Monday, October 1, 2018
Equity Market Recap
· U.S. stocks end mixed, with the Dow Industrials and S&P posting solid gains led by energy, industrials and financials as trade fears ease, though the NASDAQ gave up early gains (falling more than 60 points from its highs) to trade little changed and Small caps lagged again as the Russell 2000 finished lower. Late last night, just before a deadline of midnight local time, the U.S. and Canada agreed on a new trade deal with Mexico that replaces the North American Free Trade Agreement (NAFTA), which will be known as the US-Mexico-Canada Agreement (USMCA). The news came as a welcome relief and removed a market overhang, helping lift the dollar, and weighed on Treasuries as yield rose. U.S and Brent crude touched 4 year highs, extending last week (and quarter) gains, on fears of reduced production as Iran sanctions loom.
· Energy stocks jumped as WTI and Brent crude topped best levels in over 4-years on production output fears ahead of Iran sanctions next month; semiconductors were mostly higher, led by gains in NVDA and AMD (overshadowing a few negative analyst calls on INTC, LRCX, AMAT); transports gained, led by rails and truckers (helped by new Canada/US trade agreement), while airlines dipped; casino stocks slipped on weak Macau monthly data; autos benefitted from the Canada/US trade news (GM, F, FCAU, MGA); healthcare and financials each also posted solid gains on the day; 52-week highs for six Dow components today: BA, CSCO, MRK, MSFT, PFE, and V; Small caps continue to outperform as Russell 2000 falls
· In other corporate news, GE shares jumped after a management shake-up as CEO is replaced (though company issues profit warning), while TSLA shares jump after CEO Elon Musk announces settlement with the SEC; Dow component BA was the top percentage and point gainer in the index, trading to a 52-week high. Again, no fear in the market as the CBOE Volatility index slips on the day with stocks surging (S&P, Dow Industrials and NASDAQ all not far from their all-time best)
· ISM Manufacturing for Sept falls to 59.8, just below the 60.0 estimate while falls vs. the 61.3 last month; new orders fell to 61.8 from 65.1 last month, employment rose to 58.8 vs 58.5 and inventories fell to 53.3 vs 55.4; prices paid fell to 66.9 vs 72.1
· Construction Spending for August rose 0.1%, missing the 0.4% estimate while July was revised to 0.2% gain from 0.1%; Private construction fell 0.5% in Aug., third straight month of decline while private residential construction fell 0.7% and private nonresidential construction fell 0.2%
· IHS Markit Economics said U.S. manufacturing purchasing managers’ index for September rises to 55.6 from 54.7 in Aug (vs. year ago 53.1) and was highest reading since May 2018
· Oil prices extended their recent gains, as WTI crude rose $2.05, nearly 3% to settle at $75.30 per barrel, its highest level in over 4-years, while Brent also topped new 4 ½ year highs above $84.50, rising a third straight session. Priced have been buoyed by nervousness towards upcoming Iranian sanctions by the U.S. (not expected until November) and the impact of production losses. Note last week oil prices surged, posting returns of 3.5% for the week and tacking on about 5.5% for the quarter. Oil prices have been undeterred by the rising dollar.
· Gold prices for the December contract slid -$4.50 or 0.4% to settle at $1,191.70 an ounce, this after ending last month with a sixth straight monthly loss. Precious metal prices (silver underperforms gold) has fallen back to 6-week lows as the dollar has perked up over the last few weeks on rising rates from the FOMC and a strong economy in the U.S.. With stocks surging near record highs again today, following the latest move in trade with Canada, defensive assets fell
Currencies & Bonds
· The U.S. dollar index (DXY) ends higher, rising roughly 0.2% to around 95.30 (off overnight lows 95), gaining ground vs. the euro and yen, while slipping vs. the Canadian dollar after a new trade agreement was announced between the US/Canada. Italian assets fell sharply as budget talks don’t seem to be going smoothly, weighing on the euro which fell back below 1.16 today; the dollar moved back to 114 vs. the Japanese yen. The Argentine peso climbed 4% as the nation’s central bank started its plan to significantly cut down the amount of pesos in circulation in order to tame inflation. The Mexican Peso pared earlier gains vs. the US dollar.
· U.S. Treasuries were mostly lower as yields ticked higher following an agreement between the U.S. and Canada to revise the North American Free Trade Agreement, which boosted stocks and sent safe-haven assets lower. The yield on the 10-year Treasury rose around 3 bps at 3.07% and the 30-year yield rose 3 bps to 3.22% while the 2-year was steady around 2.82%. News that the U.S. and Canada struck a deal to revamp NAFTA, removed some market uncertainty.
