Closing Recap

Wednesday, November 25, 2020

Equity Market Recap

·     U.S. stocks finish mixed as the tech heavy Nasdaq Composite led today’s outperformance (touching fresh record highs), while the S&P 500, Russell 2000 and Dow Jones ended with modest losses after record closing highs for the latter two Tuesday. Ahead of the Thanksgiving Day holiday (stock markets are closed and half day Friday), the government released a slew of mixed data, highlighted by in-line GDP data, a rise in jobless claims, strong new home sales, and in line confidence data. Stocks did pair gains late afternoon after minutes of the Federal Reserve’s recent rate-setting committee meeting showed no immediate plans to change its asset-purchases. In earnings news, ADSK and HPQ shares advanced after better results, while GPS led a decline in retail after profit missed views, but JWN rallies following its surprise profit. The U.S. dollar index (DXY) slips to fresh 3-month low, falling -0.15% under the 92 level as the euro edged back above the 1.19 level and the Canadian dollar held strong amid a resurgence in oil prices to 8-month highs.

·     Stocks have been surging since the Presidential election, rising on hopes that vaccines for Covid-19 could soon become widely available after strong efficacy readings from various drug makers the last 2-weeks (PFE, MRNA, AZN) as well as the easing of concerns around the presidential transition and President elect Joe Biden’s pick of former Federal Reserve head Janet Yellen for Treasury secretary. Pandemic-resilient tech and tech-adjacent market leaders helped keep the Nasdaq afloat today after being market laggards the last few weeks with reopen/cyclical/value names leading the way higher the last few weeks. Markets have surged despite near-term concerns, as the coronavirus pandemic continues to threaten households and raises the prospect of further restrictions with surging cases, hospitalizations, and deaths

·     The sum up the recent trading action in markets, turn to this week’s Investor Intelligence Poll which showed bearish sentiment fell to (17.2) still one point above Sep 2020 low, but bullish sentiment surged to (64.6%) its highest level since Jan 2018 as the bull-bear spread (47.4) is similarly stretched (Investor Intelligence is seen as a contra-indicator).

Economic Data

·     The second reading of GDP in Q3 was unchanged from the initial estimate, at a 33.1% annual rate, while US company earnings picked up strongly. Upward revisions to nonresidential fixed investment, residential fixed investment, and exports were offset by downward revisions to state and local government spending, private inventory investment, and PCE. Imports were revised up – PCE price index estimate stayed at 3.7% and Core PCE price index unchanged at 3.5%.

·     Jobless claims rose for the second straight week to 778,000 (up 30K), going in the wrong direction as a sign the nationwide surge in virus cases was starting to weigh on the labor-market recovery, while prior week was revised to 748K from 742k). U.S. continued claims fell to 6.07M in latest week vs. est. 6.020M (and from 6.370M prior week); and 4-week moving average up to 748,500 from 743,500; U.S. insured unemployment rate fell to 4.1% from 4.3%

·     Durable goods orders topped expectations, rising for the sixth consecutive month in October as new orders for durable goods increased 1.3% from the prior month vs. the 0.9% expected and +2.1% revised while core Durable Goods: +1.3% vs. +0.5% expected and +1.5% prior (revised)

·     Personal income falls -0.7% MoM in October vs. est. -0.1%, while real personal spending rises 0.5% MoM, topping the 0.3% estimate; Consumer spending: +0.5% M/M vs. +0.4% consensus and +1.2% prior (+1.4% prior), PCE Price Index: +0.0% vs. +0.0% consensus and +0.2% prior, and Core PCE Price Index: +0.0% vs. +0.0% consensus and +0.2% prior

·     New Home Sales for October fell -0.3% to 999K annual rate (best numbers since 2006), topping the 975K expected and 1002K prior (revised from 959K); Oct home sales Northeast +5.1%, Midwest +11.2%, South -2.0%, West -1.5%; new home supply 3.3 months’ worth at current pace vs. Sept 3.3 months and median sale price $330,600, +2.5% YoY ($322,400)

