Wednesday, October 3, 2018
Equity Market Recap
· U.S. stocks ended the day higher (though gave back much of their gains late afternoon), with the Dow Industrials locking up another all-time record high, though the S&P 500 failed to top its previous all-time high of 2,940.91 on Sept 21 with financials, industrials, and tech pacing the gains. While stocks surged, the real story of the day was the bond market, with brutal selling pressure as the 30-year and 10-year yield each advanced as much as 11 bps to 3.34% and 3.17%, respectively (both new highs of the year, as the 10-yr was actually a 7-yr high), while two-year rates rose 5 bps to 2.86% – before paring gains late. The move in bonds came after another round of solid U.S. economic data, as the US economy continues to fire on all cylinders on improving payroll data (ADP private payrolls) and ISM services data (touching 21-year highs), along with a rebound in Italian bonds and stocks following reports the government will bow to pressure from the EU to trim its budget-deficit target. Oil prices extended their recent streak, with WTI crude setting fresh 4-year highs, overlooking bearish news out of Saudi Arabia (increased production) and after weekly inventory data showed larger than expected inventory builds. Interest rate sensitive sectors active with Treasury yields spiking as utilities erased earlier gains, though financials posted one of their best days in months, with the Regional Bank ETF (KRE) snapping its 8-day losing streak as financials seen as beneficiary of rising rates. Overseas, Europe ended mostly higher while Asia declined.
· Private payroll data for September surprises to the upside as ADP said private-sector employment as employers added 230K jobs, handily topping expectations of around 180K and marked the highest gain since February. August’s gain was upwardly revised to show 168,000 growth instead of a previously estimated 163,000.Data pre-cursor to Friday nonfarm payrolls
· ISM Non-Manufacturing index rises to 61.6 in September, topping the 58.0 estimated and above 58.5 prior month; business activity rose to 65.2 vs 60.7 prior month, while new orders rose to 61.6 vs 60.4 and employment rose to 62.4 vs 56.7 (employment index highest level on record)
· Markit September Composite PMI 53.9 vs. flash reading 53.4, while index falls to 53.9 from 54.7 in August and compared to year ago reading of 54.8; output prices rise to 56.6 vs 55.3 in August while employment rises vs prior month
· Oil prices with an impressive rebound off earlier lows, as WTI crude spiked $1.18 to settle at $76.41 per barrel, well off session lows of $74.30, as market concerns over the lost production from OPEC member Iran next month (due to US sanctions) trumped two pieces of bearish data today. Oil prices moved lower this morning after the EIA reported weekly crude stockpiles rose a much greater 7.98M barrels, well above the expected 1.5M barrel build, with Cushing up 1.699M barrels (though gasoline and distillate data came in bullish with larger draws – and attention could have turned towards that. Meanwhile, Saudi energy minister al-Falih said his country’s oil production has reached an all-time high 10.7M bbl/day, in an effort to compensate for the loss of Iranian barrels from U.S. sanctions. While the stories drove oil lower initially, the December contract ended back at 4-year highs. Gold prices slipped, falling -$4.10 or 0.3% to settle at $1,202.90 an ounce, pulling back from 2-year highs yesterday as prices jumped. Gold prices dipped back towards the $1,200 level as the dollar rose and Treasury yields spiked.
· The U.S. dollar advanced nearly the entire session, with the dollar index (DXY) finishing near its best levels up around 95.80 (+0.30%), moving in reaction to better economic data and the subsequent surge in Treasury yields, as the 10-yr and 30-yr yield topped 2018 highs. The dollar hits 11-month highs against the safe-haven Japanese yen, rising above 111.42 as stocks surged and the U.S. economy continues to motor higher with more solid data today. The Argentine peso advanced about 1% at 37.7 vs. the dollar (and up over 9% the last 3-days), while the Mexican peso fell to 18.94 vs. the dollar. The euro ends near its worst levels around 1.1515, while the pound slipped back below 1.30 vs. the greenback. Earlier, PM Theresa May says the U.K. is not afraid to walk away without a Brexit deal.
