Thursday, October 11, 2018
Equity Market Recap
· Big time swings in equity markets late day as averages end lower (but well off their worst levels)! U.S. stocks tried an early attempt at paring some of yesterday’s steep losses…but it didn’t go well…as major averages collapsed late day, breaking through key technical support levels for a second straight day and adding to already weak October totals. Markets saw rotation into safe haven assets, with gold prices jumping nearly 3% to its best level in over 2-months, while Treasury prices gained, as the yield on the benchmark 10-year falls 12 bps from its weekly high of 3.25%. Note month to date, the NASDAQ has fallen shy of 9%, the S&P 500 -6% and the Dow about 5% after touching record highs late September. The S&P 500, DJIA, NASDAQ, and Russell 2000 all closed below their 50-DMA for the first time since June 2016. Bespoke noted that there was -1793 tick, the biggest since the May 2010 flash crash. Volatility has also spiked in recent sessions, with the CBOE Volatility Index (VIX) moving to highs of around 29 with weekly lows of 15.27 on Tuesday. There were no new specific developments to cause the market plunge for a second straight session, other than stocks and major averages were falling below key levels (61 S&P 500 stocks trading at 52-week lows – the highest single day total since February 2016). Selling was once again broad based, with defensive sectors (such as Healthcare, Utilities, Staples), which had held up well prior to today, also succumbed to late day selling pressure.
· Stocks had inched modestly higher earlier (small gains at one point for all major averages) after a cooler-than-expected report on inflation (CPI data) led to hopes the Fed may “tap the brakes” on rate hikes. Following President Trump’s “attack” on the Fed for a second consecutive day, calling the central bank’s recent rate increases “a mistake” and that “they’re making a mistake and being too aggressive”, the somewhat tamer inflation report was good news for markets. Reports that President Trump and Chinese leader Xi to meet at G-20 meeting in November, also helped markets initially…but that too failed to boost markets. With macro factors driving markets the last few weeks, attention will now turn to fundamentals as earnings kick into high gear next week (banks report tomorrow and more next week with). Oil dropped, the dollar slumped.
· Weekly Jobless Claims rose 7K to 214K, above the 207K estimate (prior week unrevised at 207K); the 4-week moving average rose 2,500 to 209.5K in the latest week; continuing claims rose 4K to 1.660M in the week ending Sept. 29
· Consumer price index rose 0.1%, missing the 0.2% estimate, while core CPI prices rose 0.1% as well, also missing the 0.2% estimate; YoY, Consumer prices rose 2.3% and core 2.2%, both coming in 0.1% below the economist forecasts (two months ago, the yearly rate hit a six-year high of 2.9% – so with prices coming down, inflation fears easing for the time being)
· Precious metals jump, with December gold surging $34.20, or 2.9%, to settle at $1,227.60 an ounce, its highest settlement since August 1st amid demand for safe haven investments/weaker dollar/softer inflation reading. Silver prices posted gains of around 2% on the day on dollar weakness and macro concerns and President Trump calling for the Fed to stop the rate hikes. Today marked the biggest one day gain in about 19-months for gold.
· Energy futures slide again, posting its biggest two-day drop since July as fears over a worsening trade war rattled global markets. WTI crude fell -$2.20 or 3% to settle at $70.97 per barrel while Brent dropped -$2.83 or 3.4% to settle at $80.26. The declines came amid mass selling in “riskier” assets as investors rotate into defensive, and after U.S. supplies rise a third week and global stock markets drop. The EIA said weekly crude stockpiles rose 5,987M barrels, above the 2.8M barrel build estimate, while Cushing crude +2,359M. Earlier today, OPEC again cuts its forecast of global oil demand growth for 2018 and 2019, citing headwinds facing the broader economy. In its monthly oil market report, OPEC says world oil demand this year will rise by slightly more than 1.54M bbl/day, 80K less than last month’s estimate, while 2019 oil demand is expected to rise by 1.36M bbl/day, 50K less than last month.
· The U.S. dollar slumped on Thursday, with the dollar slipping to afternoon lows under 112 vs. the Japanese yen as investors flee to safe haven assets (bonds and gold also rose on the day) – had traded to lows of 111.83 earlier (lowest level since Sept. 18). The Turkish Lira jumped midday on an NBC report that the White House has reached a deal with Turkey to release Pastor Andrew Brunson in days. The euro approached the $1.16 level late afternoon (after hitting 3-week lows Monday) while the British Pound edged to afternoon highs of 1.3232. The buck is suffering from political uncertainty as the public battle between President Donald Trump and the Fed plays out.
· Treasury prices gained as yields pullback from multi-year highs reached earlier this week. The 10-yr yield dropped to lows around 3.13%, the 2-yr to 2.85% and the 30-yr 3.32% (off recent highs of 3.25%, 2.89% and 3.4% respectively) as investors rotate into safe havens. The U.S. Treasury sold $15B in 30-year notes at a yield of 3.344% vs. 3.353% pre-sale when issued with a bid-to-cover at 2.42 vs. 2.34 prior and indirect bidders awarded 64.4% and primary dealers getting 22.8%.
