Market Review: September 10, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, September 10, 2018

Equity Market Recap

· U.S. stock markets end mixed as the S&P 500 index and Nasdaq Composite snapped their 4-day losing streaks though volumes were lighter than normal due to the holiday. Today’s focus given the lack of economic data or earnings was the potential impact on Hurricane Florence, which was upgraded to a category 4 storm today and is making its way up the east coast weighed on life insurers, while home improvement/building products (HD, LOW, BECN, OC) advanced. The governors of North Carolina, South Carolina and Virginia have declared a state of emergency as markets fear of a repeat of 2017 when Irma and Harvey caused tremendous destruction, especially with hurricanes Helene and Isaac churning behind Florence. The Dow Transport index traded to new all-time record highs, rising as much as 2% above 11,575, with 52-week highs for rail companies (UNP, NSC) though strength was broad based, paced by gains in truckers (JBHT, LSTR, CHRW) as Hurricane Florence is expected to boost trucking prices amid higher demand.

· The U.S. dollar traded lower with stocks mixed as risk sentiment faded ahead of imminent U.S. tariffs against China still being considered. Trade issues persisted last week, sinking stocks last Friday after President Donald Trump said tariffs on another $267 billion on Chinese goods could be implemented in short order, on top of the already announced tariffs on $200 billion of goods that he has said would be deployed soon. The MSCI Emerging Market stock index falls to another 14-month low today. In corporate news, Dow component Apple slipped after the iPhone maker warned that a list of proposed tariffs would affect many of its products and increase costs and ahead of its product announcement this Wednesday.


· Prices for the U.S. oil shifted lower as WTI crude slides 21c to settle at $67.54 per barrel (well off earlier highs $68.52) as the market showed concerns over Hurricane Florence in the Atlantic and its potential to weaken energy demand on East Coast. The storm is expected to approach the coast of South Carolina and North Carolina on Thursday. The mover reversed earlier gains – attempting to rebound after oil prices declined 2.9% last week.

· Precious metals end little changed, sliding 60c to settle at $1,199.80 an ounce as gold prices continue to gravitate around the $1,200 an ounce level over the last few weeks (had hit 18-month lows 3-weeks ago sub $1,200), as the dollar remains volatile given FOMC commentary on rates, strong economic data and weakness in emerging market currencies

Currencies & Treasuries

· The U.S. dollar ends lower as major currencies start the week quiet ahead of central bank action from both the European Central Bank (ECB) and Bank of England (BOE) monetary policy decisions on Thursday, though the British Pound did see strong action to the upside after the EU’s top Brexit negotiator Michael Barnier said it would be realistic for a deal to be forged by early November (6-8 weeks)/pushing cable to highs of 1.3052. The dollar index (DXY) fell about -0.25% amid weakness vs. the Pound and euro (pushing back to 1.16). The move comes after a bounce in the greenback Friday following the upbeat jobs report and wage increase. This week, the Federal Reserve’s Beige Book report on Wednesday and Thursday’s CPI may also impact currencies. Digital currencies were hit again after U.S. regulators temporarily suspended trading in two securities linked to the asset class yesterday, citing investor confusion regarding the assets – bitcoin prices slumped over 2% to $6,300. Treasury prices were mixed as shorter term 2-yr holds above 2.70% while the 10-yr dipped to 2.93%.

Sector News Breakdown


· Retailers; FL was upgraded to outperform and tgt raised to $58 at Wells Fargo due primarily to 1) improvement in the Nike-brand assortment, 2) an alleviation of the Jordan-brand and 3) an alleviation of the headwinds in Europe; Wayfair (W) tgt raised to $155 at Loop Capital after the company’s presentations at competitor conferences last week supported their longer-term view on the top-line upside potential; DEST reaffirmed FY guidance after Q2 results

· Consumer Staples STZ downgraded to hold from buy at SunTrust and cut tgt to $220 from $260 as believe the recent $4B investment in CGCwill keep a cloud over the stock for at least the next few quarters; WTW was added to the S&P MidCap 400, replacing KLXI; 52-week highs for CHD, YUM, HRL, MKC, ORLY, TGT, LOW, HD, K, COST, CLX in the consumer sector

· Restaurants; restaurants DRI and TXRH both downgraded to neutral from outperform at RW Baird citing recent strength and recommends a more disciplined approach to buying in the short-term as many restaurant names begin to look extended; TXRH was also downgraded to neutral at Wedbush on valuation & increased risk to 2019 margin expectations; DIN was downgraded to outperform at Raymond James but raise tgt to $108 saying gains alter the risk/reward from here, though they see a higher probability for further upside

· Housing & Building Products; shares of HD, LOW, BECN, OC, GNRC among names active ahead of Hurricane Florence coming up the east coast; RH was upgraded to outperform at KeyBanc saying the pullback in shares presents a compelling buying opportunity, in our view, given the LT transformation of the gallery network and NT margin and merchandising initiatives; homebuilder HOV reported a narrower than expected Q3 EPS loss

· Gaming stocks rebound after a few analysts weigh on recent weakness; 1) Morgan Stanley says the summer sell-off in Macau-exposed stocks creates a buying opportunity in U.S-listed WYNN, LVS, MGM and MLCO as attributes the sell-off to a variety of factors, including China macro/trade fears and concern about the Chinese economy; 2) Credit Suisse remains cautious given, higher near-term risks, as estimates trimmed 2019/20 growth to +7.6% and +6.6% from +9% and +8% respectively, and reduced target prices on LVS and WYNN by approximately 10%; 3) JPM said while there was nothing incrementally new/positive coming out of recent investor meetings, there was, importantly, also nothing incrementally negative on Macau or LV Strip operating trends; 4) Nomura notes positive comments about GGR trends made on 2Q earnings calls HAVE NOT deteriorated/believe when sentiment is as poor as it is now, the group should be bought, especially MLCO, MGM and WYNN, which have 20%-30% upside in a flat VIP world


