Wednesday, September 12, 2018
Equity Market Recap
· U.S. stock markets were volatile today following several market moving catalysts including the Apple product event today, Fed Beige Book commentary (as well as several Fed members speaking prior), comments from various companies speaking at industry and investor conferences, and some speculation out of Washington pertaining to trade/tariffs with China. Don’t forget there are two central bank meetings tomorrow morning, with the European Central Bank and Bank of England weighing in on monetary policy. Emerging markets/currencies got a lift late morning after the WSJ reported the U.S. is proposing a new round of trade talks with China in the near future, with outreach being led by Treasury Secretary Mnuchin (which bounced the dollar and stocks). The move is an effort to give Beijing another opportunity to address Washington’s trade concerns before the Trump administration puts more tariffs on Chinese imports. However, markets had trouble holding onto their gains as stocks slid mid-afternoon. The dollar fell while Treasuries gained, and the yield on the 10-year falling to session lows.
· Semiconductor stocks were a big drag on tech as the Philly semi index (SOX) fell as much as 3% before paring losses (down 5 of last 6 days), led lower after Goldman Sachs cautious comments on MU (downgraded) and semi equipment names (cut sector and LRCX) while Stifel also downgraded four names in the sector (MXIM, MTSI, NXPI, POWI) – which follows negative shipment outlook from KLAC last week at investor conference (INTC shares down a 7th straight day as well). A boost in energy stocks amid positive comments at a conference and surging oil prices on bullish inventory data is helping keep the market declines in check.
· Hurricane Florence the other big story as it is closing in on the Southeast as officials warned more than 1 million people in its projected path to leave now or face disaster. Florence is a category four hurricane with sustained winds of 130 mph, and computer models on Wednesday morning show it will make landfall around Wilmington, North Carolina on Friday as a major hurricane, the National Hurricane Center said.
· Fed Beige Book Anecdotes: Three of the Fed’s 12 districts — St. Louis, Philadelphia and Kansas City— reported weaker growth in August, according to the latest Beige Book report released Wednesday. While the overall U.S. economy expanded at a “moderate pace,” trade concerns and a lack of workers were delaying projects. There were also “some signs of a deceleration” in prices of final goods and services. All districts noted fairly widespread input price pressures, particularly for construction materials and freight transportation. Tariffs were reported to be contributing to rising input costs, mainly for manufacturers.
· Earlier in the day, Fed Governor Lael Brainard said an inverted yield curve would not necessarily point to an imminent recession, despite its historical track record in doing so. The comment suggests the Fed won’t let the prospect of an inverted yield curve deter the central bank from continuing to lift short-term interest rates.
· Producer Price Index (PPI) for August fell (-0.1%), missing the expected estimate for a rise of 0.2%, posting the first decline since Feb. 2017; final demand ex food, energy (core) fell (-0.1%) MoM vs. est. up 0.2% as well; final demand rose 2.8% y/y vs est. up 3.2%; final demand ex food, energy rose 2.3% YoY, below the 2.7% estimate
· Gold prices jumped late day, with December gold futures rising $8.70, or 0.7% to settle at $1,210.90 an ounce, its highest settlement in two weeks as a report that the U.S. was reaching out to China to hold a new round of trade talks put pressure on the U.S. dollar. Gold futures extended gains following the release of the Fed Beige Book release at 2:00 PM EST.
· Oil prices end higher as WTI crude advances $1.12 or 1.6% to settle at $70.37 per barrel, getting a boost today on bullish weekly inventory data as the API reported that U.S. crude supplies dropped by -8.6M barrels for the week ended Sept. 7 (bigger draw bullish) though showed big builds for gasoline and distillates. Oil got an additional boost after the EIA said weekly draws were -5.2M barrels, more than the -2.0M estimate
· In other commodities, corn prices dropped as much as 4% after the USDA said U.S. corn production for the 2018/2019 crop year may climb to the second highest level on record. It forecast corn production at 14.827 billion bushels, up 241 million from last month’s forecast.
