Closing Recap

Thursday, December 31, 2020

Equity Market Recap

·     The year has finally come to an end, with many looking to put 2020 behind them which was filled with a pandemic, a Presidential election, unprecedented monetary and fiscal stimulus measures, trade deals and signs of market euphoria. While the year was “whacky” those that are in the stock market may wish it never came to an end, with a massive end of year rally helping push major U.S. averages at or near all-time closing records (S&P and Dow closed at new highs) – here as some of the top stories of 2020.

·     1) COVID-19 Coronavirus: it takes a big story to replace a contested Presidential election as the top story of the year, but the Covid-19 pandemic takes the prize. The impact of the Covid-19 virus, which coming into the day has seen around 82.5M infected worldwide and over 1.8M deaths, dominated headlines every day since the virus first broke out after originating in Wuhan, China late last year, spreading quickly and causing a global worldwide shutdown that many companies are still feeling the effects from. The U.S. reported more than 220,000 new coronavirus cases for Wednesday, according to Johns Hopkins University and more than 3,700 deaths from Covid-19, a single-day record, as the total exceeded 342,000. While the numbers are staggering and many nations remain in tight restrictions, the recent emergency use approval of several vaccines from Pfizer (PFE) and German partner BioNTech (BNTX), AstraZeneca (AZN) and Moderna (MRNA) have boosted sentiment and hopes for a return to normalcy in 2021. However, at this time, rollouts of the vaccine have been slower than hoped by officials and case counts, hospitalization are surging around the holidays.

·     2) The Presidential Election/Politics: In one of the wackiest elections in history (an understatement), Joe Biden defeated Donald Trump in an election that wasn’t decided for a few weeks due to close tallies and contested voting results by Republicans. The Trump campaign had sued several states to contest vote counts including in battleground such as Pennsylvania, Michigan, Arizona, Nevada, and Georgia, but judges dismissed the claims. Questions arose from Trump amid several State restrictions in place including no in person voting due to the coronavirus. President Trump fought for weeks calling the contested “rigged” with several questionable situations, but the final electoral vote count stands at 306 Biden to 232 Trump after losing all final six battlegrounds late on election night. Among sectors that have rallied ahead of Biden in office include cannabis (CGC, TLRY, MJ) and solar (FSLR, SPWR, ENPH, SEDG) as both are seen as beneficiaries under his Administration.

·     Congress is still controlled by Democrats, while the tight Senate seat control is in focus (Republicans hold the majority at 50-48). On 1/5/2021, Georgia will hold two U.S. Senate runoff elections. If Democrats win both seats, that will mean control of the House, Senate and White House, making it easier for Democrats to pass bills without challenge. If incumbent Georgia Republicans David Perdue and Kelly Loeffler hold their seats, the GOP will have majority control and greater ability to block President-elect Joe Biden’s agenda and proposals from the Democratic-controlled House. If challengers Jon Ossoff and Raphael Warnock win, Democrats would gain control of the Senate with Vice President-elect Kamala Harris, casting tiebreaking votes. Mr. Biden would have a far better chance of significant policy changes.

·     3) FOMC and Fiscal Monetary Policy: The main reason markets are sharply higher from the March lows is the Fed and its monetary policy moves that back-stopped the economy. The Fed said in March it was committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The FOMC announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. In addition, the FOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases. Supporting the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing.

·     Shortly after the FOMC intervention, Washington approved a historic, $2 trillion stimulus package to provide a jolt to an economy reeling from the coronavirus pandemic that produced one of the most expensive and far-reaching measures Congress has ever considered. Among the key elements of the proposal were $250 billion set aside for direct payments to individuals and families (individuals who earn $75,000 in adjusted gross income or less would get direct payments of $1,200 each, with married couples earning up to $150,000 receiving $2,400 — and an additional $500 per each child), $350 billion in small business loans, $250 billion in unemployment insurance benefits and $500 billion in loans for distressed companies. The bill also provided a major amount of funding for hard-hit hospitals ($130 billion) as well as $150 billion for state and local governments that were cash-strapped due to their response to coronavirus. Almost 7-months later, after months of bickering, Congress cleared a 5,593-page $2.3T bill ($900B included new funding for small businesses, a second round of individual checks, extension of federal unemployment benefits, and various funding for state/local programs).

