Monday, October 8, 2018
Equity Market Recap
· U.S. stocks end mixed, led by a sharp decline tech stocks, as the Nasdaq Composite underperformed broader averages (falling a 3rd straight day – but rallied more than 100 points off the lows), though the Dow Industrial Average eked out a small gain (snapping its 2-day losing streak). The Dow Industrial Average bounced nearly 300 points off its intraday lows, turning positive mid-afternoon amid a rise in financial stocks (ahead of earnings this week for JPM, C, WFC). However, much like Friday’s action it was not the interest rate sensitive names that weighed on markets (utilities and REITS were among the top gainers on the day), while the selling pressure came in the form of energy, and technology. Given the fact markets have slid amid tech, industrials and energy, it leads to the assumption that the sell-off may not be due to the recent surge in Treasury yields (10-year 3.23%) but possibly more tied to trade with tensions heating up after Bloomberg reported last week that China used a tiny chip in a hack that reached U.S. companies including Amazon and Apple (which is expected to dampen and already difficult trade situation with China).
· Markets overall were quiet today with bond markets closed in observance of the Columbus Day Holiday, and no major economic data on the agenda as well to impact markets. European and Asian markets sunk overnight following another round of macro developments, while major US averages prepare for the start of earnings season. Oil prices dipped slightly, though gold plunged over 1.3% and the dollar rises vs. counterpart currencies. Volatility picked up with the CBOE Volatility index (VIX) touching highs of 18.38 (highest since June 28th) before paring gains. China stock markets fell, with the Shanghai Composite dropping over 3.7% (follows a week long holiday market closure), despite news that China’s central bank cut the amount of cash lenders must hold as reserves for the fourth time this year (to 14.5% from 15.5%, a move coming as the U.S. has imposed tariffs on $250B of Chinese goods), as policy makers seek to shore up the weakening domestic economy amid a worsening trade war. In Europe, attention remained on Italy, where its 10-year bond yield moved to a 4-year high and banking stocks sold off on budget concerns.
· Oil futures slipped, but gives up most of its earlier losses by the Nymex settlement, as WTI crude slips 5c to settle at $74.29 per barrel. New of oil and natural-gas operators evacuating some Gulf of Mexico platforms as Hurricane Michael approaches helped bounce prices off earlier lows ($73.07). Prices were in retreat earlier amid reports that the Trump administration was softening its hard line on Iran crude exports and might allow waivers for some buyers when sanctions against the Islamic Republic go back into effect in November. A U.S. government official said the Trump administration is considering waivers on sanctions for countries that are reducing imports of Iranian oil, Reuters reported late Friday.
· Gold prices drop by -$17.00, or 1.4% to settle at $1,188.60 an ounce, its biggest one day drop in about 2-months, and posting its third drop in the past four sessions as Treasury yields remained elevated and the dollar index firmed. With today’s pullback, prices moved back near end of September lows after a brief bounce on Friday following the weaker headline jobs data.
· The U.S. dollar strengthened, with the dollar index (DXY) briefly trading as high as 96.03, posting solid gains vs. most rival currencies after jumping last week on rising rate expectations and surging Treasury yields. The euro dropped as low as 1.146 (back near last week lows) and down from Friday levels $1.1523 as political concerns out of Italy continue to weigh on sentiment and keep it near seven-week lows. Today’s move reflected increasing concerns from the EU Commission that Italy’s budget is a source of concern prompting fears of a showdown between the two. Meanwhile, the British Pound touched lows of 1.3028 before paring losses to 1.3075. The Canadian loonie slipped as oil prices weigh on the commodity-dependent currency. The dollar sank to the lowest levels since late September, falling back below the 113 level.
