Market Review: August, 14, 2018

Terrie AmengualDaily Market Report

***Please note this will be the last “Closing Recap” note for the week –

Closing Recap

Tuesday, August 14, 2018

Equity Market Recap

· U.S. stock averages finished Tuesday with strong gains as the Dow Industrials climbed over 100 points, while the S&P 500 index gains were broad, snapping the 4-day losing streak for each. The Russell 2000 SmallCap index outperformed, along with gains in Transports (index climbed over 1%), while the Nasdaq Composite advanced. Sector strength was broad-based, but healthcare and consumer discretionary were among the top performers. The U.S. dollar climbed to a 14-month high as global markets steadied, while concerns eased overseas as Turkish markets rebounded following actions taken by the central bank Monday to support the banking system. However, the euro and British Pound fell to their lowest against the dollar since June 2017 despite data showing the region’s economy grew faster in the second quarter. From tariffs to trade wars to inflation to a flattening yield curve to a global economic slowdown, to rising interest rates, the headlines have failed to dent the U.S. stock market, as it remains not far from all-time record highs (the S&P SmallCap 600 index posted an intraday record today). Late Tuesday, Reuters reported the U.S. is warning more economic pressures may be in store for Turkey if it refuses to release a jailed American pastor, a White House official said on Tuesday, in a dispute that has further strained relations between the NATO allies.

Economic Data

· Import Prices for July were unchanged MoM, in-line with estimates, after falling 0.1% in June (and rose 4.8% y/y in July –t he largest increase since Feb. 2012), while import prices ex-fuels fell 0.3% after falling 0.3% in June. Export prices for July fell (-0.5%) after rising 0.2% in June and was well below the expected rise of 0.2%

· The National Federation of Independent Business (NFIB) small business optimism index rose 0.7 points in July to 107.9. The NFIB said it was the second-highest level in history and just under the 1983 peak. Eight of the ten components, led by plans to increase employment, expectations for rising sales and for expansion, increased


· Oil prices reversed off earlier highs, with WTI crude falling 16c to settle at $67.04 per barrel (off earlier highs of $68.37 per barrel) ahead of inventory data tonight (API) and tomorrow (DOE). Earlier, prices got a lift after Saudi Arabia said it had cut production in July, on top of market expectations for lighter Iranian output. Saudi Arabia told OPEC that it had reduced crude output by 200,000 barrels per day to 10.29M bpd in July.

· Gold futures edged higher, rising $1.80 or 0.2% to settle at $1,200.70 an ounce, but still finished just barely off its lowest level of the past 18 months. A flight to U.S. dollars was fueled by fears that Turkey’s problems could infect other markets, with the dollar rising to a 14-month peak, weighing on commodity prices.


· The U.S. dollar advanced, trading to new 14-month highs after spending much of yesterday and the early part of today’s session in modestly negative territory after a recent run higher. The dollar index (DXY) touched a high of 96.79, the best levels since last June, posting strong gains against the euro, Pound, yen and Canadian dollar. Recently beaten up currencies such as the Turkish Lira (down 40% YTD) and Russian ruble pared its recent declines (though slipped off highs late days on new headlines about possible further sanctions). The Argentine peso rose over 1% to settle around 29.60. The euro dropped to lows late day, falling over -0.6% to 1.133 (lowest since last June) amid strong US data, while the British Pound also to lows, down -0.5% as approached the 1.27 level to the downside (also lowest since June 2017). Bitcoin prices, along with the rest of crypto market (Litecoin, Ethereum, Ripple) decline, as the crypto market cap has lost more than $600 billion, slipping below $200 billion for the first time since Nov. 12, 2017 as Bitcoin prices dropped below the $6,000 level overnight.

Bond Market

· Treasury prices slipped as yields inched higher, as the 10-yr yield tops 2.89%, the 30-yr at 3.05% and the 2-yr at 2.63% – well off earlier highs this month of 3.01%, 3.16% and 2.68% respectively. Mixed economic data not moving bonds early. Investors had fled to the safety of Treasuries the last few days amid the Turkish financial crisis and plunging Lira, but as markets stabilized today, and stocks rallied, bonds slipped across the board.