·     4) IPO and SPAC market all the rage: IPO market a record year as companies raised $167.2 billion through 454 offerings on U.S. exchanges this year through Dec. 24, compared with the previous full-year record of $107.9 billion at the height of the dot-com boom in 1999, according to Dealogic. The IPO market got a boost from a surprising surge in special-purpose acquisition companies, or SPACs, empty vehicles that raise money through listings and then look for businesses to merge with. Nearly half of all fundraising in the IPO market was for SPACs, and the total raised through SPACs this year is almost six times as much as the vehicles raised in 2019, the previous record-setting year, as per the WSJ https://on.wsj.com/2KERSXi

·     5) Sector impact of the coronavirus: Stocks plunged in early March amid the virus impact, led by the most obvious names hurt from global stay-at-home restrictions including limited flights and businesses that were forced to shut unless declared as an essential business (hospitals, grocery, and drug stores). The news crushed airlines (AAL, DAL, UAL), hotels (HLT, MAR), cruise lines (CCL, NCLH, RCL), theme parks (SEAS, SIX, DIS), restaurants (DRI, EAT), casinos (WYNN, LVS, MGM), REITS (property owners) such as SPG, KIM, FRT, BXP), retailers (M, KSS), leisure (PLNT, LYV, WWE), and energy (CVX, XOM) among them on slowing demand.

·     However, the impact provided a greater need for online, software, security, and takeout themes with ZM being the face of stay-at-home, with shares soaring over 400% YTD. Other sectors that grew from the stay (and work) from home included: vaccine makers (MRNA, BNTX, AZN, PFE), campers (CWH, WGO), online gaming (PENN, DKNG), takeout restaurant (DPZ, PZZA, CMG), Internet security software (CRWD), and software in general (DOCU, TWLO), home exercise (PTON, NLS), home improvement (HD, LOW, POOL), video gamers and digital entertainment (ATVI, EA, SE), chip names as computer sales jumped (NVDA, AMD), online retail (W, OSTK, KIRK, ETSY, AMZN, PINS), a jump in social media related usage (FB, SNAP, TWTR) as well as in increase on home TV subscriptions (ROKU, NFLX, DIS, CMCSA) and a jump in online payment processor names (SQ, PYPL). There has also been a migration out of inner cities (financially driven, as well as political), which has led to a boom in real estate and housing names (ZG, LEN, DHI).

·     6) The fall of the dollar, the rise of Bitcoin, precious metals rise! Bitcoin mania extended into the final month of the year, touching record highs yesterday above the $29,000 level, rising about 48% MTD, 214% the last 6-months and up over 300% YTD on rising demand and limited supply. In precious metals, Gold advances about 25% on the year, Silver prices jump just shy of 50% for its best year since 2010, palladium gained over 25% on the year on economic uncertainty and as governments worldwide dished out massive stimulus to offset the impact of the coronavirus pandemic, weighing on the dollar which dropped about 7% on the year to its lowest levels since April 2018 for the dollar index (DXY) below 90.0. The dollar is holding just above a nine-month low of 102.86 yen reached on Dec. 17, Sterling rose about 3%, the euro up about 9%.

·     7) Security software rises on hacking fears: The SolarWinds (SWI) hack late year received significant media attention over the last few days/weeks, as rather than targeting a single company, attackers successfully hacked into a security platform that monitors thousands of companies and stole weapons used by security companies to protect targets. Companies such as Microsoft (MSFT), FireEye (FEYE), and the U.S. Treasury department had been hacked in the SolarWinds attacks. SolarWinds alerted thousands of its customers that an “outside nation state” had found a back door into its most popular product, a tool called Orion that helps organizations monitor outages on their computer networks and servers. MSFT today said that Russia-linked hackers behind a widespread cyber-intrusion into U.S. corporate and government systems were able to access internal systems within Microsoft Corp. and view internal source code, used to build software products, the company said. Increased awareness into 2021 for cyber security.