Sector News Breakdown
· Retailers; consumer discretionary names drop with the broader market; MOV was upgraded to outperform at Cowen premised on expectations of positive inflection in the U.S. Wholesale channel plus a valuation pullback as P/E has contracted; IRBT was downgraded to neutral at Piper as has become incrementally more concerned with the stock’s valuation following the year-to-date outperformance
· Consumer Staples/Restaurants; KMB was downgraded to neutral at Goldman Sachs as upside to our modestly revised price target is no longer meaningful enough to warrant a constructive rating and we see no basis to justify an increase in our price target; CAG was upgraded to buy from neutral at UBS and raise tgt to $40 from $38 rating change takes advantage of the stock’s underperformance, recognizing market concerns of CAG/Pinnacle’s sales slowdown and equity size offering are overstated; DNKN positive at Baird as raise tgt to $82 as see opportunity for Q3 Dunkin’ U.S. comps to exceed estimates, and we believe this outcome would help to strengthen investor confidence
· Housing & Building Products; JELD shares fell after Baird downgraded to neutral and tgt cut to $23 (RBC cut tgt to $28) following a ruling late Friday that may result in a divestiture of the company’s Towanda, PA facility; BECN downgraded to market perform from outperform by William Blair saying not confident in near-term outperformance given another soft roofing survey/William Blair’s roofing survey was up 1% vs up 3% last quarter; September was much softer than anticipated; homebuilder index comes into the day riding a 13th-day losing streak, longest ever amid rising rates and weaker outlooks from builders (LEN last week); TMHC downgraded to market perform at JMP Securities citing hesitancy in regard to the AV Homes acquisition and more reserved absorption and margin outlook.
· Energy stocks; PBR was upgraded at both JPM and Bank America after conservative congressman Jair Bolsonaro’s strong showing in Sunday’s presidential election/says there’s a lower perceived policy risk than had been priced into Petrobras’ stock; BP said it is evacuating personnel and has shut in production at four operated platforms as Hurricane Michael approaches; Irving Oil Corp.’s refinery in New Brunswick, a major supplier of fuel to the northeastern U.S., was hit by an explosion and fire early today
· E&P and Drilling sector; drillers ESV agreed to buy RDC in a deal the companies say will help them win business as the offshore oil market starts to grow again/RDC shareholders will receive 2.215 Ensco shares for each of their Rowan shares (ESV holders will own 60.5% of the combined company, with Rowan shareholders owning the remaining) https://on.wsj.com/2y70In0
· Utilities & Solar; GEVO, GPRE, PEIX shares were active after Reuters reported over the weekend that U.S. President Donald Trump is expected to announce the lifting of a federal ban on summer sales of higher-ethanol blends of gasoline on Tuesday in Washington DC ahead of a trip to Iowa the same day. The lifting of the summer ban on so-called E15 gasoline is expected to be coupled with restrictions on trading biofuel credits that underpin the program
· Bank movers; banks slide with broader markets as attention turns to the large cap banks this week ahead of earnings from WFC, C and JPM Friday morning; FinTech/Payment stocks pulling back today, with V top decliner in the Dow off over 3%, MA to the lows down over 4%; PYPL fell more than 5% (down for the 8th time in last 9 sessions), while SQ falls as much as 10% for a 4th straight day (had been one of the strong segments in financial space heading into the month)
· Insurance; WLTW was upgraded to outperform at Credit Suisse as firm said they are “puzzled” by WLTW’s stock weakness post what was admittedly a confusing 2Q’18 EPS report, because peers, some of whom also had messy 2Q prints, have re-rated upwards
· Consumer finance and lending; SQ tgt raised to $108 from $77 at Goldman Sachs on higher estimates and an increased multiple; ONDK was upgraded to neutral from sell at BTIG saying its shares are now more reasonably valued after mid-August sell-off; Bloomberg reported GS is looking to restrain the rapid expansion of its online lending platform Marcum as the firm grows more cautious on the consumer debt market that’s a key area of growth
· Pharma movers; AKCA/IONS announced FDA approval of antisense oligonucleotide (ASO) RNA therapeutic TEGSEDI (inotersen) for patients with polyneuropathy associated with hereditary transthyretin-mediated (hATTR) amyloidosis late Friday; NVO was downgraded to neutral at Bank America; EXEL initiates a 300-subject Phase 3 clinical trial, COSMIC-311, evaluating single-agent CABOMETYX (cabozantinib) in patients with radioiodine-refractory differentiated thyroid cancer; LCI said that it has engaged and/or expanded the role of existing advisors to assist in evaluating a range of alternatives regarding the company’s debt and capital structure
