Closing Stock Market SummaryThe S&P 500 declined 0.9% on Thursday to end a strong April with some light profit-taking activity. Mega-cap technology stocks outperformed and limited the Nasdaq Composite's decline to 0.3%, while the Dow Jones Industrial Average declined 1.2% and the Russell 2000 declined 3.7%.
Economic data continued to reveal the damage caused by the coronavirus, specifically a 7.5% plunge in personal spending for March (Briefing.com consensus -3.6%) and 3.839 million initial jobless claims (Briefing.com consensus 3.050 million) filed for the week ending April 25. The positive spin regarding the jobs data was that it marked a 603,000 decline from the prior week.
The market remained unperturbed by the data, having rallied remarkably in the face of bad data since March 23, but it appeared due for some sort of breather. The market traded lower all day, but it did close off session lows.
The S&P 500 materials (-3.0%) and financials (-2.7%) sectors lagged, while the consumer discretionary (+0.4%) and communication services (+0.02%) sectors eked out small gains.
Notably, mega-cap technology stocks remained in favor, with Amazon (AMZN 2474.00, +101.29, +4.3%) and Apple (AAPL 293.95, +6.22, +2.2%) rallying in front of their earnings reports after the close. Facebook (FB 204.35, +10.16, +5.2%) and Microsoft (MSFT 179.13, +1.70, +1.0%) also finished higher following their earnings.
Conversely, Tesla (TSLA 781.88, -18.63, -2.3%), McDonald's (MCD 187.56, -0.26, -0.1%), Comcast (CMCSA 37.63, -1.37, -3.5%), Twitter (TWTR 28.68, -2.41, -7.8%), and Dow, Inc (DOW 36.69, -0.78, -2.1%) were among the many companies that ended the session lower after reporting earnings results.
Separately, central banks remained committed to supporting the financial system. The Fed expanded the scope and eligibility for its Main Street Lending Program, and the ECB said it will conduct net asset purchases under its EUR750 billion pandemic emergency purchase program through at least the end of the year.
U.S. Treasuries ended the session near their flat lines. The 2-yr yield and the 10-yr yield declined one basis point each to 0.18% and 0.62%, respectively. The U.S. Dollar Index declined 0.6% to 99.01. WTI crude rose another 22.8%, or $3.45, to $18.58/bbl.
Reviewing Thursday's economic data:
- Initial jobless claims decreased by 603,000 to 3.839 million (consensus 3.050 million) for the week ending April 25. Continuing jobless claims totaled 17.992 million for the week ending April 18, which is the highest number ever for that series.
- Notwithstanding the deceleration in initial claims from the prior week, the key takeaway from the report is that it reflects a brutal employment situation, evidenced by a six-week total for initial claims that exceeds 30 million.
- Personal income declined 2.0% m/m in March (consensus -1.5%) while personal spending plunged 7.5% (consensus -3.6%). The PCE Price Index dropped 0.3% and the core PCE Price Index, which excludes food and energy, declined 0.1%.
- The key takeaway from the report is that it is a precursor to what will be much worse data for April, which will drive a much worse decline in GDP than the 4.8% annualized decline registered in the first quarter.
- The Q1 Employment Cost Index increased 0.8% (consensus 0.6%), seasonally adjusted, for the three-month period ending in March 2020 after increasing 0.7% for the three-month period ending December 2019. Wages and salaries, which account for about 70% of compensation costs, rose 0.9%, while benefit costs, which make up the remainder of compensation costs, increased 0.4%.
- The key takeaway from the report is that the reported increase in employment costs matched peak rates from 2017 and 2018. The 12-month percent change in wages and salaries of private industry workers (+3.3%) exceeded its prior peak from 2019.
- The Chicago PMI for April declined to 35.4 (consensus 39.2) from 47.8 in March.
Looking ahead, investors will receive the ISM Manufacturing Index for April, Construction Spending for March, and auto and truck sales for April on Friday.
- Nasdaq Composite -0.9% YTD
- S&P 500 -9.9% YTD
- Dow Jones Industrial Average -14.7% YTD
- Russell 2000 -21.5% YTD
US: The biggest post-WW-II drop in consumer spending will drive the contraction in the GDP.
French consumer confidence was surprisingly resilient in April.