·     Honorable mentions: It was the return of the Day Trader in 2020 led by “Robinhooders” as people that were stuck at home, out of work, unable to gamble on sporting events or go to casinos turned their attention to the stock market. In May, Robinhood said it had 13 million accounts, up from 10 million at the end of 2019, that number surely grew as stocks soared into year end. Electric Vehicles was (and remains) a hot market trade, none greater than Tesla (TSLA) as shares surged over 750% YTD (dwarfing the next S&P gainer up over 300% – ETSY), as growth expectations soared with big gains for the likes EV names and charging related companies such as: NIO, NKLA, AYRO, FSR, BLNK, LI, SOLO, XPEV. M&A Activity slowed from prior years as the value of M&A globally declined 5% Y/Y to $3.6T in 2020, its lowest since 2017, according to a preliminary tally by Refinitiv. By number, 48,226 deals were announced vs. 50,113 in 2019. Also, the EU and UK finalized a trade deal that has been ongoing for years in December. Trade news with China, which dominated news in 2019 took a back seat due to the pandemic.

Yearly Market Totals and Sector Movers

·     After the S&P posted a 35% collapse into its March trough (of 2,191 on 3/23), it has now surged more than 70% into December’s high (3,756, 12/29), on track to end the year up about 15%. The Dow rises about 6% for 2020, which would be its weakest rise since a 5.5% gain in 2011. The Nasdaq is up over 43%, best gain since 2009 and the Russell 2000 rises over 18% YTD. Of the eleven S&P sectors, technology leads with a more than 40% advance while energy the top decliner, down around 35% YYTD (biggest yearly collapse in its history as per Reuters). Defensive utilities and REITs lagged while Materials and Industrials perked up late year on recovery hopes. Banks are on track to lose about 18% in 2020, though have bounced over the last month.

·     There remains absolutely no fear in stocks markets, exhibiting massive market exuberance as U.S. stocks close out the year around record highs, with record ETF inflows, and all-time high margin debt levels (investors borrowed a record $722.1 billion against their investment portfolios through November, topping the previous high of $668.9 billion from May 2018). Sentiment overly bullish (last week, the AAII sentiment poll showed bullish sentiment remained above 40% for a seventh consecutive week, which is its longest consecutive weekly streak since an eight-week stretch between December 14, 2017, and January 31, 2018). Possible stumbling blocks heading into the New Year include higher tax potential (if the Democrats win the Senate), a slowing of the rollout for vaccines or if impact doesn’t prevent against mutated strains), a possible inflation swing into 2H of the year, and of course potential “Black Swan” events.

Recap of some top M&A Deals this year

·     M&A activity slowed in 2020 as the value of M&A globally declined 5% Y/Y to $3.6T in 2020, its lowest since 2017, according to a preliminary tally by Refinitiv. By number, 48,226 deals were announced vs. 50,113 in 2019. Eight of the year’s 10 biggest deals were announced in the second half, led by S&P Global’s $44B purchase of IHS Markit (INFO). Others include AstraZeneca’s $39B acquisition of Alexion Pharmaceuticals, and Salesforce (CRM) $27.7B deal for Slack (WORK)

·     In FinTech: Intuit (INTU) announced it would acquire Credit Karma for approximately $7.1 billion in February; Just Eat Takeaway entered into an agreement to acquire GrubHub for $7.3 billion in June; Morgan Stanley announced decision to acquire E*TRADE for approximately $13 billion in February 2020; Uber entered a $2.65 billion deal to acquire Postmates in July after Uber’s $6.5 billion bid for GrubHub fell through; Visa (V) announced the decision of Plaid’s acquisition for $5.3 billion in January 2020

