Market Review: September 20, 2018

Terrie AmengualDaily Market Report

Closing Recap

Thursday, September 20, 2018

Equity Market Recap

· It was another banner day for U.S. equities, with all-time record highs for the Dow Industrials and benchmark S&P 500 index, while the tech heavy Nasdaq Cop and Russell 2000 basket of small caps played catch-up after recent underperformance. Emerging-market stocks gained as the dollar fell to 2-month lows despite stronger economic data and “baked-in” expectations for the FOMC to raise interest rates another 25 bps next week. Commodity prices took a breather as oil prices dipped after U.S. President Donald Trump resumed his criticism of OPEC ahead an oil minister meeting in Algeria this weekend. Financials, Industrials and Materials paced gains again, with banks getting a lift as Treasury yields hold near multi-month/year highs. The Dow traded to new all-time intraday record highs, surging another +200 points (taking out the January 26th record closing high of 26,616), while the S&P 500 tops its all-time best of 2,916.50 on 8/29.

· Investors have shaken off worries about trade spats, even as President Donald Trump earlier this week reiterated his hardline stance on China and said the U.S. had “no choice” but to levy another $267 billion in duties on China. China responded with an announcement of 5% to 10% tariffs on $60 billion in U.S. goods. Those tariffs are set to go into force on Sept. 24.They have also rallied in the face off Brexit uncertainty as UK/EU at odds over sticking points. Stocks have been buoyed by strong corporate earnings results and better economic data showing the US on firm footing (lots of data this morning reinforcing US strength). There also remains no fear as the CBOE Volatility index (VIX) slid back to lowest levels since early August. Europe stocks post 5th straight gain for longest win streak since July, up 1.6% during this stretch. Germany’s DAX rose 0.9% to finish at 12,326.48, while France’s CAC 40 jumped 1.1% to 5,451.59 and the U.K.’s FTSE 100 rose 0.5% to close at 7,367.32.

· Investors are in for a hectic Friday with the scheduled rebalancing of several major indexes, “quad witching” and “big changes by two of the world’s largest index providers to a widely used system that organizes companies based on where they fit in the global economy,” says the Wall Street Journal. The changes in how S&P 500 will classify companies will impact 23 listed names. “Although a seemingly esoteric exercise, it has real-world implications, especially for stocks such as Facebook, Twitter and Google-parent Alphabet that will leave the technology sector to join a new “communication-services” segment.”- WSJ

Economic Data

· Weekly Jobless Claims fell 3K to 201K, beating the 210K estimate while prior week unrevised at 204K; the 4-week moving average slipped by 2,250 to 205,750, a fresh 49-year low; continuing claims fell 55K to 1.645M in the latest week

· Philadelphia Fed Index for Sept rises to 22.9 from 11.9 in the prior month and topping the 18.0 estimate; Sept. prices paid fell to 39.6 vs 55.0, while new orders jumped to 21.4 vs 9.9 prior and employment rose to 17.6 from 14.3; shipments rose to 19.6 vs 16.6

· Existing-Home Sales for August were unchanged at 5.34M, slightly missing the 5.37M estimate after falling 0.7% prior month; there was 4.3 months’ supply in Aug. vs. 4.3 in July; said inventory unchanged 0% to 1.92M homes; median home price rose 4.6% from last year to $264,800

· The 30-Yr Fixed Mortgage Rate rose to 4.65% this week from 4.6% according to Freddie Mac; the 15-year rate avg 4.11%, up from 4.06% a week earlier


· Oct oil prices slipped late session (expired today), ending just above the intraday lows, falling -32c to settle at $70.80 per barrel, dropping just below the $71 per barrel mark after its recent surge. The Nov futures contract slipped -45c or 0.6% to settle at $70.32 per barrel. Prices fell after President Donald Trump, in a tweet, called on OPEC to lower crude prices. Oil has had a nice spike in recent days on bullish inventory data and heading into oil minister meeting this weekend in Algeria.

· Gold prices ended higher by $3 to $1,211.30 an ounce, only a modest gain given the broad decline in the dollar this afternoon, but the precious metal did settle at a month-to-date closing high. Palladium stretches streak of gains to a 7th session, logs highest finish since February.


· The U.S. dollar ended lower, falling vs. major currencies as the dollar index (DXY) sunk below the 94 level (down -0.6%), first time under since mid-July. The euro rose to $1.177 from $1.1673 late yesterday, while the British pound moved to its best levels since mid-July, at $1.325 (down from earlier highs around 1.33), compared with $1.3143 late Wednesday. The move came following upbeat U.K. retail-sales data, despite signs a Brexit compromise still remains far away. The dollar falling broadly vs. emerging markets as well; falls to 1.29 vs. Canadian loonie as markets await the latest developments surrounding the North American Free Trade Agreement (NAFTA).

Bond Market

· Treasury markets remained steady, as yields held recent elevated levels across the board; the 10-year yield touched 4-month highs of 3.09% earlier before paring gains, the 2-yr yield holding above 2.8% and the 30-yr yield above 3.2%, rising more than 10 bps over the last week. The U.S. Treasury Department will auction $213 billion in securities next week, comprising $106 billion in new debt and $107 billion in previously sold debt.

