Tuesday, September 11, 2018
Equity Market Recap
· U.S. stocks quickly erased overnight losses, led by a rebound in technology stocks and a bounce in energy names as oil prices jumped over 2.5% to one week highs. The NASDAQ and Dow gains were paced by Apple (AAPL) ahead of its 1:00 PM EST product announcement tomorrow where new phone releases, among other items, are expected. Treasury two-year note yields rose to a decade high (above 2.74%) with the U.S. selling debt and expectations become confirmed for more Federal Reserve rate increases. The dollar was modestly higher gold gained.
· Stocks initially opened lower on trade concerns following reports that China plans to ask the World Trade Organization (WTO) for authority to impose trade sanctions on the U.S. Earlier, the AP reported that Chinese regulators are delaying license applications from American companies in financial services and other industries until the countries resolve a tariff dispute. Later this afternoon President Trump said trade deal with Canada is coming along very well.
· The other top story outside of trade and tariff news was Hurricane Florence a current category four storm which is bearing down on the Carolinas and Virginia, with all declaring state of emergencies. Several related sectors seen potentially greatly impacted by the storm, with insurers, restaurants, retailers, auto, and home improvement/building material companies’ active the last few days. As Hurricane Florence bears down on the southeastern United States, nearly 759,000 homes are in the storm’s path, and a worst-case rebuilding scenario could cost more than $170 billion, according to an estimate from real estate data provider CoreLogic.
· Oil futures spiked late day, with WTI crude settling at $69.25 per barrel, up $1.71 or 2.5%, off intraday lows of $67.48 per barrel) – its best levels in over a week. Oil prices recouped some of its recent losses as markets focus on renewed sanctions on Iran to weigh global supplies, and await weekly data that are expected to show a decline in U.S. crude inventories. Also, despite the fact that hurricane Florence is nowhere near U.S. offshore oil production, the storm has apparently hit some nerves, resulting in a fairly sharp bout of short covering.
· Gold prices reverse earlier declines to settle at $1,202.20 an ounce, rising 0.2% on the day, off lows of $1,192.70 an ounce and snapping the 2-day losing streak (ending near the highs of day for gold). Gold has been teetering back and forth above the $1,200 level over the last week after bouncing from 18-month lows three weeks ago sub $1,180 an ounce. Trade issues, a rising rate hike environment from the Fed and plunging emerging market currencies have affected gold.
· In currency markets, the dollar bounced off overnight lows (DXY touched 94.88), rising to highs of 95.35 before paring gains; the British Pound declined to lows of 1.2965 (well off overnight best 1.3087) before moving back above the 1.30 level as markets try and sort out conflicting headlines pertaining to Brexit (exit from the European union). The Pound tumbled from a six-week high after a report the EU sees the U.K. as too optimistic, then pared some losses after Ireland’s Prime Minister said a deal could be done in weeks (echoing the comments from chief negotiation Barnier yesterday). The euro was little changed at 1.159, while the buck rose against the yen.
· Treasury prices slipped as yields pushed higher, led by a spike in short-term yields; the 2-year yield moved to new 10-year highs, up around 2.744% as rate hike expectations from the Fed have increased the last few weeks on strong jobs, manufacturing and GDP data. The 10-yr yield inched closer to 3%, rising nearly 4 bps to 2.975%. The Treasury Department sold $34 billion of 3-year notes which traded 4 basis points higher at 2.820%, its highest since May 2007.
