Market Review: September 14, 2018

Terrie AmengualDaily Market Report

Closing Recap

Friday, September 14, 2018

Equity Market Recap

· U.S. stock markets end the day little changed, falling from earlier highs after reports U.S. President Donald Trump told aides yesterday to proceed with tariffs on roughly $200B more in Chinese products, according to Bloomberg. The move comes despite his Treasury secretary’s efforts to restart talks with China to put an end to this trade dispute. However, markets clawed back in the afternoon with major averages bouncing off lows and ending the week higher as the path of least resistance remains to the upside. The dollar extended gains while emerging markets currencies sold-off, with the greenback getting a boost from a busy round of economic data. Oil prices whipsawed higher, ending the week up more than 1% while metals prices fell. Back to economic data, monthly retail sales and import prices coming in well below expectations, but industrial production and sentiment figures topped economist views. Retail sales slowed to 0.1% in August, undercutting expectations of 0.3%, but industrial production beat the consensus, expanding 0.4% in the same month, versus the 0.3% forecast. Hurricane Florence also a big story this week as it made landfall in North Carolina, battering the region with water and wind, and knocking out power to more than 300K. Stocks in Asia and Europe gained earlier as prospects for U.S.-China trade talks and action by Turkey and Russia to support their currencies. The Nasdaq Comp managed to hold above 8,000, the S&P above 2.900 and the Dow above 26,100, all posting gains on the week.

Economic Data

· The Preliminary Sept. Michigan Sentiment jumped to 6-month highs of 100.8, above the 96.6 estimate and topping the 96.2 prior month; the current economic conditions index rose to 116.1 vs. 110.3 last month and the expectations index rose to 91.1 vs. 87.1 last month.

· Import Prices fell (-0.6%) MoM more than the (-0.2%) estimate, the largest monthly decline since Jan. 2016, after falling (-0.1%) in July; import prices rose 3.7% y/y in Aug. and import prices ex-fuels fell 0.1% after falling 0.3% in July; export prices fell (-0.1%) after falling 0.5% in July

· Retail Sales for August rose 0.1%, missing the 0.4% estimate, as it marked the weakest sales in six months and only an increase in purchases at gas stations prevented an outright decline; the numbers would have been even worse if not for a 1.7% spike in spending at gas stations. Retail sales less autos rose 0.3% in Aug., vs. est. 0.5% gain

· Industrial production rose 0.4% in August, the third monthly increase and topped expectations of a 0.3% increase; over the past year, output is up 4.9%; utility output rose 1.2% after a 0.1% gain in July; Capacity utilization rose to 78.1% in August, the highest rate since April (est. 78.2%)

· Business inventories in the U.S. jumped 0.6% in July, the Commerce Department said while sales rose 0.2% in the month

· Housing data provider CoreLogic late downgraded its initial estimate of losses from Hurricane Florence to $3-5 billion. The company says 250,000 homes are at risk

Commodities

· Oil prices end higher, with WTI crude rising 40c or 0.6% to settle at $68.99 per barrel, adding 1.8% on the week despite slipping 2.5% yesterday. Oil prices bounced off earlier lows ($67.94 per barrel) as reported comments from U.S. officials surrounding their plans to impose sanctions on Iranian oil renewed concerns over tighter global crude supplies. Meanwhile, President Donald Trump still wants to impose tariffs on China despite recent attempts to restart talks between the U.S. and China, which is the second-largest oil consumer. Oil prices dropped Thursday after the IEA said in its monthly report that crude oil output in OPEC climbed in August by 420K barrels a day, to average 32.63M barrels.

· Gold prices slipped on Friday, with December gold futures falling -$7.10 or 0.6% to settle at $1,210.10 an ounce, falling as the dollar rebounded on economic data. However, despite the late week pullback in precious metals, gold still ended the week higher by 70c. Gold fell from mid-week highs of $1,218 an ounce as inflation fears subsided on softer CPI and PPI reports. Front-month September silver futures settled at $14.042 an ounce, the lowest level since Jan. 15, 2016. The most-active December contract settled at $14.142 Friday, down about 19% year to date.

