled by deal making as GILD buys IMMU in $21B deal, while SGEN rises after MRK to buy $1B equity stake – each providing a boost for several SMID biotech names on hopes of further consolidation. Energy stocks the big laggards in the S&P as oil stocks remain unloved. Apple (AAPL) will host a virtual event tomorrow starting at 10 AM PDT that could involve a variety of product announces but might not include the 5G iPhone lineup, which could have a separate launch event in October.

·     Overall, excluding the last two-weeks, it has been a great summer for stocks as the NASDAQ has risen over +80% (SPX over +60%) from 3/23 to the 9/2 top heading into election time (50-days away from the Presidential election), and the FOMC meeting this week. In addition, world oil demand will fall more steeply in 2020 than previously forecast due to the coronavirus and recover more slowly than expected next year, OPEC said on Monday.

Commodities

·     Oil prices slipped 7c to $37.26 per barrel amid concerns about a stalled global economic recovery while drillers and E&P companies brace for another potential disruption in the Gulf. More than 21% of Gulf of Mexico oil production has been shut down in preparation for Hurricane Sally and 25.3% of natural-gas production has been shut in, according to the BSEE. Sally was upgraded to a hurricane on Monday, but its trajectory has shifted east likely sparing some of Louisiana’s refining ops. Oil prices also dealt more negative headlines as energy giant BP Plc and commodities trading giant Vitol all made grim forecasts as rising rates of COVID-19 infections sap hopes for quick recovery. OPEC said in its monthly report that world oil demand would fall by 9.46 million barrels per day (bpd) this year, a decline sharper by 400,000 bpd than predicted in August.

·     Gold prices jumped $15.80, or 0.8%, to settle at $1,963.70 an ounce, its biggest one-day percentage and dollar price gain for September thus far as the dollar slipped and investors positioned themselves ahead of the two-day FOMC meeting which concludes Wednesday. Today’s gains also marked the largest one-day rise for the most-active contract since Aug. 28^th.

Currencies & Treasuries

·     The U.S. dollar declined as investors rotated back into riskier assets as stocks surged after two-weeks of declines; the dollar fell to 2-week lows against the Japanese yen amid improved COVID-19 vaccine news (AZN) and as trades look ahead to an event-packed week which includes a Federal Reserve meeting and the appointment of a new Japanese premier. The dollar index (DXY) fell at least 0.3% after posting two straight weeks of gains.

·     Treasury yields held steady throughout the trading day despite a surge in U.S. stocks, as investors await the first U.S. Federal Reserve policy meeting mid-week since it recently adjusted its approach to monetary policy saying they would late inflation run hotter. The benchmark 10-year yield remained little changed at 0.66% most of the day, while the 2 and 30-yr yields were also little changed. The U.S. central bank will meet on Tuesday and Wednesday

Sector News Breakdown

Consumer

·     Retailers; strength in retail with big gains for names like TPR, PVH, VFC, KSSand DDS; CROX positive mention in Barron’s this weekend saying the stock could double over time, with more styles, smart marketing, and a growing e-commerce effort; TPX upped its Q3 sales guidance; sees Q3 sales to grow by more than 30% compared with the year-ago period, the mattress company said, upping its 25% guidance from July; JILL avoided filing for bankruptcy protection after a majority of its lenders and shareholders agreed to support an out-of-court financial restructuring deal; FIT receives clearance from the USFDA and CE marking in the European Union for its electrocardiogram app to assess heart rhythm for atrial fibrillation; GME was upgraded to buy with $8 tgt at Jefferies noting risk but says Q4 kick-starts the next gen console cycle and expect GME to win big & early

·     Auto sector; NKLA pares losses (and later reversed higher) after company issues statement on the “short” Hindenburg report issued last Thursday saying the report contains false statements and provides rebuttal to each point in the report and accuses Hindenburg Research manipulating the market to benefit short-sellers; GPC upgraded from Neutral to Overweight at JPMorgan based on a 2.9% dividend yield on our projected 2022 dividend

·     Consumer Staples; KR downgraded to Neutral at Bank America and lower our PO to $40 given our outlook for muted ID trends in F2H (and likely neg in F22) as think profitability will moderate and see additional margin pressure for KR from price investment & fuel; BYND starts selling plant-based meatballs in stores this week; in protein space (TSN, PPC, SAFM), China bans pork imports from Germany and will destroy existing supplies after Germany confirmed a case of African swine fever last week; Stifel said MNST is planning to introduce a watermelon variant under the Ultra family very shortly; KHC rises ahead of investor day tomorrow

