Thursday, August 9, 2018
Equity Market Recap
· U.S. stocks slid to lows in the final minutes of trading, wiping out gains after spending most of the day in a tight trading range, though the Nasdaq Composite managed to advance for an 8th straight session. The streak marks its longest since March led by record highs in both AAPL and AMZN and continued better earnings in the software sector, while semiconductors slide amid a cautious analyst comment about the sector overheating. However, the S&P 500 index and Dow Industrials were little changed as a drag in energy weighed on markets. Oil prices settled slightly lower, adding to yesterday’s 3% decline and closing at 7-week lows. Meanwhile, the U.S. dollar neared its best levels of 2018 on strong economic data and broad weakness in other currencies (Russia ruble to 2-year lows vs. the dollar and Turkish Lira record lows on sanctions imposed against both). Geopolitical tensions between the U.S. and other countries have failed to dent markets, despite China responding to the Trump administration’s recent tariffs with additional tariffs of its own. Inflation data was in-line to slightly tame for PPI today, with the CPI report due tomorrow morning. Still no fear as the CBOE Volatility index (VIX) remains near 7-month lows amid lack of fear/hedging in markets. There were also two failed mergers announced today, with SBGI and TRCO deal terminated along with the Albertsons deal to acquire RAD falling apart.
· Producer price index (PPI) was flat in July, below the expected 0.2% increase, while core PPI, rose 0.1%, also below the 0.2% estimate. The core rate strips out food and energy. The flat PPI reading pulled the 12-month rate of wholesale inflation down to 3.3% from 3.4% while the 12-month rate of core PPI advanced to 2.8% in July, the highest since March.
· Initial jobless claims fell by 6,000 to 213,000 in the week ended Aug. 4, below the 220K estimate while the 4-week moving average fell by a smaller 500 to 214,250; continuing claims rose by 29,000 to 1.76 million.
· Wholesale Inventories for June rose 0.1% in June, slightly above the unchanged estimate, as wholesale inventories increased to $632.4B vs. $632B in prior month; wholesale sales fell 0.1% in June after rising 2.1% the prior month
· The 30-year fixed mortgage rate for week ended today fell to 4.59% from 4.60%, Freddie Mac said, while the 15-year rate avg 4.05%, down from 4.08% a week earlier and 5/1-year ARM rate avg 3.9%, down from 3.93% a week earlier
· WTI crude oil ends lower, sliding 13c to $66.81 per barrel, back at 7-week lows, erasing earlier gains that saw highs of $67.41 per barrel. Oil prices failed to rebound after falling more than 3% on Wednesday on bearish weekly inventory data and fears of the trade/tariff impact to commodity prices. Gold prices dipped -$1.10 to settle at $1,219.90 an ounce, snapping its modest 2-day win streak, as the dollar remained strong and economic data came in mostly higher. Initial jobless claims fell more than expected in the latest week, while the July producer-price index was flat, compared with expectations for a 0.2% rise.
· The U.S. dollar pushed higher, extending its 2018 gains vs. most major and emerging market currency rivals. The euro moved to afternoon lows of 1.550 (down -0.5%) vs. the dollar, while the greenback was little changed vs. the Japanese yen. It has been a rough week for the British Pound, falling to fresh 1-year lows of 1.2836 today vs. the dollar (recent move below 1.30 was the first time in 10-months) amid worries over a so-called “hard Brexit.” The Russian ruble slid to its lowest level since late 2016 amid US sanctions as the USD touched highs of 66.71. The New Zealand dollar fell after the Reserve Bank of New Zealand took a more dovish stance on its policy outlook and left interest rates unchanged. The Turkish Lira also at new record lows vs. the dollar on sanctions from the U.S., falling more than 5%.
· Treasury prices gained, sending yields lower despite generally stronger economic data today. The U.S. Treasury sold $18B in 3-year notes at a yield of 3.09% (vs. 3.087% when issued prior) with the bid-to-cover (demand) at 2.27 vs. 2.34 prior and indirect bidders awarded 62.2% of the auction and only 8% to direct bidders (smallest since January). Overall, the yield on the 10-yr fell to 2.93% (now about 8 bps off highs two weeks ago around the FOMC hike), with the 2-yr yield down at 2.65% and the 30-yr steady at 3.07%.