Sector News Breakdown


· Retailers; SKX downgraded to market perform at Cowen and cut tgt to $28 from $32 saying Street estimates are too high going into Q3 eps where they expect weak Q4 guidance given the company’s rapidly expanding inventory issue which suggests results are slowing; SFIX was downgraded to neutral at Piper saying emergence of Amazon Prime Wardrobe as a competitor and rising customer acquisition costs are two of the threats that Stitch Fix faces; RL was upgraded to neutral at Piper; NKE tgt raised to $100 at Guggenheim as expect 1) sustainable growth in NA, 2) continued DTC/ Int’l strength, and 3) a return to annual GM expansion (NKE tgt also raised to $100 at Susquehanna); UAA raised low end of Q3 EPS to 16c-19c from 14c-19c and said to cut about 3% of jobs/sees added $10M in charges/sees $200M-$220M pretax restructuring and related charges in 2018, saw $190M-$210M; MLHR reported Q1 EPS and revenue above consensus views and mid-point of Q2 sales view $635M-$655M topped estimates of $639M

· Consumer Staples; NSRGY said it is exploring strategic options for its skin-health unit, as the Swiss company puts its focus on food, beverage and nutritional health products. Nestle the unit had sales of about 2.7 billion Swiss francs ($2.8 billion) in 2017 ; DEO warned that its full-year profits will be dented by the recent sharp sell-off in in emerging-market currencies; MED shares slipped after Gotham City Research names new short idea

· Restaurants; DRI Q1 EPS beat by 10c, on better revs of $2.06B and Q1 comp sales rose 3.3%, topping the 2.1% estimate/also boosted its EPS view from continuing operations forecast for the full year to $5.52-$5.65 from $5.40-$5.56 (est. $5.54) – better comp sales LongHorn, Capital Grille and Olive Garden; also raises year comp sales view to +2% to +2.5%

· Casino & Leisure movers; in the RV sector, shares of THO decline as 4Q EPS and gross margin missed lowest street estimates, posting a sales drop of 3% in FQ4 and a profit decrease of 19% citing raw material and commodity-based component inflation from the steel and aluminum tariffs as a drag on profit (comps WGO, LCII, CWH) and also warns that it has “more work to do” in FY19 and 1H FY19 faces tougher y/y comparisons

· Auto’s; Aston Martin is seeking a valuation as high as 5.1 billion pounds ($6.7 billion) in its London IPO. It said it will sell a 25% stake for 17.50 pounds to 22.50 pounds a share, aiming to begin trading in October. Sanford C. Bernstein said the Ferrari-like valuation isn’t realistic – Per Bloomberg L.P.


· Energy stocks were mixed as drillers extend recent rally (analysts been getting positive on space, RIG example), while E&P names slipped and refiners recovered after yesterday’s decline on falling crack spreads. Earlier today, Trump tweet: “We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now!” Raising a little concern into oil minister meeting this weekend in Algeria. Russia’s pumping a record amount of crude ahead of talks with OPEC this weekend, a government official said. Output has climbed to as much as 11.36 million barrels a day from 11.21 million in August. – Bloomberg

· Drilling stocks; RBC Capital positive on offshore drilling stocks saying they are poised to outperform the Oil Service ETF (OIH) over the next 12 months, as sees definitive improvements in offshore activity increases and company commentary is pointing to a resumption in offshore spending (upgrades DO, NE, RDC, RIG to outperform from sector perform) – note RIG shares up nine of last ten days with two analyst upgrades this week and two positive buy initiations

· Services at RBC; on frac sand, says the sand supply curve is overshooting demand and pricing pressure likely to become more prevalent (downgrades CVIA and SLCA to sector perform from outperform; in equipment, HP upgraded to outperform form sector perform given co’s “dominant” mkt position for super-spec land rigs, and ability to increase share via rig upgraded and “industry-leading” dividend yield

· Refiners (HFC, DK, PBF) were weak Wednesday, as RBC Capital noted crack indicator was down 7% on the week. The East Coast (-41%) and Gulf Coast (-9%) were the weakest regions on the week with no region positive. Europe was down 9% on the week. US light crude spreads were negative on the week with notable downward moves from WTI, LLS, Clearbrook and Midland. Citigroup said Wednesday’s refiner equity sell-off seems “myopic”, which reset share price levels back to pre-2Q earnings levels while also “round-tripping” the mid-summer rally


· Bank movers; Bank stocks were among the top performers for a second day in a row as the 10-year yield continues to hold above the closely-watched 3% (touching highs of 3.09% earlier); financials also get a boost with consumer comfort at a new 17-year high and jobless claims hitting the lowest since 1969 – the BKX trades above trading range it’s been stuck in for 6-months, led by large cap, regional banks, brokers and insurance names; FBP was upgraded to buy at Bank America on view that the ongoing post-hurricane rebuilding efforts in Puerto Rico (PR), still in their early stages, have the potential to jolt the PR economy from a decade-long economic recession; in consumer finance, SQ tgt was raised to $100 at Stifel, upbeat about the company’s goal of moving further upmarket, following CFO’s comments at a Recode conference this week


