Closing Recap

Thursday, September 24, 2020

Equity Market Recap

·     U.S. stocks managed a small recovery after yesterday’s market carnage with most S&P sectors (outside of healthcare) managing small gains as investors remain on edge with several macro factors weighing on sentiment. It seems to this point, despite both sides (White House and Democrats) continuing to talk about hopes for additional stimulus, the market seems convinced there will be no more fiscal relief before the election. The dollar pared back from recent gains, oil advanced for a 3^rd straight day and gold managed to rebound, snapping its 3-day losing streak. 

·     There are many factors that have contributed to the recent broader risk-off move including: 1) the resurgence in coronavirus in Europe (France 16,096 cases today after 13,072 yesterday and 10,008 the day prior) and measures to contain outbreak dampening growth prospects for the region; 2) political uncertainty another headwind with President Trump refusing to commit to a peaceful transfer of power if Biden wins (though Senator McConnell suggested otherwise today); 3) more U.S.-China tensions amid security concerns in TikTok deal; 4) stimulus package doesn’t appear viable ahead of election – prompted Goldman Sachs to slash its Q4 GDP growth forecast from 6% to 3%, based on the expectations a U.S. stimulus package won’t happen this month; the rotation out of high flying tech over the last month and rotation into other sectors.

·     U.S. stocks started lower initially after data showed a surprise increase in the number of Americans filing new claims for unemployment benefits last week, only to rebound later following the biggest figure in New Home sales in 14-years. Stocks are still on pace to end the month sharply lower with the S&P 500 coming into today’s action down 9.6% from the Sept. 2 record closing high, while the Nasdaq ended down 11.8% from that date.

·     More Fed comments today to stir up markets as Fed Chairman Powell said evictions, mortgage defaults could increase in ‘not too distant future’ without further fiscal assistance to families. Fed’s Rosengren said we are a long way away from reaching 2% inflation target and not going to raise rates for several years; some of the concerns people have with corporate leverage and commercial real estate are likely to be headwinds

Economic Data

·     Jobless Claims rose to 870K from 866K the prior week and was above the 840K estimate while continued claims fell to 12.58M in the latest week from 12.74M prior but above thee 12.3M estimate; the 4-week moving average fell to 878,250 from 913,500 prior week; US insured unemployment rate fell to 8.6% from 8.7% prior

·     August New Home Sales rose +4.8% to 1,011M annual rate well above the 875K estimate and 965K prior (revised from 901K) while single-family home sales +4.8% vs July +14.7%; new home supply 3.3 months’ worth at current pace vs July 3.6 months; the median sale price $312,800, -4.3% YoY ($327,000)

Commodities

·     December Gold prices rises $8.50 or 0.5% to settle at $1,876.90 an ounce, reversing off earlier lows ($1,851) and snapping its 3-day losing streak. Gold had dropped to a more than two-month lows initially amid a 5-day win streak for the dollar while news of no additional stimulus measures to aid the economy dented by the coronavirus takes its toll. Federal Reserve officials this week have reaffirmed their low interest rate policy until the labor market recovers or inflation rises to 2% (with many pointing until at least 2023), but failed to offer a path for further stimulus on their side, noting that additional stimulus is needed out of Washington.

·     WTI crude oil prices rose 38c or 0.95% to settle at $40.31 per barrel (3^rd straight day of gains), getting a boost as U.S. stocks recovered form yesterday’s decline and as the dollar fell from 2-month highs. Natural gas prices rose 5.8% to settle at $2.248 mln btus after a smaller than expected storage build. Oil prices managed to close slightly higher Wednesday, buoyed by a bullish EIA report that saw inventory declines in crude-oil, gasoline, and distillates.

