Market Review: October 5, 2018

Scott GreenDaily Market Report

Closing Recap

Friday, October 5, 2018

Equity Market Recap

· U.S. stocks dropped sharply for a second straight session, with major averages breaking or testing key technical levels today as markets continue to digest the spike in borrowing costs this week, trade issues with China, a strong economic outlook after better data this week (minor hiccup from the headline jobs report) and issues in Europe (Italy/UK). The Nasdaq Composite extended its recent decline, falling over 1% for a 2nd-straight session led by a 2% drop in semiconductors, dropping below its 50-day and 100 day moving averages in successive sessions. The benchmark S&P 500 index also dropped below the psychological 2,900 level. Meanwhile, the 10-year Treasury yield touched 7-year highs above 3.25% today, and the 30-yr 4-year highs of 3.40%, which took a heavy toll on homebuilders and related building products.

· The question is, was the last two day’s stock market decline really a rate driven rally? After all, interest rate sensitive sectors such as utilities and REITs were the two best performing sectors, while defensive telecom names also held up well (VZ touched a 52-week high). The pullback may have been more driven on trade concerns, with tensions heating up yesterday after Bloomberg reported that China used a tiny chip in a hack that reached U.S. companies including Amazon and Apple. Perhaps it was concern ahead of the upcoming earnings season (companies go into black out period for stock buybacks ahead of earnings). It could have been a factor of all, coupled with profit taking as the Dow Industrials traded at record highs just Wednesday.

· Jobs data missed: Despite the big headline miss in the monthly nonfarm payroll report (134K jobs added vs. 185K estimate and 121K private payroll jobs vs. 180K estimate), markets took the headline miss in stride initially, pointing to the much higher revisions (Nonfarm payrolls, net revisions, 87K from prior two months), as well as taking into account the potential impact from Hurricane Florence to the Sept figures. The unemployment rate fell to a 49-year low of 3.7%, while average hourly wages grew an in-line 0.3%. The data likely did nothing to dampen expectations for the Federal Reserve to continue on its path of gradual rate rises.

Economic Data

· U.S. nonfarm payrolls showed a big headline miss, creating 134K new jobs in September, missing the estimate of 184K, though was enough to push the U.S. unemployment rate down to a 49-year low of 3.7% (below est. of 3.8%). Nonfarm private payrolls rose 121K vs. prior 254K (est. 180K). However, employment gains for August and July were revised up by a combined 87,000 as the government said 270K new jobs were created in August instead of 201K, while July’s gain was raised to 165K from 147K. The average hourly wage paid to American workers rose 0.3% to $27.24 an hour, in-line with consensus views.

· The U.S. trade deficit jumped 6.4% to (-$53.2B) in August, a 6-month high and widened from (-$50.0B) in the prior month, but was mostly in-line with consensus of (-$53.6B); The U.S. trade deficit added up to almost $390B in the first eight months of 2018…compared to about $361B in the same span in 2017; imports rose 0.6% in Aug. to $262.67B from $261.14B in July, while exports fell 0.8% in Aug. to $209.43B from $211.10B in July


· Gold prices rose $4.00 or 0.3% to settle at $1,205.60 an ounce, managing to end the week higher by about 0.8% and snapped its modest 2-day losing streak following mixed jobs data. Prices had touched highs of $1,209.80 an ounce before slipping but remains well off last week lows of $1,187 an ounce – which had marked 6 week lows). December silver rose 5.9c, or 0.4%, to end at $14.649 an ounce, for a weekly loss of about 0.4%.

· Oil prices end flat on the day, with WTI crude up 1c at $74.34 per barrel, bouncing off earlier lows of $73.83 after prices for both Brent and WTI slipped from 4-year highs yesterday following a week of bearish inventory data reports. For the week, WTI crude ended roughly higher by 1.5% (4th straight weekly gain) as the energy complex remains fixed on declines in Iranian exports ahead of an approaching deadline for further U.S. sanctions on the nation in November.