·     International advance trade in goods rose +1.2% to -$80.3B vs. -$80.8B consensus (-$79.3B prior)

·     University of Michigan surveys of consumers sentiment final for Nov 76.9 vs. est. 77.0) and final Oct 81.8 as the current conditions index was 87.0 vs. prelim Nov 85.8 and final Oct 85.9 and expectations index final Nov 70.5 vs. prelim Nov 71.3 and final Oct 79.2

Commodities

·     Gold prices ended little changed, failing to hold stronger gains earlier, rising 90c to $1,805.50 an ounce after highs of $1,816 an ounce late morning. Weaker jobless claims data helped boost the precious metal initially which has seen mass selling pressure over the last few weeks amid a rotation into Bitcoin and surging U.S. equities. The precious metal is on track for a weekly decline of almost 4%. Metals trading on Comex will be closed in observance of Thanksgiving in the U.S.

·     Oil prices extend gains as WTI crude rises 80c or 1.78% to settle at $45.71 per barrel, fresh new 8-month highs and rising for a 4^th straight session following a weekly decline in oil inventories, further signs of a rising U.S. demand and hopes OPEC will maintain output cuts a few months longer. Reuters reported earlier that OPEC+ is leaning towards delaying next year’s planned increase in oil output to support the market during the second wave of COVID-19 and rising Libyan output, despite a rise in prices, three sources close to OPEC+ said.

Sector News Breakdown

Consumer

·     Retailers; AEO reported a 3% decline in Q3 revenue, matching estimates of $1.03B, but comes the same day GPS and ANF beat sales expectations. UBS noted however two main reasons to own AEO are its Aerie brand is one of Retail’s best growth stories and the American Eagle brand should generate solid FCF; GPS shares dropped after missing profit estimates and giving a tepid holiday quarter forecast – sales at Old Navy and Athleta were strong but higher marketing expense drove a 3Q miss and caused management to guide 4Q below consensus; JWN delivered a large surprise profit for its Q3, with 37% surge in online sales, helps it post a surprise profit in Q3 as digital sales accounted for 54% of sales, with activewear, home decor and beauty products among best-performing categories; GOOS downgraded to sell from buy at BTIG and lowering our 12-month price target to C$35 as expectation for a revenue ramp into holiday has not materialized thus far, and as such is putting FQ3 at risk of missing consensus estimates

·     Auto sector; NKLA shares dip after yesterday’s sharp advance after the CEO failed to reassure investors that the company’s $2B deal with GM would go through in his interview on CNBC’s Mad Money with Jim Cramer (sides can walk away if no deal by 12/3); Ford (F) downgraded to Equal Weight from Overweight at Morgan Stanley as tgt stays at $9 saying while it believes Ford can ultimately transition to EVs, it faces substantial headwinds on its high-margin internal combustion engine products; GM tgt raised to $53 from $44 at Morgan Stanley saying it is moving ‘all in’ on EVs, allocating $27B towards EV investment by 2025 with a plan to launch 30 EV models by 2025; Chinese EV names hit especially hard (XPEV, LI, NIO, KNDI) on news of a government investigation into the sector as the National Development and Reform Commission asked local officials to investigate construction and production details of projects related to Evergrande (EGRNF) New Energy Vehicle (NEV) and Shenzhen Baoneng that started from 2017, as per the document seen by Reuters – leads to profit taking in group after massive run for week; FSR initiated with a buy at Citi and $26 tgt as sees significant upside potential in future entry into flex-leases and believes the company is targeting the right segment of the market, SUVs

·     Restaurants, Leisure and Gaming; CZR downgraded to Equal-weight at Morgan Stanley saying while sees Caesars with attractive long-term opportunities in sports betting and online gambling, sees near-term earnings risk from rising COVID-related restrictions; Germany’s AIDA Cruises, which forms part of Carnival (CCL), said Wednesday it will start offering seven-day Canary Island cruises from Dec. 5; DRI downgraded to Neutral from Buy at BTIG following a sustained breach of their $108 price target, the stock’s recovery over the past eight months and recent step back in casual dining sales trends; Evercore ISI downgraded HST to In-Line from Outperform

