Market Review: September 21, 2018

Terrie AmengualDaily Market Report

Closing Recap

Friday, September 21, 2018

Equity Market Recap

· U.S. stock averages closed out the week with solid gains, as the Dow Industrials and S&P 500 both posted new all-time highs, though the S&P slipped late Friday. Gains on the week were led by industrials as Dow components Caterpillar and Boeing helped pace the advance as investors shrugged off the U.S. newly imposed tariffs on $267B of goods, while China responded with tariffs of its own mid-week. The Nasdaq Composite slipped late session, led by a pullback in Internet names and as Micron guidance weighed on semi stocks, finishing around the 8,000 level. Overall, markets were treading water on Friday ahead of next week’s Federal Reserve gathering, at which the central bank is expected to lift a key interest rate and update its policy outlook. The dollar index edged higher (gaining vs. the Pound on Brexit fears following comments from UK PM May), managing to pare its weekly slide. Volumes a little higher today given the “quadruple witching” options expiration in the U.S. today. Oil prices gained, finishing at its best levels in 2-months ahead of a key meeting by oil ministers this weekend.


· Oil prices posted solid gains on Friday, rising 0.7% to settle at $70.78 per barrel (2nd straight weekly gain and 2-week highs), ending the week with a 2.6% advance into a meeting in Algiers between major producers at which production levels are expected to be discussed in anticipation supply disruptions. The meeting between OPEC and non-OPEC members, which had agreed in June to boost production in an effort to get output nearer a previously agreed ceiling, takes place Sept 23rd. The June agreement was seen, in part, as a response to U.S. pressure. Oil prices have been on the rise, boosted in part by President Donald Trump’s decision to pull out of the Iran nuclear accord and renew sanctions – but prices dipped Thursday after President Trump in a tweet once again called for OPEC to maintain lower crude-oil prices.

· Gold prices settled lower by -$10.00, or 0.8% to end the week at $1,201.30 an ounce, posting its lowest close since last Friday, but managed to hold above the psychological $1,200 level for a ninth straight day. With today’s pullback, gold managed to eke out a small gain. Overall, gold prices are down roughly 9% for the year given a rising rate environment (FOMC expected to raise rates next week at its policy meeting). A strong dollar weighed on gold and other metals across the board today though industrial metals such as copper held steady.


· The U.S. dollar with a rough week overall, but bounced back in a big way against the British pound today amid Brexit uncertainty. The decline in the UK pound against the dollar (fell -1.4% to 1.3075, erasing earlier weekly gains to end flat) accelerated as Prime Minister Theresa May gave a short statement on the state of the Brexit talks. Prime Minister Theresa May spoke about the possibility of a “no deal” Brexit, in which the U.K. leaves the European Union without an agreement governing its future relationship in place. The euro was modestly lower on the day but finished with a roughly 1% gain for the week. The Canadian Loonie was active, after slightly warmer core CPI figures, and a better ex-auto retail sales outcome.

Bond Market

· Treasury yields were mostly unchanged on Friday, though ended the week with solid gains ahead of next week’s meeting by the Federal Reserve, where a rate increase is widely expected. The 10-year yield slipped 1 bps to below 3.07% after hitting highs of 3.09% earlier this week (4-month highs) and close to a seven-year high at 3.119%. The 2-year note yield touched its highest level since June 2008 earlier this week, settling above 2.80% while the 30-year bond yield dipped slightly to 3.20%. The FOMC next week could push yields to new multi-year highs.

Sector News Breakdown


· Retailers; UAA was upgraded to overweight at JPMorgan as views the stock’s risk/reward as more balanced following the recent underperformance; FTCH 44.244M share IPO priced at $20.00; PIR shares slide as preannounced 2Q results below expectations

· Consumer Staples & Restaurants; UNFI shares slid in food space after reported Q4 EPS below forecast on sales and gross margin miss/sales growth of 10.7% YoY missed estimates due to slower supermarket channel growth & food service customer rationalization/margins contracted 124bps YoY; MCD raised its quarterly dividend

· Housing & Building Products; homebuilders a drag on markets Thursday after Wedbush downgraded two stocks, today JPMorgan downgraded five names (PHM, MDC to underweight and cuts BZH, CCS, MTH to neutral, though raises LGIH to overweight) as sees a housing recovery that’s likely to stay “fairly tepid” in 2019, while rising new home inventory and declining affordability, along with higher interest rates, may slow price gains; in home retail; SKY 10M share Secondary priced at $29.25

· Auto sector; Guggenheim comments on auto dealer sector as upgraded LAD calling it the best place for new money in the auto dealer sector while upside seems limited at PAG (which they downgrade to neutral on valuation); CPRT was downgraded to underweight at JPM Morgan following recent softer than expected Q4 results this week as notes trades at “near record multiples” of earnings and EBITDA


· Energy stocks were active this week as markets await a meeting of major oil producers in Algiers over the weekend. A report suggesting that major producers may increase production more in order to cover an expected shortfall in output from Iran briefly knocked prices lower.

