Wednesday, September 5, 2018
Equity Market Recap
· U.S. stock markets were mostly lower, led by a decline in tech, while defensive sectors such as utilities and healthcare outperformed. Internet stocks were among the biggest drags in tech, led by sharp declines in NFLX, FB, TWTR, GRUB, SNAP and GOOGL, pushing the Nasdaq Composite down as much as 1.5% to lows of 7,962 before settling around the 8,000 level. Social media company execs (FB, and TWTR) faced questioning from U.S. senators, as the Senate Intelligence Committee members raised the prospect for government regulation. U.S. airlines declined amid company comments from an industry conference, and as 100 passengers fell ill on an Emirates flight from Dubai to JFK International in New York. Regarding trade, Canada has insisted that there is still room to salvage NAFTA after negotiations with the U.S. and added that both sides would meet again later in the day after separate talks on this morning proposals. The U.S. held up well relative to Asian markets overnight when the Shanghai Index declined -46 points (1.68%) to settle at 2,704 and the Hang Seng Index plunged -729 points or 2.61% to settle at 27,243. Also, the White House will implement 25% tariffs on next $200B of Chinese imports, as soon as Thursday. The Pound spiked vs. the dollar after reports the British and German governments have abandoned key Brexit demands, potentially easing the path for the U.K. to strike a deal with the European Union, as the dollar ended mixed. Oil prices dropped more than 1% ahead of inventory data and as tropical storms didn’t interrupt production in the Gulf. Emerging market contagion fears are abound (amid declines in the Argentine/Mexican peso, South African Rand and Turkish Lira), keeping the market in check.
· The U.S. trade deficit widened 9.5% to (-$50.1B) in July from (-$45.7B) last month and almost in-line with expectations for (-$50.2B) while exports declined by 1% on the month and imports rose 0.9%; the deficit with China widened to a fresh high of (-$36.8B); petroleum exports were a record $15.8B; petroleum imports of $20.3B were the highest since Dec. 2014
· Oil prices end lower, falling $1.15 or 1.65% to settle at $68.72 per barrel, paring recent gains (yesterday highs around $71.50 per barrel) as the tropical storm in the Gulf weakens to depression, lowering fear of reduced production/damages. OPEC Secretary-General Mohammad Barkindo said on Wednesday that world oil consumption would hit 100 million barrels per day later this year, “much sooner” than earlier expected. Note weekly inventory data coming up with API inventories after the close tonight (pushed out a day due to Labor Day holiday) with EIA inventory data tomorrow at 11:00.
· Gold prices eked out a small gain today, rising $2.20 to settle at $1,210.30 an ounce as worries about trade negotiations and weakness in the dollar helped safe haven/defensive assets. Gold rebounded after falling -0.6% on Tuesday, closing back below the psychological level at $1,200 for the first time since Aug. 23. Worries about tariff disputes between the U.S. and counterparts such as China, Mexico, China and the EU weighed on sentiment today.
Currencies & Treasuries
· The U.S. dollar ends lower, with the dollar index (DXY) sliding roughly -0.25% to around 95.20 (off overnight highs 95.66), falling against the euro and British Pound. The Pound jumped to highs of 1.2983 after a media report that the UK and Germany have made progress on a Brexit deal (though later pared gains after Reuters reported Germany said to keep Brexit position unchanged). In emerging markets, the Columbia peso falls to lowest levels since November 2016 while the Argentine peso reversed earlier losses, rising mid-afternoon and trading down from record worst levels of 41.36 last week vs. the US dollar. Bitcoin prices tumble 6% to move back under $7,000 on a report that Goldman Sachs is pulling back on near-term plans to set up a cryptocurrency trading desk. The dollar with a modest gain vs. the Japanese yen.
· Treasury markets end little changed after sliding the last few days, as yields remain near three-week highs with the 10-yr at 2.90%, 2-yr 2.65% and the 30-yr been inching higher, now at 3.07%; hawkish commentary from Fed speakers and stronger economic data pushing yields higher. Bonds have slipped recently as economic data continues to come in upbeat, such as yesterday’s ISM manufacturing gauge surging to a fourteen-year high, keeping the Fed on track for additional rate hikes this year.