Currencies & Treasuries

·     The U.S. dollar index (DXY) reversed earlier gains, falling vs. major currencies as a 4-day win streak was snapped, touching highs of 94.60 (highest since July 24^th) before dipping under 94.30 late day. The dollar rose to 2-month highs when the euro bottomed this morning around 1.163 (ended the day high around 1.168) as the combination of technical breakdown in main markets, including EURUSD back below 1.17, and broader risk tone led the way. Investors have been seeking the safety of the dollar, rising the most against the euro amid a resurgence in coronavirus cases in the Eurozone has raised fears of a second wave further crippling its economy. Federal Reserve policymakers have called on the U.S. government to provide more fiscal support, fueling a bout of selling in risky assets, while European economic data has worsened in recent days. Treasury yields again remain in a tight range, with the 10-year around 0.67%, stuck in a narrow 6-8 bps range over the last week or so.

Sector News Breakdown

Consumer

·     Auto sector; TSLA shares try to bounce back after back-to-back session declines following its Battery Day headlines failed to impress investors; NKLA dropped sharply after being downgraded to Underperform from Neutral at Wedbush and cuts tgt to $15 from $45 saying recent questions surrounding the Nikola story raised by the bears will be a dark cloud over the stock until answered; KMX posted a top and bottom line beat for Q2 while saying it experienced negative comparable sales for used cars in June, but that was more than offset by positive comparable used-car sales in July and August; Guggenheim raised its tgt on auto auction names IAA to $59 from $52 and CPRT to $118 from $115 based on our higher estimates while update models to reflect lower volumes and stronger pricing/RPU

·     Housing & Building Products; homebuilders outperform (BZH, TOL, LEN) following August new home sales data reported at the strongest levels in 14-years; ZG said strong home prices in the US are expected to continue through at least 2021, but economic uncertainty is clouding the long-term outlook, a new survey shows; BBBY shares were upgraded to outperform at Baird saying sales appear to be stabilizing, and channel checks suggest real change is setting in across the organization

·     Restaurants; DRI said a streamlined menu contributed to fiscal 1Q profit and margins that beat analyst expectations despite same-store sales trending lower than projected – removing low-selling items from menus has helped to reduce waste and schedule labor more efficiently – said its Olive Garden chain saw a -27.7% drop in sales during FQ1, while sales were down -16.3% for LongHorn Steakhouse and overall, comp sales were down -21.9% vs. -25.3% consensus.

·     Leisure and Gaming; in the gaming space, PENN files to sell 14M shares of common stock while was also downgraded to neutral at Macquarie while the firm initiated DKNG with an outperform and $65 tgt as think DraftKings can sustainably maintain top 2 share; Truist raised [price tgts in the sector, upping BYD (to $35 from $28), PENN (to $85 from $62), MCRI (to $57 from $50), MGM (to $24 from $18), and CZR (to $70 from $50) to reflect upside to estimates on regional resilience coupled with market re-rating for sports betting/iGaming

·     Retail and Staples; Kanye West has threatened to withhold the Yeezy Gap line at GPS unless he receives a board seat; Aegis initiates Buy ratings on VSTO ($27 pt) and SWBI ($23 pt) and a Hold rating on RGR ($70 pt); DLTR announced it will resume its share buyback program, of which it has $800M remaining in authorization after halting it in March; SPWH acquires two Field & Stream locations in PA and SC from DKS for $4.5M; COTY was downgraded to Equal-Weight from OW at Consumer Edge; ULTA announced it is suspending its planned expansion into Canada to focus on its US markets and it expects to incur between $55-65M in costs, most of which will be recognized in FY20; DLTR rises after resumed buybacks; AMZN announced the next-generation Fire TV Stick, the all-new Fire TV Stick Lite, and a reimagined Fire TV experience that is more personal and customized. The all-new Fire TV Stick features an enhanced 1.7 GHz quad-core processor that makes it 50% more powerful than the previous generation.

