Wednesday, October 10, 2018
Equity Market Recap
· U.S. stock markets tumbled, posting their worst daily returns in several months amid a rise in Treasury yields, fresh concerns over the trade war with China, and key technical levels being breached all sending U.S. stocks spiraling by the most since February. The Dow Industrials broke below 26K, falling as much as -800 points and taking out its 50-day MA support of 26,002 in the process, led by continued weakness in industrial (CAT, MMM, BA) and technology stocks (MSFT). The S&P 500 index fell for a 5th straight day (longest losing streak since November 2016), taking out its 50-day (2,880) and 100-day (2,822) moving average in successive days (fell more than 3.3% to below 2,800), while tech stocks continue to bear the brunt of the stock market sell-off, with the Nasdaq Composite down more than 4% to around 7,425 (below its 200-day moving average support of 7,499). Markets also note the continuing criticism by President Trump of the FOMC, repeating yesterday that he thinks the Fed is wrong in continuing to raise rates. With today’s plunge, the CBOE Volatility index “fear index” (VIX) traded above 20, its highest levels since April. Small Caps fall again as the Russell 2000 index, after a more than 5% plunge so far this month, moved below its 50-day, 100-day and 200-day moving averages.
· Sector movers: Transports sunk for a second day, falling over -400 points (losing more than 500 points the last 2-days), led by broad weakness in airlines, rails and truckers, as the index fell below the 10,600 level after dropping below its 200-day MA support of 10,816. Defensive healthcare names, specifically generics and drug supply chain (ABC, MCK) advanced while yearlong winners such as tool makers declined. Chemical stocks have been bludgeoned with DWDP falling to 2-year lows as analysts have lowered estimates in the group and both PPG and TSE lowered guidance the last 2-days after warning of higher costs, an automotive slowdown and U.S.-China trade risk. Chipmakers were struggling again, leading the tech space lower (SOX fell to its worst levels since early May). Bad news also hit a range of sectors, with luxury brands facing a customs crackdown in China (RL, TIF, KORS fall). Utility stocks closed higher.
· European stocks dropped as the Stoxx Europe 600 fell to the lowest since March amid rising bond yields and persistent concerns over Italy’s debt sustainability. Italy’s populist leaders reiterated their commitment to a fiscally aggressive policy even as its sovereign yield spreads continue to widen. China fears remain an issue after U.S. Treasury Secretary Steven Mnuchin stopped short of accusing China of purposely depressing its currency, yesterday, but warned Beijing against engaging in a competitive devaluation of the yuan. That follows recent new revelations from Bloomberg that China used a tiny chip in a hack that reached U.S. companies including Amazon and Apple and reports yesterday that a major U.S. telco company discovered manipulated hardware from SMCI in its network and removed it in August, fresh evidence of tampering in China.
· Markets also watching Hurricane Michael and its potential impact as it strengthened to a “dangerous” Category 4 storm ahead of making landfall later today near Panama City, Florida. The fast-moving weather system has already cut oil production by 42% and natural gas output by 28% in the Gulf of Mexico (watch insurers, utilities, restaurants and retail in the area). Reports late afternoon talked about winds up to around 200 mph.
· Producer Price index (PPI) for September rose 0.2%, in-line with consensus while core PPI prices (ex food and energy) also rose an in-line 0.2%; The increase in wholesale inflation over the past year, however, slowed again to 2.6% from 2.8%. The 12-month rate hit a seven-year high of 3.4% just four months ago; final demand ex food, energy rose 2.5% y/y vs. est. up 2.5%
· Wholesale Inventories for August rose 1%, slightly above the 0.8% estimate as Aug. wholesale inventories increased to $642.7B vs. $636.3B in prior month; the total and auto inventories both largest increases since Oct. 2013; wholesale sales rose 0.8% in Aug. after rising 0.2% prior
· Oil prices pull back from recent 4 plus year highs as “riskier” assets falling across the board today; WTI crude fell $1.79 or 2.4% to settle at $73.17 per barrel, posting its lowest close since September 27th. Oil prices didn’t fall as badly as broader stocks with the upcoming storm in the Gulf and sanctions reimpose on Iran in November keeping prices steady. December gold rose $1.90, or 0.1%, to settle at $1,193.40 an ounce, bouncing off an earlier low of $1,188.50, as gold got a boost from a pullback in the dollar and a small rotation into defensive and safe haven assets as oil and stock prices plunged.
