Closing Recap

Tuesday, December 15, 2020

Equity Market Recap

·     U.S. stocks rise in an overwhelmingly upbeat day, as several factors buoyed U.S. markets including renewed stimulus hopes (again) after a bipartisan group of lawmakers put forward another economic relief package, which would split a previously proposed $908B package into two parts, and as House Majority Leader Nancy Pelosi invited Senate Majority Leader Mitch McConnell, along with Senate Minority Leader Chuck Schumer and House Minority Leader Kevin McCarthy, to a 4 p.m. ET meeting to discuss stimulus and government funding. In addition to the stimulus hopes, markets rallied on further rollout of the Covid-19 vaccine from Pfizer (and ahead of expected emergency use authorization from Moderna this week), as well as M&A news into year end, expectations of dovish commentary at tomorrows FOMC day conclusion, and strength in Dow component Apple Inc (AAPL) after a report said it plans to increase iPhone production by 30% in the first half of 2021 (which boosted many chip suppliers). It wasn’t just technology advancing as S&P Materials near record highs, consumer stocks outperformed, energy and financials resume strength as investors continue the rotation into cyclical and value names. The Russell 2000 trades above its Dec 10 record close while the S&P 500 snaps its 4-day losing streak.

·     Congress is running out of time to strike new stimulus relief measures before the year-end holiday season, so investors are betting on a last-minute deal with many gov’t officials saying they won’t go on break until a package is delivered. Also, add possible positive developments in the UK after a BBC report of "big buzz" among Tory MPs that UK is heading towards Brexit deal with EU, as per Reuters. Commodity prices jump with oil and gold prices higher, while Treasury yields also gain. Markets prepare for dovish Fed comments, as the FOMC concludes its final 2-day meeting of the year tomorrow (while the Bank of England meets on Thursday and the Bank of Japan on Friday which closes out central bank meetings for 2020).

·     It was “risk-on” pretty much all day with market sentiment surging on elevated vaccine optimism with the rollout of the Pfizer/BioNTech and the likelihood the Moderna candidate gets EUA by the end of the week. However, concerns about elevated case counts, hospitalizations and deaths continue to trigger tougher restrictions into the Christmas holiday (New York said that people should prepare for a full shutdown while London would face tougher Tier 3 restrictions from tomorrow).

Economic Data

·     Import prices rise +0.1% MoM in November vs. +0.3% consensus and -0.1% prior as higher fuel prices in November more than offset lower nonfuel prices (YoY import prices decreased 1.0%); Export prices rose +0.6% MoM in Nov vs. +0.3% consensus and +0.2% prior as higher prices for both agricultural exports and nonagricultural exports contributed to the November rise.

·     Empire State Manufacturing for December rises a smaller-than-expected +4.9 vs. +6.9 consensus and +6.3 prior month while new Orders index up +3.4 vs. +3.7 prior, shipments index: +12.1 vs. +6.3 prior and employment index up +14.2 vs. +9.4 prior; its highest level in over a year; prices paid index +37.1 in December vs +29.1 in November

·     November Industrial Production rose +0.4% MoM above the +0.3% consensus and vs. +1.1% prior while Capacity Utilization 73.3% vs. 72.9% consensus and 72.8% prior. Manufacturing Output +0.8% M/M vs. +0.3% consensus, +1.0% prior as an increase of 5.3% for motor vehicles and parts contributed significantly to the gain in factory production

Commodities, Currencies and Treasuries

·     Oil prices rise as WTI crude gained 63c or 1.34% to settle at $47.62 per barrel (back to 9-month highs) as positive vaccine news, stimulus hopes offset a lower IEA global demand forecast. February gold rises $23.20 or 1.3% to settle at $1,855.30 an ounce, rebounding off its lowest levels in almost 2-weeks as most asset classes advanced on the day. The U.S. dollar index (DXY) back near over 2-year lows, falling vs. the euro and yen while the British Pound rises on BBC report of "big buzz" among Tory MPs that UK is heading towards Brexit deal with EU, as per Reuters (Sterling jumped around 1%). Treasury prices edge lower as yields rise.

