Market Review: September 18, 2018

Terrie AmengualDaily Market Report

Closing Recap

Tuesday, September 18, 2018

Equity Market Recap

· U.S. stocks jumped on Tuesday, erasing most of yesterday’s declines, while the Dow Industrials surged as much as 240 points to move less than 1.5% of its all-time highs 26,616 on January 26th as investors again turned their attention to trade. Major US markets climbed as the retaliatory tariffs by China fell short of market expectations following U.S. levies announced by President Trump on Monday. China said it will impose tariffs of 5% or 10% on $60B of US goods (5,207 items) on Sept 24th, though that was below extra tariffs of up to 25% prior. That news is in direct response to the Trump administration’s announcement of 10% tariffs on $200 billion in Chinese goods, which will be implemented on the same date. The gains today were broad based, as technology shares recovered after the -1.4% decline in the NASDAQ yesterday, while financials rallied amid a spike in yields and energy shares up as oil moved back near $70 per barrel ahead of inventory data tonight and a minister meeting this weekend. There were also strong returns in Healthcare, Industrials and Materials while defensive assets lagged. Treasury yields climbed, with the 10-year above 3.04% (highest in 4-months), while the dollar eked out small gains, crude rose and gold prices slipped. Transports moved higher overall despite a -4% decline in FDX after earnings missed, but boosted its year outlook.


· Commodity prices closed mixed as oil prices rise 94c or 1.3% to settle at $69.85 per barrel (off earlier highs of $70.42) ahead of API inventory data tonight (EIA tomorrow morning). Oil got off to a good start today ahead of an upcoming OPEC meeting where members will weigh how to address the loss of supply from Iran, which faces U.S. sanctions. Energy prices also got a boost after comments from Saudi Arabian officials as Bloomberg reported the OPEC member is now comfortable with Brent oil prices rising above $80 a barrel, at least in the short term, as the global market adjusts to the loss of Iranian supply from U.S. sanctions. Gold prices ended slightly lower, falling -$2.90 but managing to hold above the $1,200 level at $1,202.90 an ounce.


· The U.S. dollar rebounded after floundering early, bouncing back after falling sharply yesterday vs. most major currencies (euro, pound, and yen) on trade/tariff concerns and the potential impact on the economy. The dollar index (DXY) recovered off earlier lows to close higher, led by a reversal to the downside for the euro. The euro moved to its lows of the day, falling over -0.2% vs. the dollar at 1.165 mid-afternoon (off overnight highs 1.1724). The British pound little changed, trading at its best levels in over a month ahead of Brexit news.

Bond Market

· Treasury market’s dropped as the yield on the 10-year rises to its best levels since late May; yields spike across the board with the 10-yr yield rising above 3.03% up over 4 bps; the 30-yr yield rises above 3.18% and 2-yr yield inches close to 2.8%. The US Treasury sold $40B of one-month debt to investors at more than 2% interest for the first time since 2008 on Tuesday. Markets appears mixed in determining the ultimate impact of trade tensions on bonds.

Sector News Breakdown


· Consumer Staples; in food space, GIS shares dropped as Q1 EPS topped estimates despite sales and gross margin shortfall – but the 7c EPS beat is not being carried through to year guidance, as maintained its previous view of FY19 constant-currency adj. EPS of unchanged to down 3%; few deals in Staples as NSRGY agreed to sell the Gerber Life Insurance Company, to Western & Southern Financial Group for $1.55B in cash ; AVP shares rallied on reports Brazil’s Natura Cosmeticos SA recently approached the cosmetics company about a takeover, according to reports (Natura later denied that it was in talks to buy AVP saying “there is no negotiation in progress); in restaurants; CBRL posted Q4 EPS and sales that missed estimates on a comp decline of (-0.4%) while guided year EPS $8.95-$9.10, below the consensus $9.60

· Housing & Building Products; APOG posted Q2 EPS miss by 9c while lowers year EPS view to $3.13-$3.33 from $3.48-$3.68 vs. est. $3.53 and cuts FY19 revenue growth view to 8%-10% from approximately 10%; in appliances, WHR shares traded to 52-week lows after industry data yesterday showed Wholesale U.S. industry shipments fell y/y in August, which represents the fifth straight month of y/y declines; The National Association of Home Builders’ monthly confidence index was unchanged at 67 in September, stalling as tariffs hit sentiment; lumber futures dropped to lowest levels since July of last year (down f46% from record highs of $648.50)