· Treasury market’s dropped sharply as yields made new 2018 highs on the long-end of the curve. Yields spike as the 10-year yield trade above 3.17% (up 11 bps) a new 7-year high while the 30-year yield topped the 2018 peak, topping 3.267% to trade as high as 3.34%. A combination of stronger economic data (private payrolls and services data at 21-year highs) and reports the Italian government would slowly trim its budget deficits from 2020, easing fears of a clash between them and the EU helped push bonds lower. The shorter-term 2-year yield only edged higher around 2.83% as the yield curve steepened (after flattening most of the cycle).
Sector News Breakdown
· Retailers; group tries to rebound from Tuesday losses after news AMZN boosted its minimum wage for employees to $15 in the U.S. weighed on retailer sentiment; NKE was downgraded at HSBC Holdings saying given a muted reaction post Q1 results, they do feel, however, that now the market is pricing in a lot of positivity; KORS was upgraded to buy with a $79 tgt at Citigroup; mattress retailer TPX, SNBR rise after Reuters reported late yesterday that Mattress Firm preparing to file for bankruptcy as soon as this week, and the process is expected to completed within a couple of months once it files ; JCP said its board of directors has appointed retail veteran Jill Soltau as CEO (30-year retail professional who most recently served as president and CEO of Joann Stores)
· Auto sector; TSLA 3Q delivery and production results are a positive, especially as production during the period tracked slightly behind deliveries, a fact which should benefit the quarter’s cash from working capital, according to JPMorgan (which rates underweight and $195 tgt); Aston Martin (AML.LN) shares fell in its debut after pricing its initial public offering at £19 a share, valuing the luxury carmaker’s equity at £4.33B; HMC said it will make a $750M equity investment in GM’s Cruise LLC in a deal that values the GM unit at $14.6B, plus spend $2B over 12 years toward deploying the autonomous vehicles
· Restaurants; WING upgraded to buy at Guggenheim as reflects the firm’s “increased confidence” in WING’s ability to support mid-single digit comps and double-digit expansion through 2025; Guggenheim also raised its price targets for LOCO (to $17 from $14) and HABT (to $17 from $15); PZZA shares active after shareholder Legion Partners Asset Mgmt said they see real potential upside in shares and could sell restaurants to franchisees to boost value
· Housing & Building Products; homebuilder LEN posted a top and bottom line Q3 beat sending shares higher initially, but the company reported new-home orders climbed 62% in Q3 to 12,319, missing the firm’s target of 12,500 while the company later lowered its guidance for deliveries/earnings citing hurricane impact/sluggish sales (shares of KBH, TOL, PHM fell); SunTrust lowered estimates on the residential roofing segments at BECN and OC on a weak quarter end in volume and pricing. The recent hurricane did little in the way of storm damage, but did disrupt work given the Eastern Seaboard rain.