· Energy stocks were mixed between E&P, integrated and equipment names while oil rebounded from the biggest weekly loss in two months as speculation of a crude supply shortage overshadowed escalating trade tensions between the China and the U.S. Impact concerns from Hurricane have eased as storms turn focus to East Coast. PetroChina (PTR) signed a deal with Qatargas Operating Co. to buy 3.4M tons of liquefied natural gas annually amid a looming trade war with the U.S. that threatens to stifle China’s purchases of American fuel, Bloomberg said

· Utilities; Goldman Sachs upgraded DUK to buy on relative valuation, and upgrades PPL from Sell to Neutral mainly on higher expected valuation for its UK segment and less currency risk/firm downgrades AEP to Neutral as they assume lower multiples in our sum of the parts, and cut both WEC and AEE to sell – primarily on below consensus estimates, especially for 2019, and for relative valuation; Guggenheim upgraded AEP to buy and raised tgt to $77 from $64, as see an inflection point w/shares trading at an attractive valuation level vs. peers on conservative estimates and downgraded NI and NJR to neutral based solely on valuation – solid run and believe fundamentals remain very sound but these levels are becoming harder to justify


· Insurance; sector in focus, especially Property & Casualty names (AIG, ALL, TRV, CB) on expectations for losses from Hurricane Florence/high auto insurance coverage includes ALL, BRK/A (Geico), PGR and reinsurers include RE, RNR, AXS; Goldman Sachs more constructive on the life insurers due to more favorable fundamental trends, de-risking opportunities, and attractive valuations relative to historical levels and adds PRU to its conviction list, upgrades LNC to a neutral and downgrades TMK to a sell; mortgage insurer NMIH rises after Barclays initiated at overweight, as believe NMIH stands out as having a long runway of outsized insurance in force (IIF) and earnings growth as it grows its share within the private mortgage insurance market


· Managed care; sector weak after Citigroup downgraded ANTM and UNH to neutral from buy as firm said taking a more selective view of the managed care sector into year-end/2019, as have some reservations about the commercial risk market and see more limited upside to estimates, making it difficult to push valuation meaningfully higher from already-premium levels, balancing risk/reward for some. Moreover, while near-term rhetoric about single payor into elections should be transient, headlines are unlikely to help.

· Pharma an Biotech; European Pharma SNY and NVS both upgraded to buy at Bank America; ECYT rises as the FDA accepts Endocyte’s rPFS as an alternative primary endpoint of the VISION trial in addition to OS/ alternative primary endpoints of the trial agreed to by the FDA are rPFSand overall survival; FLXN announces Phase 2 study of ZILRETTA evaluating blood glucose levels in patients with osteoarthritis knee pain and Type 2 diabetes met its primary endpoint; ACOR falls as loses Appeals Court bid to revive Ampyra patents, Bloomberg reported; AMGNhighs after encouraging initial data for its BCMA-BiTE AMG-420 over the weekend; BLUE shares slipped

· Healthcare services and providers; FRED surges after WBA said it will pay $165M to buy pharmacy patient prescription files and related inventory from 185 Fred’s pharmacies in 10 Southeastern states; HCA CEO Milton Johnson to retire/COO Sam Haven to become CEO

Industrials & Materials

· Industrial & Machinery; URI announced a deal to buy BlueLine Rental in a cash deal valued at $2.1 billion from private-equity firm Platinum Equity; KMT shares rallied after Longbow upgraded shares to buy reflecting the improving pricing and robust end demand uncovered in recent industrial channel checks

· Transports; the Dow Transports trade to new all-time record highs, up over 1.5% above 11,500, with 52-week highs for NSC, UNP in the rail sector, though all sub components (airlines, truckers, freight) are in positive territory; LSTR traded to all-time highs; UPS rises ahead of its upcoming Transformation Conference on Sept. 13

· Metals & Materials; aluminum producers AA and CENX rises after report Rusal is said to prepare for production cuts amid U.S. sanctions/aluminum futures on LME also jumped about 1% on the supply cut report; metals in general were higher early as the U.S. dollar weakened

Technology, Media & Telecom

· Semiconductors; Apple suppliers ADI, AVGO, TSM, CRUS, SWKS among those active after the iPhone maker warned that a list of proposed tariffs would affect many of its products and increase costs. President Donald Trump said in a tweet over the weekend: Apple prices may increase because of the massive Tariffs we may be imposing on China – but there is an easy solution where there would be ZERO tax, and indeed a tax incentive. The Philly semi index (SOX) outperformed, up around 1%, paced by gains in AMD up over 8%

· Internet; BABA Co-founder and Executive Chairman, Mr. Jack Ma, today announced his plan to step down on Sept 10, 2019 with current CEO, Mr. Daniel Zhang, succeeding him as Chairman; AMZN tgt raised to $2,250 at Citigroup as believe global Prime-related GMV is expected to exceed $500B over the next 10 years (vs. $137B this year) and view Amazon’s large and growing global Prime member base as not only a source of recurring revenue but a key reason why brands and third-party sellers are increasingly relying on Amazon’s marketplace; SNAP said its Chief Strategy Officer, Imran Khan, would step down

· Media & Telecom movers; CBS CEO Les Moonves will leave his role as chairman and CEO, effective immediately amid additional sexual harassment allegations, with COO Joseph Ianniello appointed president and acting CEO/also National Amusement/CBS have arranged a standstill agreement where NAI will not attempt to recombine CBS and VIAB; SAIC agreed to acquire rival government services contractor EGL for $1.5 billion, paying $40.44 per share in stock


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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