· The U.S. dollar ended lower vs. most currencies ahead of tomorrow’s ECB and BOE central bank meetings as well declining on “tamer” PPI inflation data earlier (CPI data coming up tomorrow). The dollar slumped against the euro, pound and Canadian dollar (back below 1.30), but gained against the safe-haven Japanese yen. Talks between Canada and the US related to a new NAFTA as well as oil price spike helped lift the Loonie
· Treasury yields fell early and stayed down following a tamer PPI inflation reading for August, as well as better demand in a US Treasury auction. The US Treasury sold $23B in 10-year Treasury notes at a yield of 2.957% with a bid-to-cover at 2.58 vs. 2.55 prior auction and indirect bidders awarded 63.9%. Wholesale inflation for August fell 0.1%, the first time in 18 months, coming in well below the 0.2% increase forecast by economists. The muted prices were bullish for bonds. The 2-yr yield off recent 10-year highs above 2.74%, while the 10-yr slips only 1 bps to 2.96%.
Sector News Breakdown
· Retailers; TIF was upgraded to outperform from perform at Oppenheimer saying the risk/reward trade-off in owning TIF nearer term is now much more favorable; Macy’s (M) to hire 80,000 seasonal workers matching last year plan; Hudson’s Bay Co. Q2 EPS loss was smaller than estimates while revenue dropped 2% to C$2.16B, missing the consensus forecast of C$3.22B; SKX shares fall after Susquehanna said they came away from mgmt meeting more confident that SKX is making the proper investments to sustain low-DD topline growth, but visibility into the level of spend needed to achieve that revenue target remains unclear (lowers tgt to $25)
· Consumer Staples; ELF shares active after activist Marathon Partners Equity Management LLC, which owns about 8.5% of e.l.f., plans to urge the discount cosmetics seller to either start a process to sell itself or refocus on core operations and reduce costs, the WSJ reported ; in tobacco, MO and PM rise as the FDA is threatening to pull flavored electronic cigarettes like Juul off the market if the tobacco industry doesn’t do more to combat use of the products by children and teens; CCE shares rise after guiding 2018 operating profit growth at the top end of the previous 6%-7% view, announces new EU1.5b share buyback; food stocks rise, led by KHC after RBC Capital named CAG top pick in group while KHC moved to second favorite due to the recent stock sell-off and an improving topline outlook
· Restaurants; Stephens downgraded CHUY, DFRG, TXRH and DENN downgraded to equal weight from overweight based on valuation saying many restaurants under coverage reflect positive view of the low-to-middle income consumer, based on “real wage growth, low unemployment, and high consumer confidence,” all of which should continue into 2019; CMG rises after Bernstein said CEO making strides just 6-months into the job/notes benefits of new leadership
· Casino sector; Casino shares fell a sixth day as WYNN, MLCO, LVS drop early as Morgan Stanley joined a growing chorus of brokers warning about the industry outlook. Factors including yuan depreciation and weaker economic data could prompt negative earnings revisions for 2018-2019 – recall Deutsche Bank had cautious comments yesterday cutting ratings on several Macau names; MLCO was downgraded to neutral at UBS
· Energy stocks helped markets early, led by bullish inventory data that pushed oil prices back above the $70 per barrel mark. Brent crude traded near a two-month high as shrinking crude inventories pointed to an increasingly tight global market. On Hurricane Florence, one analyst noted there are no refineries in the path of the storm. Earlier today, in its monthly report, OPEC said August crude production by the cartel, based on secondary sources, rose 278,000 barrels a day to average 32.56 million barrels a day. OPEC also slightly lowered its forecast for growth in world oil demand this year to 1.62 million barrels a day, down from a previous estimate of 3 million barrels a day. In its monthly report, the cartel said total oil demand for 2018 is estimated at 98.82 million barrels a day. In 2019, world oil demand growth is forecast to rise by 1.42 million barrels a day, down by 20,000 barrels a day from OPEC’s previous report.
