Market Review: September 28, 2018

Terrie AmengualDaily Market Report

Closing Recap

Friday, September 28, 2018

Equity Market Recap

· U.S. stocks end the day little changed but still closed out the week and month in positive territory overlooking ongoing trade issues between the U.S. and China, a rising rate environment after the Fed boosted interest rates this week for a 3rd time this year, and political drama in Washington. Similar to yesterday, market gains were paced by defensive sectors as Utilities and Real Estate were among the top gainers, followed not far behind by energy as oil prices jumped on the day and week on signs of tighter supplies. Major averages got a boost late morning, led by gains in tech after Dow component and chip giant INTC said it is adding $1B to capex to boost production saying shortages of chips caused by better PC market (that lifted semi-equipment names – AMAT, LRCX, and ASML). U.S. stocks pared gains to trade flat, weighed down by Facebook after the social media company revealed a security issue affecting about 50 million accounts. Friday represented the final trading day of the third quarter as the S&P has risen more than 7%, which would be its biggest quarterly advance since the fourth quarter of 2013. The Dow is up about 9% and the NASDAQ up about 7% for the quarter. The Dow and the S&P have risen in 11 of the past 12 quarters while the NASDAQ posted its ninth straight quarterly gain. Recent trading has been relatively quiet on Wall Street, with few corporate earnings reports to drive the market, but that will pick up in about three weeks. Geopolitical events took center stage overnight after Italy’s antiestablishment government significantly widened its budget-deficit target for next year to fund its electoral promises, making waves in the EU. European markets ended much lower, led by losses in Italy’s FTSE MIB, down -3.7% to post its worst day since the June 2016 Brexit vote, while the German Dax fell -1.5%. Out of Washington another twist regarding the Supreme Court nomination of Brett Kavanaugh, as the Senate Judiciary committee voted along party lines to send Brett Kavanaugh’s Supreme Court nomination to the Senate floor for a final showdown amid a call by GOP Senator Jeff Flake for a one-week FBI investigation before the full Senate takes a vote. The committee vote was 11-10, including support from R-Flake of Arizona, who had been undecided until today.

Economic Data

· Personal Income for August rose 0.3%, slightly below the 0.4% economist estimate while personal consumption rose 0.3%, matching estimates but moderated after five straight strong gains and growing at the slowest pace since February; PCE core inflation was unchanged vs. est. up 0.1%, while rising 2.0% YoY (in-line with estimates); the savings rate at 6.6% in Aug., unchanged MoM

· Chicago Purchasing Managers index fell to 60.4 reading (5-,month lows), down from the 63.6 last month and below the 62.0 economist estimate; prices paid rose at a slower pace, signaling expansion while new orders rose at a slower pace, and employment rose at a slower pace, signaling expansion

· University of Michigan Sept final confidence sentiment rose to 100.1 vs. the est. 100.6 (down from 100.8 in the preliminary reading but well above the 96.2 last month). The expectations index rose to 90.5 vs. 87.1 last month while the current economic conditions index rose to 115.2 vs. 110.3 last month.


· Oil prices rise with WTI crude up $1.13, or 1.57% to settle the day at $73.25 per barrel, posting returns of 3.5% for the week and tacking on about 5.5% for the quarter. Meanwhile Brent crude rose $1.00 or 1.22% to settle at $82.72 per barrel (near 4-year highs). Prices have surged in recent weeks on signs of tighter global supplies, including reports that China is scaling back purchases of Iranian oil ahead of U.S. sanctions on Iran in early November.

· Gold prices advanced, rising $8.80 or 0.7% to settle at $1,196.20 an ounce, bouncing off 6-week lows and posted a -0.4% loss for the week and -0.9% for September. Gold prices slumped midweek after the FOMC, as expected, boosted interest rates for a 3rd time this year (and remains on track for another hike in December) and provided another positive assessment on the economy while removing its “accommodative” language. The action and news gave a boost to the dollar, which weighed on precious metal prices. The contract had plunged more than $11 or 1% to settle at $1,187.40 Thursday, but prices rose today as the dollar pared recent gains.