French households expect a spike in inflation as a result of shortages of certain items. The reality, however, will be quite different, as economists project deflation in the Eurozone.
Researchers believe that the number of coronavirus infections in Italy has been grossly underestimated (perhaps by a factor of ten).
The ECB (Eurosystem) balance sheet is approaching €5.5 trillion.
The Swiss central bank (SNB) has been intervening in the currency markets to halt the appreciation of the franc. The SNB's activity is evident in the increase of Switzerland's sight deposits.
The Stoxx 600 index is testing the 50-day moving average.
China's 5-year government bond yield reached a record low.
Saudi Arabia's F/X reserves registered the largest monthly decline in at least two decades as it defends the dollar peg. Will the Saudis be forced to devalue (or give up the peg)?
The percentage of S&P 500 stocks trading above their 50-day moving average climbed above 50%.
The S&P 500 has decoupled from consumer confidence.
Self-employed share of the labor force (related to the chart above):
Gapping down
In reaction to disappointing earnings/guidance:
- OLN -11.9%, RDS.A -9% (also cut dividend), LYG -8.2%, NLSN -6.9%, TPR -4.6%, RYN -4.4%, INOV -4.2%, TTMI -4.1%, PRGO -3.4%, HIG -3.1%, EBAY -3%, DNKN -2.9%, GT -2.9%, FCN -2.8%, MXL -2.7%, ALGN -2.6%, MCO -2.3%, DOW -2.1%, TAP -2%, TTEK -1.8%, TDOC -1.8%, SWK -1.7%, FBP -1.6%, MCD -1.3%, TYL -1%
Other news:
- FENC -9.3% (stock offering)
- NEO -7.3% (files for $150 mln convertible notes offering)
- ZM -5.5% (Zoom Video says it has 300 mln meeting participants, not daily active users, according to The Verge)
- TTMI -4.1% (announces restructuring of its Electro-Mechanical unit; to discontinue certain Chinese facilities)
Analyst comments:
- STM -3.1% (downgraded to Sell from Neutral at Goldman)
- ZBRA -2% (downgraded to Neutral from Overweight at JP Morgan)
Gapping up
In reaction to strong earnings/guidance:
- OIS +31.3%, AX +20.4%, MTDR +18.1%, AR +16.9%, UCTT +12.6%, MTSI +11.1%, TPX +10.1%, FLWS +9.5%, WHD +9.1%, SIX +8.8%, FB +8.4%, TSLA +7.7%, MSA +7.4%, NGVT +6.3%, NOK +6.3%, SPB +6.1%, NOW +5.8%, TWTR +4.9%, FICO +4.7%, AGIO +4.5%, AGI +4.2%, CONE +4.1%, VRTX +3.6%, JBT +3.4%, HCC +3.2%, AGNC +3.2%, MPW +3.1%, HBI +3.1%, NLY +3%, SNP +2.9%, MTOR +2.9%, AVTR +2.7%, COP +2.7%, ICE +2.6%, PTC +2.5%, ONDK +2.5%, PEGA +2.4%, AIMC +2.4%, BAX +2.4%, LKQ +2.3%, GIL +2.2%, MSFT +2%, TXT +1.9%, AM +1.8%, RFP +1.7%, KHC +1.7%, MOBL +1.6%, MO +1.6%, BMRN +1.5%, SHI +1.5%, CMCSA +1.5%, CI +1.4%, ETN +1.4%, QCOM +1.3%, AAL +1.3%, PS +1.2%, INSM +1.2%, ORAN +1.1%, TFX +1.1%, WLTW +1%
Other news:
- MRKR +22.9% (granted FDA Orphan Drug designation to MT-401)
- HOLX +9.9% (to launch new Aptima molecular assay to detect the SARS-CoV-2 virus)
- PSTI +8.8% (receives €50 million of financing from European Investment Bank)
- CHS +7.9% (names new CEO; also announces restructure to get leaner)
- SIGA +7.9% (announces BARDA exercise of contract options valued at approx. $101.3 mln)
- AZN +4.7% (to collaborate with Oxford University for COVID-19 vaccine)
- FTAI +4.7% (Fortress Transportation and Infrastructure announces agreement with Air France for the purchase and leaseback of sixteen aircraft) MESO +4.7% (begins enrollment in Phase 2/3 trial of remestemcel-L in 300 patients with COVID-19 acute ARDS)
- BCEL +4.2% (announces collaboration on novel antibody treatment for COVID-19)
- UNIT +2.7% (Uniti Fiber comments on connectivity initiatives)
- AMC +2.1% (files to delay its 10-K and 10-Q)