Sector News Breakdown

Consumer

·     Retailers; online retail related names such as Wayfair (W), OSTK as well as market place names EBAY, ETSY rally as AMZN remains in tight range; Piper initiated OW ratings on REAL with a $19 target and RVLV with a $30 target; Stephens issued an UW rating on DKS and a $45 price target due to gross margin pressure and saying other analysts are too optimistic in the face of elevated freight costs and a normalizing promotional cadence on the horizon; CVNA was initiated at a Buy with a street-high $314 target at Truist who sees robust growth over the next 10 years; gun stocks rise (SWBI, RGR, VSTO) ahead of AOUT earnings tonight – expectations high into results

·     Leisure and Gaming; cruise lines were broadly lower, while casinos and gaming names rise; NCLH proposes to sell $500M senior notes due 2026; PLNT given credit by the WSJ for having a clever business model that has helped it to grow rapidly, but it is also highlighted that certain elements of the business backfired recently; MAR upgraded to buy with an overweight position at Citigroup in our model portfolio and a $150 price target as believe the industry is on the cusp of a multiyear recovery; PENN entered into a definitive agreement with GLPI to acquire the operations of Hollywood Casino Perryville in Maryland for $31.1M in cash; LAZR shares fell after Mobileye CEO tells Reuters that company plans to build own LIDAR

Energy

·     Energy stock movers; after a day of selling pressure, energy names opened and traded higher on vaccine and stimulus hopes and positive analyst calls; following OPEC in cutting its forecast for oil demand growth in 2021, the IEA also expects a slower rebound than initially anticipated as the aviation sector takes longer to recover from the pandemic

·     Major oils sector; Wells Fargo upgraded XOM (to OW, $53 pt), RDSA (OW, $49), CNQ (EW, C$32), OXY (EW, $20) and downgraded CVX (EW, $105), MUR (UW, $11), SU (EW, C$26), calling for more supportive macro tailwinds next year, but realize significant challenges exist and maintain an average Brent price below $50; Raymond James reiterates their outperform ratings on BP on compelling valuation despite not loving their business pivot and CVX as the best positioned for most macro environments, and their UW rating on XOM as the debate over dividend/capital allocation is not going away any time soon

·     Oilfield services: Citi downgraded BKR and HP, and upgraded HAL and PUMP to Buy and SLCA and NINE to Neutral, predicting the upstream capex cycle should begin anew next year and be lead by NAM then international, and are looking for the best revisions and FCF yield combo given the likelihood of a stair-step recovery as OPEC+ spare production is absorbed

·     Energy stock movers; TCP agreed to be acquired by TRP in a deal that values it at ~$2.27B ($30.85/share, representing a 0.6% premium from yesterday’s close), which is 13.3% more than the original October 5 bid and TRP will exchange 0.70 of its shares for each TCP shares outstanding; GTLS signed an exclusive letter of intent to acquire Sustainable Energy Solutions for $20M in cash and an associated earn-out, and the deal is expected to close in the next 30 days; CRK was downgraded to Hold from Buy with a $5 target (from $8) at Truist due to their estimates relative to peers, including a 2021 FCF margin of 15% for CRK vs 39%/29%/20% for CNX, 2yr DACAGR of 4% for CRK vs 10% for the other three, and CRK has little in the way of 2021/2022 hedges vs CNXT that are highly hedged at strong prices

·     Utilities & Solar; Morgan Stanley re-offered about 2M shares of FSLR at $85.50 (a 1.3% discount to yesterday’s close), which comes a week after billionaire investor Lukas Walton cut his stake to 6.7% from 8.3%; EXC was upgraded to Neutral with a $43 pt at Bank of America; JKS announced its CEO Kangping Chen has stepped down effective immediately and Chairman Xiande Li will replace him, and the chief marketing officer, chief operating officer, chief human resources officer, and chief technology officer also resign; Morgan Stanley upgraded ATO to OW, $113 pt from EW due to their confidence in the company’s long-term growth profile and their underperformance of about 10% YTD versus other electric utilities; PLUG says it began expansion of hydrogen and fuel cell solutions into WMT’s ecommerce network, with first deployments in August and additional expansion planned in 2021 to use more than 9,500 GenDrive fuel cell-powered vehicles at its distribution centers

Financials

·     Bank movers; HBAN, PNFP, and BKU all upgraded to Overweight at JPMorgan as see EPS growth potential for banks under coverage universe in the 18%+ range in 2021 as well as 2022. Moreover, should the yield curve steepen in response to additional stimulus and/or an improved economic outlook, the EPS growth gap of banks versus other sectors could widen materially. WFC upgraded to overweight from market weight and upgraded the universal bank sector to overweight as well at KBW Inc.; in insurance, GE agrees to transfer ~$1.7B in pension obligations to the retirement services company ATH