·     Leisure and Gaming; SGMS said a group of investors led by Australia’s Caledonia Investments to buy 34.9% stake in SGMS from U.S. billionaire investor Ronald Perelman as deal is for $28 per share, a 47.6% premium to SGMS Friday close, valuing co at $2.65B https://bit.ly/2FrZpG9 ; in other gaming, Goldman Sachs downgraded MGM to sell from neutral with $20 tgt as anticipate a slower recovery in Las Vegas which will drive downside to consensus estimates and fundamental underperformance relative to peers; ESPN announced that it has entered into two separate multi-year agreements with CZR and DKNG (also New Jersey sports betting handle for August is $667.8 million, breaking the all-time state monthly sports betting handle record by $70 million (Nevada, $597.8 in March 2019)

Energy

·     Energy stock movers; energy was one of the weakest sectors on the day, remaining unloved as companies from BP to Trafigura questioned the future of demand growth days before OPEC and its allies meet to assess whether they’re still managing to shore up the market. The rebound has stalled as OPEC+ returns some supply to the market, with prices last week slipping to the lowest since mid-June. A meeting of the JMMC is scheduled for Thursday. OPEC downgraded its outlook for the global oil market a few days before ministers meet, amid faltering demand and signs of a recovery in supply from U.S. shale drillers. The figures raise questions about the group’s decision to ease production cuts last month.

·     Oil Majors and E&P sector; BP becomes the first oil major to call the end of an era saying the relentless growth of oil demand is over in its latest energy outlook; BP was also upgraded to outperform from neutral at Credit Suisse on valuation grounds and downgraded TOT to Neutral from Outperform; Wells Fargo upgraded E&P stocks XEC and MTDR to overweight as see substantially improved FCF generation versus our prior expectations, while downgraded CDEV and LPI to underweight as believe smaller operators that struggle to maintain production without outspending cash flows and expanding the balance sheet will continue to struggle against peers; Credit Suisse lowered estimates for U.S. refiners and cuts price targets by an average 20% on downward earnings revisions saying current level of inventories will prevent diesel margin to recover quickly in the near term (VLO, PSX, MPC)

Financials

·     Bank movers; financials and REITs among top gainers today; Citi (C) slipped after saying at an investor conference it expects 2020 revenue to be flat to slightly lower; FITB leads banking stocks among leaders in the S&P while CMA jumps after Odeon upgraded earlier saying there are a growing number of signs that the company’s core businesses are beginning to turn around; in consumer finance, SYF core delinquency rate of 2.6% in August slips from 2.9% in July and 4.2% in the year-ago month, reflects the improvements in customer payment behavior (shares of COF, ADS also outperform in the space); FISV reiterated buy and $140 tgt at Baird saying the stock that will likely grow EPS 10%+ in 2020 and 15-20%+ in 2021-2024; REITs outperform with gains in AIV, ESS, KIM, SLG, EQR, SPG on reopen hopes (note retailers were also among top gainers on the day); KIM was upgraded to overweight at Morgan Stanley saying its free cash flow looks undervalued, while downgraded MAC to underweight saying market focus has shifted from the value of their properties to future cash flow growth given negative FCF in 20e

·     Exchanges; the biggest U.S. stock exchanges and major market-makers are joining forces to fight a proposed tax on financial transactions under consideration by N.J. Governor Phil Murphy. Members of the newly formed coalition such as NYSE, Nasdaq Inc. (NDAQ), Citadel Securities and Virtu Financial Inc. (VIRT) are threatening to move operations out of the state if the tax is enacted. Murphy said on Aug. 31 he was "very seriously" considering a tax on high-volume electronic trading in the state, home to Wall Street’s massive server farms

Healthcare

·     Pharma movers; AZN said clinical trials for the Oxford coronavirus vaccine, AZD1222, have resumed in the U.K. following confirmation by the Medicines Health Regulatory Authority that it was safe to do so; PFE and BNTX submitted an amended protocol to the FDA to expand enrollment in their Phase III Covid-19 vaccine trial to up to 44,000 participants, a significant increase from the previous target of 30,000; on Sunday, President Trump signed an executive order to lower drug prices in U.S. by linking them to those of other nations and expanding the scope of a July action; JAZZ downgraded to sell from neutral saying believe upcoming changes to the SXB market dynamics may lead to changes in OpEx discipline; ELAN positive Barron’s mention; DVAX to supply its adjuvant or vaccine booster, CpG 1018, to French vaccine maker Valneva for producing up to 100M doses of its coronavirus vaccine candidate, VLA2001, in 2021; AXSM announced that AXS-05, a novel, oral, investigational NMDA receptor antagonist with multimodal activity, rapidly and significantly improved patient-reported outcomes of depression in patients with major depressive disorder, or MDD, in the GEMINI Phase 3 trial