· Biotech movers; MNLO falls as a Phase 2 clinical trial, TUSSIX, evaluating Menlo Therapeutics’ Serlopitant in patients with refractory chronic cough failed to beat placebo; INO successfully develops first dMAb checkpoint inhibitor and demonstrates tumor shrinkage in preclinical studies; FOLDreported updated data from the ASPIRO Phase 1/2 clinical trial of AT132 for the treatment of XLMTM, with Mizuho saying data met best-case scenario expectations with cohort 1 patients showing continued improvements out to week 48 and the initial cohort 2 patient showing rapid initial improvement at week 4
· Medical equipment and devices; LMAT was upgraded to buy at Roth Capital noting lower guidance last week which sent shares lower, but says expect winds to reverse by mid-19 (note LMAT shares dropped -20% on Friday after guidance); WAT was downgraded to market perform at Leerink, sending shares lower; medical devices (IHI) fell nearly 2% as the Nasdaq Composite has sold off over 5% since last week. The iShares US Medical Devices ETF has sold off the same amount since touching $228.90 on October 1 (NVRO, ISRG, ZBH, WMGI, TNDM)
Industrials & Materials
· Industrial & Machinery; GE rises for a 6th straight session after being upgraded to overweight at Barclay’s with $16 tgt as think further reductions to estimates may soon draw to a close as restructuring savings are realized; separately, funds managed by Apollo Global have agreed to acquire a portfolio of equity investments worth about $1 billion from GE Capital’s energy financial services unit https://on.mktw.net/2E7WNvD ; ARNC rises early after Reuters reported earlier Blackstone, Carlyle, Onex Corp and Canada Pension Plan Investment Board have joined forces in a bid to acquire it https://reut.rs/2E6mY5Y
· Metals & Materials; aluminum prices sink after Norsk Hydro (NHYDY) said on Saturday it’s ready to restart the world’s biggest alumina refinery at 50% capacity/decision comes just days after Norsk Hydro said it would stop production and lay off 4,700 people at Alunorte, which has been operating at half capacity since March (shares of AA declined in reaction to the news); SCCO was upgraded to neutral at Citigroup
· Chemicals; Susquehanna said see current fertilizer price momentum continuing into 2019 as global NPK supply-demand balances tighten/expect NTR and MOS to raise the bottom end of their 2018 guidance on a stronger Q4 outlook for nitrogen and potash prices; AXTAnamed Robert Bryant interim CEO as Terrence Hahn resigned by mutual agreement with the board following an investigation by outside counsel into conduct by Hahn unrelated to financial matters; PPG said it is increasing prices on all automotive original equipment manufacturers products by an average of 10% as it works to combat rising inflationary pressures; SON to increase prices for rigid plastic packaging by 6% to 10%
Technology, Media & Telecom
· Internet; NFLX slipped early after Buckingham reiterated underperform and $305 tgt saying it could be especially vulnerable to recent interest rate increases despite mild funding cost effects, given its long-date free cash flow duration and anticipated near $7B in negative free cash flow through 2021; SNAP falls over 4%, down for the 7th time in 8 sessions as continues to make all-time lows; broad weakness in tech ahead of earnings (AMZN, NFLX, FB, BABA); GOOGL extended losses after the WSJ reported Google exposed the private data of hundreds of thousands of users of the Google+ social network and then opted not to disclose the issue this past spring
· Semiconductors; Philly semi index (SOX) dropped below the 1,300 level (first time since July) amid the broad sell-off in the tech sector (but rebounded), with all 30-components in the SOX falling at midday, as group continues to be under pressure on trade fears, cautious comments from analysts heading into earnings season starting next week
· Software mover; broad selling pressure in big YTD winners as tech falls (CRM, SPLK, ULTI, ADBE among top decliners); in security sector, Morgan Stanley said recent channel checks and VAR survey paint a healthy fundamental picture for the firewall market in 2H/CY19/raise PANWand FTNT price targets, given increased confidence in the growth profiles, but prefer PANW
· Media & Telecom movers; CCOI was downgraded to neutral at BTIG citing valuation and recent management comments suggesting a lower dividend growth rate; VOD was downgraded to hold at Jefferies saying nearly 5Y after exiting the US, dividend cover still hinges on FCF growth