· The U.S. dollar erased overnight gains, sliding vs. most major currencies, as the defensive/safe-haven Japanese yen extended its recent gains as investors rotate out of stocks and riskier assets. The Euro held near afternoon best levels up 0.4% at 1.1535, while the Pound tops and hold the 1.32 level vs. the greenback, up about 0.5% (best levels since Aug 26th) as investors took heart from comments from EU chief negotiator Michel Barnier that a Brexit deal was “within reach.” The dollar index (DXY) fell to lows of 95.375 (off overnight highs 95.80).
· Bonds caught a small bid as U.S. equities sold off; the 10-year yield dipped below 3.21%, off 7-year highs of 3.25% yesterday, while the 2-yr and 30-yr year yield steady at 2.88% and 3.39% respectively. The U.S. Treasury sold $36B in 3-year notes at a yield of 2.989% vs. 2.987% pre-sale when issued with a bid-to-cover (demand) at 2.56 vs. 2.68 prior and indirect bidders awarded 46.9% of the auction and primary dealers awarded 43.3%. The $23B 10-year auction drew 3.225%, slightly above the when-issued yield of 3.222%, with the bid-to-cover was a little light at 2.39, roughly in-line with the trend of the past couple of years while indirects bought 64.5%.
Sector News Breakdown
· Retailers; Luxury stocks were all under pressure (TIF, KORS, RL) after LVMH confirms China is enforcing customs rules more strongly on non-declared imports, adding that Louis Vuitton sales growth to Chinese shoppers has slowed “slightly” to the mid-teens; SHLD has hired M-III Partners LLC to prepare a bankruptcy filing that could come as soon as this week, according to reports (shares of JCP, KSS, and retailers with appliance sales exposure such as BBY, HD, LOW may benefit from a bankruptcy); DSW said it’s acquiring the Camuto Group in partnership with Authentic Brands for about $375M, while Wedbush said the news adds uncertainty to DSW’s outlook
· Consumer Staples; Household products CHD, CLK, KMB downgraded to sell from hold at Deutsche Bank as structurally more cautious on this group versus the beverages and tobacco names ahead of earnings and the remainder of the year as well as into 2019; CAG 16.312M share Secondary priced at $35.25; Morgan Stanley also downgrades the European luxury goods sector to “underweight”, adding to pressure on industry stocks
· Restaurants; MCD was upgraded to buy at Guggenheim with $200 tgt as its valuation discount to large cap peers has widened to what we view as an unjustifiable level given our outlook for stable to improving SSS and greater FCF generation; PBPB upgraded to buy at Maxim as believe a potential top-line catalyst will be accelerated following our recent channel checks; SHAK initiated neutral and $65 tgt at Stifel following strong stock price performance
· Housing & Building Products; home improvement retailers LOW, HD as well as GNRC (generators) rally as storm approaches Florida; Citigroup initiated SMID home improvement retail sector with Buy ratings on FND ($44 tgt) and TTS ($9) and a Neutral rating on LL ($15) as the hard-surface flooring sector in which FND, LL and TTS operate is an attractive one due to its favorable growth profile; building products MLM, VMC and related names FBHS at 52-week lows
· Energy stocks giving back much of its recent gains, as oil prices drop sharply given the broad pullback in risky related asset classes (stocks, commodity prices); with big declines in E&P (APA, MUR, EOG), service (WFT, SLB) and drilling names (RIG, NE); PXD was downgraded to neutral at Seaport Global and trimmed its price target to $210 from $230 citing increased FY19 capex expectations; just general weakness in energy today; weekly inventory data released tonight with API and EIA tomorrow morning (each pushed out a day due to Columbus Day holiday)
· Utilities & Solar; utility space was one of the few sectors that held up well after today’s market rout; utility stocks a focus given the upcoming Hurricane set to hit parts of Florida; SO upgraded at Bank America saying management was the most confident it recent memory regarding its ability to execute on time and within budget following September’s owners vote; PEG upgraded to buy at UBS as expect PEG to benefit from market reform initiatives to introduce zero emission certificates in NJ; 52-week highs today for AES, WEC, CMS, NEE, AEE, FE