Energy

·     Energy stock movers; energy stocks slipped on the day in a bout of profit taking, but the S&P energy sector still remains higher by over 10% on the week as crude oil prices climb to the highest in more than eight months. Prices got another boost after a surprise drop in U.S. crude inventories last week extended a rally driven by hopes that a COVID-19 vaccine will lift fuel demand as well as strong demand in Asia; XOM cuts its expectations for future oil prices for each of the next seven years by 11%-17%, suggesting the company expects the harm from the pandemic will linger for much of the next decade; U.S. total rig count 320 (up 10) – Baker Hughes says – U.S. oil rig count up 10 to 241

·     Inventory data; trade group the American Petroleum Institute (API) showed a bigger than expected build of 3.8M barrels of oil for the week ending Nov. 20; gasoline inventories showed a build of 1.3M barrels, distillate inventories show a draw of 1.8M barrels and Cushing inventories show a draw of 1.4M barrels. The EIA said crude inventories fell by roughly 800,000 barrels in the week to Nov. 20 to 488.7 million barrels, compared expectations for a 127,000-barrel rise. Gasoline stocks rose by 2.2 million barrels in the week to 230.2 million barrels, the EIA said, more than forecasts for a 614,000-barrel rise.

Financials

·     Bank movers: European banks weaker overnight (CS, DB, UBS) after the European Central Bank (ECB) warned that Eurozone banks are by no means out of the woods, despite the prospects for a recovery next year. The ECB warned in its semiannual Financial Stability Review that the risk of a broad asset price correction had risen after the rallies seen this year in markets from bonds to house prices and beyond. It also suggested that the healthy-looking balance sheets presented by banks at the end of the third quarter were flattered by government and regulatory support schemes and warned that actual loan losses may be higher than the banks expect.

·     Consumer Finance; SQ rises on news it will pay $50M in cash for Credit Karma tax from INTU helping push shares higher (first reported by CNBC that the U.S. DOJ plans will require INTU to divest Credit Karma tax unit to SQ as part of the settlement)

Healthcare

·     Pharma movers; on Tuesday, U.S. officials said they plan to release 6.4M COVID-19 vaccine doses nationwide in an initial distribution after the first one is cleared by regulators for emergency use, Reuters reported (PFE, BNTX, MRNA); AIMT said starts enrollment for Ampligen and interferon alpha-2b as a potential early-onset treatment for patients with cancer and mild-to-moderate COVID-19; ACB entered into a strategic Supply Agreement with Cantek Holdings, one of Israel’s leaders in the medical cannabis field; ALT submits application to U.S. FDA seeking approval to start early-stage clinical study of its single-dose intranasal COVID-19 vaccine candidate, AdCOVID

·     Biotech movers; MRNA says the European Commission has approved an agreement to secure 80 mln doses of mRNA-1273, Moderna’s vaccine candidate against COVID-19 and that the delivery of the vaccine could begin as early as Q1 2021 if it secures regulatory approval in Europe; LQDA shares slide as the FDA issued a complete response letter (CRL) for its NDA for LIQ861 (Treprostinil) inhalation powder for the treatment of pulmonary arterial hypertension (PAH) as identified the need for additional information and clarification on CMC data; RETA shares fell after the U.S. FDA review of its rare genetic disorder drug, omaveloxolone, concluded that the findings do not strengthen results of an earlier mid-stage study, company said

·     MedTech and Equipment; in research, DHR downgraded to Sector Perform from Outperform at RBC Capital as believe that its high-quality, defensive portfolio (70% recurring revenues) is less compelling to own in the near-term as the cyclical recovery gains traction into 2021; Agilent (A) was upgraded to buy with a $132 PT at UBS given numerous tailwinds in 2021 should drive accelerating growth ahead of expectations; ANGO was upgraded to strong buy at Raymond James with $18 tgt saying its business is still overly diversified, but the growth drivers are more identifiable and the base business has largely stabilized; CODX JV Cosara receives clearance from Indian FDA for covid-19 2-gene multiplex test