·     In Energy: ConocoPhillips (COP) confirmed its decision to take over Permian pure play Concho Resources (CXO) in an all-stock transaction, valued at $9.7 billion in October; Pioneer Natural Resources Company (PXD) agreed to buy smaller rival Parsley Energy (PE) in a $4.5 billion all-stock deal in Oct; Chevron (CVX) bought Noble Energy for roughly $5 billion ($13 billion including debt), announced in July and concluded in October; Devon (DVN) announced a $2.6 billion merger agreement with WPX Energy (WPX) in September

·     In Technology: AMD announced it would acquire Xilinx in a $35 billion all-stock deal in October and Marvell Technology announced that it would acquire Inphi in a $10 billion cash-and-stock deal also in October; Nvidia confirmed the planned acquisition of UK-based chip designer Arm in September for $40 billion in a combined stock-and-cash deal; Private equity firm Vista Equity Partners agreed to buy software specialist Pluralsight for $3.5 billion in cash in December

·     In Healthcare; Teladoc (TDOC) and Livongo announced an $18.3B merger in online Telehealth; Siemens Healthineers’ acquisition announced a $16.4 billion deal of Varian Medical Systems; Gilead Sciences’ (GILD) acquired Forty Seven or $4.1 billion and Sanofi’s (SNY) bought Principia Biosciences for $3.4 billion

Commodity, Currencies, Treasury’s:

·     Oil prices end the year with a roughly 20% decline (slightly higher) after prices for 2020 bottomed in April as fuel demand collapsed due to the COVID-19 pandemic and a price war between oil giants Saudi Arabia and Russia. WTI plummeted to a record low negative-$40.32 per barrel, while Brent fell to $15.98 barrel, the lowest since 1999. From there prices drifted higher and took off once vaccine optimism hit the market. Natural gas futures are up roughly 13% on the year, its biggest yearly percentage rise since 2016.

·     The 10-year Treasury yield ends 2020 at 0.913%, down 99.7 bps from its 2019 closing yield level; the 2-year yield ends at 0.121%, down 144 bps from 2019 closing yield; the 30-year yield ends at 1.642%, down 73.6 bps from its 2019 closing levels. The Euro falls vs. dollar at 1.2232 (YTD high was 1.2039 recently and well-off YTD low of 1.0638 mid-March) – YTD the euro with a roughly 9% advance vs. the buck

Stock Movers today

·     ELF rises after getting added to the S&P Small Cap 600 index

·     ENPH also rises after getting added to the S&P 500 index

·     FUBO falls for a 6th straight day and down over 50% from December highs after negative short calls the last 2-weeks (Hedgeye and Kerrisdale yesterday) and a lock up expiry

·     JWN active as Wedbush raised tgt to $35 from $17 today (though remains neutral) as issued a positive data signal on shares of Nordstrom, given better-than-expected holiday business

·     RLH rises as Sonesta International Hotels to acquire RLH in an all-cash transaction valued at ~$90M. Each RLH’s common stockholder will receive $3.50 per share in cash, representing a 30% premium over today’s closing price prior https://bit.ly/2WOBlCd

·     TPCO rises; the WSJ reported hedge fund Alden Capital (already largest shareholder at 32% stake) is seeking to buy the newspaper chain behind titles including the Chicago Tribune and New York Daily News, according to people familiar with the matter. Tribune has a market value of roughly $470M https://on.wsj.com/3pEt9Ba

·     WDC shares soared along with gains in MU while LRCX shares fell as Citigroup said they turn positive on NAND from 2H21E while turning more bullish on DRAM in 2021E as we now project Samsung’s 2021E memory CAPEX will be 26% lower than our previous forecast, mainly on 1) CAPEX reallocation from memory to foundry, and 2) profit optimization efforts in preparation of more favorable dividend policies.