· Wholesale Inventories for July rose 0.6%, compared to the 0.7% estimate as July wholesale inventories increased to $636.3B from $632.7B the prior month; wholesale sales unchanged in July after falling 0.2% the prior month; wholesale sales excluding automobiles 0% in July
· U.S. job openings (JOLTs) climb to record 6.9 million in July, up from 6.822M in June; July job opening rate (job openings as a % of total employment plus openings) 4.4% vs 4.4% prior month
· The National Federation of Independent Business (NFIB) said its small-business optimism index rose 0.9 points to a 108.8, eclipsing the previous record of 108 some 35 years ago
Sector News Breakdown
· Retailers; NKE upgraded to buy from hold and raise tgt to $95 from $78 at Canaccord saying after two years of a soft product cycle that led to increased inventory levels, higher discounting, margin compression, and market share declines, NKE has regained its footing; FRAN shares plunge as lowers FY18 revenue view to $453M-$463M from $485M-$499M (est. $482.7M) and lowers FY18 EPS view to 15c-25c from 53c-63c/sees FY18 comp sales decrease of 8%-10%
· Consumer Staples; UN said it will simplify its corporate structure in December with a move from two UK and Dutch legal entities into a single holding company; LMNR shares decline after Q3 EPS missed by 5c and narrowed narrows FY18 EPS view to 65c-70c from 65c-75c (est. 70)
· Restaurants; YUMC declines after Bloomberg reported a Chinese consortium including Hillhouse Capital is planning to drop its pursuit of a takeover after its initial proposal was rejected. ; Goldman Sachs upgraded DRI to buy and up tgt to $130 as believe off-premise can continue to act as a 1%-plus comp tailwind in F19 and note positive recent data points in search trends; upgraded BLMN to neutral on valuation while remain well below consensus estimates and downgraded WING to neutral, taking profits as shares are up 178% since adding WING to the Americas Buy list on April 1, 2016; Raymond James notes BOJA (59% of system stores), TAST (23% system stores), CBRL (10%) most hurricane path exposed in coverage
· Casino stocks weak (WYNN, MLCO, MGM); Deutsche Bank said they think Macau is at the start of a downward earnings revision cycle and cut Macau 2019 GGR growth from 11% to 4% (VIP 2%, Mass 6%), resulting in industry EBITDA growth of only 5%, much lower than consensus (13%) – firm downgraded GALAXY from buy to sell, MGM china from buy to hold, Sands China from buy to hold, SJM from Hold to sell, and Wynn Macau from $31 to $22
· Auto movers; TSLA was downgraded at Nomura Instinet (long-time bull) and cut tgt to $300 expressing concern that the “erratic behavior” of CEO Elon Musk will taint the Tesla brand; GM was reinstated neutral at Goldman Sachs (previously a sell) as sees positives from GM’s pickup truck refresh and Korea restructuring accruing in 2019, but still expects a “downward trajectory” to earnings and free cash flow next year
· E&P sector; SD shares fell after the company said it had ended its strategic review and rejected all bids, saying they undervalued the company/SandRidge Energy’ implied liquidation value, obtained by totaling the highest cash bids, amounted to about $12 to $13 per share, which “meaningfully undervalues” the company, it said
· Coal sector; Goldman Sachs upgraded ECR and downgraded CNX to sell as we believe the stock’s c. 2x 2019E E&P EV/EBITDA premium vs Appalachian E&P peers is too high; Seaport Global said Hurricane Florence could further tighten up the met market as many of the US’s key export coal ports are located in Hampton Roads, Virginia (HCC, TECK, BTU)
· Utilities & Solar; RUN shares rise after Bank America upgraded to buy with $17 tgt seeing significantly limited downside to shares following recent underperformance
· Financials have not participated with the recent market rally, with GS shares falling for a record 10thconsecutive session, its longest streak since becoming a public company amid a recent sell-off for financials and concerns about investment banking; banks in general were weak despite a recent move higher in Treasury yields that tend to help lending margins; insurance stocks, specifically P&C names (TRV, ALL) and reinsurance (AXS, RE) active ahead of Hurricane Florence
· Pharma movers; LGND price tgt raised to $300 at Argus as believe that LGND is on track to post solid earnings growth over the next several years, driven by its two primary partnered products of Promacta (used for clotting) and Kyprolis (for the treatment of multiple myeloma); TLRY rose after the cannabis production and distribution company said its 2:100 medical cannabis product was successfully imported into the United Kingdom. The product was for a pediatric patient in need, the company said ; Goldman Sachs upgraded ENDP to neutral with $15 tgt while cut MNKto sell as sees risk to the pipeline and reason to be cautious on Acthar into 2019 and long-term; EXELshares fell as much as 10% – prior day, Morgan Stanley started coverage w Underweight rating, as believes the company faces tough competition
· Biotech movers; CDMO shares rise after quarterly earnings and revenue results; gene editing space remains active as Oppenheimer noted yesterday’s US Court of Appeals decision for University of California v. Broad Institute, Inc., upholding the decision of PTAB that there was no interference by the Broad on UC Berkeley’s CRISPR/Cas9 patent filing was a positive for EDIT, which licenses the Broad’s patents; and as neutral for CRSP/NTLA which license UCB’s patents.
