After Hours Summary: CLDR +11.6% gains on earnings/guidance while VSLR -11.4% falls on earningsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: CLDR +11.6%
Companies trading higher in after hours in reaction to news: DXC +15.4% (to sell US State & Local HHS business for $5.0 bln; also withdrew previously provided forecast estimates for FY22), KALA +11.4% (commenced $100.0 mln common stock offering), NCNA +10.9% (reported preliminary data from Phase II study of Acelarin in patients with platinum-resistant ovarian cancer), STNG +7.5% (announced purchase of call options by President Robert Bugbee), INO +6.7% (continued volatility after closing lower by 42%), PRTK +6.1% (submitted pre-emergency use authorization for NUZYRA to FDA), DGX +2.5% (continued volatility), NDAQ +1.4% (announced end-of-month short interest positions in Nasdaq stocks)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: VSLR -11.4%, KFY -2.8%, APEI -0.8%
Companies trading lower in after hours in reaction to news: HLT -3.7% (withdrew Q1 and FY20 guidance), LPLA -2.1% (lightly traded; reported total brokerage advisory assets for February), NVTA -1.7% (announced its acquisitions of Diploid, YouScript, and Genelex), MGM -1.3% (issued statement regarding COVID-19 case involving Yonkers Raceway), APEI -0.8% (lightly traded), JBLU -0.6% (CEO comments in interview that he doesn't think bookings have stabilized yet)
Closing Stock Market SummaryThe stock market rebounded about 5%, while Treasuries sold off, in Tuesday's volatile session as investors weighed the possibility of a fiscal stimulus package. The major indices started the session up nearly 4%, then briefly dipped negative as investors sold into strength, and later staged a strong rally into the close.
The S&P 500 rose 4.9%, the Dow Jones Industrial Average rose 4.9%, and the Nasdaq Composite rose 5.0%. The small-cap Russell 2000 increased just 2.9%. Sector gains ranged from 1.0% (utilities) to 6.6% (information technology).
President Trump said last night he wanted payroll tax cuts and support for hourly workers to help mitigate the impact and spread of the coronavirus. Mr. Trump added today that he also wants to protect airlines, cruise ships, and shipping industries. On top of that, CNBC reported he pitched the idea of a 0% payroll tax rate for the rest of the year.
Republican Senate Leader McConnell (R-KY) reportedly said he didn't like the idea of a payroll tax cut, but Treasury Secretary Mnuchin said he thinks there's bipartisan interest in getting something done. The market appeared to side with Mr. Mnuchin's optimism, and Mr. Trump's urgency, although there was some skepticism about the efficacy of tax relief in improving consumer confidence.
The big moves in the Treasury market, meanwhile, appeared to dictate investor sentiment. Stocks gave up gains as renewed buying interest in bonds pulled yields from prior highs, but a resurgence in selling interest coincided with the late rally in equities.
The 2-yr yield finished 15 basis points higher at 0.47%, and the 10-yr yield finished 25 basis points higher at 0.75%. The U.S. Dollar Index rose 1.6% to 96.45.
Separately, oil rebounded from its worst day since 1991 after reports indicated that Russia could be interested in discussions to stabilize oil markets. The price of WTI crude rose by 10.2%, or $3.16, to $34.25/bbl. The energy sector (+4.7%) increased slightly less than the broader market.
Airline stocks were among the biggest beneficiaries from President Trump's comments. Delta Air Lines (DAL 45.47, +1.95, +4.5%), American Airlines (AAL 17.00, +2.25, +15.3%), and United Airlines (UAL 52.56, +5.78, +12.4%) announced capacity cuts due to weakened travel demand, but shares rallied on the potential for government aid.
Tuesday's lone economic report was the NFIB Small Business Optimism Index for February, which increased to 104.5 from 104.3 in January.
Looking ahead, investors will receive the Consumer Price Index for February, the Treasury Budget for February, and the weekly MBA Mortgage Applications Index on Wednesday.
- Nasdaq Composite -7.0% YTD
- S&P 500 -10.8% YTD
- Dow Jones Industrial Average -12.3% YTD
- Russell 2000 -19.0% YTD
H2O warns clients of ‘surprisingly large’ losses after market turmoil
Fund management subsidiary of Natixis hurt by bets on bonds and currencies
H2O Asset Management has sent a letter to clients warning that its funds face “surprisingly large” losses because of bets on bonds and currencies that turned sour during volatile market swings in recent days.
The London-based investment firm, a subsidiary of French bank Natixis, suffered €8bn of outflows from its funds last year after the Financial Times detailed the scale of its illiquid bond holdings linked to controversial financier Lars Windhorst. H2O had assets of about €30bn at the end of last year.
While the group met all of these redemptions, some of its funds blew through limits on counterparty risk when dealing with the fallout, while influential ratings group Morningstar downgraded one of its funds, citing H2O’s “loose risk controls”.
In a letter to clients dated March 9, H2O warned that its funds now face heavy losses because of a series of bets on the direction of bonds and currencies that went against them during recent market turmoil.
“This has led to negative performances that may be surprisingly large, but which do not correspond to our reading of the macroeconomic reality of today’s world,” the letter reads. “We have experienced such crises in the past. We know that the important thing is not to regret getting caught (almost impossible in the case of Covid-19), but to manage the exit well.”
H2O’s positions included a short trade on US Treasuries — which rallied to all-time low yields on Monday — and a long position in Italian sovereign bonds, which have been badly knocked as the country faces the world’s second-largest coronavirus outbreak after China.
H2O’s funds have been some of the best-performing in Europe over the past decade, with Multibonds having regularly posted annual returns in excess of 30 per cent.