Sector News Breakdown
· Retailers; LB July Comp sales flat vs. est. up 1% and net sales $849.7M for 4 weeks ended Aug. 4; expects to report 2Q EPS toward the high end of previous guidance range of 30c-35c; COST reports July total company comparable sales up 8.3% vs. est. 7.4% and the company reported net sales of $10.59B for the retail month of July; ZUMZ rises as July comp sales up 9.1% and July net sales of $83M and raises Q2 EPS to 13c-14c, from prior 4c-9c; BKE net sales for 4-week fiscal month ended Aug. 4 increased 12.3% to $68 million and Q2 comp sales +1.4%; PRTY reports revenue growth of 2.3% in Q2, on a constant currency basis and brand comparable sales up 0.1%; shoe apparel names outperformed (NKE) after ADDYY earnings; 52-week highs for NKE, AMZN, AAP, TGT, KORS, ROST, TJX in the retail segment of the S&P 500 index; firearms and outdoor producer VSTO rises on better earnings and raised outlook for the year
· Consumer Staples; beauty and cosmetics space weak after ELF falls after reducing its 2018 year sales growth view to up low single digits from up 6%-8% citing current trends within select national retailer partners (downgraded by at least four analysts); shares of ULTA, RV, COTY, EL also active on the ELF results; MNST delivered a strong quarter, with 13.2% volume growth driving 12% top-line growth; in beverages, BREW shares rise after its Q2 sales beat; CCE Q2 earnings topped consensus and maintained its full-year outlook; CPB spiked after Reuters reported Third Point is prepared to call for a sale of the company
· Auto’s; it has been all about TSLA the last few days with the latest developments today: The U.S. SEC is intensifying its scrutiny of Tesla Inc.’s public statements in the wake of Elon Musk’s provocative tweet Tuesday about taking the electric-car company private, according to two people familiar with the matter. SEC enforcement attorneys in the San Francisco office were already gathering general information about Tesla’s public pronouncements on manufacturing goals and sales targets (TSLA shares dropped as much as 6% today)
· Housing & Building Products; DOOR is a top performer after reporting solid earnings while BECN is another positive outlier as it recoups some of yesterday’s massive earnings-induced losses
· Casino & Leisure movers; in cruise line sector, NCLH shares rise on strong bookings and as passenger ticket revenue of $1.08B in Q2 vs. $1.04B consensus/net yield during the quarter of +4.7% easily topped guidance mark of ~+2.75% with better year profit guidance
· Education sector; group active after a handful of earnings results; APEI shares dropped to lowest levels since March, falling below its 200-day MA of 34.55 after Q3 EPS missed the lowest estimates; LAUR Q2 EPS handily topped consensus and backed its year revenue outlook and said it expects to generate over $1 billion in proceeds from its plan to divest additional units in Europe, Asia and Central America; LOPE Q2 revs topped views but issued mixed Q3 results
· Energy stocks were dominated by earnings results in the E&P sector (OXY, FANG, VNOM, MUR, SD) and news of tie ups (APA), coupled with another decline in oil prices (fresh 7-week lows), sent the energy sector lower again
· E&P sector; FANG reported 2Q last night and production came in above consensus and management raised the FY18 guide by ~4 Mboe/d at the midpoint/beat was largely driven by the acquisition of ~12.1 mboe/d from last Oct/EPS missed while EBITDA beat; APA falls after announced a plan to form a midstream unit with Kayne Anderson Capital Advisors (appeared to disappoint those who were expecting cash proceeds from the roughly $1 billion invested in the Alpine High asset to date); SND reported better than expected Q2 earnings and revenues, which surged 83% Y/Y to $54M/says overall frac sand tons sold during Q2 totaled 839K, the highest in its history; MUR raises FY18 production view 1,000 BOE/d to 168,500-170,500 BOE/d and boosts full year capital expenditure guidance by 6% from $1.11B to $1.18B; SD slips after recording a Q2 loss of $0.05/share vs. a $0.23/share profit in the year-ago quarter; BCEI Q2 EPS missed views; OXY same problem that has plagued a majority of E&P names this quarter – the jump in cap-ex spending overshadowing the rise in production guidance for the year
· Equipment and services; NE downgraded to underweight at Barclays, as has little confidence in a floater recovery saying with current offshore driller share prices now implying day rates will eclipse $400k per day by mid-2022 in the face of substantial floater overcapacity and few signs of an imminent recovery (RIG, ESV, DO drag lower); RES was downgraded at BMO Capital
· Services and software; DNB has agreed to a $5.4 billion buyout by an investor group led by CC Capital, Cannae and Thomas H. Lee-affiliated funds, as holders will receive $145 in cash for each share
· Brokers and asset advisors; ITG upgraded to overweight at JPMorgan on view the company is gaining traction on a number of fronts that have and will continue to drive higher earnings power
· Consumer finance and lending; GDOT posted a solid 2Q beat-and-raise, highlighted by a continuation of robust demand trends and raised FY18 revenue outlook
· Bond insurers; Assured Guaranty (AGO) Municipal agrees to terms for a restructuring support agreement–or RSA–resolving how Puerto Rico sales and use tax revenue will be divided among holders of senior and subordinate bonds issued by the Puerto Rico Sales Tax Financing Corp. (COFINA by its Spanish acronym) and secured by the sales and use tax (AMBC, MBI also active on the related news as MKM noted MBIA has ~$700M of par exposure to senior Cofina bonds)
· Pharma movers; PRGO shares dropped after earlier cutting its 2018 EPS and sales forecasts and announcing plans to separate its prescription pharmaceuticals business; LJPCshares drop in response to its release of Q2 results that were shy of consensus; large cap Pharma names pull back from recent multi-year highs for the likes of LLY, MRK, PFE
· Biotech movers; SGMO shares active as reports progress in preliminary data from the Phase 1/2 clinical trial evaluating SB-525, a cDNA gene therapy candidate for Hemophilia A; SRPT reports better earnings and makes $30M equity investment and enters license and option agreement with Lacerta Therapeutics to develop CNS-targeted treatments; ACAD rebounded despite lowering its FY18 NUPLAZID net sales guidance to $210M-$225M from $255M-$270M
· Medical equipment and devices; NUVA announces a partnership with Siemens Healthineers aimed at improving outcomes and OR workflow in minimally invasive spine surgery; WMGI was upgraded to buy at Bank America noting Q2 results were strong with solid outlook with new products in lower, augment injectable, and best in class shoulders.