Currencies & Treasuries

· The U.S. dollar finished the day mixed, as the dollar index slipped to around 95.60, but posted a weekly gain of about 0.5% (touching mid-week high of 96.12). The Pound around session highs vs. the dollar, up 0.75% at 1.3117, taking out the highs of the week, getting a boost earlier after the EU is said to be ready to offer the U.K. a free-trade deal deeper than any agreement that’s gone before. The safe-haven Japanese yen advanced vs. the greenback as stocks dropped while the euro inched higher late day to around 1.153,

· What a week for Treasury markets, as prices rolled and yield surged toward the highest levels in years. The yield on the benchmark 10-year note reached about 3.25% on Friday, the highest since 2011, before paring gains to around 3.23, while the 30-year yield traded above 3.40% (4-year highs). Even a smaller-than-forecast increase in September U.S. payrolls or sliding stocks slowed the surge in yields today. Overall, it has been a strong week of yield returns, with the 10 and 30-year yields up more than 10 bps on the week.

Sector News Breakdown


· Retailers; COST shares dropped after earnings and comp sales were reported in-line on while total revs just missed estimates/analysts noted continued investments into pricing, e-commerce and digital are the right moves for the longer term, but will pressure near-term earnings and margins; mattress retailer TPX and SNBR shares were active after Mattress Firm has filed for chapter 11 bankruptcy protection, according to its parent company, Steinhoff International

· Autos; TSLA shares pressured after CEO Elon Musk last night fired off several tweets targeting the SEC and short sellers, referring to the regulator as the “Shortseller Enrichment Commission” and sarcastically quipping that it was “doing incredible work.”; TM announced a total of about 2.43 million vehicles voluntary recall affected, 94% are the Prius and its derivatives; auto parts supplier DLPH said its CEO is stepping down, after less than a year in the role, to pursue other interests, and also cut its full-year revenue outlook citing “more challenging industry dynamics as well as other factors/now expects 2018 revenue to be flat with a year ago, compared with previous guidance of 2%-to-4% growth and lower operating margin views

· Consumer Staples; PEP was downgraded to neutral from outperform at Macquarie as 3Q earnings showed higher spending was needed to drive sales growth, which will likely continue to pressure margins; NBEV said it is planning for a large-scale roll of its cannabis-based drink product next March or April; the NY Post reported KHC passed on making takeover offer for CPB

· Restaurants; sector has swung lower this week as move by AMZN to raise the US minimum wage for employees has added fears that other retailers and restaurants may need to follow suit; Senator Sanders yesterday pressured MCD to do so; Piper positive on the group today as they upgraded BJRI to overweight and FRGI to neutral, while raise tgt on other names

· Housing & Building Products; the homebuilder ETF (XHB) extended its losing streak to 13-days amid rising rates and yields, weaker housing data, and disappointing margins, new orders and forecasts from recent homebuilder earnings (LEN this week); SunTrust lowered Q4 estimates on TILE and MHK on another round of carpet input increases which have come in late 3Q18; fresh 52-week lows for home improvement/builder space FBHS, WRK, MAS, LEN, WHR, MHK, PHM


· Energy stocks held in well despite the broader market decline as oil prices advanced on the week; the Baker Hughes weekly rig report showed the total rig count fell -2 to 1,052, while oil rigs slipped -2 to 861 and gas rigs steady at 189, and miscellaneous rigs steady at 2

· E&P sector; SLCA said the company grew 3Q sand volumes 10% q/q, also expects Northern White proppant pricing to be down q/q; HCLP was downgraded to neutral from buy at UBS citing distribution risk and industry headwinds; PD to merge with Trinidad Drilling in deal that values Trinidad at about $1.028B, offering 0.445 shares

· Utilities & Solar; utilities outperformed,, rising more than 1% for the UTY above the 680 level, topping its 50-day MA 679 – rotation into the defensive sector despite the rise in Treasury yields; AZRE 14.8M share Secondary priced at $12.50; D and SCG filed a stipulation agreement with the Public Staff of the North Carolina Utilities Commission (NCUC) and an intervenor in the proposed merger between the two companies


· Bank movers; both large cap and regional banks, along with insurance and brokers have all benefitted this week from a spike in borrowing costs, hoping what investors feel will boost future lending margins as the sector was one of the few standouts in an overall “soft” tape; attention will shortly turn to earnings, with the big banks starting off next week, with JPM, WFC and C all expected to report on Friday October 12th, which kicks off the season

· REITs: JPM made cautious comments on the REITs as they are backing off their constructive REIT call after becoming bullish back in June; negative FFO forecast revisions are a headwind for the group; prefer the residential and retail areas, and they worry about office more despite accelerating growth; REIT valuations are reasonable but the rise in yields is a concern; top picks: TCO, FRT, PLD, WELL, TIER, AMH, ESS, VER; ratings changes: BXP, KRC, SPG all upgraded to overweight from neutral and downgraded CLI, HCP, SLG, WRE to neutral from overweight