· Bank movers; markets eagerly await earnings season, which starts with the banks this week and next week with many majors reporting results; USB was upgraded to outperform at Macquarie due to stronger than peer TBV and PTPP growth, as USB is at an inflection point with processing revs and operating leverage; Bank America downgraded KKR to neutral due to a fuller valuation post c-corp conversion, though current trends remain favorable and we still see some upside; 52-week lows for financials BLK, MS, IVZ, AMG in the S&P 500
· Insurance; sector in focus given the devastating storm expected to hit the Florida panhandle (watch P&C stocks ALL, CB, and reinsurers RE, RNR); TRV said it plans to sell discounted home-security and sensor devices to its home-insurance customers on Amazon.com Inc. starting Wednesday, the first time an insurer will have a retail presence on the online retail giant; CB said Q3 prelim net catastrophe loss $372M
· Consumer finance and lending; ELLI upgraded to buy at Roth Capital as the valuation pressure in the interim has resulted in a better risk/reward bias; our view of ELLI as a good long-term growth story has remained intact; PYPL defended at William Blair saying strong fundamentals suggest that the stock’s recent selloff offers an attractive entry point for long-term investors; Payments companies and technology-oriented shares, like SQ, V, PYPL, WEX and MAwere among financial sector stocks getting hammered in ongoing selling of big winners in 2018
· Asset managers: monthly assets under management (AUM) released: AB said preliminary AUM decreased to $550 billion during September 2018 from $551 billion at the end of August; APAM said prelim AUM totaled $116.6 billion; IVZ prelim AUM was $980.9 billion, a decrease of 0.7% (from $985.1B), driven by unfavorable market returns, net long-term outflows, lower money market AUM and foreign exchange; LM September AUM includes net long-term inflows of $3.4B, driving by net inflows in fixed income of $2.1B
· Pharma movers; BAYRY halted a study of its blockbuster blood-thinning drug Xarelto after an interim look at the data found patients who received a new heart valve and took the medicine were more likely to die or suffer serious complications, said Bloomberg; ACRX falls after FDA staff says pain-killer Dsuvia will face questions on its safety in a report posted ahead of an advisory committee meeting on Friday/report says database didn’t have a sufficient number of patients dosed at the maximum amount; AKRX receives new Abbreviated New Drug Application approval from FDA for Bimatoprost Ophthalmic Solution/product is manufactured at Akorn’s Amityville, NY manufacturing facility; RARX upgraded to strong buy at Raymond James ahead of Phase 2 data for lead subcutaneous C5 inhibitor zilucoplan in generalized myasthenia gravis around YE18
· Healthcare services; CVS and AET received conditional approval for their $69B merger; CNC said it is expanding its 2019 Health Insurance Marketplace, or exchange, offering under its national brand, Ambetter; HIIQ shares fell after reports Democrats will force a vote in the Senate to try to roll back President Trump’s plans to approve sales of health insurance that falls short of Obamacare’s standards, though the resolution is “certain to fail” without the needed support of two Republicans, said the Washington Times
· Medical equipment and devices; ISRG upgraded to overweight at Piper and raised tgt to $600 from $540 saying a survey of doctors from various specialties came back favorable for robotics and confirms that robotic surgery penetration is going much higher; MYGN upgraded to overweight at Piper saying if Myriad were to capture all the incremental revenue from its GeneSight, NIPT, Vectra and Prolaris testing, it would suggest earnings power of $9 per share; NVCN said its said it Neovasc Reducer device for the treatment of refractory angina was granted a Breakthrough Device designation by the FDA
Industrials & Materials