Sector News Breakdown
· Retailers; sector was mixed; VRA shares advanced after Q2 earnings estimates beat and offered upbeat guidance, driven by a higher-than-expected gross margin rate thanks to reduced clearance, improved full-price selling, savings on freight and shipping and better-than-expected SG&A expense; in footwear, CAL Q2 EPS missed by a penny and a slight miss on sales at $706.6M as Famous continued to post higher comps & Brand Portfolio sales also grew, but kids shoes relatively weak; DLTH reported Q2 EPS and sales above consensus with mixed year EPS view; TLYS filed to sell 8.1M shares of stocks, sending shares lower
· Consumer Staples & Restaurants; MO said at Barclay’s conference that they are exploring options on cannabis, and will follow federal law; TSN was downgraded to hold at Argus; RRGB COO Stutz leaves role/CEO Post to be interim; BJRI slides as CEO sells over $1.4M in shares
· Housing & Building Products; RH reported revenues were below expectations while delivered another impressive quarter of y/y earnings growth and raised its FY18 earnings guidance for the third time (though reduced its full-year outlook); ADT shares active after announcing less than 9 months following the company’s IPO, ADT announced that CEO Tim Whall will retire and be replaced by the company’s President Jim DeVrie
· Casino Services & Leisure movers; RHI shares dropped after Goldman Sachs downgraded to sell from neutral on signs of a maturing cyclical recovery that puts a damper on the firm’s view of the staffing company’s earnings growth over the next two to three years; in gaming, CZR was rated a new buy and $14 tgt at Deutsche Bank; in leisure, MTN downgraded at Macquarie on valuation
· Oil services stocks pressured early after HAL and FRAC offer weaker guidance; HAL said it sees 8c-10c share Q3 impact from Permian slowdown, due to pipeline constraints, and slowness in Middle East are more than expected; FRAC also cut its guidance in 8K guiding Q3 revs $545M-$555M, below the prior $565M-$590M view; note SLB noted a soft frac market thus far in 3Q on Tuesday – group pressured on guidance
· E&P sector; WLL was upgraded to buy at Lafferty and raise tgt to $56 saying the Bakken, unlike the Permian, has no issue with takeaway capacity. Also its production is mostly weighted towards crude oil making Whiting Petroleum a better proxy on crude oil.
· Utilities & Solar; the defensive sector outperforms with the UTY up around 1% as selling ensues for growth sectors (tech, med-tech); CNPwas upgraded to overweight at JPMorgan as now model the impact of CNP’s pending acquisition of Vectren and see an attractive outlook for the proforma company
· Pharma movers; defensive large cap Pharma names LLY, PFE, BMY, JNJ outperformed; HSGX shares plunge after saying its Phase 3 clinical trial of NeoCart did not meet the primary endpoint of a significant improvement in pain and function in a dual threshold responder analysis; Cannabis market momentum continues, with additional gains in CRON, TLRY, WEED, CGC early on before paring some gains, turning lower
· Biotech movers; SGMO shares slid on the heels of updated data from a Phase 1/2 clinical trial, CHAMPIONS, evaluating zinc finger nuclease gene editing candidate SB-913 in patients with mucopolysaccharidosis type II; TSRO rises as initiates the second stage in its open-label JASPER study assessing PARP inhibitor ZEJULA (rucaparib) plus its PD-1 inhibitor, TSR-042, for the first-line treatment of non-small cell lung cancer; AGIO and CELG agreed to terminate the collaboration and license agreement dated April 27, 2015
· Managed care; Morgan Stanley with sector call, upgrading ANTM to overweight and tgt to $368 from $272 on the potential of its PBM transition to drive growth well above market expectations; also raises tgts for MOH to $178 from $132, CNC to $175 from $138, WCG to $330 from $280, UNH tgt to $305 from $278 and HUM to $400 from $365; HQY reported its F2Q19 results slightly ahead of consensus with a $3M raise to FY revenue guidance, driven by strong performance in Custodial and Interchange revenue, but shares slipped despite better results
· Medical equipment and devices; Barclay’s sector call on life science tools as they downgraded MYGN to underweight (shares at 18-year high), downgrade HOLX to equal-weight (cautious around the near-term outlook for Hologic’s Diagnostics Segment) and upgrade PKI to equal-weight; while initiate BIO with EW and $345 tgt as they take more selective approach; med tech stocks pull back from 52-week highs in broad selling pressure: ABMD, ISRG, IDXX, HOLX drop