· Pharma movers; LLY upgraded to outperform at BMO Capital with $130 tgt saying facts have changed and LY’176 has the potential to significantly improve Lilly’s growth prospects after 2022; MYL downgraded to neutral and cut tgt to $37 at Mizuho as view generic Advair risk/reward as unfavorable at this point, and we do not expect Mylan to get acquired; ADMS downgraded to neutral at Bank America saying Gocovri could take more time to ramp; PGNX PET imaging agent for prostate cancer shows positive action in Phase 2/3 study

· Biotech movers; XNCR said its Phase II study of XmAb 5871 in patients with systemic lupus erythematosus didn’t meet primary statistical significance in portion of efficacy-evaluable patients who did not experience loss of improvement by day 225; KMPH 8.3M share Spot Secondary priced at $3.00

· Medical equipment and devices; CUTR guides Q3 revs to be about $40M (vs. est. $45.8M), and lowers year revs outlook to $165M-$170M from prior view of $178M-$181M; LMAT also cuts FY18 EPS view to $1.01-$1.03 from $1.04-$1.11 (est. $1.07) and cuts FY18 revenue view to $102.8M-$103.6M (est. $107.15M); TFXacquired Essential Medical, a privately held company that has developed a unique closure device that can be used in fast-growing structural heart and endovascular aneurysm repair; ATRC 2.5M share Secondary priced at $30.75

· Healthcare services and providers; MDXG, a major supplier to government-run hospitals, limited the range of products it offered to federal buyers forcing the government to purchase more costly products than it needed for treatments, WSJ reported

Industrials & Materials

· Transports; several analysts raised their price target on CP following its analyst day presentation yesterday ($255 at CSFB, $260 at Citi) while was upgraded to outperform at Wolfe; in the trucking sector, Wolfe Research lowered the croup to underweight from market weight saying truckload spot rates have inflected negative and that Wolfe’s Q4 survey results indicate shipper pricing expectations are beginning to moderate (downgraded ARCB, CVTI, LSTR, PCAR, WERN, SNDR to underperform from peer perform and upgraded WBC)

· Chemicals, Metals & Materials; MYE slides as Q3 adjusted EPS 14c-16c, below est. 21c and reports preliminary Q3 revenue $135M vs. est. $140.67M/cuts FY18 revenue view; EMN was downgraded to neutral at JPMorgan as believe that raw material trends will probably pressure year-ahead results and think consensus views for Eastman’s 2019 EBITDA and EPS growth are high; metals stocks (aluminum/steels) were down across the board

Technology, Media & Telecom

· Internet; NFLX drops a 4th straight day (fell 3.5% yesterday), slipping below its 50-day MA support 354.65 amid ongoing roll in tech (though this name underperforms); SFIX shares cut in half from Sept 18th highs of $52.44/drops below its 200-day MA support 27.01 – shares dropped more than 30% on Tuesday disappointing guidance

· Semiconductors; the Philly semi index (SOX) moved firmly below its 200-day MA support of 1,348.75 with 4% or more declines in XLNX, ADI, MXIM, MPWR, MCHP, SWKS; SGH shares advanced after reported a beat-and-raise showing good progress in the specialty business and a strong Q1 from Penguin and Brazil Mobile Memory businesses; SIMO guides Q3 revenue within lower half of guidance range of $136M-$142.9M based on its preliminary Q3

· Optical movers; IPGP guided Q3 EPS $1.68-$1.72 on revs $355M-$356M, below the company’s prior guidance range of $1.80-$2.05 and $360M-$390M due to foreign currency headwinds (shares of COHR, LASR, LITEmoved in sympathy)

· Media & Telecom movers; VZ traded to a new 52-week high earlier before paring gains; COMM downgraded to neutral at Nomura as still view as a long-term beneficiary of both mobile and fiber spending growth, but these tailwinds appear less muscular than hoped; ESTC 7M share IPO priced at $36.00; DISCA also strength in media at 52-week highs today

· Hardware & Component news; HPQ was downgraded to neutral from overweight at JPMorgan saying despite excellent execution, they see limited catalysts ahead as personal systems faces a tough y/y comp coupled with component cost shortages and possible tariff headwinds; GPRO said its Hero7 Black camera model had the best first week of retail sales in the company’s history


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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