· Casino & Leisure movers; RV stocks were active after THO agreed to buy Erwin Hymer Group for an enterprise value of about EU2.1 billion (shares of CWH, WGO also active) ; in lodging, PLYA was downgraded to neutral at Nomura due to a frustrating level of renovation disruption and weaker fundamentals in Mexico, which they believe will negatively impact investor sentiment over the next 18 months

· Retailers; LB was upgraded to neutral at Bank America and raise tgt to $33 saying that management’s decision to close Henri Bendel brand represents the first move to improve shareholder value in years; NKE shares extended gains early, moving to record highs

· Autos sector active; auto suppliers (AXL, LEA, DLPH) slipped early after BWA cut its 2018 forecast on weaker industry volumes primarily in China and added short-term issues in Europe (guided 2018 adjusted EPS $4.35-$4.40, saw $4.45-$4.50); auto retailers slumped after AZO Q4 EPS of $15.02 missed the lowest estimates (est. $17.97) on lighter sale and comp sales of up 2.2% just missed the 2.3% estimate (AAP, ORLY fell in sympathy). The European Union’s antitrust body said it opened an investigation into “possible collusion” between German car manufacturers BMW, Daimler (DDAIF) and Volkswagen (VLKAY) to limit the development of less-polluting technology; RACE share were active after providing long-term forecasts for 2022; TSLA shares slipped late morning on Bloomberg report that the company is under investigation by the US DoJ following Elon Musk’s claim last month that he had secured funding to take the company private.


· Oil drillers active after BTIG saying with a full-fledged (pricing) offshore drilling recovery still 12-18 months away, stock selection still matters, as they name ESV and RIG as buy ratings and top picks with Borr Drilling also initiated at buy and neutral on NE and RDC. Also said that despite Brent oil touching $80 earlier this year and comfortably in the $70 range, rig tendering activity remains largely muted

· Utilities & Solar; utility stocks sliding, as interest rate sensitive sectors slide with 10-yr yields moving to best levels in 4-months; EXC, XEL, ETR, AEP among top decliners; SRE said it reached a cooperation agreement with activist shareholders Elliott Management and Bluescape Energy Partners, which own a combined 4.9% stake in SRE valued at $1.6B. The parties say two new directors will be appointed to SRE’s board in the coming weeks; solar stocks advanced as SPWR, said they received solar tariff exclusion

· Pipelines & MLPs; ENB announces deals to acquire all public equity of sponsored units EEP, EEQ, and EBGUF for roughly $7.1B, simplifying its corporate structure and detailing a plan proposed in May EEP unitholders will receive 0.335 ENB common shares for each common unit owned, representing an 8.7% increase to the exchange ratio proposed by ENB on May 17. EEQ shareholders will receive 0.335 ENB common shares for each share owned, which is at parity with the EEP exchange ratio. EBGUF shareholders will receive 0.735 ENB common shares for each share owned plus C$0.45 cash per share, representing a 9.8% increase to the exchange ratio proposed on May 16, and 11.3% including the cash component; LNG shares rise as hares in US liquefied natural gas companies rallied as investors and traders expressed relief that the tariff China announced on the fuel came in lower than expected; TRGP was upgraded to outperform and upped tgt to $63 at Wells Fargo saying strong and likely persistent positive NGL fundamentals should drive shares higher


· Bank movers; banks have been drastic underperformers as major averages have climbed to record highs over the last month but group little bounce today as Treasury yields surge, as the 10-yr topped 3% to its best levels in 4-months (helping lending margins). Morgan Stanley downgraded BKU amid concerns over slowing loan growth noting recent commentary coming out of the midcap banks has been incrementally more negative, with five midcap banks (ASB, CMA, KEY, MTB, and WBS) guiding for loan growth that is below expectations and several others flagging headwinds to growth.

· Insurance; MMC has agreed to buy Jardine Lloyd Thompson (JLT.LN) for about 4.3 billion pounds ($5.7B) ; UNM rises as said it expects to increase its long-term care GAAP reserves in Q3 by about $590M after-tax as a result of completing its reserve review for its long-term care block of business; PRI falls after Citigroup downgraded to sell saying the company’s rising price-to-earnings premium is at odds with its slowdown in growth

· Consumer finance and lending; Visa (V), MasterCard (MA) and U.S. financial institution defendants have agreed to settle and resolve class claims in multi-district U.S. merchant interchange litigation with a proposed settlement amount of about $6.2 billion


· Cannabis names active again, led early by TLRY after they received approval from the Drug Enforcement Administration to import cannabis into the U.S. for medical research, the first Canadian company to do so. Tilray will work with the University of California San Diego’s Center for Medicinal Cannabis Research on a clinical trial to test whether the drug can effectively treat essential tremor; ACBFF said in response to a regulator’s request for comment regarding media reports, that it currently had “no agreement, understanding or arrangement” with respect to a partnership with a beverage company