Sector News Breakdown
· Autos; TSLA rises over 15% as the SEC reached a settlement of fraud charges with Elon Musk, CEO and chairman, and with the company that forces Musk’s removal as chairman of the Tesla board for three years and the payment of $40M in penalties, $20M by Musk personally and $20M by Tesla; autos FCAU, GM, Fand auto suppliers (BWA, DLPH, LEA, MGA) rise after new Canada/US Nafta headlines as pact includes tighter rules for origin of auto production; note monthly auto sales data expected tomorrow with a potential impact from recent hurricanes
· Consumer Staples; protein stocks slipped early (TSN, PPC, SAFM) after CALM Q1 EPS and sales missed estimates by a wide margins; dairy producers (DF, POST) active as the new NAFTA agreement reportedly offers U.S. farmers improved access to Canada’s dairy market; BUD was downgraded to hold at Jefferies as struggle to identify the drivers of a near term rebound; PEP to report earnings tomorrow morning
· Restaurants; CMG was downgraded to underperform at Oppenheimer on valuation, noting shares are up 82% and has been upgraded 10 different times by the Street, since the announcement of its new CEO
· Casino & Leisure movers; casino stocks were mostly lower (WYNN, LVS, MLCO) after monthly data missed views after a typhoon that shut Macau casinos for more than a day and a pullback by high-stakes bettors resulted in the slowest revenue growth in two years. Gross gaming revenue in Macau rose 2.8% in September to 22 billion patacas ($2.7 billion) from a year earlier, missing the median analyst estimate for growth of 6.5% and was the weakest showing since August 2016
· Energy stocks outperformed given the ongoing strength in oil prices; Husky Energy Inc. (HSE.CN) said it has made an unsolicited bid to acquire oil sands oil producer MEG Energy Corp. (MEGEF) of $3.3B Canadian ($2.6B US dollars ) in a cash-and-stock deal ; ECA agreed to sell its San Juan assets located in New Mexico for $480M to Denver-based DJR Energy/says the assets include 182K net acres; in drilling, NE was upgraded to neutral at Piper and reaffirming neutral group outlook with upwardly revised price targets as estimate ~$400-ish k/d UDW dayrates required now to support compelling upside
· Utilities & Solar; MKM Partners lowered Q4 EBITDA estimate for BTU to $341M from $393M after the company disclosed a fire at its flagship Australian coking coal mine on Friday; utility stocks underperformed on rising yields and a rotation out of defensive assets
· Bank movers; banks were among the top performing sectors today given the broad rally in stocks and sell-off in bonds (lifting yields) as the US reached a trade agreement with Canada and Mexico late last night, giving a lift to stocks; IBKR said it had 807 thousand Daily Average Revenue Trades (DARTs), 16% higher than prior year and 9% higher than prior month; in insurance; TRUP shares were pressured after being mentioned cautiously in Barron’s saying while shares are down to $35.73 from $46 in midsummer, they remain up by more than 270% from March 2016 levels, and appear overvalued
· Pharma movers; PFE announced its board has unanimously elected Dr. Albert Bourla Pfizer COO, to succeed Ian Read as CEO effective January 1, 2019; AKRXshares plunged after a Delaware judge ruled Fresenius SE had proper grounds for canceling a $4.3 billion buyout of the rival drugmaker and needn’t consummate the deal; TEVA two positive analyst calls as Goldman adds shares to its conviction list as concerns related to 2H headwinds and LLY galcenuzemab approval were already expected and well understood, while Leerink upgraded the stock to a market perform due to improving business fundamentals and increasing multiples for the broader generics sector; ATRS testosterone drug Xyosted gets FDA approval; OMER shares fell as its ‘721 IGA nephropathy study failed
· Biotech movers; NKTR shares led losses in S&P after a short report from Plainview today (which comes from a former Kerrisdale analyst); REGN and SNY won U.S. FDA approval for their first immuno-oncology drug; SGEN & Takeda Pharma phase 3 ECHELON-2 clinical trial met its primary endpoint, demonstrating a statistically significant improvement in progression-free survival of ADCETRIS in combination with CHP; VKTX reported positive results in a mid-stage trial of a treatment for VK5211 for broken hips; AVEO announced analysis of topline data from the Phase 3 TIVO-3 trial evaluating FOTIVDA (tivozanib) compared to Bayer’s NEXAVAR; INSM said the FDA has granted accelerated approval of ARIKAYCE for the treatment of Mycobacterium avium complex lung disease – but shares fell after box warning related to respiratory; AVRO shares dropped more than 50% following data from an early stage trial of its AVR-RD-01 gene therapy in Fabry Disease