- GSK +1.8% (FDA approval of Zejula as monotherapy maintenance treatment)
- BA +1.8% (rising despite S&P cutting rating on Boeing to BBB- from BBB; watch negative)
Analyst comments:
- IFRX +13.3% (upgraded to Outperform from Mkt Perform at Raymond James)
- LUV +2.5% (upgraded to Buy from Hold at Stifel)
- MERC +2% (upgraded to Outperform from Neutral at Credit Suisse)
Early premarket gappers
- Gapping up:
- AX +20.4%, MTDR +19.9%, MRKR +17.6%, AR +17.3%, SIX +13.5%, OIS +11.7%, UCTT +11.6%, MTSI +11.1%, PSTI +9.5%, WHD +9.1%, FB +8.9%, TSLA +8.4%, HOLX +8.3%, SIGA +7.9%, AMC +7.7%, NOK +7.7%, NGVT +7.6%, MSA +7.4%, NLSN +7.4%, NOW +6.8%, AMRN +6.3%, CHS +5.4%, AZN +4.7%, FICO +4.7%, NLY +4.4%, BCEL +4.2%, CONE +4.1%, AGI +4.1%, MPW +4%, HBI +3.5%, VRTX +3.4%, JBT +3.4%, ETN +3.3%, WYNN +3.2%, HCC +3.2%, BA +3.1%, SNP +2.9%, UNIT +2.7%, AVTR +2.7%, PTC +2.5%, ADM +2.4%, PEGA +2.4%, AGNC +2.4%, LKQ +2.3%, URI +2.2%, MSFT +2.1%, CI +2.1%, TPX +2.1%, QCOM +2%, IDXX +1.9%, MOBL +1.6%, BMRN +1.5%, ORAN +1.5%, SHI +1.5%, GSK +1.3%, DNKN +1.3%, PS +1.2%, XOM +0.9%
- Gapping down:
- FENC -12%, OLN -9.1%, RDS.A -7.2%, AM -6.7%, LYG -6.5%, NEO -5.7%, HIG -5.6%, INOV -4.5%, RYN -4.4%, TTMI -4.1%, TTMI -4.1%, ALGN -3%, EBAY -2.7%, MXL -2.7%, GIL -2.3%, PRGO -2.2%, TTEK -1.8%, TYL -1%, CACI -0.9%, TDOC -0.9%
Gapping down
In reaction to disappointing earnings/guidance:
- APRN -21.1%, CRTO -9.8%, HWC -9.4%, IRBT -7.6%, SITE -5.4%, GE -4.6%, AKAM -4.4%, F -3.9%, TX -3.8%, FEYE -3.6%, UTHR -3.4%, BYD -3.1%, AMD -3.1%, CHRW -2.7%, CYH -2.5%, BKU -2.5%, GD -2.2%, SBUX -1.8%, HAS -1.7%, OKE -1.4%, NOC -1.1%, YUM -0.9%
Other news:
- RPD -5.3% (acquires DivvyCloud for $145 mln; provides preliminary Q1 results; announces proposed private offering of $200 mln of convertible notes)
- SUI -3.3% (commences offering of 3.6 mln shares)
- RDUS -3% (CEO to step down)
- LUV -1.3% (upsizes offering by 15 mln shares and prices offering of 70 mln shares of common stock of the Company at $28.50 per share and $2.0 bln of 1.250% Convertible Senior Notes due 2025)
Analyst comments:
- HEAR -2.3% (downgraded to Neutral from Outperform at Wedbush)
- RH -0.9% (downgraded to Underperform from Hold at Gordon Haskett)
- WMT -0.9% (downgraded to Accumulate from Buy at Gordon Haskett)
- CE -0.5% (downgraded to Equal Weight from Overweight at Wells Fargo)
Gapping up
In reaction to strong earnings/guidance:
- WW +13%, EAT +12.3%, MTH +9.5%, SPOT +8.7%, ENVA +8.6%, BXMT +8.4%, HELE +7.8%, DXCM +7.6%, CHE +7.1%, GOOG +7.1%, BCS +6.8%, MASI +6%, SHW +6%, DB +5.8%, MKSI +5.5%, WPP +5.3%, BA +5.2%, JNPR +4.9%, LSCC +4.9%, VLO +4.9%, ACA +4.8%, STRA +4.3%, OSK +4%, CLH +3.9%, AJRD +3.8%, CRSP +3.6%, MKTX +3.3%, MRC +3.1%, LH +2.9%, HUM +2.8%, EPD +2.4%, ANTM +2.2%, GRMN +1.9%, BSX +1.8%, YUMC +1.7%, SIMO +1.4%, AZN +1.4%, CSTM +1.3%, OI +1.2%, CVE +1%
Other news:
- CMRX +37.1% (receives FDA clearance for rolling submission for NDA for brincidofovir)
- BNTX +7.5% (BioNTech and Pfizer complete of dosing for first cohort of Phase 1/2 trial of COVID-19 vaccine candidates in Germany ) INO +6.9% (presents positive data with INO-4700 for MERS coronavirus)
- SUPN +5.2% (to acquire central nervous system portfolio from US WorldMeds for $530 mln)
- CLB +4.1% (cuts dividend)
- DVAX +3.9% (reports data from clinical trial evaluating HEPLISAV-B)
- MET +2.3% (increases dividend)
- AVDL +2.1% (prices offering of 11,630,000 ADSs at $10.75 per ADS)
- PFE +1.4% (BioNTech and Pfizer complete of dosing for first cohort of Phase 1/2 trial of COVID-19 vaccine candidates in Germany )