· Medical equipment and devices; IVTY rises after agrees to be acquired by SYK for $7.40 per share, in deal valued at around $190M
Industrials & Materials
· Industrial & Machinery; DOV unveils a right-sizing plan aimed at delivering $130M of annualized pre-tax earnings by year-end 2019, of which $30M will be reinvested in high-return growth initiatives; PNRrises after Trian Management Partner Matthew Peltz resigned from Pentair’s board on Sept. 10.; Tran said Peltz played an active role in the spinoff of nVent Electric and the fund believes Pentair is currently well positioned to succeed; AIR was downgraded @to hold at SunTrust as believe MRO headwinds will pressure near-term growth; JCI was downgraded to neutral from buy at UBS as sees lower than expected growth
· Transports; sector coming off all-time record closing highs yesterday, led by strength in truckers and rails (UNP, NSC 52-week highs on Monday); but prices moved back near new highs, after truckers led gains yesterday (LSTR, CHRW, JBHT) while airlines pacing today’s gains (AAL, DAL)
· Metals & Materials; trade war risks weighed on the metals again, with aluminum underperforming the group; Clarksons was positive on metals saying the selloff on rising U.S.-China trade war risk has created buying opportunity in the sector as the miners are still in the “sweet spot” of the investment cycle (named HCC top pick in group while upgraded AKS, TECK and downgraded FCX, CCR).
· Chemicals; TiO2 space were clobbered today after SunTrust estimates for major TiO2 producers including CC, TROX, VNTR and KRO to reflect declining TiO2 prices in 3Q and 4Q as believe global supply/ demand conditions are loosening, particularly in non-US markets, and expect negative sentiment for Western producers to continue
Technology, Media & Telecom
· Apple (AAPL) is holding its product announcement tomorrow – and is expected to announce three iPhone models along with Watch and AirPods update on its September 12 ‘Gather Round’ event. RBC Capital preview: 1) iPhone XS: 5.8” OLED model with a comparable design to iPhone X but with new colors (gold?) with some improvements on processor and camera. We think pricing could be $899 ($100 less vs. iPhone X). 2) iPhone XS Max: A 6.5” OLED phone that will be priced at $999 and 3) 6.1” LCD Model: This will be AAPL’s lower priced model that we think is priced around $699-799 with design comparable to iPhone X
· Internet; CVNA tgt raised to $77 from $67 at Citigroup as current findings from the weekly Manheim Market Report stated that 3-year old vehicles have appreciated, creating a 4.8% increase in ASP versus typical depreciation; SNAP was upgraded to outperform at Wedbush and raising tgt to $12.25 from $11.50 saying key hires and execution over the past six months suggest increased focus on shareholder value; RENN shares surge after Q2 results/Q3 guidance
· Semiconductors; IDTI was acquired by Renesas Electronics Corp. for $6.7B, paying $49 a share, a 29.5% premium over yesterday’s closing price ; memory/disk-drive names slip as WDC downgraded to Sector Perform at RBC Capital as they think NAND oversupply will persist through mid-2019 and GMs are unlikely to stabilize for next several quarters resulting in sustained downward revisions for FTM estimates; CREE was upgraded to buy at Roth Capital
· Software mover; USAT shares drop after the payment technology company said it is conducting an internal investigation into the accounting of certain of its present and past contractual arrangements and financial reporting controls/said won’t file 10K by 9/13 deadline; ATVI replaced by EA on Stifel’s select list citing expectations for a solid holiday season led by “Call of Duty: Black Ops 4” anticipation ahead of BlizzCon/momentum for the Overwatch League; ZS shares slipped ahead of its IPO lock up expiration tomorrow
· Hardware & Component news; SONO shares fell after its first quarterly report as a public company as Q3 results came in at the high end of the preliminary results ($208M vs. $206-208M, while investors were looking for a raise on the FY guide, but was in line with Street. Raymond James said bears may argue declining margins are a result of product commoditization and profitability will remain challenged; ROKU tgt boosted to $81 from $67 by KeyBanc saying checks point to potential upside to 3Q estimates and continued adoption of ad-supported streaming; Optical stocks broadly lower with hefty declines early for FNSR and LITE, along with additional weakness from NPTN, IIVI, ACIA, AAOI, and CIEN