Friday, September 7, 2018
Equity Market Recap
· U.S. stocks slumped mid-afternoon on trade/tariff concerns after President Trump said he’s ready to impose tariffs on an additional $267 billion of Chinese goods on short notice, on top of tariffs on $200 billion in goods the administration is now preparing, pressuring Chinese related ADRs as well as industrial and material stocks in the meantime. The headlines overshadowed a bullish jobs report earlier this morning as U.S. wages rose at their quickest pace in nine years in August (up +0.4% vs. est. +0.2%), a standout in a report that topped Wall Street forecasts for headline jobs (added 210K jobs vs. est. 190K) and keeps the Federal Reserve on track to raise rates. The Nasdaq Composite, which is coming off near back-to-back 1% daily losses, failed to hold early gains after a rebound in semi stocks (SOX index fell 3% the last 2-days), and Internet names despite better earnings results from AVGO, FNSR, PANW overnight.
· Asian markets slumped overnight, led by a 6th straight decline for the Nikkei after President Trump noted yesterday about turning an eye toward Japan next on trade. The U.S. dollar extended gains while risk flipped, denting stocks and emerging-markets. Oil prices were little changed on the day, falling roughly 3% on the week while Treasuries fell and yields spiked to 1-month highs. Federal Reserve Bank of Dallas President Robert Kaplan reiterated his view the central bank should continue lifting interest rates until it reaches roughly a neutral level. Emerging-market equities snapped seven days of declines, while the Stoxx Europe 600 Index pared its worst weekly slide since March.
· Strong jobs report for August as Nonfarm Payrolls rose 201K, topping the 190K estimate while private payrolls rose 204K vs. est. 194K; the unemployment rate held steady at 3.9% (above the 3.8% est.) while U.S. wages rose at their quickest pace in nine years in August, jumping 0.4% and topping the 0.2% increase estimated; the participation rate dipped to 62.7% vs prior 62.9%; manufacturing payrolls fell 3k after rising 18K in the prior month vs. est. 23K
· Oil prices end little changed, as WTI crude slipped 2c to settle at $67.75 per barrel (off earlier highs $68.08 and lows $66.86), as concerns surrounding yesterday’s unexpected weekly build in U.S. gasoline inventories and the potential for a trade-dispute growing between the US and China, cause weakness in the commodity space. For the week, oil prices declined 2.9% for the week, part on mixed inventory data and a stronger dollar.
· Gold prices slip, falling -$3.90, or 0.3% to settle at $1,200.40 an ounce, ending lower for a second consecutive week (down -0.5% after snapping a 7-week losing streak prior) as upbeat monthly jobs data reinforced the likelihood for further interest-rate hikes this year. The dollar also rebounded following the data, reducing the appeal of precious metals. Copper declined while aluminum pared gains on the back of extended strike action at alumina operations in Australia.
· The U.S. dollar rebounded vs. majors after the better jobs data and rising wages lifted sentiment in the economy, while emerging market currencies rebound after an awful few weeks from the Turkish Lira, Argentine/Mexican Peso and latest drop in Russian ruble. Argentina’s peso rallied for a third straight day as fresh comments from the country’s central bank governor helped soothe market jitters following the peso’s recent plunge. The dollar jumps to around 70 vs. the Russian ruble (highest levels since 2016). The dollar trades back above the 111 level vs. the JPY, while the British pound fell late afternoon vs. the dollar, erasing earlier gains. Bitcoin prices little changed on the day, but down roughly 9% for the week around $6,400.
· Treasury market’s slide, as yields jump across the board following the better than expected monthly jobs report (10-year trades to 2.94% and 2-yr around 2.7%). Yields jumped to 1-month highs following the release of a strong labor market report that should keep the Federal Reserve on track to raise interest rates this month. The August jobs report showed the U.S. economy added 201,000 jobs, leaving the unemployment rate at 3.9%, while wages spiked. Markets also keeping a watchful eye on the trade/tariff situation with China, as the Trump administration could implement the levies as early as Friday.