· Healthcare services and providers; EXAS tgt raised to $100 at Cowen and raising sales estimates on deeper dive into the PFE Cologuard co-promotion deal that effectively doubles the Cologuard detailing effort; in hospitals, Morgan Stanley said while hospitals may continue to rally on better comps in 2H18 they face “limits to cost-cutting strategies as organic topline growth remains a challenge – raise tgt on HCA to $124 from $115, UHS to $134 from $122; PDCO shares slipped after discloses criminal investigation into subsidiary
Industrials & Materials
· Industrial & Machinery; GE tgt cut to $13 from $16 at UBS saying there should be no argument that GE Power is struggling. In 2Q18, Power orders were down 26% (equipment -29%, services -22%), while revenues were down 18%; Deutsche Bank resumes coverage on eight machinery stocks, saying group is approaching valuation lows vs SPX last seen during 2015 energy and 2008 global financial crises/top picks are buys on AGCO (top pick), CAT and sell rated on TEX
· Rails; BMO Capital downgraded CSX to market perform saying visibility into the cyclical tailwinds that have supported earnings growth is low and the margin of safety in valuation has significantly moderated/sees more balanced risk/reward at current levels; CNI also downgraded at BMO saying while the outlook for demand and pricing growth are favorable and expect CN Rail to improve operating margins in F2019, notes the strong share price performance; NSC said at Cowen conference it expects strong pricing to continue into 2019
· Airlines; UAL said it sees Q3 consolidated passenger unit revenue to be near the high end of its previously-provided guidance range of up 4%-6% and also sees pre-tax margin (ex-charges) to be near high end previously provided guidance range of 8%-10%; JBLU raises low end of Q3 RASM to 1%-3% from prior view flat-3% which reflects strong close-in demand; HA cuts its Q3 RASM view to flat to down 2%, having previously seen down 1.5% to up 1.5%, as a result of service disruptions, passenger cancellations and booking interruptions (lowers year capacity as well); DAL reaffirms Q3 EPS guidance and sad Aug capacity rose 3.5% and traffic rose 3.6%
· Other transports; UPS and FDX shares were active after AMZN ordered 20,000 vans for a delivery service partner program, Daimler said in statement/order to make Amazon Daimler’s biggest customer for Mercedes Sprinter/vans will be Amazon branded
· Chemicals; BAYRY lowered its year EPS view to between EUR5.70 and EUR5.90, compared with a restated 2017 figure of EUR6.64 a share to reflect the Monsanto acquisition and the divestment of several businesses; did raise 2018 sales to more than EUR39 billion, compared with a previous estimate of below EUR35 billion
Technology, Media & Telecom
· Internet; social media companies slipped as executives from FB, TWTR, GOOGL faced a grilling in Congress; JD shares add to yesterday declines after the arrest of a Chinese billionaire in Minnesota over the weekend was for suspicion of rape, according to local police; AMZN tgt raised to $2,450 from $2,200 at Davidson saying they see Twitch as an incredibly valuable and under-appreciated asset of the company, as one of the leading social gaming platforms and a contributor to the gaming category for its cloud computing efforts; KeyBanc said AKAMappears to be on track to post 3Q revenue at the high end of its guidance if momentum continues
· Semiconductors; AMD pulls back after recent spike/today Bank America raised estimates and upped tgt to Street high $35 (recall shares jumped 11% yesterday after Cowen and Jefferies raised their target to $30); overall though, semis dropped with broader tech weakness on profit taking in a group that has pushed markets to record highs last week
· Software mover; COUP shares jumped after posting stronger than expected 2Q, driven by 39% subscription rev growth and raised guidance across the board/also expanding operating margins (6.5% vs. (8.5%) on top of a revenue base; SMAR 2Q included strong revenue and billings upside and better than expected non-GAAP loss more than offsetting modest cash flow mix along with strong metrics performance across the board; WDAY shares fell despite exceeding Q2 expectations and provided better than expected guidance and cash flow topped expectations (shares slipped as stock was at 52-week high into print – likely profit taking)
· Media & Telecom movers; CMCSA and ESPN today announced the launch of ESPN3, ACC Network Extra and SEC Network + on Xfinity X1; VOD was upgraded to outperform at Bernstein; TRCO little spike late day after Reuters reports begins new round of talks to sell itself