However Morningstar warned last year that H2O’s “stellar record” came at the “cost of higher risk than investors could have expected”, pointing to the “extensive use of leverage through derivatives”.
H2O’s latest investor letter flags that its funds have bounced back strongly from previous large losses during times of extreme volatility.
It says that H2O’s funds lost more than 20 per cent during the 2015 Greek government debt crisis, but that an investor who bought in at this point then made more than 76 per cent over the following three years.
At the height of the fallout over H2O’s illiquid debt exposures last year, chief executive Bruno Crastes vowed to never halt redemptions from its funds, which mostly allow investors to withdraw their money on a daily basis.
Worries about H2O’s performance have fed through to the share price of its parent company Natixis, which was the worst-performing major European bank on Monday, as the asset management subsidiary has been a key source of profits for the French lender. Natixis shares fell 18 per cent on Monday and were down a further 2.5 per cent on Tuesday.
Matthew Clark, an equity analyst at Mediobanca, slashed his price target for Natixis shares on Tuesday, citing the impact of H2O’s weaker performance on the bank’s revenue. He also flagged the potential for renewed concerns around the fund manager’s hard-to-sell bonds.
“Against a backdrop of stressed markets, we fear reputational risks relating to these illiquid fund holdings which weighed last year could yet resurface,” Mr Clark said.
NMC Health discovers almost $3bn of debt hidden from its board
Middle Eastern-focused healthcare group said debt used for unknown purposes
NMC Health has discovered almost $3bn of debt hidden from its board that has been used for unknown purposes in the latest disastrous revelation at the former FTSE 100 stalwart struggling to find answers in a mounting accounting scandal.
The Middle Eastern-focused healthcare group said it had identified more than $2.7bn in debt facilities that had previously not been disclosed or approved by the board — more than twice as much as the $2.1bn of reported group debt.
The company said it was working with its advisers “to understand the exact nature and quantum of the undisclosed facilities” but believed that some proceeds may have been utilised for non-group purposes.
The discovery of the unreported debt facilities will add to the questions being asked of the company’s former management — most of which have been cleared out from its board — and its founder and previous majority owners.
The UK’s financial watchdog has already started a formal investigation into the company’s finances after it was forced to reveal unauthorised off balance sheet loans last month. The company’s shares have been suspended and its chief executive fired amid an internal investigation into its finances led by former FBI director Louis Freeh.
NMC has brought in Moelis and PwC to lead discussions over debt restructuring with its lenders as well as to help provide transparency over its financial position. The board of NMC said it had received an update on Tuesday that the group’s debt position “was materially above the last reported number” at an estimated $5bn. “The work on verifying this figure is ongoing,” it said.
Staff at NMC said they did not get paid last month, raising worries over the cash position of the group. NMC said on Tuesday that it was focused on “safeguarding its operational liquidity to continue funding existing operations throughout its various subsidiaries”. NMC said that it recently completed the payment of its February payroll.
In a statement, the company said: “At a time of increasing sensitivity towards the provision of public healthcare, NMC has reported a strong operating start to the year and has provided services in the months of January and February to over 900,000 outpatients, 24,000 inpatients and 1,700 maternity deliveries in the UAE.”
The company said at the end of last month that an interim report had found potential discrepancies and inconsistencies in its cash position, and a supply chain financing arrangement apparently used by its founder as well as a major shareholder guaranteed by NMC but not approved by the board.
While NMC’s shares are suspended, its publicly traded debt fell sharply on the news, suggesting that the group’s lenders are braced for heavy losses. The company’s $360m convertible bond fell to just 20 cents on the dollar, according to traders, having previously been quoted at 40 cents.
Apple’s iPhone 9 release next month has reportedly been canceled
Tesla to add production capacity for 250,000 cars at Gigafactory Shanghai
Newly revealed documents show that Tesla is preparing to add production capacity for 250,000 cars per year at Gigafactory Shanghai.
Tesla started production at Gigafactory Shanghai in December 2019 – less than a year after breaking ground at the new factory.
The company initially talked about quickly ramping up production to 3,000 units per week, but the goal is to eventually produce over half a million cars per year at the plant.
However, the timeline to achieve those production levels is not exactly clear.
We now get a better idea of the ramp-up following a new report from Reuters about fillings in China revealing some of Tesla’s plans for the factory:
“The Shanghai factory is key to Tesla’s growth strategy. There it aims to produce 150,000 Model 3 sedans and later hike output to 250,000 a year, including the Model Y, according to a Shanghai government filing in 2018.”
The automaker plans to add Model Y production at the factory next year.
Tesla is reportedly building a new stamping line that should increase its body part production capacity at Gigafactory Shanghai:
“The company is also building an additional stamping line to speed up car production in Shanghai, according to construction documents seen by Reuters.”
We noted last year that while Tesla impressed by quickly starting production at Gigafactory Shanghai, only about 30% of the made-in-China Model 3 were locally made.
Tesla still had to import a lot of parts to make its electric cars at the new factory.
Now Reuters also adds that the fillings show plans to soon add production lines for “battery packs, electric motors, and motor controllers”:
“The U.S. automaker, which started delivering Model 3 electric sedans from its Shanghai factory in December, plans to add lines to make more battery packs, electric motors, and motor controllers, according to the document submitted by Tesla to Shanghai government.”
However, the documents still don’t show any plan for local battery cell production as Tesla still plans to use cells sourced from LG Chem and CATL for its vehicles made in China.
As we reported earlier today, Tesla’s sales in China have surprisingly remained stable in February amid the coronavirus crisis.