Sector News Breakdown


· Retailers; TPR rises as forecast revenue for FY2019 ahead of market expectations, while its recently acquired Kate Spade brand provided a boost to its Q4 results; PERY affirms commitment to $437M going-private deal led by George Feldenkreis (terminated discussions with Randa Accessories at $28.90-per-share buyout proposal, and said remains committed to the $27.50 bid led by founder); URBN was downgraded at Baird after rally in shares as risk/reward appears more balanced as valuation approaches the upper end of multi-year ranges ahead of earnings; Macy’s (M) reports earnings tomorrow morning.

· Auto space; TSLA’s board forms special committee to evaluate potential going-private deal (overnight, TSLA CEO Musk “tweeted” that he’s working with Goldman Sachs and Silver Lake on the go-private proposal); in auto retail, AAP Q2 EPS $1.97/$2.33B vs. est. $1.86/$2.27B; Q2 comp sales rose 2.8% vs. est. 0%; reports new $600M share buyback authorization; sees FY18 revenue $9.3B-$9.5B vs. est. $9.38B and sees FY18 comp sales growth 0%-1.5%; (shares of comps AZO and ORLY active on report)

· Restaurants; EAT posted in-line Q4 earnings and revenue, while comp sales of 0.6% for co-owned stores misses the 1% estimate, but mid-point of year EPS view $3.70-$3.90 tops the $3.75 est.; YUMC rises early on reports China Investment Corp. is backing a potential takeover of Yum China Holdings Inc., which runs KFC and Pizza Hut outlets ; DAVE Q2 results mixed as EPS beat but revs miss and company owned comps of +1.2% (including a 1.0% headwind due to weather closures) and franchise comps down 1.9%

· Housing & Building Products; Dow component HD reported a solid Q2 and exceeded consensus comparable store growth estimates, with an 8.1% figure overall, topping estimate of 6.5%. HD also posted beat and raise quarter but shares slipped after guiding year gross margin expansions 41 bps vs. prior view 45 bps (LOW reports next week);TILE was upgraded to buy at Longbow as believe current levels present an attractive entry point for a name with strong organic order momentum combined with a recently closed accretive acquisition

· Casino & Leisure movers; in casino sector, Jefferies downgraded WYNN to hold as view the recent board additions and the standstill agreement as a significant overhang for shares, reducing the likelihood for a structural change over the next 2-years. Meanwhile, Jefferies upgraded BYD to buy as see the recent post-earnings weakness as a compelling opportunity. Credit Suisse initiates the sector saying they like the domestic gaming industry, given a good macro backdrop, high cash flow generation and leverage to spending on experiences (OP rated on GLPI, VICI, neutral on IGT, MGP, MGM, WYNN, LVS and underperform on SGMS)


· E&P and equipment sector; TDW shares rally after mixed Q2 results as EPS missed but revenue topped views; in drilling, NE was upgraded to hold at Argus saying Noble has begun to see improvement in fleet utilization and day rates, especially for jack-up rigs, and continues to win new contracts; CLB upgraded to neutral at Citigroup around earnings given less risk in Permian and investors looking for an alternative to NOV to play a combo of US and improving int’l

· Utilities; PJM Interconnection LLC, which manages the grid serving more than 65 million people from Chicago to Washington, has requested permission from the Federal Energy Regulatory Commission to push the 2019 event to August from May. The auction, which can move share prices and provide a glimpse of long-term market direction (NRG, FE, EXC, PCG, PEG)


· Bank, brokers and asset managers; ETFC said July daily average revenue trades of 250,787, down 8.2% from June and up 20% from July 2017 and ended month with about 3.9M brokerage accounts, down 4,235 from June; in insurance; CB downgraded to sell at Deutsche Bank as believe that the past several quarters have shown post-merger Chubb to be unable to grow its business at levels in-line with the peers group