· Pharma movers; ELAN, the animal drug company spin-off of LLY, priced its IPO at $24.00 per share, above prior estimates of $20-$23 raising up to $1.74 billion on an offering of 62.9M shares; GALT shares active after the company said that combining its therapy, GR-MD-02, with MRK’s Keytruda, appeared to have better results for patients with advanced melanoma than Keytruda alone; ALKS faces FDA panels on depression drug on November 1st; ACAD shares jumped in afternoon trading after the FDA announced it has completed a review of all post-marketing reports of deaths and serious adverse events reported with the use of Nuplazid

· Cannabis sector; TLRY shares volatile again (not as bas yesterday) – rising as much as 8% before falling as much as 20% after crazy run yesterday (highs of $300 before lows of $151 on Wednesday); CRON shares active after announcement of the start of a joint study with Aleafia Health evaluating medical cannabis to improve the management and treatment of insomnia and daytime sleepiness

· Biotech movers; NBIX tgt raised to $142 at Stifel after deep dive on valbenazine’s in Tourette’s Syndrome, and raising our probability-of-success on the Ingrezza [valbenazine] program to 75% from 60%; in gene-editing space, CRSP filed to sell $200M in stock (weighed on other names in the space including NTLA, EDIT)

· Medical equipment and devices; BRKR was downgraded to underweight at Morgan Stanley as specific leading indicators continue to decelerate/see 9% downside to consensus ’20 revenue and 12% multiple compression citing tough macro and comps

· Healthcare services and providers; TDOC tgt raised to $86 at Canaccord as they remain bullish on sustained robust growth and opportunity for continued financial outperformance as ’18 progresses and reiterate their buy ahead of Thursday, September 27th’s investor day

Industrials & Materials

· Industrial & Machinery; CAT, MTW and SNHY all upgraded to outperform from neutral at RW Baird on a combo of good fundamentals and inexpensive valuation/notes steel prices have started to roll over with OEMs enacting outright price increases (the three aforementioned names along with Deere) instead of surcharges likely to benefit; GE another negative mention at JPMorgan as cut tgt to street low $10 saying the impact on ’asset value’ from a failure at GE’s US H-frame launch customer, while tough to estimate, represents a negative development

· Aerospace & Defense; Bernstein said a proposed change to Defense Federal Acquisition Regulation (DFAR) could significantly reduce progress payments to large defense contractors (BA, LMT, NOC, RTN), and notes this may have triggered a selloff in defense stocks in afternoon trade on Wednesday which the firm feels is “overdone”

· Transports; in rails, UNP tgt raised to $186 at UBS saying company’s plan to implement the Precision Scheduled Railroading (PSR) principles provides visibility to a stronger margin performance and EPS growth path for the company; also CNI was upgraded to outperform at Macquarie with a $118 tgt; rental cars weaker (HTZ, CAR) possibly on news CVNA to launch next-day car delivery in NY, the largest market the online car buying and selling platform has launched in so far

Technology, Media & Telecom

· Internet; AMZN grabbed headline with new product launches today that included various devices for inside the home including wall clock, security system, speakers, microwave; EB 10M share IPO priced at $23.00; AMZN tgt raised to $2,250 from $2,100 at Argus, while Morgan Stanley maintained its $2,500 tgt saying they are bullish on AMZN’s reported opening of 3k automated Go stores over the next 3 years; WSJ reported that GOOGL told lawmakers it continues to allow other companies to scan and share data from Gmail accounts, citing a letter sent to senators by Susan Molinari

· Semiconductors; MU positive mention at Bank America (ahead of earnings tonight) saying sees stable DRAM ASP, solid demand for server DRAM, and record high profits sustainable due to the combination of ASP, cost, and volume; NVDA underperformed broader semi space after Morgan Stanley cautious commentary; AAPL suppliers MXIM, CRUS, SWKS outperformed

· Software mover; RHT fell after its Q3 revenue forecast came in below estimates (87c/$848M-$856M vs. est. 92c/$862.7M); posted Q2 adjusted EPS at 85c beat, while $823M in revenue fell short of estimate; IQV announced the expansion of its alliance with CRM to build a clinical solution for life sciences on Salesforce Health Cloud; in security software, FTNT downgraded to neutral at Bank America primarily on valuation risks

· Media & Telecom movers; CMCSA is preparing for FOX/DIS to increase its offer for Sky just to make Comcast bid higher for the asset, Reuters reported ; LYV’s Ticketmaster is accused of colluding with scalpers, and collecting double fees in the process, in a weeks-long investigation published by CBC and the Toronto Star ; VIAB was upgraded to outperform at Macquarie saying the co has made some impressive investments in data and technology that will drive growth in TV advertising; IPG was also upgraded to outperform at Macquarie


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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