· Inventory data: the API data was mixed as reported that U.S. crude supplies dropped by -8.6M barrels for the week ended Sept. 7, while supplies of gasoline rose 2.1M barrels and distillate stockpiles climbed by 5.8M barrels. This morning, the EIA also with a bullish report as weekly crude stockpiles fell -5,296M barrels, more than the -2M barrel draw estimate while Cushing crude fell -1,242 – but much like the API report, both gasoline and distillate stockpiles rose
· Oil drillers rise, led by gains in ESV after the CFO said bottom of offshore rig market is behind us at conference today (as per Bloomberg); RIG, NE, DO shares also higher. In the E&P sector; SLCA and PXD enter long-term sand supply agreement where Pioneer will purchase an interest in U.S. Silica’s sand reserves at its Lamesa, Texas, mine/U.S. Silica to process and supply sand to Pioneer for 15 years; NOGsaid it Q3 production tracking significantly above view as preliminary results for July and August averaged over 25,000 Boe/d vs prior est. of 23,000-24,000 Boe/d for 3Q
· Bank movers; GS shares post its 11th consecutive losing session, its longest such streak since it came public in 1999; Citigroup (C) outperform after saying sees Q3 trading flat to slightly higher YoY/says investment-banking revenue will probably be “somewhat lower” compared with a year earlier/boosts long-term RoTCE target to about 16% from 14%/sees 2019 RoTCE about 12%, 2020 RoTCE up to about 13.5%/maintaining its low-50% efficiency ratio target; FRC 2M share Spot Secondary priced at $102.00; CADE 12.1M share Spot Secondary priced at $27.55
· Consumer finance and lending; WP was upgraded to buy at Mizuho saying there should be near-term multiple upside as investors “recalibrate out-year expectations” for sustainable revenue growth; EEFTtgt raised to $130 at SunTrust saying stock should rally on receding risk of adverse DCC regulation (essentially price fixing) as EU Parliament recently issued a draft report arguing against these DCC caps
· Asset managers; BEN reports preliminary AUM $722.4B as of August 31, down from $733.7B at July 31, 2018. The decrease in assets under management was attributable to net market declines and net outflows; CNS preliminary assets under management of $61.3B as of August 31, 2018, an increase of $774M from July 31, 2018; the increase was due to market appreciation of $910 million and net inflows of $71 million, offset by distributions of $207 million
· REITs; Bank America notes retail REITs with exposure to Hurricane Florence include CBL, DDR & KRG – Charlotte, Virginia Beach, Raleigh, Columbia, Greensboro, Charleston and Greenville. The REITs with the most exposure are CBL at 6.1%, DDR at 8.9% & KRG at 11.4%. If turns north toward DC – FRT & PEI most exposed
· Pharma movers; in specialty pharma, BHC shares rise as announces resolution of IP litigation with Actavis acknowledging Xifaxan patent/Bausch said it will not make any payments or other transfers of value as part of the agreement with Actavis Labs, which acknowledged the validity of its Xifaxan patent, which expires in late 2029; BMY active after a phase 2 clinical trial evaluating its BMS-986165, a tyrosine kinase 2 (TYK2) inhibitor, in patients with moderate-to-severe plaque psoriasis met the primary endpoints; FOMX rises as the company’s lead drug, a topical foam to treat acne called FMX101, meets both co-primary endpoints in a third Phase 3 trial; TLRY extended upward momentum, topping the $100 level (Citron later reiterated its cautious view); HRTX 2.7M share Block Trade priced at $36.75
· Biotech movers; GLPG and GILD shares rise as announced that FINCH 2, a global, randomized, placebo-controlled, Phase 3 study of filgotinib in adults with moderately-to-severely active rheumatoid arthritis achieved its primary endpoint; VTL plunges after biotech says it will scrap treatment for liver failure after it failed to meet primary and secondary endpoints of improvement in survival through at least 91 days; BHVN submitted an NDA to the FDA to evaluate the safety and tolerability of BHV-3500 (Piper raises tgt to $65 on news); ECYT 9.459M share Secondary priced at $18.50
· Medical equipment and devices; ISRG tgt raised to $635 from $575 at Wells Fargo on 2020 EPS estimate, saying that the company has filed a complaint against Auris Health, alleging that the company’s Monarch endoscopy platform that received FDA 510k clearance on March 22 infringes on eight patents held by Intuitive; DXCM was upgraded at Northland; IRTC shares dropped as much as 10% after Apple’s new Watch Series 4 offers the capability to take an electrocardiogram (note IRTC makes a patch that monitors heart data)
Industrials & Materials