· Consumer finance and lending; ONDK shares were downgraded to sell at BTIG based in large part on current valuation, which we view as overextended at 17.7x and 14.8x its FY19E and FY20E consensus adjusted EPS, respectively; JPMorgan comments on payments, as upgraded ADS to overweight as shares trade near multi-year low valuation; sentiment may be near inflection point thanks to stabilizing delinquency trends, expanded share buyback and potential for segment divestitures; JPM downgraded FISV and PAYX to underweight, saying they’re below-average growers with below-average earnings upside risk; FDC 64M share Secondary priced at $23.75; SQ’s Square Cash had 33.5 million total downloads as of July while PYPL’s Venmo had 32.9 million, according to Nomura saying Square Cash grew three times faster than Venmo in July


· Pharma movers; 52-week highs for AET, HUM, UNH, CNC in the managed care sector; XERS shares advanced following quarterly results and submitted a New Drug Application (NDA) for the Glucagon Rescue Pen that Mizuho sees a potential regulatory approval sometime around mid-2019; OPTN shares plunged despite better quarterly results but some focused on commentary on revenue and average selling price (ASP) for XHANCE Nasal Spray

· Healthcare services and providers; CVS shares were active after CTFN reported it had discussed a full divestiture of Aetna’s Medicare Part D business with Justice Dept. as it seeks approval for deal; PINC downgraded to hold at Canaccord given shares are up ~6% quarter-to-date and ~32% YTD, thus outperforming the S&P 500; WBA shares outperform in the DOW; ESRX climbed after Carl Icahn dropped his bid to block the $54B buyout of the company from CI after ISS and Glass Lewis both supported the deal last week

Industrials & Materials

· Industrial & Machinery; 52-week lows for GE today below $12.40 per share; PH was downgraded to hold at Argus noting shares have underperformed the market over the past quarter, with a decline of 5% versus a gain of 4% for the S&P 500

· Transports; Transport index outperforms, rising as much as 150 points as nearly all 20 components in the index were higher, led by gains in CAR, ALK, FDX, MATX, AAL, KSU all leading

· Metals & Materials; CMC upgraded to Neutral from Sell at Goldman Sachs as the stock now looks more reasonably valued after its correction this spring while domestic rebar pricing remains solid, meanwhile Goldman downgraded KALU to sell as believe a mismatch has opened up between the market’s valuation and the relative strength of the company’s outlook; GFI slides to 52-week low after announcing plans to cut costs at its struggling South Deep mine, including laying off more than 1,500 employees and contractors, or ~30% of its workforce; regarding steel, Canadian officials are looking to levy “broad quotas or tariffs on seven steel products in a bid to protect domestic producers from a flood of cheap imports,” said Dow Jones

Technology, Media & Telecom

· Internet; Chinese ADRs fall following several earnings results with YY and HUYA both sliding more than 10% while e-commerce name VIPS drops as missed 2Q estimates and guided lower for 3Q; note JD reports earnings this week and BABA next week

· Semiconductors; NVDA announced the first products containing a long-awaited new generation of graphics technology late Monday, upgrading from its Pascal architecture first released in 2016 (ahead of earnings later this week); MTSI was downgraded to underweight at JPMorgan amid competitive pricing environment; MU shares dropped as low as $50, holding above its 200-day moving average support just below it; INTC shares slipped late afternoon after they provided additional details about a vulnerability that could allow hackers into unauthorized computer areas (shares of AMD advanced on reports)

· Software mover; VERI shares fall after Q2 miss (Q2 EPS loss (88c)/$4.2M vs. est. loss (85c)/$4.92M) – posted a miss on top and bottom lines in its Q2 earnings as revenues grew just 2% (Roth noted Q2 AI revenue was in-line as agency underperformed); EA said Chief Design Officer Patrick Soderlund will leave, effective Oct. 30, after two decades with the company

· Media & Telecom movers; in telco, SWCH shares plunge after its Q2 earnings miss and reduced FY18 guidance attributed to the timing of several large deals closing later than expected; in media, NLSN shares were upgraded by two analysts (Barclays and Macquarie) following the announcement Elliott Management of an 8.4% activist stake and as sees multiple avenue to unlock value; GDS Q2 results that beat on revenue with a reported RMB637.51M but missed on EPS with RMB0.29

· Hardware & Component news; CTSH downgraded to neutral at JPMorgan; BZUN shares active after Q2 results that beat EPS and revenue estimates with a 35% Y/Y revenue growth/in-line Q3 guidance has revenue of RMB1.09B to 1.12B


Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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