Currencies

The U.S. dollar surged on Friday, with the dollar index (DXY) ending near the highs of the day around the 95 level (off overnight lows 94.35…but still down about -0.4% on the week). The rebound came after a busy round of economic data this week, reinforcing views that the Fed will remain on auto pilot for additional rate hikes this year. The dollar gained vs. the euro, Pound and after sliding earlier in the week on Brexit commentary and less “dovish” talk from the ECB and BOE yesterday when they kept rates unchanged. The Russian ruble advanced vs. the dollar after its central bank raised interest rates by 25 bps to 7.5%. The dollar advanced to highs around 112.17 vs. the Japanese yen, its best levels since mid-July before paring gains. Treasury market’s slide,as yields back to monthly highs for the 10 and 30-year yields, while the 2-year yield moves back near 10-year highs above 2.78%; the 10-year yield topped 3% briefly after stronger sentiment and industrial data overshadowed weaker import/retail sales data.

Sector News Breakdown

Consumer

· Retailers; VFC was upgraded to Outperform at Cowen and upped tgt to $106 saying VF’s disclosure of a 23% operating margin for Vans implies that the brand alone could generate $1B-plus in free cash flow by fiscal 2022; COST downgraded to market perform at Wells Fargo saying long-term earnings growth outlook is attractive, but maybe not as impressive as the stock price; HAS was added to Franchise picks at Jefferies as see 50% stock appreciation potential over the next 1-2 years as underlying toy sales stand to grow and generate strong cash flow; SHLD shares rallied despite lower quarterly earnings results, as sales improved after the summer; LB shares outperformed after closing money-losing Henri Bendel stores

· Consumer Staples and Restaurants; PLAY Q2 EPS and revs topped consensus and Q2 comp sales fell (-2.4%), less than the expected (-2.9%) decline/midpoint of year guidance also above estimates; DNKN was downgraded at RBC Capital as believe current valuation of 22x 2020E EPS and a 5.5% FCF yield is closer to fair value; CCE shares upgraded at Susquehanna and Wells Fargo after recent positive upbeat capital markets day

Energy

· Energy stocks actually performed fairly well today as oil prices rebounded from earlier lows, with investors rotating back into the sector. The weekly Baker Hughes (BHGE) U.S. rig count rose 7 to 1,055 with oil rigs up 7 to 867, gas rigs unchanged at 186, and miscellaneous rigs unchanged at 2

· Services & Equipment; JPMorgan upgraded HP to neutral as a better oil macro has created an elevated mid-cycle level of activity, clearing the way for the dividend through 2019, while top large cap picks remain FTI and HAL and re-cut top Smids include FRAC, LBRT, MRC and NINE

· Utilities & Solar; NI shares fell over 10% after closing at a record high yesterday, following a series of gas explosions near Boston/the explosions killed at least one person, injured 12 others; Goldman Sachs raised its tgt on PCG to $49 from $47 and EIXto $69 from $62 as recently-passed California wildfire legislation is a positive for both utilities

Financials

· Bank movers; bonds caught a bid midday as US stocks turned lower on Trump comments about China and $200B in tariffs; prior to that, banks had been one of the top performing sectors with yields surging on economic data and rising rate hike expectations; US banks MS, BAC, C, GS, outperformed Euro banks (BCS, UBS, DB); FVCB 1.75M share IPO priced at $20.00

· Insurance stocks, specifically P&C names (TRV, CB, ALL) bounce with Hurricane Florence not expected to cause insured losses that will “materially impact insurance or reinsurance pricing trends,” according to one analyst. KBW said Hurricane Florence will likely cause billions of dollars of insured losses representing a significant, but not capital, earnings event: KBW

· Consumer finance and lending; PYPL resumed outperform and $108 tgt at Raymond James saying the stock and estimates should rise over the next year as the firm benefits from eCommerce, but any missteps will likely be costly.

· REITs; Citigroup downgraded ESS and DDR to Neutral from Buy, MRT to Sell from Neutral & upgraded REG to Buy from Neutral – said their 8th annual “Fantasy REIT draft” herein highlights our top picks heading into the fall, REITs’ current valuation & model portfolio weights. Picks include top line players AVB, FRT, HST, PLD, SPG, draft risers AMH, DLR, DRE, HPP, KRC, RHP, SLG, VNO and injured reserve EQIX, INVH, REG, RPAI