· Industrial & Machinery; MMM falls after the company warned about a bigger-than-expected headwind from material costs, and said there were signs that auto production units were lower than expected; SPR cut its 2018 EPS view while boosting its revenue outlook saying it’s on track to meet its ’18 delivery targets on all programs; WBC said it sees FY EPS guidance in lower half of $7.10-$7.40 view as the “recent intensification of geopolitical dynamics” is negatively impacting markets and currencies in some of WABCO’s regions; AYI downgraded to sell at Goldman from neutral citing margin concerns related to mix, costs and pricing power; fertilizer names moved after NTR says at industry conference fertilizer market fundamentals improving while nitrogen mkt continues to tighten (CF, IPI, MOS)
· Transports; group pulled back after setting new intraday record highs of 11,599.60 earlier (and up roughly 12% from the early July lows); in airlines, LUV cuts its Q3 capacity view to 3.5%-4% from 4.5%-5% citing cancellation of almost 2,000 flights in July and August due to thunderstorms and weather-related disruptions; also sees 3Q RASM up 1%-1.5% y/y, vs. prior view down 1% – up 1%; FDXsaid to expand ground U.S. operations to 6 days a week; car rental names HTZ and CAR outperform early (possibly on hurricane impact)
Technology, Media & Telecom
· Apple (AAPL) product announcements: Apple says the new iPhones will have a 512GB storage option for the first time and says iPhone A12 Bionic chip can process 5 trillion operations per second; Apple unveiled the iPhone XS and XS Max, made of stainless steel and come in gold; also unveils the iPhone XR which includes LCD, not OLED, screen; the iPhone XS will has a “super retina” OLED display, and will come in space gray, silver and gold; AAPL is offering duel and eSIM
· Pricing: The iPhone XS Max will sell for about $1,100, or $100 more than last year’s iPhone X. The iPhone XS, an update to last year’s model, will stay at $1,000. To reach customers not willing to pay that much, Apple will have the iPhone XR. It will use cheaper materials and sell for about $750. The new XS models come out Sept. 21, while the XR is out Oct. 26. Older models get price cuts as well for iPhone 7 and 8
· FIT shares fell after Apple Inc. announced its new Apple Watch Series 4. The Series 4 line comes in 40-millimeter and 44-millimeter screen sizes, and they feature edge-to-edge screens. The watches also support the ability to take an electrocardiogram from the wrist.
· Internet; SNAP two negative notes today as BTIG downgraded to sell with $5 tgt saying they believe it could fall another 50% as engagement weakens with revenue consensus far too high/bleeding cash could force company to raise capital by 2020. Meanwhile, Jefferies said analysis of DAUs and Time Spent trend data, show that both are heading lower in the 3Q; Pandora (P) tgt raised to $13 at Needham from $8 on optimism for the company’s ability to accelerate subscriber growth and lower its customer acquisition costs; TWTR shares fall to lowest levels since early May
· Semiconductors; NXPI analyst day results failed to lift shares as the company announced dividend of 25c/q implies only modest 1.1% yield vs comps yielding 2%+ while provided unchanged 5%-7% sales growth and 53%-57% GM targets despite mix shift to faster growth autos/IoT which are 70% of sales now vs. 65% in 2016; AMD moved back to 12-year highs, rising above the $31 mark while INTCcontinues to lag; Stifel also cautious on the group today, downgrading MXIM and POWI to hold from buy and cuts NXPI and MTSI to sell as multiple industry data points in recent months appear to suggest a peaking in the AMS markets
· Memory stocks lower after Goldman Sachs downgrade MU to Neutral from Buy and lowered price target to $50 from $68 as sees weaker fundamentals for DRAM and NAND in calendar Q4 and the first half of 2019; expects Micron’s gross margin to decline sequentially from Q4 of 2018 through mid-2019 (also downgraded Hynix and Tokyo Electron from Buy to Neutral and remove Buy-rated Samsung Electronics and SUMCO from the Conviction List)
· Semi-equipment sector weak after Goldman Sachs downgraded the sector from Attractive to Neutral as they reduce 2018/2019 memory capex expectations following early signs of excess supply in DRAM combined with further weakness in NAND pricing. Goldman downgraded LRCX to neutral saying it is unlikely to outperform our broader coverage group in the face of negative estimate revisions/they also removed ENTG from their conviction list
· Media & Telecom movers; NLSN rises after saying it expanded its previously announced strategic review to assess a potential sale of the company/said it continues to assess a separation of its buy and watch segments; in telecom, the FCC said late Tuesday it paused its informal 180-day clock for reviewing TMUS takeover of Sprint (S), saying it needs more time to consider information the wireless carriers have provided; VZ said it plans to offer the next generation of wireless technology to customers beginning in October; DISCA rises as CFO reiterated the company’s previously provided guidance in CNBC interview while expands partnership with HULU for live on-demand programs/also said channels will be on both Sling platforms