· The U.S. dollar pared gains but still closed higher on the day closing out a week of gains for the greenback. The dollar index (DXY) touched highs of 95.366 before paring gains, its best levels in 2-weeks (and off recent low 93.81 on 9/21) after the FOMC raised rates this week. The Argentine peso ended at an all-time low of 41.25 per YSD/central bank said to plan higher reserve requirements. The British Pound sunk to lows around 1.30, its lowest levels since Sept 12th as concerns about Brexit, a disappointing GDP, and threats to the government weigh. The euro slid back under 1.16 to lows around 1.157 before paring losses (down over 1.3% for the week) on Italian market concerns. Japanese yen hold near 2018 highs above 113.50. The US dollar sinks to lows vs. Canadian dollar around 1.2960 (off earlier highs 1.3049) as oil prices rise.

Bond Market

· Treasury prices ended little changed on the day, with the 10-year yield holding steady around 3.05% (down from 3.113% on Tuesday, its highest levels since May), while the 30-yr yield was up around 3.2% but the 2-year yield fell to 2.81% in a week of volatility, continuing a post-Fed meeting rally, while a rout in Italian equities and bonds sparked by the government’s poorly received budget targets appeared to weigh on sentiment.

Sector News Breakdown


· Auto’s; TSLA shares fell as much as 15% after the SEC sued its CEO Elon Musk of misleading investors when he tweeted that he was “virtually certain” he could take the company private if he wanted to (shares downgraded to sell at Citigroup while several analyst lowered tgts citing uncertainty); VLKAY and Microsoft have joined forces to connect cars to the internet using cloud technology; overall it was a rough week for autos and suppliers amid tariff impact fears

· Housing & Building Products; rough week for homebuilders as the XHB comes into the day with a 7-day losing streak on rising rates, weaker housing data and cautious analyst commentary citing the environment; KBH shares fell this week after mixed Q3 results (EPS beat, revs missed), with results from LENexpected next week (10/3); LOW was upgraded to buy at SunTrust and tgt raised to $138 (also had tgt raised by other analysts) saying recent 2Q earnings and analyst meeting with LOW’s new CEO point to a turnaround that is internally focused and should come at a consistent pace over next the 2-3 years

· Consumer space; in retail, JCP CFO Jeffrey Davis resigned effective from October 1 to pursue another opportunity; STZ was upgraded to positive at OTR Global; in restaurant space, BOJA spiked late afternoon after Reuters reported the company is exploring strategic alternatives, including a potential sale, people familiar with the matter said


· Energy stocks active on a few stories: US production rose 2.5% in July to a record 10.96M barrels per day according to the EIA. The Baker Hughes (BHGE) weekly rig data showed the U.S. rig count rose 1 to 1,054, with oil rigs down 3 to 863, gas rigs up 3 to 189 and miscellaneous rigs up 1 to 2

· E&P sector assumed coverage at Piper (upgrade DVN and cut HES and APA) as sees the long-term investment case for the group being more attractive than it’s been for “quite some time.” Sees 3Q results being a potential opportunity with weak 4Q18/2019 guidance getting the “bad news” out, and offering a chance to buy the attractive 2H19+ outlook; prefers FANG and MRO

· Coal, Utilities & Solar; SCG was upgraded to neutral from sell at UBS saying the South Carolina Office of Regulatory Staff’s pre-filed testimony that was submitted to the South Carolina Public Service Commission was more constructive than the firm expected; BTU shares fell sharply after Seaport Global downgraded to neutral – BTU noted it does not expect any production from North Goonyella in the Q4 and has a small amount of coal in inventory to ship


· Bank movers; both US and European banks were under pressure the majority of the day, with steady declines in C, MS, while GS was down for a 6th straight day (and down 18 of last 23 days); Italian bank shares came under intense pressure on Friday, as a sharp drop in the country’s sovereign debt put the sector in investors’ crosshairs; European banks DB, BCS, CS declined

· Mortgage insurers (MTG, ESNT, RDN) shares were active as new rules published by Fannie Mae and Freddie Mac seem like they won’t hurt private mortgage insurers as much as had been feared said analysts. Susquehanna said the news is a non-event in our view with MTG still holding an ~16% capital buffer while NMIH’s buffer actually increased. ESNT and RDN are yet to comment as of press time, but on their 2Q18 earnings call they indicated they believe the buffer would be largely unchanged post PMIERs 2.0