Energy

·     E&P sector; WLL ranked number 1 in E&P coverage universe #1 as forecast it is #1 on CFPS growth y/y, #2 on debt/EBITDA, #4 on EV/EBITDA, and #7 on FCF yield; in refiner, MPC, VLO, PSX remained pressured after falling yesterday as California Governor Gavin Newsom said to ban sale of new gasoline-powered passenger cars and trucks starting in 2035

·     Natural gas prices active after the EIA reported domestic supplies of natural gas rose by 66 billion cubic feet for the week ended Sept. 18, smaller than the increase of 77 billion cubic feet forecast. Total stocks now stand at 3.680 trillion cubic feet, up 504 billion cubic feet from a year ago, and 407 billion cubic feet above the five-year average.

·     Utilities & Renewable energy; SUNW and POLA rise in the renewable energy space following news yesterday that California state is planning to ban the sale of new gasoline-powered passenger cars and trucks starting 2035, in a bid to reduce climate-warming emissions by shifting to electric vehicles; PLUG signed a memorandum of understanding with LIN for demonstration of its ProGen fuel cell engine; SPI extends gains (after jumping 1,236% Wednesday) after having launched unit EdisonFuture Inc to design and develop electric vehicles and EV charging solutions

Financials

·     Bank movers; GS upgraded to buy at UBS saying it is generating solid results in the current environment, which has sustained in 3Q and potential volatility from the upcoming US election could allow for a solid 4Q; SPAC names were under pressure after SEC chief Clayton says in CNBC interview that they are looking at the SPAC Boom (shares of GMHI, GHIV, DMYT, SHLL, LCA, PIC, SPE were among names under pressure early); overall financials bounced on the day

·     Brokers & Asset managers; JEF reported Q3 EPS of $1.07 (15c Q3 2019), rev $1.62B (+89% YoY), net revenue $1.38B (+61% YoY), Total Equities & Fixed Income net revenue $655.2M (+92% YoY), total investment banking rev +46% driven by a surge in equity underwriting, and increases share buyback authorization to $250M from $128M; RJF said Aug 2020 client assets under administration of $945.2B, +15% YoY, and assets under management of $155.6B, +9% YoY; FDS reported Q4 adj EPS of $2.88 vs $2.61 last year, revenue $383.6M (+5.3% YoY), and adjusted operating income $127.4M, a 2.8% YoY increase

·     Consumer Finance; SQ upgraded to Outperform with a $185 pt from Perform at OpCo, who re-establishes positive stance after re-assuming coverage – COVID-19 is pulling through a massive shift in digital commerce and they see SQ as a structural winner during the recovery to sustain elevated growth levels for multiple years

·     REITs; NRZ was initiated with a Buy rating and $11 pt at Jones; AMT priced its $1.1B offering in two series, offering $800 million of 1.875% senior unsecured notes due 2030 priced at 99.554% of par value and $300M of 3.1% senior unsecured notes due 2050 priced at 101.972% of face value

Healthcare

·     Pharma movers; according to Health and Human Services (HHS) Secretary Alex Azar, all six frontrunning COVID-19 vaccines are being produced at industrial scale, as per Bloomberg (AZN, PFE, BNTX, JNJ, MRK, MRNA, GSK); AXSM presents new data from momentum phase III trial with axs-07 demonstrating rapid onset of action and reduced symptom recurrence in the acute treatment of migraine; CRTX announces gain trial of atuzaginstat in Alzheimer’s disease has exceeded study enrollment target of 570 patients; BMRN said it dosed the first participant in the PHEARLESS Phase 1/2 study with BMN 307 for phenylketonuria, or PKU

·     Healthcare services and providers; OMI boosted its guidance for full-year 2020, expects positive trends in 2021 (now sees adjusted EPS of $1.75-$1.90 (vs. prior $1.00-$1.20) and well above the consensus of $1.08 and says expects positive trends will continue in 2021; RAD said its loss narrowed for the August quarter as sales rose amid the Covid-19 pandemic, and it set expectations for the full year amid strong demand for flu immunizations; recent IPO AMWL extends gains for a third day (41M IPO priced at $18 on 9/17); CAH, ABC slipped after U.S. appeals court overturns approval of novel ‘negotiation class’ framework to settle opioid lawsuits