Sector News Breakdown
· Retailers; FIVE gives the discount retailers a lift after Citigroup said 2Q was a standout quarter with comps of +2.7% accelerating by over 600 bps on a 2-yr stack vs 1Q and new store productivity of ~105% (recall group fell last week on softer DLTR and BIG results); COST posted better than expected August comps (+8.9% US core comp vs. consensus of ~5.8%) as traffic growth remained robust (+5.5% US); UBS positive on ULTA saying believe that ULTA will benefit in a number of direct & indirect ways by carrying Kylie Cosmetics and Kiehl’s; JPM makes focus list changes as removed DKS as a value idea after adding it opportunistically last month ahead of earnings, while keeping MIKand AAP on the list; TLYS 5.5M share Secondary priced at $18.50; BKS shares rise as Schottenfeld fund increases stake to 6.9% from 5.7% as per a filing.
· Auto sector; TSLA again in the spotlight after two events: 1) Tesla announced Chief Accounting Officer Dave Morton’s resignation, effective immediately, in an SEC filing after just one month on the job saying “level of public attention placed on the company, as well as the pace within the company, have exceeded my expectations”; 2) and its HR chief said she isn’t returning from leave
· Consumer Staples; CPB confirms receipt of Dan Loeb’s Third Point director slate and says its board open and committed to evaluate all options; MDLZ new CEO announced the company’s long-term strategy, affirmed its year outlook, now expects share repurchases to be about $2B in 2018 and boosts capital expenditures to $2.3B; TAP falls after being initiated underperform and $55 tgt at Jefferies saying industry volumes in the US, TAP’s key market, have declined 2-3% YTD and the company has lost share; VSI was downgraded at Barclay’s
· Casino & Leisure movers; casino stocks remained weak after sliding yesterday (LVS, WYNN and MGM were down 3%, 9% and 2%) as investors are cautious despite undemanding valuations, as they want to see more supportive data points before buying. Bernstein said the 2H deceleration in Macau gaming “will be more pronounced,” especially in the 4Q
· Energy stocks have had a rough week as oil prices falls to multi-week lows; the Baker Hughes U.S. rig count was steady at 1,048, with oil rigs fell -2 to 860, gas rigs up 2 to 186, and miscellaneous rigs unchanged at 2; RDC was upgraded to buy at Citigroup noting it has underperformed its peers by about 16 YTD, and said it now appears attractive on both a relative and absolute basis
· E&P sector; COG was upgraded to outperform at Evercore/ISI saying it is at an inflection point, and growth with free cash flow is increasingly rare within energy industry that’s grappling with eroding capital efficiencies (form downgraded OAS to in-line); XEC was downgraded to hold at SunTrust as forecast slightly lower than Street ~22% QoQ 4Q18 oil growth w/some risk to Street earnings estimates
· Refiners; Goldman Sachs downgraded CVE to sell from neutral and cut tgt to $8 given negative exposure to WTI-WCS differential, along with acceleration of higher royalty payments and downgraded CVRR to neutral from buy following outperformance. Goldman upgraded PBF to neutral from sell given positioning to benefit from wider WTI-WCS spread, and potential upside from IMO 2020 sulfur standards, along with more balanced risk/reward. Also upgraded CVI to Buy to take advantage of sharp relative underperformance and exposure to improving Mid-Continent refining fundamentals
· Financials; CMA and WFC both downgraded to neutral at Macquarie saying due to compressing LIBOR spreads and rising funding costs, they believe industry is in the late stages of the NIM story with margins peaking in 2Q19; ZION was downgraded to neutral at UBS and tgt cut to $56 from $67 as reduced loan growth forecast; TROW was downgraded to hold at Deutsche Bank saying thru August, trends are worsening for active managers and T. Rowe Price has posted weaker performance relative to peers
· Services; KBW Inc. transferred coverage of the three publicly traded container lessors, raising the rating for TRTN and CAI to Outperform, and we are maintaining a Market Perform rating on shares of TGH saying the uncertain impact of tariffs on global trade is weighing on valuations; however, the fundamental backdrop remains supportive for the lessors
