Mid-Morning Look

Wednesday, November 25, 2020

U.S. stocks with a slight pullback after massive runs the last two weeks, with the Dow Jones Industrials (back below the 30,000 level after topping for the first time), Dow Transports and Russell 2000 dipping from record highs, while the Nasdaq Composite performs better early. With the Thanksgiving Day holiday tomorrow (stock markets closed and half day Friday), economic data pouring in with 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 (see all below). Stocks have been boosted 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. The best way to characterize the bullishness and optimism in the market was in 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). At the same point, 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. Oil prices rising again, gold rebounding and Treasury yields slipping in the early going.

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 (but best numbers since 2006 and up 41.5% YoY), 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

Sector Movers Today

·     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.

·     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

·     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

·     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

Stock GAINERS

·     ADSK +8%; 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

·     FSR +18%; as Citigroup initiated with a buy and $26 tgt as sees significant upside potential in Fisker’s future entry into flex-leases and believes the company is targeting the right segment of the market, SUVs

·     HPQ +6%; 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

·     JWN +8%; 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,

·     MESA +14%; as 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

·     SQ +4%; as will pay $50M in cash for Credit Karma tax from INTU

Stock LAGGARDS

·     DE -2%; despite 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 (profit taking)

·     F -3%; 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

·     FSLY -3%; after Credit Suisse downgraded to neutral 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

·     GPS -9%; 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

·     LQDA -8%; 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

·     NKLA -15%; 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

·     PSTG -6%; 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

·     VMW -5%; 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