· Pharma movers; BHC shares active after its Salix Pharma unit was sued/settled with the SEC; ADMP said the FDA approved Adamis’ lower dose version (0.15mg) of Symjepi for the emergency treatment of allergic reactions (Type I) including anaphylaxis; ENDP is voluntarily recalling two lots of Robaxin 750mg Tablets 100 Count Bottle pack to the consumer level; GRTS 6.071M share IPO priced at $15.00; GWPH tgt raised to $240 at Morgan Stanley following the DEA’s assignment of Epidiolex to Schedule V, which he said was a better classification than he expected; LLY said the FDA has approved its drug Emgality for the preventive treatment of migraine in adults; ALDX 5.25M share secondary priced at $13.75 per share; NITE 4M share Secondary priced at $18.00

· Healthcare services and providers; HCP was upgraded to overweight at Cantor saying company is well positioned in all of its major businesses, especially life science and medical office; TDOC shares active after several analysts raise tgts following investor day as the company highlighted a new partnership with CNC and global reach through the recent Advance Medical acquisition

Industrials & Materials

· Industrial & Machinery; GE shares remain weak after touching 10-year lows yesterday/today, RBC the latest to speak negatively as cut tgt to $13, arguing that the bottom has not yet been reached

· Containers; Wells Fargo downgraded TRTN, CMRE, and CAI to market perform and cut both TGH and SSW to underperform while maintaining market perform on MATX as they believe 2020 will potentially create pockets of material counterparty risk, which they expect to eventually weigh heavily on valuation/too much history supporting the idea that Container Line credit risk leads to poor equity performance for Box/Ship Lessors to justify staying even remotely constructive

· Metals & Materials; ag related stocks active after the USDA revised its estimate of the 2017 U.S. soybean harvest to 4.411 billion bushels, from 4.392 billion previously and said corn stocks at 2.140 billion bushels, also above an average of analyst expectations; metals outperformed despite no agreements on trade between the US and either China or Canada copper underperforms and aluminum and nickel outperforming; FCX said the Rio Tinto interests will be merged in exchange for 40% share ownership in PT-FI in Indonesia

Technology, Media & Telecom

· Optical stocks under pressure as AAOI cuts Q3 revenue view to $55M-$58M from $82M-$92M (below est. $88.48M) saying during Q3 they identified an issue with a small percentage of 25G lasers within a specific customer environment (shares of LITE, IIVI, FNSR, ACIA moved in sympathy) – recall Loop Capital recently downgraded to sell

· Semiconductors; INTC said it is adding $1B to capex to boost production saying shortages of chips caused by better PC market/says still on course to meet full-year rev targets (shares of equipment names moved on INTC comments (AMAT, LRCX, KLAC); NVDA tgt boosted to $400 from $300 at Evercore/ISI as believes investors are now more appreciative of Nvidia’s opportunity in creating the AI industry standard

· Software mover; EPAY resumed strong buy and $87 tgt at Raymond James saying significant investments over the last several years have created a best-in-class B2B payments technology platform; CTK 4.35M share IPO priced at $12.00; PRGS falls after Q3 sales missed estimates and guided Q4 adjusted EPS 71c-74c on revs $107M-$110M, below est. 78c/$116.67M (narrowed year EPS view and cut revenue outlook); BCOR rises after JPMorgan upgraded to Overweight with more clarity on the 2019 tax season competitive environment

· Media & Telecom movers; Bloomberg reported LGF/A partnership AMZN could be a precursor to an outright takeover, Bloomberg reports. That’s the hope of investor John Kornitzer, the fourth-largest holder of Class A shares in the company ; in advertising, OMC was downgraded to underweight at Barclays; also late yesterday, the WSJ reported Federal prosecutors in Manhattan have started investigation into media-buying practices in the advertising industry and have begun issuing subpoenas (IPG, OMC, WPP were weak)

· Hardware & Component news; BB Q2 EPS beat by 3c on higher revenue and margins, and confirmed its forecast for the fiscal year, buoyed by its software business; CAMP reported Q2 EPS/revs above consensus due to better than anticipated gross margin and stronger software and subscription revenue, but issued mixed Q3 guidance; AAPL positive mention at Goldman Sachs saying traffic acquisition cost (TAC) revenue is likely to be approximately $9 billion in 2018, an estimate that is materially above where consensus is; CRNT rises on Oppenheimer upgrade

· Internet; SNAP shares fell to record lows on the day amid further downward momentum; overall broad pullback in the space after outperformance earlier in the week; FB among top decliners after said they discovered security issue almost affecting 50M accounts; TWTR shares among worst performance in quarter down roughly 12% during that stretch


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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