· Medical equipment and devices; DVA shares active after California’s governor Jerry Brown vetoed a state bill that would have curbed premium assistance to dialysis patients to steer them toward more costly insurance; DXCM shares fell after ABT announced CE Mark approval of Libre 2, which provides optional real-time alarms at no additional cost compared to Libre 1, according to Piper Jaffray
Industrials & Materials
· Industrial & Machinery; GE bounces off decade lows after they replaced their CEO Flannery with Lawrence Culp (formerly CEO of DHR 2000-14), while company did say it will miss previously provided guidance for free cash flow and earnings per share in 2018; Dow component BA traded to a new all-time high amid rally in industrials on trade news
· Transports; UPS was upgraded to outperform at BMO Capital with $128 tgt as believe risk/reward is attractive for investors with a medium-term horizon; RYAAYcut its profit guidance for the year due to rising oil prices, strikes and staff compensation costs/sees EU1.10B-EU1.2B from prior forecast FY19 profit of EU1.25B – EU1.35B; Stifel cuts REVG to hold to reflect near term headwinds, listed below, that are likely to persist for a couple or few quarters in many cases, in addition to the recent appreciation in its stock price, now about $3 off its low
· Metals & Materials; Commerce Secretary Ross said the new trade deal between the U.S., Canada and Mexico – to be known as USMCA going forward, not NAFTA – will not result in the removal of steel and aluminum tariffs, which he says will be handled separately and have no timeline; metals slipped overnight on weaker Chinese manufacturing data
· Chemicals; HUN downgraded to neutral at Citigroup citing lack of near-term catalysts for the next few quarters in the backdrop of a well-telegraphed normalization in MDI profits; BMO Capital said FMC lithium spin-off Livent expected IPO range of $18-$20/share, implying 13x-14x Ebitda multiples, is “slightly positive” for lithium stocks; PX shares rise after Linde AG said that it had received approval for its proposed $83B merger w/PX from the Chinese antitrust authorities
Technology, Media & Telecom
· Semiconductors; AMD was downgraded to neutral at Baird saying most good news is already priced in; Deutsche Bank downgraded equipment stocks AMAT/LRCX to hold saying the sector lacks positive catalysts, while upgraded ENTG to buy; Mizuho downgraded both LRCX and WDC and cut tgts along with STX), while remains positive on MU after an Asia trip, noting that NAND ASP pricing will continue to decline at a low-double digit rate through the first quarter and a high-single digit rate through 2019; Barclay’s downgraded INTC to underweight saying end-market tailwinds “are likely to reverse (tgt cut to $38) while raised AMD tgt to $25; HIMX upgraded to buy at Roth Capital as believe HIMX represents a differentiated investment opportunity as a diversified display and sensor semiconductor vendor.
· Software mover; VEEV was downgraded to hold at Canaccord citing valuation only; according to NPD, August U.S. console/handheld software sales were $179 million, flat year-over-year, and below our estimate of $195 million. The positive impact of an earlier release date for the newest iteration in the Madden franchise was offset by ongoing digital mix shift and a relatively underwhelming recent release slate, among other factors; Optical stocks (ACIA, AAOI, FNSR, NPTN, CIEN) and internet security (FTNT, SYMC, PANW) pockets of weakness in Nasdaq Comp
· Hardware & Component news; VIAV upgraded to buy at Deutsche Bank and raise tgt to $14 saying FY19-20 are likely early inflection point years, in our view, for 5G and Fiber to X Broadband Services and network roll-outs; INFN shares fall after MKM downgraded to sell and cut tgt to $5 from $10 saying checks indicate Infinera has all but lost its largest customer CTL to CIEN because of concerns with its ability to produce new leading edge DSPs (digital signal processors) every 18-30 months; FFIV was downgraded to underweight at Piper based on 8 factors (demand trends, the software-transition, competition, SD-WAN, capital return, estimate risk, valuation, and that the stock is overbought; ROKU tgt raised to $85 at Needham
· Internet; TCEHY announced a strategic organizational upgrade which, building on our “Connection” foundation, positions Tencent to drive the convergence of social, content, and technology trends; FB shares remain weak after Friday’s disclosure of around 50 million Facebook accounts hacked; EBAY traded down to a fresh 52-week low today