·     Biotech movers; IMMU surges over 100% after GILD reaches a $21 billion deal to buy the company, paying $88 a share in cash, whose shares closed at $42.25 Friday, which represents a 108% premium https://on.mktw.net/32oLTvF ; SGEN rises after saying will jointly develop and commercialize its vedotin, an investigational therapy for breast cancer and other solid tumors with MRK which will buy $1 billion worth of equity stake in SGEN and make a $600M upfront payment; SAVA jumps after the o reports final data from a mid-stage study testing its lead experimental Alzheimer’s treatment, sumifilam; INCY and partner LLY said their jointly developed treatment, baricitinib, combined with GILD’s antiviral remdesivir reduced the time of recovery in hospitalized patients with COVID-19; MRNS was awarded BARDA contract to develop iv Ganaxolone for treatment of refractory status epilepticus caused by nerve agent exposure as BARDA to fund up to $51 million of $84 million contract for program; SRNE entered into an exclusive license agreement with privately-held Mayo Clinic for its potential antibody technology platform that can help target different types of cancer

·     Healthcare services and providers as well as MedTech and Equipment; HOLX launches $950M debt offering; TMO initiated overweight and $485 tgt at Morgan Stanley as expect TMO to meaningfully outpace peers, with diversification and scale embedding best-in-class resilience and flexibility; RNVA entered an agreement with ABT to install and provide the ID NOW testing facilities.

Industrials & Materials

·     Industrials, Metals & Materials; DOW agrees to sell some U.S. Gulf Coast marine and terminal operations and assets to a joint venture owned by tank storage company Royal Vopak and BlackRock’s Global Energy & Power Infrastructure Fund for $620M; PNR upgraded to buy at Citigroup saying it stands out as having above average exposure to what we view as sustainable positive trends in residential construction; NAV rises after saying Traton’s revised offer undervalues company, expects further discussions; building materials outperform again, adding to gains late last week (EXP, MLM, VMC)

Technology, Media & Telecom

·     Semiconductors; NVDA shares rise as agreed to buy chip designer Arm for $40B from Japan’s SoftBank Group Corp (SFTBY), confirming reports this weekend (SoftBank bought Arm four years ago for $32B) https://on.mktw.net/3hnzQDb; CRUS upgraded from Underweight to Equal weight at Barclays noting the stock is down over 20% since earnings, on belief that December quarter is achievable, and says investors will want to own the stock ahead of the AAPL 5G cycle; MU was upgraded to buy at Goldman Sachs with $58 tgt as believe ongoing weakness in DRAM and NAND pricing will be short-lived, and says Micron is well-positioned competitively as it continues to execute on its tech transitions (i.e. 1anm in DRAM and 2nd-gen replacement gate in NAND); AMKR upgraded to outperform at Credit Suisse based on 14x 2021E P/E and 1.5x P/B on growth leverage from rising 5G and SiP content and leverage to improving auto demand; PLAB announces $100M share repurchase program

·     Software movers; ORCL won the bidding for the U.S. operations of the video-sharing app TikTok, according to various reports, beating out the team of MSFT and WMT in a high-profile deal https://on.mktw.net/2RmyyxJ – ORCL later confirmed that it is part of the proposal submitted by ByteDance (for TikTok) to the Treasury Department over the weekend in which Oracle "will serve as the trusted technology provider”; Snowflake (SNOW) raised the expected price range of its initial public offering, pushing its valuation over $29 billion, as 28M share IPO price range raised to $100-$110 from $75-$85

·     Media & Telecom movers; VZ announced today that it has entered into an agreement with AMX to acquire Tracfone, the leading pre-paid and value mobile provider in the U.S. in a deal worth up to $7 billion in cash and stock; WWE upgraded from Sell to Hold at Loop Capital with $42 tgt saying ratings continue to be challenging for WWE, but other sports, and TV in general, is experiencing similar weakness; NFL Media and DISH reached an agreement on a new multi-year contract for NFL Network and NFL RedZone; Red Ventures confirmed a deal to pay $500 million to VIAC to acquire CNET Media Group. The deal is expected to close in the fourth quarter of 2020; SIRI extends long-term agreement with GM into 2027GM brands to increase vehicles equipped with SiriusXM beginning with model year 2021 vehicles, making SiriusXM available in nearly all GM vehicles