· Healthcare services and providers; RAD shares fell after Albertsons pulled the plug on its multibillion-dollar takeover of the pharmacy retailer. Last month, Institutional Shareholder Services said that Rite Aid investors should vote down its $24B deal
· Other movers after earnings: ACHN, AERI, AKBA, CHRS, CLDX, COLL, FOMX, FPRX, INSY, MNTA, NKTR, NVAX, OSUR, OTIC, PDLI, PTLA, RIGL, TLGT
Industrials & Materials
· Industrial & Machinery; FLS jumps to 52-week highs after Q2 EPS and revs topped consensus helped by a surprise 110 bps gain of operating margins; DE shares weak after Cleveland Research said its dealers surveyed report near-term sales and the 2018 outlook is unchanged, but weaker order trends are now leading to a 2019 sales outlook of flat vs. 0-5% prior, with only a net 11% expecting growth vs 83% previously
· Transports; CPA falls as earnings missed estimates and management cut guidance for the year amid higher jet fuel prices, coupled with a weaker Brazilian real and Argentine peso; GWR was downgraded to neutral at Bank America given 8% uptick since last week; SNDR also downgraded at Bank America on a relative basis as multiples reaches high end of range vs. peers
Technology, Media & Telecom
· Internet; in online travel, BKNG guided Q3 profit $36.70-$37.70, well below the $38.60 consensus view, the 2nd straight quarter of disappointing outlook (after better Q2 results); STMP shares fall after yesterday’s 10-Q report included a United States Postal Service risk factor that could impact revenue and operating results; CVNA rises as 2Q revenue of $475.3M vs. est. $424.2M and raised the revenue and unit sales guidance for the year; now sees year revenue of $1.85B-$1.95B vs. prior view of $1.75B-$1.85B; ZNGA initiated underweight at Barclay’s saying at 13x 2019 Ebitda expectations, stock already reflects solid future execution; YELP reported better-than-expected results and the full-year revenue/Ebitda raise; ANGI trades to best levels since early 2014 after its earnings results; SPOT rises after strikes a deal with Samsung in an effort to fight off Apple Music
· Semiconductors; Morgan Stanley downgrades the semiconductor industry from in line to cautious due to chip inventory levels saying the sector is “showing signs of overheating.” Further, elevated inventory and stretched lead times have no margin for error as any lead time adjustment or demand slowdown could drive a meaningful correction and risk/reward is the poorest it has been in 3 years – firm cut ON to underweight and AMAT to equal-weight while upgraded APH to overweight given less pronounced cyclical risk and reflecting its best in class execution and a tripling in its total available market (TAM) due to sensors
· Software mover; AYX rises after strong top and bottom line beat and a guide above while rev and billings growth accelerated to 54%/63% from 50%/44% last quarter, helped by a record number of six figure deals; UPLD rises after boosting FY revenue guidance to $139.6M-$142.6M, from prior view $121.8M-$124.8M seen in June (upgraded to buy at Roth); SAIL soars as reported strong 2Q18 results, exceeding Street’s expectations and raising FY18 guidance driven by a healthy mix of International growth, upsell momentum, and strong execution across both license and subscription products
· Media & Telecom movers; SBGI shares fell on reports TRCO is seeking $1B in its breach-of-contract lawsuit against the broadcaster, after walking away from a $3.9B merger deal. The long-running $3.9B buyout hit a deadline yesterday where the companies could walk, and Tribune made the choice to do so; VIAB mixed Q3 as EPS beat, but revs short of consensus on weak ad sales and filmed entertainment but says it is confident in delivering FY18 EPS growth; FOXA delivered a strong quarter to end the fiscal year driven by 11% domestic affiliate growth and a healthy contribution from the robust film slate; WIN rises on earnings and refinancing talks; IAC shares jumped as quarterly Ebitda and revenue topped consensus; CTL among the top gainers in the S&P on earnings and its boosted outlook for the year in Telco space; other earnings results from LBYTA, CABO, LILA in the media/cable space
· Hardware & Component news; STX downgraded to sell at Goldman Sachs as believe HDDs remain a cyclical industry, and one facing secular challenges in many parts of the market from the growth of SSDs that are based on NAND flash; PCTI downgraded by two analysts as company’s Q3 outlook and the downward adjustment to full year guidance came in well below estimates; ROKU rises following better than expected 2Q results, FY guidance and the launch of The Roku Channel off platform; TIVO rises as the company missed Q2 revenue expectations, but reiterated that it was exploring strategic alternatives to boost shareholder value