·     Monthly Master Trust Credit Card data: SYF credit card adjusted charge-off rate falls to 3.1% from 3.3% in November and down from 4.8% in November 2019, while delinquency rate of 3.0% edges up from 2.8% in October but is down from 4.5% in November 2019; COF monthly NCO’s improve to 2.57% in November from 3.11% in October and 3.91% in November 2019 and its delinquency rate of 2.29% is up from 2.19% in October, but down from 4.43% YoY; ADS reported net charge offs of $68.24M, or 5.2% vs. 6.3% in year ago month of average receivables which dropped 13% Y/Y to $15.66B as of Nov.30 month end; JPM credit card net charge-off rate for November improves to 1.59% from 1.89% in October and 2.20% in November 2019 while the delinquency rate of 1.02% up from October’s 1.00% and down from 1.17% YoY; AXP November write-off rate 1.9% vs. 2.2% last month and 30 days past due loans 1.0% vs. 1.0% last month

·     REITs; AIV announced that it has completed the separation of its businesses, creating two, separate and distinct, publicly traded companies, Apartment Income REIT Corp. and Aimco; at Citi, in conjunction with 2021 Outlook, they are moving to Market-weight in strips and maintain underweight in malls/outlets and net lease retail REITs (downgraded MAC to sell, raised KIM to buy and in office REITs upgraded DEA and OFC)

·     Financial services; Piper raised its price tgt on ZG to $159 from prior $133 and RDFN to $73, prior $58 and reiterate Overweight on both names; CATM enters into definitive agreement to be acquired for $35.00 per share by funds affiliated with apollo global management and Hudson executive capital with enterprise value of $2.3 bln, including net debt.

Healthcare

·     Pharma movers; LLY announced a definitive agreement to acquire PRVL for $22.50 per share in cash (or an aggregate of approximately $880M) but with CVR’s deal valued about $1.04B https://bit.ly/3oYghpb ; LLY also said Covid-19 treatment sales would boost earnings in 2021, while also raised its dividend 15%; TGTX 6.32M share Secondary priced at $43.50, MIRM 3.75M share Secondary priced at $20.00

·     Biotech movers: MRNA active as the FDA said the company’s COVID-19 vaccine candidate is "highly effective" at preventing infections with the coronavirus. The FDA published a document outlining its thinking about Moderna’s emergency use application in advance of the FDA Vaccines and Related Biological Products Advisory Committee’s scheduled meeting on Thursday; LEGN and MNOV were selected for addition to the NASDAQ Biotechnology Index, effective prior to market open on Monday, December 21, 2020; MESO slips after announcing top-line results from the landmark DREAM-HF Phase 3 trial of its allogeneic cell therapy rexlemestrocel-L (REVASCOR) in 537 patients with advanced chronic heart failure; IONS upgraded to outperform at Cowen based on internal pipeline being overlooked and focus on internal pipeline will drive long term-revs; REGN said it was pausing patient enrollment in two trials testing its experimental lymphoma drug, after the U.S. health regulator requested changes in trial protocols.

·     Healthcare services and providers; THC upgraded to buy from hold at Deutsche Bank and raise tgt to $69 from $28 saying the recently announced transaction of SurgCenter Development is an efficient use of capital and is immediately accretive; TFX tgt raised to $455 from $435 at UBS as like the growth potential of its portfolio

·     MedTech and Equipment; busy morning of research as Morgan Stanley upgraded MDT, BDX to overweight and downgraded ISRG to equal-weight (on valuation) noting that multiple expansion on rising earnings will drive performance in 2021. Wells Fargo upgraded NARI from Equal Weight to Overweight, downgraded BDX and TNDM from Overweight to Equal Weight, and downgraded NUVA from Equal Weight to Underweight. Firm’s top picks in 2021 are ZBH, TFX, PODD and SWAV as see positive catalysts and potential upside to Street estimates for each of these names; OCX surges as diagnostic test maker BNR enters into an exclusive licensing agreement with OCX to bring co’s cancer risk stratification test DetermaRx to China

Industrials & Materials

·     Industrial & Machinery; EAF announced that BAM, who owns a majority ownership interest in GrafTech, priced a secondary offering of 8.5M shares, an increase from previously announced 7M share offering; BDC reaffirmed Q4 and FY20 guidance at its Investor Day, seeing Q4 Adj EPS 63-78c on sales $460-485M and FY20 Adj EPS $2.47-2.62 on sales $1.824-1.849B; WM raises its dividend 5.5% to 57.5c and its board approved up to $1.35B in stock buybacks;