Industrials & Materials

·     Industrial & Machinery; DE Q4 EPS of $2.39 handily topped consensus of $1.49 and $2.27 prior year as Q4 worldwide revenue $9.73B beat the $7.68B estimate and forecast FY21 net income of $3.6B-$4.0B above consensus view of $3.3B; GE tgt raised to $12 from $9 at UBS with an $18 upside scenario following recent news on the efficacy of vaccines as the stock has re-rated significantly; it has been a strong month for metals and industrials in general given the vaccine news, economic recovery rebound hopes, and China strength

·     Transports; Dow Transports pull back from record highs a day earlier amid profit taking in airlines and rails, while analysts have gotten a bit cautious on truckers/freight of late (Citigroup and Bank America downgraded names the last 2-weeks – KNX, WERN); MESA rises on news it finalized a new contract replacing its previous agreement with American Airlines (AAL), to operate 40 CRJ-900s for a five-year term through year-end 2025; FDX touched record highs Tuesday with sentiment upbeat as holiday set up is positive for FedEx and UPS as volume is moving early spreading out the peak, pricing is strong and consumers are desensitized to weaker on-time performance; in tankers, FRO posts Q3 bottom-line miss while average daily time charter equivalents down QoQ as VLCC $49,200 vs. quarter-ago $75,800, SMAX $25,100 vs. quarter-ago $51,100, LR2 $12,800 vs. quarter-ago $36,900

Technology, Media & Telecom

·     Semi’s & Internet; FSLY downgraded to neutral at Credit Suisse citing the balanced risk/reward after the stock recovered from recent pullbacks/says any unused reserved capacity would put pressure on near-term gross margins; online travel names BKNG, EXPE came under pressure following strong rally in shares; social media names outperformed (PINS, TWTR); AAPL suppliers QRVO, SWKS shares slipped after Digitimes ran a headline for a preview of a story that says Apple is reportedly mulling development of RF REM modules in house; STM shares popped after a Business Insider report said that SpaceX hired STMicroelectronics to manufacture Starlink user terminals https://bit.ly/39en8WT ; CHGG shares jump after being mentioned as Motley Fool pick

·     Software movers; WORK shares spiked after the WSJ reported that CRM has recently been in talks to buy Slack, citing people familiar with the matter https://on.mktw.net/3m6bIb3 ; VMW reported good revenue and EPS upside in F3Q, but total and license billings missed Street estimates on account of a COVID-related slowdown that impacted the timing of large on-premise projects and prelim FY22 revs and op margin guidance was below; ADSK posts Q3 revs and adj profit above expectations helped by strength in Subscription plan segment which rose 24% YoY and said it sees FY21 rev and adj profit above analysts ests.; in research ZS upgraded to outperform from neutral at Credit Suisse saying downgrade thesis has largely been debunked and see COVID-19 acting as a more durable catalyst for cloud security adoption

·     Media & Telecom movers; VIAC will sell its Simon & Schuster publishing business to Penguin Random House LLC for $2.18 billion in cash, the company said; SNE said in a tweet its newest videogame console had a bigger launch than any of its previous ones. The PlayStation 5 debuted on Nov. 12 in two versions, one costing $500 and another without an optical disk drive for $400. Sony didn’t disclose sales figures in its tweet, but two weeks after launching the PlayStation 4 in 2013, it said that machine had sold 2.1M units

·     Hardware & Component news; HPQ beat expectations for Q4 revenue and forecast Q1 adj profit above estimates, driven by the continuing pandemic tailwinds in consumer notebook sales, offset by weakness in commercial and desktops, promoting several analysts to raise tgt prices; DELL also reported strong results on PC demand strength; PSTG Q3 results were ahead of consensus estimates, but revenue declined 4% Y/Y, the first decline in the company’s history/Subscription services revenue was again strong, up 29.5% to $136.1M while not giving official forward guidance; SITM raised revenue guidance for Q4 to increase 18-22% sequentially vs. 10-15% guidance provided during its Q3 earnings release