· Casino & Leisure movers; in casino’s WYNN among the top gainers in the S&P 500, rallying after recent underperformance following softer Macau monthly data after recent typhoon hurt the area; in gun space, AOBC, RGR trading lower (though paring losses) after monthly NICS firearm background checks show decline to 1.956M from 2.073M last month and below 1.967M YoY
· Energy sector active again; Saudi energy minister al-Falih says his country’s oil production has reached an all-time high 10.7M bbl/day, in an effort to compensate for the loss of Iranian barrels from U.S. sanctions. The minister was speaking at an energy conference in Moscow, as Brent crude oil trades near a four-year high of $85/bbl and U.S. WTI crude tops $75/bb
· Inventory data showed: the API reported that U.S. crude supplies rose by 907,000 barrels for the week ended Sept. 28, showed supplies of gasoline declined by -1.7M barrels and distillates fell by -1.2M; the EIA reported weekly crude stockpiles rose a much greater 7.98M barrels, well above the expected 1.5M barrel build, with Cushing up 1.699M barrels (though gasoline and distillate data came in bullish with larger draws
· Sand frac sector cautious at Credit Suisse as they downgraded CVIA to underperform from neutral and cut tgt to $7.50 from $14 and downgraded HCLP to neutral and $11 tgt as lowers frac sand assumptions; SLCA tgt cut to $21 from $29 – for sector, sees $26/ton Northern White sand mine-gate pricing in 2019 vs prior ~$31/ton; also cites weaker demand environment in 2H18
· E&P sector; Oppenheimer initiated coverage of 13 exploration and production companies with a positive bias as bullishness is supported by a favorable oil price view, given a strong global supply/demand outlook. We believe oil price strength supports companies as they attempt to deliver fiscal spending austerity, and note balance sheets are the strongest they’ve been since 2014 (top picks: FANG, WLL, QEP, VNOM)
· Refiners; Barclays comments on the sector as they upgraded PSX to Equal Weight from Underweight following sharp share price underperformance (up 13% YTD vs. peers +30%), while downgrading CVRR to Underweight from Equal Weight given the majority owner’s right to purchase the remaining units at market prices. For MPC, the firm said at 3 million b/d (mmb/d) of US refining capacity, the company’s new found scale is nearly a class of its own as they reinstate with an overweight and names it refining sector’s Top Pick, replacing PBF
· Utilities & Solar; interest rate sensitive utility stocks declined following the massive spike in Treasury yields (making high dividend paying/defensive stocks less attractive to investors) in coal, the WSJ reported BTU has held discussions to buy Colombian peer Drummond International LLC, people familiar with the matter said, cementing a swift comeback from bankruptcy for America’s largest coal producer. It is unclear how advanced the talks are or if the two sides will reach a deal ; TRGP was upgraded to overweight at Barclays
· Bank movers; banks surge amid spike in treasury yields/helping margins; the regional bank sector (KRE) snapped its 8-day losing streak, rising around 2% today and bouncing off the worst levels since February – helped by the rise in yields today (WBS, VBTX, GNBC, SIVB, FULT among top gainers) along with gains in large cap; earning previews start rolling out from analyst ahead of upcoming earnings: 1) SunTrust said believe IBKC, LTXB, SIVB, and UMPQ have greater upside potential in 3Q18, while OZK has greater near term EPS risk factors; 2) Barclays upgraded WBS to overweight as expect deposit growth at HSA Bank to positively surprise, model ongoing healthy commercial loan growth trends, and upgraded FULT to Overweight as think it is poised to exceed the 2H18 consensus EPS based on greater-than-expected NIM expansion, controlled expenses, and share repurchases
· Consumer finance and lending; WP was upgraded to buy at Bank America and tgt raised to $118 on increased confidence in Vantiv synergies; EEFT tgt raised to $155 at SunTrust as recommend investors continue building positions amid anticipation for above-trend organic rev growth as the co rolls out DCC on Visa cards (several analyst have boosted tgt recently on news); PYPL shares move after entered a partnership with CVX to allow drivers to pay for fuel at the pump through the online-payment company, Digitimes reported
· Pharma & Biotech movers; GWPH 1.9M share Secondary priced at $158.00; KALA 7.5M share Spot Secondary priced at $8.25; PTCT shares fell sharply after several posters for its oral SMA drug RG7916, partnered with Roche were released; Piper noted the data stacked up fairly well to BIIB’s Spinraza clinical data, even taking into account all of the usual caveats regarding cross-trial comparisons; EPZM 8.333M share Spot Secondary priced at $9.00; PRTK rises as FDA approved Paratek’s novel antibiotic Nuzyra (omadacycline) as an IV-to-oral therapy for adult patients with CABP (pneumonia) and ABSSSI (skin infection), and as an all-oral therapy in ABSSSI
· Medical equipment and devices; NVCN shares rise after the company announced positive data from the first U.S. patient to be implanted with a device to treat refractory angina; SYK positive mention at JPMorgan as maintain overweight and $200 tgt noting stock has lagged its peers YTD despite solid earnings and think the current price is an attractive entry point ahead of Q3; ELGX shares rose as preannounced a Q3 revenue range of $34.3-$34.7M that outpaced consensus’s estimate of $31.5M. Sales guidance for 2018 was revised to $150-$155M (prior: $145-$155M); EXAS active after Jana Partners listed it among its top 5 holdings in its September monthly letter.