· Asset managers; Data just out from Morningstar Direct for August shows active equity mutual fund outflows increased to $21bn vs. $16bn in July, while passive equity fund and ETF flows remained solid at $24bn vs. $27bn in July (said Deutsche Bank); WDRreported preliminary assets under management of $80.2 billion for the month ended August 31, 2018, compared to $79.2 billion on July 31, 2018; LM said prelim assets under mgmt were $751.8B at end of August; MN reported preliminary AUM as of August 31 of $23.1B compared with $23.0B at July 31 and $22.8B at June 30; AB prelim AUM increased to $551B during August 2018 from $546B at the end of July

Healthcare

· Cannabis-related stocks (TLRY, CGC, CRON, WEED and MJ) shares dropped initially following a report that the U.S. may bar Canadians who invest in the companies from entering the U.S. Politico reported Thursday afternoon that an official with the U.S. Customs and Border Protection agency said that Canadians who smoke marijuana, work in the industry or invest in the companies could be permanently banned from the U.S. – stocks rebounded off lows; NXTFF shares fell after Citron Research put out negative article on it

· Medical equipment and devices; BEAT tgt raised to $66 from $57 at Raymond James saying citing visibility into potential upside and accelerating organic growth in the near-term; Canaccord raised price targets on ILMN to $375, IDXX to $270 and GHDX to $70 on medical devices as continues to see strength despite the diagnostics coverage being up +46% YTD; TNDM was downgraded to neutral at Baird citing the strong run-up in shares this year

· Pharma and biotech movers; FOMX 11.67M share Secondary priced at $6.00; PRNB 6.25M share IPO priced at $17.00; AZN said the FDA approved its drug Lumoxiti for patients with hairy cell leukemia who had received other treatment previously; 52-week highs for several healthcare names in the S&P 500 today: include: ESRX, RMD, HUM, ABT, ZBH, TMO, ISRG, DHR, BAX as Med tech continues to outperform

Industrials & Materials

· Industrial & Machinery; CAT August machine retail sales that showed further deceleration in growth worldwide, despite continued acceleration in North America; 0n a 3-month rolling basis, total machines sales globally rose 23% in August, after rising 24% in July and 25% in June. In North America, however, sales rose 29% in August, after increasing 27% in July and 22% in June; WAB fell after JPMorgan said details from the GE/Wabtec deal suggest caution is warranted in taking those forecasts to the bank; BLBD rises as announces tender offer to buy up to $50 million shares at $28 per share, and 7.625% Series A Convertible Cumulative Preferred Stock, at a price of $241.69 per share; COL and UTX shares advanced after UTX said at a conference today that it sees the deal between the two to close later this month

· Transports; the sector has had a strong week, led by gains in truckers, rails and airlines; today no different as the Dow Transport index traded to a fresh all-time intraday high of 11,623.58 before paring gains

· Metals & Materials; OI rises after Atlantic Investment in a 13D said the company should explore the sale of its European business, may see proceeds of the $3.2B-$3.8B and use proceeds for buyback/pay debt; miners were mixed (steel, aluminum) amid rising iron ore futures; note Hurricane Florence forced lumber and paper mills in the Carolinas to temporarily close

· Chemicals; VVV falls after being downgraded at JPMorgan on AMZN fears, citing report they online giant has launched its first private label motor oil called AmazonBasics Full Synthetic Motor Oil; KMG was cut to neutral at Seaport Global

Technology, Media & Telecom

· Semiconductors; NVDA tgt raised to street high $350 from $325 at Needham citing increased confidence that the chipmaker will take more share of the interference market with its new TensorRT Hyperscale Platform; AMD tgt raised to $40 at Argus saying the company’s Epyc server chips are increasingly becoming a threat to INTC’s dominance in data center CPUs; MPWR defended at Oppenheimer saying market misinterpreted mgmt commentary heightened macro/cycle fears already impacting the semiconductor group

· Software and Hardware movers; ADBE Q3 results were solid with net profits rising 58% on 24% revenue growth driven by Creative Cloud growth of nearly 28% y/y. Creative Cloud revenue now represents 59% of sales vs. 47% three years ago, and remains one of the primary growth engines (several analysts raised tgts after results); in video games (ATVI, TTWO, EA), overall August NPD video game software sales were flat y/y, driven by a solid launch of Madden NFL ’19 from EA, the top title for August; GLW upgraded to buy at Citigroup as believe Corning shares are poised to continue to grind higher in the next 12-18 months; QTT 12M share IPO priced at $7.00, opened at $9.10 before trading as high as $17

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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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