·     Industrial Research; AGCO was initiated at Outperform with a $114 pt at OpCo and upgraded to OW by Morgan Stanley ($122 tgt) and Deutsche Bank ($107 pt), saying the agriculture equipment industry has shown the strong post-Covid rebound and the company’s organic rev returned to positive YoY growth after only 1 negative quarter. Deutsche also issued upgrades to Buy on CNHI on sum-of-the-parts valuation with a $16 pt as their new CEO is committed to executing the previously announced company split of on- and off-highway franchises and EMR with a $95 pt due to a global economic recovery driving positive momentum in crude, which is tightly correlated with this stock. MHK was upgraded to Neutral at the bank with a $135 pt (from $86) as they expect building stocks to continue their outperformance beyond this year as beneficiaries of sustained strength in new home construction and repair/remodeling; Deutsche also downgraded JCI to Hold from Buy and lowered their price target to $50 from $52, though they remain cautiously optimistic on the macro-outlook

·     Machinery; Morgan Stanley additionally upgraded PCAR ($96 pt) and REVG ($10 pt) to EW and downgraded URI ($180) to UW; OpCo also initiated DE at Outperform with a $296 target and CNHI at Perform with a $96 target; Stifel upgraded TEX ($41 pt) to Buy, along with FLS ($45 pt) and ITT ($100 pt), whose price targets are both now street-highs; CAT price target was raised to $190 at Bank of America, $212 at Deutsche, and $295 at Stifel

·     Aerospace & Defense; LHX was downgraded to Neutral in aerospace and defense at JPMorgan, while likes SPR the most in Commercial Aero – says RTX and HWM attractive too in, while notes it will take time, but we see the ramp on 737 giving Spirit appealing exposure to a multi-year Aero recovery. Boeing’s (BA) future depends on ramping MAX production in the coming years, giving Boeing a strong incentive to sell the key platform that drives Spirit profitability.

·     Chemicals; NDSN reports its quarterly earnings after markets close; APD was upgraded to buy from neutral at UBS and up tgt to $310 from $308 as believe stock can recover as investors gain back confidence after SepQ conf. call disclosed complications with two gasifier projects related to refinery operations; in agriculture chemicals, RBC Capital thinks the supportive ag backdrop has resulted in the most favorable affordability levels for fertilizers in the past 10 years, which they expect should result in fertilizer demand growth and higher prices – says they prefer MOS for significant leverage to improving conditions in the phosphate and potash markets which we think have been underappreciated; like NTR but the improved fundamentals have been partially reflected in the recent rally in share prices and are neutral on CF

Technology, Media & Telecom

·     Internet; TWTR failed to inform users about the breach within the required 72 hour window, earning the company a $547,000 fine from the EU data protection watchdog; BIDU rises after Reuters reported according to sources the company is looking to make electric vehicles and has also held talks with automakers. BIDU has held early talks with Zhejiang Geely Holding Group Co Ltd, Guangzhou Automobile Group Co Ltd and China FAW Group Corp Ltd.’s; ETSY, EBAY rise as online market name places among S&P leaders

·     Semiconductors; industry remains strong with several analysts raising target prices on names as Goldman Sachs upped tgts changes across the industry (AMD, INTC, KLAC, LRCX, others), while Apple suppliers (QRVO, TSM, QCOM, SWKS) rise on reports AAPL plans to manufacture up to 96 mln iPhones in the first half of 2021, ~30% y-o-y increase owing to strong demand for its 5G handsets, Nikkei reports; MU pt raised from $55 to $82 at Wedbush as believe the outlook for the current quarter and beyond has improved substantially

·     Software movers; SNOW falls as IPO lock-up expiry today as shareholders can sell shares; ZNGA upgraded to Overweight from Equal Weight at Wells Fargo saying post Q3 results stock reaction appears overdone; stock looks inexpensive relative to growth; TUFN announces support for Google Cloud platform; stay-at-home winners such as DOCU, CRWD were strong initially

·     Hardware & Component news; AAPL has reportedly tasked suppliers to produce up to 96 million iPhones for the first half of 2021, a nearly 30% YoY increase, following a late surge in demand for the iPhone 12 amid the global health crisis, according to MacRumors https://bit.ly/34eTGN4 ; in the optical sector; Morgan Stanley downgraded IIVI to EW from OW with $76 tgt saying the biggest risk to PT’s is a pullback on Apple iPhone builds or China’s 5G build; the firm also upgraded LITE to Overweight from EW and raised estimates