Analyst comments:
- RLGY +9.3% (upgraded to Buy from Neutral at Compass Point)
- TJX +2.6% (upgraded to Overweight from Neutral at Atlantic Equities)
- PH +2.4% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
Wirecard: what KPMG’s report found
The payments group had predicted vindication from a special audit — it did not arrive
For months Wirecard had confidently predicted that KPMG would vindicate its accounting and deliver a final riposte to its sceptics.
Instead, the publication of the report on Tuesday caused shares in the Dax 30 company to crash 26 per cent as investors discovered that forensic investigators had faced obstacles in their attempts to verify that large parts of the business were real, and publication of full-year results would be delayed again. The shares fell another 7 per cent on Wednesday.
Wirecard has long been viewed as Germany’s next great technology company. Like software giant SAP it claimed a global business and offered services indispensable to the future of commerce.
Those products were obscure, part of the financial plumbing that helped online merchants take payments from customers, but rapid growth in sales and profits made it a stock market sensation. The message to investors was that as cash fell out of fashion, it would be in prime position to succeed, and enthusiasm for that prospect prompted pension funds and investors to snap up its stock.
Then last year it was rocked by an accounting scandal. Singapore police raided its operations in a probe of alleged accounting irregularities at several subsidiaries in Asia following FT reports of problems raised by whistleblowers. Wirecard sued the FT in Munich, claiming misuse of trade secrets, and said that while some staff may face criminal liability, the financial impact of their actions was limited and lessons would be learnt.
In October 2019 the FT published internal documents that indicated that sales and profits at key Wirecard units may have been invented. The company said the files scrutinised by the FT were fake and anyway misinterpreted, and that KPMG’s special audit would prove it. Only last month it told investors that if the probe had produced material findings, it would have been obligated to inform them.
Missing bank records
KPMG’s 74-page report has highlighted weaknesses in record-keeping at a regulated financial institution and raised new issues about the group’s accounting.
For instance, KPMG’s report revealed that Wirecard’s senior managers did not record minutes when holding executive board meetings, and that they did not sign a so-called declaration of completeness, stating that anything relevant to KPMG’s inquiry was fully disclosed.
KPMG reported that some essential documents for its review arrived at the last minute, while many never arrived at all. Among the desired but absent information: original bank records detailing €1bn of payments.
A trustee in charge of key bank accounts had quit shortly after the special audit was launched, the report said. The so-called escrow agent terminated the relationship in late 2019, then did not co-operate in the audit afterwards, creating an obstacle for KPMG.
In terms of the accounting, while KPMG found no evidence for manipulation, it cast doubts over several areas: how Wirecard calculated its cash reserves; how it booked the revenue generated by third-party business partners; about its know-your-customer procedures; its risk management; and about the willingness of staff to co-operate with KPMG.