·     MedTech and Equipment; EXAS shares jumped following a presentation at a sell-side conference; CODX says its Logix Smart ABC diagnostic test for COVID-19, Influenza A and Influenza B is expected to be ready for launch to U.S. Clinical Laboratory Improvement Amendments (CLIA) lab customers in the first week of October; OSUR said its saliva collection device has been included in U.S. FDA’s Emergency Use Authorization granted to Quadrant Biosciences Inc for a COVID-19 laboratory test; DXCM signed a five-year collaboration agreement with the University of Virginia to advance its R&D efforts on continuous glucose monitoring-based solutions; BDX reached a $60 million settlement with the attorneys general of 48 U.S. states and Washington, D.C. to settle litigation related to discontinued pelvic mesh products.

Industrials & Materials

·     Transports; FDX was upgraded to Buy from Hold with a price target of $281, up from $175 at Stifel as FedEx has shown it is a winner from this odd pandemic period; airlines were among the biggest decliners in transports (AAL, ALK, DAL, LUV, UAL) amid rising COVID-19 cases; Wells Fargo said top ideas in the freight sector in its initiation this morning are KNX, JBHT, XPO, and HUBG, in order of preference noting the sector has fared well despite a challenging economic backdrop, looking forward to the progression of an economic recovery in 2021 into 2022.

·     Metals & Materials; FCX upgraded from Equal weight to Overweight at Morgan Stanley saying mining equities are poised to benefit from a global synchronous recovery supported by unprecedented fiscal and monetary stimulus that is expected to drive inflation higher; in chemicals, FUL shares fell initially despite a Q3 top and bottom line beat and solid guidance as estimated revenue in Q4 is anticipated to increase by 4% to 7% sequentially from Q3

Technology, Media & Telecom

·     Semiconductors; the Philly semiconductor index (SOX) outperformed broader tech; Keybanc raised its 2020 IC unit forecast to -2% from -5% previously given improving recovery trends and are maintaining our 2020 IC ASP estimate at +3%, given tight capacity and spot shortages (said ADI, AVGO, NXPI, QCOM among top picks); SIMO upgraded to Outperform at Wedbush citing better than expected end market conditions, expectation fundamentals should improve in 2021, and reduction in our concerns regarding customer concentration risk

·     Software movers; CRWD announced today its intent to acquire Preempt Security, a leading provider of conditional access technology, for $96M in cash and stock; KC 16.422M share Secondary priced at $31.00; The federal judge presiding over TikTok’s request for a preliminary injunction against the upcoming weekend’s U.S. ban has directed the United States to file a brief by tomorrow or agree to postpone the ban

·     Media & Telecom movers; SSP rises after the TV station owner confirmed a deal to buy the broadcast network ION Media for $2.65 billion, in a deal backed by Warren Buffett https://on.mktw.net/306V8Po ; Needham doubles Q4 loss estimate of DIS due to continuing negative COVID-19 impacts on DIS’s revenue, profitability and asset mix; AMC slides after reaching a deal with some banks to sell up to 15M shares to raise capital

·     Hardware & Component news; BB beats Q2 revenue and earnings estimates following a record 6% increase in its qtrly revenue as demand for its security software suite, Spark, and its QNX car software rose; ACN Q4 earnings, revenue forecast falls short of analysts’ estimates, hit by lower spending from clients due to COVID-19 pandemic (guided Q1 revs $11.2B-$11.6B vs. est. $11.5B; JBL guided Q1 EPS $1.15-$1.35, above estimates of 99c but guided Q1 revs $6.7B-$7.3B, which at midpoint was below the $7.25B estimate noting several of their key businesses remain especially strong including Mobility, Healthcare and Cloud