Industrials & Materials
· Industrial & Machinery; large multinational companies including BA and CAT led gains early, extending their recent push higher on improved trade news with Canada and Mexico this week before paring gains; AYI reported Q4 earnings and sales above consensus views but said margins fell amid a sharp rise in input costs/operating margin decreased 3.9%
· Metals & Materials; aluminum stocks very active, with AA shares rising, but CENX falling after Norsk Hydro ASA said it will temporarily close the Alunorte alumina refinery (the largest aluminum refinery in the world) as the stoppage is expected increase the scarcity of alumina and raises the possibility of higher metal prices; Copper producers higher after RIO and BHP reiterated their bullish stance on the commodity
· Chemicals; coating stocks active (AXTA, SHW, PPG) after RPM reported Q2 EPS of 76c, below the lowest estimates (avg 86c) citing costs and restructuring expenses for the negative impact on profitability/though reported better quarterly sales of $1.46B; LNDC reported F1Q19 (Aug) results, including slightly better-than-expected revenue and inline GAAP EPS
· Paper stocks were weak in overall strong day for stocks (IP, PKG, GPK, WRK fall) Resolute Forest Products sold its Catawba, South Carolina, paper and pulp mill, which RBC said was a positive for them as it adds cash but likely negative for the containerboard sector with “capacity jitters” for the industry.
Technology, Media & Telecom
· Internet; FB issues continued after its Instagram app was down for some users overnight/follows recent data breach of over 50M customers; UPWK shares opened at $23 per share after pricing its 12.48M share IPO at $15 per share; BABA tgt raised to $247 from $241 at Goldman Sachs, reiterate buy and conviction list rating citing strong growth potential in the cloud and financial businesses; EBAY sent a cease-and-desist letter accusing AMZN of illegally poaching its sellers
· Semiconductors; another cautious analyst comment as Morgan Stanley said a slowdown in autos and industrial is likely to weigh on guidance for Q4 as they cut estimates for Q4 and 2019, leading to a reduction in PTs. Investor sentiment has already swung from positive to negative, although further de-risking could keep pressure on stocks – stay Cautious on Semis (tgts were cut for APH, ADI, TEL, MCHP, MXIM, NXPI, QRVO, and SWKS). Separately, Susquehanna reduced estimates for AMAT, LRCX and KLAC with most of the revision focused on 1h19. We argue annualized WFE tracked ~$53-$54B in 1h18, but down to $45bn in 2H18
· Software mover; ORCL downgraded to in-line at Evercore ISI saying growth expected to accelerate modestly in 2H and we bump PT to $53, but we do not see enough catalysts for shares to meaningfully ‘re-rate’ from here; INTU upgraded to outperform from in-line and raise tgt to $255 at Evercore/ISI; several analyst’s positive on shares of WDAY following analyst day, saying although F1H19 metrics were in line, mgmt. is confident in 2H19 net new ACV acceleration; SPLK shares also active after hosted its annual conference; TWLO initiated buy and $99 tgt at Davidson based on Twilio’s rapid growth, market leadership position, and developer-driven model
· Hardware & Telecom movers; Intelsat (I) shares active after Cowen said a multi-billion dollar Spectrum monetization event is likely in 2019, in their opinion; DVMT confirms meeting with investment banks to explore a potential IPO of its Class C common stock/says the IPO is a contingency plan if shareholders don’t approve the Class V route