· Biotech movers; VKTX shares soared after the company reported positive results in a mid-stage trial of a treatment for non-alcoholic fatty liver disease, or NAFLD/said the Phase 2 trial of VK2809 in patients NAFLD and elevated low-density lipoprotein cholesterol met its primary goal of reducing LDL-C compared with placebo (shares of rival MDGL shares fell as data came in better than its MGL-3196 according to one analyst)

· Pharma movers; AKCA rises after Needham initiated w buy and street high $45 earlier; LLY up as Barclays raised tgt to $112 today saying they continue to like Lilly’s positioning in 2H18/ 2019 given its differentiated growth profile and several remaining upside drivers in play; CLVS shares slid on reports SEC charged executives with misleading investors

· Healthcare services and providers; ATHN shares slipped after the NY Post reported Paul Singer’s Elliott Management has backed away from its $160-a-share bid for the company while other suitors have also gone quiet (ATHN pared losses after CNBCs David Faber said sales process “not broken” refuting Post story; Bank America positive on psych business growth as they upgraded UHS to buy and upped tgt to $155 as it nears a Department of Justice (DoJ) settlement and has easier comps in 2H/SGRY also upgraded to buy saying the company is getting closer to an inflection point on its turnaround and upgraded MD to neutral and raise tgt to $55 as fundamentals appear stabilized with a more balanced risk/reward

Industrials & Materials

· Transports; FDX posted Q1 earnings miss, mainly due to wage increases that followed last year’s tax cut legislation and its operating margins in Q1 were also lower as a result of higher hourly pay rates, though the company raised its FY19 earnings guidance; in rails, UNP is adopting the playbook of late railroading legend Hunter Harrison, whose precision-scheduling strategy helped him to turn around four major carriers. The operating plan “implements Precision Scheduled Railroading principles” in phases across the network beginning Oct. 1 (UNP was upgraded to buy at Loop Capital on the news)

· Metals & Materials; STLD said it sees Q3 EPS $1.64-$1.68 vs. est. $1.67 as profitability from the company’s steel operations is expected to continue to improve from the strong second quarter results, based on strong underlying demand and meaningful metal spread expansion

· Chemicals sector; NXEO to be acquired by UNVR in cash and stock deal valued at about $2 billion, including the assumption of Nexeo’s debt, or $11.65 per share; deal to be accretive to Univar adj. EPS in full year after closing.; specialty chemicals maker Clariant (CLZNY) raised its earnings guidance and said it has reached a governance agreement with Saudi Basic Industries Corp. 2010 which has bought a quarter of the Swiss chemicals company; sees year EBITDA margin of 20% by 2021, up from previous guidance of 16% to 19%

Technology, Media & Telecom

· Internet & Semi’s; generally saw a bounce back after sharp pullback in both sectors yesterday as tech was for sale; no specific news to account for move; JPMorgan lowered FB Estimates on higher spending in ‘19/’20, while reiterating Overweights on Top Picks AMZN, TWTR, YELP;

· Software movers; ORCL shares slipped after earnings results with total revenue missing slightly due to a larger than expected FX headwind and EPS beating consensus by 3c driven a slight margin beat and a large buyback/Q1 license revs meeting expectations and cloud/support slightly below Street/guidance for Q2 was below consensus, pressuring the stock; RHT was downgraded by JPMorgan to neutral and cuts tgt by $10 to $150 saying the equity will trade between $120 and $180 until headwinds normalize; WK was downgraded to underweight at Morgan Stanley

· Media & Telecom movers; DISCA was downgraded to sell at Pivotal saying that the recent agreements bringing networks to Hulu and Sling are positive developments but don’t meaningfully change fundamentals; NBC (owned by CMCSA) ratings for last night’s Emmy Awards fell 10% to a new low (note the decline isn’t as bad as this year’s 16% drop for the Oscars (DIS) and 20% decline for the Grammys (CBS).

· Hardware & Component news; NTNX shares defended by analysts after falling yesterday on a report from The Information indicated that GOOGL might be working on a competing hyperconvergence product. Piper said “while the potential offering could be viewed as competitive to Nutanix (if it is sold commercially), believe most enterprises will choose to leverage a multi-cloud infrastructure and would not want to be locked into single cloud; RDCM rebounds after falling -29% yesterday as company provided business update saying didn’t see impact from typhoon and sees no change in relationships with its key customers

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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