· Industrial & Machinery; sector bludgeoned again with broad selling in industrial names (CAT, DE, MMM, UTX); HON spin-off Resideo sees FY19 adj. Ebitda margin ~13% excl. environmental indemnification payments, or 10% including the payments; FAST Q3 EPS beat but gross margins fell 100 bps YoY and 60 bps QoQ to 48.1% with fears margins may remain challenged amid inflationary pressure and new tariffs on China goods; GE another cautious mention at JPMorgan saying feedback from a General Electric H-frame user group event suggests more serious technology issues with the new flagship product
· Aerospace & Defense; TDG will purchase ESL for $122.50 per share in cash, a 38% premium to yesterday’s closing prices, in a deal valued at $4B ; BA was among the top market decliners with broad industrial related sell-off
· Transports; index pressured again as it broke below its 200-day MA support of 10,817, with index falling as much as -300 points or -2.8% (after a -200 point drop yesterday); trucker JBHT said it sees Q3 charge of 26c after received the arbitrators’ Interim Award, the details of which remain confidential, regarding the company’s arbitration with BNSF Railway Co; in airlines (after group got crushed yesterday), JBLU narrowed 3Q RASM forecast to up 1.7% Y/y, within the prior range of an increase of 1.0-3.0%, which was cut by ~0.4 points on three storms during September/preliminary September capacity up 19.3%
· Chemicals; PPG rebounds after activist hedge fund Trian Fund Management has bought 2.59M shares of paints and coatings maker PPG according to a filing late Tuesday (note PPG shares fell 10% yesterday after lower EPS guidance); SHW was downgraded to neutral at Citigroup on slowing China growth, rising raw material costs, while upgraded MOS to buy due to more favorable phosphate outlook; TSE shares fall after saying Q3 results are expected to be below previously issued guidance as results in the Latex Binders, Synthetic Rubber, Performance Plastics, and Polystyrene segments were below previously issued guidance due to several factors; Dow component DWDP shares fell to 52-week lows, along with EMN
· Paper sector; Goldman Sachs said following a sharp acceleration in announcements of new US containerboard capacity, they downgrade IP to Neutral and remove WRK from the Americas Conviction List (CL) but stay buy due to the defensiveness of its Consumer segment, potential accretion from the pending KS acquisition, and valuation (group fell to 52-week lows yesterday)
Technology, Media & Telecom
· Internet; BABA price tgt lowered by several analysts as shares trade to 15-month lows – both Deutsche Bank and KeyBanc trimmed their price targets, citing Sept quarter GMV and lower expectations on core commerce; VIPS was downgraded to neutral at JPMorgan saying they are more cautious on the group’s outlook over the next 3-6 months and street earnings estimates are too high and will need to come down; SNAP shares fell for the 10th time in the last 11-days, touching fresh record lows; road weakness in sector (AMZN, NFLX, GOOGL, FB)
· Semiconductors; the Philly semi index (SOX) fell more than 3% to below 1,260, falling to its lowest levels since April, led by losses in AMD, NVDA, MRVL, ASML, QRVO, MPWR among biggest decliners as the SOX down over 8% the last 5-days; analysts have been taking down estimates and have turned more cautious on semiconductors into this earnings season; Semi-equipment stocks AMAT, LRCX, KLAC 52-week lows
· Software movers; IMPV being taken private for $55.75 per share from Thoma Bravo in deal valued at $2.1B (security stocks move – PFPT, FEYE, SYMC) ; DBX added to focus list at JPM at JPMorgan and reaffirming our $35 price target as recap key takeaways from the investor meetings we hosted with DBX management back in September; Amazon Web Services is said to have signed 5-year deals with SYMC and SAP with an estimated combined value of about $1B
· Media & Telecom movers; DISCA upgraded to outperform at Credit Suisse and up tgt to $40 from $30 as recalibrated distribution trends leading to an increase in his U.S. revenue forecast and increased confidence in his above-Street EBITDA estimates; IDT shares advanced following earnings results