‘Unable to fully comprehend’ accounting
At the heart of the report was the question of third-party business. Wirecard is licensed by the big payment networks, such as Visa and Mastercard, to help retailers accept credit card transactions. When it lacks a licence in a particular country, Wirecard uses a third-party payment processor to handle the transactions on its behalf.
Wirecard had dismissed FT reports that three such partners were at times responsible for half of the group’s sales and most of its profits. KPMG said that three partners had in fact “comprised the major part” of Wirecard’s operating profit between 2016 and 2018, but it was not able to offer an opinion on whether the business was genuine: verification attempts “proved to be impossible, as we were not given access to the relevant data for the investigation period”, the report said.
The report said KPMG could not confirm “that the sales revenues exist and are correct in terms of their amount, nor can it make any statement that the sales revenues do not exist and are incorrect in terms of their amount”.
The report also revealed a contradiction between the level of knowledge claimed about the underlying clients. Wirecard “would neither understand nor monitor these Know-Your-Customer compliance checks carried out” by its partners, the report said, a vital requirement under rules to prevent money laundering. The relationship was arm’s length and the third parties with the data did not provide it.
Yet when it came to accounting for the activity, Wirecard treated the third parties as an extension of its own business. Their sales were counted as its sales, their costs as its costs. The validity of Wirecard’s published accounts was not within the scope of KPMG’s remit, but the report questioned the approach. “We were unable to fully comprehend Wirecard’s ‘gross accounting’ of revenue generated with [third-party acquiring partners],” wrote KPMG, pointing out that it did not receive the necessary documents to do so.
When KPMG requested minutes of quarterly meetings between the German company and its third-party business partners, Wirecard wrote that such minutes were not taken in 2016 and 2017. However, on April 23, Wirecard’s accountant EY handed over the minutes Wirecard had said did not exist.
Whose cash?
The auditors also took issue with Wirecard’s practice of counting money held in escrow accounts as cash that it can readily use — an issue the FT reported about in December. “There are arguments against Wirecard’s accounting of escrow accounts as cash or cash equivalents during the investigation period of 2016 to 2018,” wrote KPMG, arguing that they might not have met key requirements of IFRS accounting standards.
Wirecard, the report said, provided KPMG with an opinion from a separate advisory firm stating that the approach to cash was appropriate.
Judgment on the matters now moves to KPMG’s top tier rival EY, which has signed off on Wirecard’s accounts as fit and proper for a decade, and was expected to do so again this week.
Publication of full-year results was planned for April 30, but was delayed on Tuesday due to the coronavirus pandemic, according to an upbeat Markus Braun, Wirecard’s longstanding chief executive and largest shareholder.
He told a conference call for investors that “we can fully reject all the allegations”, that no need for corrections had been found, but that some “weaknesses in processes need to be addressed”.
Early premarket gappers
- Gapping up:
- ENVA +15%, WW +12%, CMRX +11.9%, INO +9.7%, MTH +9.5%, BXMT +8.4%, HELE +7.8%, GOOG +7.7%, BNTX +7.4%, CHE +7.1%, DB +6.3%, DXCM +5.9%, MASI +5.9%, MKSI +5.5%, BCS +5.5%, SUPN +5.2%, ACA +4.8%, SPOT +4.4%, MRC +4.3%, DVAX +3.9%, LSCC +3.9%, AJRD +3.8%, ANTM +3.5%, VLO +3.5%, MKTX +3.3%, CRSP +3.2%, KBR +3.2%, JNPR +2.9%, EPD +2.4%, CLB +1.8%, HUM +1.8%, BSX +1.8%, YUMC +1.7%, MET +1.5%, SIMO +1.4%, UBER +1.3%, PFE +1.3%, OKE +1.2%, OI +1.2%, AZN +1%
- Gapping down:
- APRN -12.4%, IRBT -8.8%, BYD -7%, RPD -5.4%, SITE -5.4%, AKAM -4.8%, SUI -4.2%, FEYE -3.9%, HAS -3.8%, RDUS -3%, AMD -2.7%, CHRW -2.7%, F -2.6%, HWC -2.3%, CYH -2.2%, LUV -1.6%, SBUX -1.5%, AVDL -0.9%, GE -0.9%