· Pharma and biotech space was very quiet for a change, with biotech names giving up recent gains (the IBB traded to 52-week highs last week), falling around -3.5% for the week in stocks news, TMO announces $2B share buyback plan; BSX entered into a definitive agreement to acquire privately held Augmenix, Inc. for up to $500M upfront cash; PRQR 5.75M share Secondary priced at $15.75; TEVA led generic makers lower after Credit Suisse downgraded shares to neutral from outperform; large cap pharma names remained strong (BMY, LLY, PFE); OPK shares sank late day after a lawsuit was filed in the U.S. District Court for the Southern District of New York, the SEC alleged that Barry Honig, Phillip Frost, OPKO Health, and other defendants engaged in “pump-and-dump” schemes (OPK shares fell as much as 25%)
Industrials & Materials
· Industrial & Machinery; Baird upgrading AYI shares to Outperform as their quarterly Baird Lighting Survey shows accelerating industry volumes and flattening price comparisons (from negative previously) during FQ4; DOV received an analyst upgrade and downgrade as BMO cut its rating amid concerns over Refrigeration’s end-market, while Citi raised its rating to buy
· Transports; in airlines, LUV was upgraded to buy at Argus which reflects the recent improvement in domestic airline fares and prospects for stronger revenue per available seat mile (RASM) in the coming quarters; in freight, Morgan Stanley said it believes UPS’ upcoming “Transformation Conference” on September 13 could fall short of rising expectations and he sees an 80% probability of a downside move in the stock
· Chemicals; WLK was downgraded to market perform at Cowen saying expects increasingly challenging environment for ethylene and PE margins to be extending out to at least until end of 1H19 and possibly beyond (DWDP, LYB, OLN among other names leveraged to ethane)
· Metals & Materials; AKS double upgraded to buy from underperform at Bank America as expects 85% of AKS’s sheet business to benefit from fixed-contract prices in 2019 and said near-term global sheet prices should be high with lesser Chinese exports due to mandated winter closures for sheet mills; form also downgraded RS to underperform and cut tgt to $90 from $107 saying construction end market could peak in 2019, raising concerns over late-cycle earnings; TAHO announced it has restarted mining operations at its La Arena mine in Peru following an agreement to end the protests there that caused operations to be suspended for eight days; VALE was upgraded to buy at Jefferies on expectation for better pricing of higher grade iron ore
Technology, Media & Telecom
· Semiconductors; death blow to sector yesterday after KLAC and MU dragged group on cautious comments at tech conference, sending the sector down over 3% the last 2-days; overnight, AVGO reported quarterly results and guidance above estimates on continued strong demand from data center customers as well as initial iPhone builds; MRVL posted better than expected F2Q revs/margins for its core business in its first report from the Cavium acquisition, which Deutsche Bank said revs in the qtr/guide were below –
· Software movers; PANW trades to record all-time highs after its beat-and-raise quarter with analysts noting strong quarter outperforming on all metrics (beats on billings $868.1M vs. $825.9M est.); EGAN posted largely in-line results for the quarter, after adjusting for currency impact and guided to strong SaaS revenue growth, but services revenue was guided to decline; OKTA record highs after 2Q19 results and elevated FY19 guidance beat driven by continued migration trends to the cloud
· Media & Telecom movers; CRTO shares fall after Goldman Sachs cut its tgt to a street low $24 after it was de-certified as a Facebook Marketing Partner as of July; DISH tgt raised to $39 at Morgan Stanley as now seeing record low satellite TV churn and while churn is modestly expected to creep up over time
· Hardware & Component news; FNSR boosts optical stocks after in-line quarterly sales but higher EPS on higher GM, while next quarter sales guide was light but offset by better GM/opex; all eyes on AAPL next week ahead of its September 12th product announcements; ROKUtrades to all-time highs above $65.50