· Top news; REPYY shares fell after Spain’s CaixaBank said it would sell its entire stake in the company by Q1 2019/Caixa has a 9.4% stake in Repsol, worth more than €2.5B ($2.93B); RDS/A is in discussions to sell $1.3 billion worth of assets in the Caesar Tonga field in the Gulf of Mexico to Focus Oil, Bloomberg reports ; WRD picked up ~31K net acres for $43MM (~$7.6MM recognized in 1H:18) through two recently closed acquisitions, as well as recent leasing activity (Seaport estimates the deal shakes out to ~$1.3K/acre)

· Baker Hughes (BHGE) weekly rig report showed that the number of active U.S. rigs drilling for oil fell by 1 to 866, for the week (compared to last week when the report showed a gain of 7). Overall, the total active U.S. rig count, which includes oil and natural-gas rigs, declined by 2 to 1,053

· Utilities & Solar; busy day for the interest rate sensitive sector that has slid this week amid rising Treasury yields (making defensive/dividend paying names less attractive); Morgan Stanley upgraded ATO to overweight while downgrading XEL to equal-weight (prefers PEG, PCG, FE, AEP, and NEE); Goldman Sachs upgraded SRE to conviction buy list while removed NI given uncertainty with the natural gas incident in Massachusetts. In stock news, ED said one of its subsidiaries has agreed to acquire a SRE subsidiary that owns 981 megawatts (MW) AC of operating renewable electric production projects, for a purchase price of $1.54B (projects have $576 million of existing project debt) ; California Governor Jerry Brown signed legislation that will help utility giant PCG pay for billions of dollars of potential liabilities from deadly wildfires that tore through the northern part of the state last year


· Bank movers; what a week it has been for banks, brokers and insurers, breaking out of a 6-month tight trading range after Treasury yields surged to multi-month highs, likely helping lending margins; JEF posted a 28.1% dip in Q3 profit (down to $60.2M from $83.8M last year), hit by a slowdown in its investment banking unit, and also impacted by a 25.5% rise in interest expenses.

· Insurance; ATH positive mentioned at UBS (reiterated top pick) and Morgan Stanley (raised tgt to $64) as firms note investor day focused on their aggressive growth aspirations while mitigating risk, while they also guided to financial returns that were above prior expectations; UIHC said it formed a new subsidiary called Journey Insurance Company that received an A- rating from A.M. Best, Wells Fargo analyst Elyse Greenspan wrote in a report.


· Pharma movers; GTXI shares plunged as the company’s sole drug fails the lead indication study in a painful setback/said Phase II ASTRID study comparing two doses of enobosarm for significantly reducing instances of stress urinary incontinence failed; ACADupgraded to overweight at Piper noting the FDA announced today that they are maintaining support of Nuplazid’s profile after completing a thorough safety review

· Biotech movers; SRPT shares slipped as receives negative CHMP re-examination opinion for Eteplirsen; CRSP 4.211M share Secondary priced at $47.50; FATE 9.26M share Spot Secondary priced at $13.50; MTEM 8.2M share Secondary priced at $5.50; VKTX 9.5M share Secondary priced at $18.50; YMAB 6M share IPO priced at $16.00; NVAX was upgraded to overweight at JPMorgan citing a favorable risk-reward investment profile ahead of pivotal trial data on its RSV treatment for infants, due out in the first quarter of 201

· Medical equipment and devices; MDT said that it plans to buy the Israel-based MZOR for $1.64 billion in cash, with holders receiving $58.50 for each ADR

Industrials & Materials

· Industrial & Machinery; ETN was upgraded to buy at UBS and raise tgt to $100 from $91; at JPMorgan, JCI was downgraded to underweight from neutral as expects earnings revisions to remain weak, and sees the standing valuation discount as appropriate, given low quality of earnings/free cash flow; JPM also upgraded IR to Overweight and raised price target for the shares to $118 from $109 as views the stock’s discounted valuation relative to peers as unwarranted following the company’s transformation

· Transports; airline stocks outperformed after AAL was the latest to announce its plan to raise the fee on a first or second checked-in bag by $5 following suit of other airlines; top gainers on the airline index include AAL, DAL, LUV among others; overall transports failed to take out their all-time highs reached last week, just off record bests

· Defense sector (GD, RTN, NOC, LLL, and LMT) tried to rebound after analysts come to the defense of the group that has sold off the tail end of this week. UBS (among others) noted it appears the group has over-reacted to an unwritten rule noting in late August, the DoD proposed a new rule for progress payments, but over the last 24 hours has triggered a correction in defense. This rule’s genesis was the ’17 National Defense Authorization Act. UBS said the contractors likely had an expectation for a rule to provide upside risk but instead, the draft would both reward and penalize contractor behavior with a default starting point substantially below the current rates (50% vs. current 80%). Obviously a 30% cut to the progress payment rate would be a hard pill to swallow, but the DoD’s analysis in the supporting documents suggest that is not a realistic expectation. Notes the rule in draft and the next public meeting in the next 7-14 days

Technology, Media & Telecom

· Internet; NTES was upgraded to buy at Jefferies citing a more favorable risk/reward with easier comps on 2H18 mobile game revenue, launch of “Ancient Nocturne”

· Semiconductors; MU delivered a solid beat to Q4 estimates as the company reported record revenue and earnings, but guided November below consensus noting DRAM inventory, CPU shortages and tariffs impacting profitability; NVDA cautious mention at Nomura as analyst remain “unconvinced” by Nvidia’s new Turing GPU after reading through the latest reviews; AMD tgt raised to $36 from $30 at Jefferies which cited a report from Fubon Research that said INTC would undersupply the market through the middle of next year; TXN raises dividend 24%, announces $12B share repurchase plan

· Software & hardware movers; ADBE acquired privately held Marketo, the market-leading cloud platform for B2B marketing engagement, from Vista for $4.75B ; IPGP and LASR were both upgraded to strong buy at Raymond James saying the market has taken an overly pessimistic view on pricing in the laser market noting each name saw significant sell-offs this summer, with IPG plunging 27% after a disappointing 2Q earnings report and sees nLight’s ~40% slide from its June peak overstating market pricing dynamics

· Media & Telecom movers; AT&T (T) was upgraded to buy at UBS and up tgt to $38 as believe the stock is trading near all-time low valuations (and the widest gap to Verizon) given a mix of EBITDA declines, concerns over the debt load and secular issues impacting the space; in media, IAC was downgraded to neutral at Guggenheim after the company topped the firm’s $212 price target.


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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