Sector News Breakdown
· Retailers; LB reports total sales growth of 8% to $1.06B in September as comp sales grew 5% during the month, comprising of 13% rise in Bath & Body Works and +1% for the Victoria’s Secret business; CATO Sept. comp sales fell (-1%), missing estimates of +2.0% saying had a slight negative effect from the net result of 2018’s Hurricane Florence offset by last year’s Hurricane Irma; COST Sept total comp sales rose 8.4% vs. Bloomberg est. 5.1% and Sept US comp sales ex-gas and FX 7.7% vs. est. 4.3%; ZUMZ Sept. comp sales up 1.2% vs. estimate of 2% increase
· Auto’s; DLPH was downgraded to neutral at Goldman Sachs following last week’s negative pre-announcement and CEO departure; LEA was upgraded to buy at Goldman as believe there is upside potential to growth and margin expansion long-term given its E-Systems product portfolio; RACE downgraded to hold at Jefferies saying higher upfront investment and lower quality of earnings lead them to re-base expectations of returns
· Consumer Staples and Restaurants; MCD mentioned cautiously by Cleveland Research saying traffic pressure likely lingered in 3Q and the 6-12 month outlook sounds more cautious; defensive sectors such as Staples pullback after recent outperformance; tobacco stocks dropped (MO, PM) after prices have rebounded over the last month; PYX positive mentioned by Citron Research helped push shares higher early afternoon
· Housing & Building Products; lumber futures fell by $15 exchange limit today, dropping to 20-month lows; the S&P Homebuilders ETF (XHB) rebounds off 20-month lows as homebuilders have plunged on weaker outlooks, rising rate expectations and higher Treasury yields; RH announces share buyback of up to $700M
· Energy stocks were mostly lower following another decline in oil prices and stocks in general; MUR one of the positive stand outs after agreeing to pay PBRas much as $1.05 billion to gain control of U.S. Gulf of Mexico oil fields; bearish inventory data also weighed
· Inventory data for the week was bearish: The EIA said weekly crude stockpiles rose 5,987M barrels, above the 2.8M barrel build estimate, while Cushing crude +2,359M and also a build in weekly gasoline prices. Overnight, the API reported that U.S. crude supplies rose 9.7M barrels for the week ended Oct. 5, showed supplies of gasoline climbed by 3.4M barrels
· E&P and oil services; Frac sand names CVIA and SLCA both downgraded to underweight at Morgan Stanley as they are most concerned about the frac sand market, which continues to deteriorate faster than expected; separately on oil servicers, says the bank is constructive on a 12-18 month view, though agrees with many investors’ concerns that near-term estimates still too high; thinks CJ, FRAC, and HAL have lower risk as management teams have been proactive in communicating these risks and setting expectations; more cautious on stocks such as CLB, FTSI, LBRT and RES where estimates have moved less
· Utilities & Solar; GPRE agreed to sell three of its ethanol plants to Valero Renewable Fuels for $300 million in cash and an additional $28 million of working capital; defensive utilities, which have outperformed over the last few weeks to new 2018 highs, pulled back today in a bout of profit taking, after several names touched 52-week highs yesterday (WEC, CMS, NEE, AEE, FE)
· MLPs; MLPs and midstream stocks initiated at Credit Suisse, as the bank’s constructive view is based on domestic oil and gas production activity expected to remain strong, and midstream stocks appear undervalued on several metrics: top picks: DCP, LNG, KMI, and MPLX; least preferred: BPMP and ENLK.Outperforms: TELL, NGL, ETE, LNG, DCP, SMLP, OMP, HESM, MPLX, WMB, PAGP, PSXP, EPD, KMI, TGE, PAA, NBLX…Underperforms: ANDX, CQP, DKL, BPMP, ENLK
· Bank movers; earnings season is upon us, with CBSH reporting better results this morning, while JPM, C and WFC expected to report tomorrow morning; 52-week lows today for a few financial names including Dow component GS, as well as STT, BEN, MS, HIG, BLK, IVZ, AMG, WU, WLTW
· Consumer finance and lending; PYPL announces pact with WMT to roll out PayPal cash in and cash out money services at Walmart for an exclusive fee of $3 per service, the first time PayPal app users will be able to take cash out in a brick-and-mortar environment; SQ said CFO Sarah Friar will be stepping down to assume a CEO role at Nextdoor
· Pharma movers; after leading markets higher, MRK, LLY, PFE all pulling back from 52-week highs in a bout of profit taking; CGEN rises after BMY investment in the company as part of a clinical trial collaboration to evaluate the safety & tolerability of Compugen’s COM701 in combination with BMS’ Opdivo in patients with advanced solid tumors; MMNFF announced a binding letter of intent to buy medical cannabis provider PharmaCann LLC in a stock deal valued at $682M
· Biotech movers; gene editing stocks outperform, led by shares of CRSP after the FDA lifted a clinical hold on CTX001 for a pending study with partner VRTXinto an experimental gene editing treatment for sickle cell disease (shares of EDIT and NTLA also in gene editing space); ALLO 18M share IPO priced at $18.00; BOLD 5.2M share Secondary priced at $29.00
· Healthcare services and providers; CVS shares fell after announcing late Wednesday that Aetna CFO Shawn Guertin, who CVS previously said would become financial chief of the combined company, planned his departure; WBA Q4 EPS beat on in-line sales and upbeat guidance helped by RAD deal/though posted lower margins; HLF was resumed with a buy and $65 target at Jefferies saying sales looked poised to accelerate to a more normalized range of 5%-9%
Industrials & Materials
· Industrial & Machinery; in E&C space, FLR shares fall after guiding preliminary Q3 revenue $4.6B, below the Street consensus $4.95B (shares of other E&C related names– JEC, KBR, ACM); UBS cautious on GE saying they think new CEO Larry Culp will work towards closing the balance sheet gap through some combination of a steeper dividend cut (>90%) and possibly a 1-time equity raise to add some cushion for future investment, but the road doesn’t look easy
· Aerospace & Defense sector; HII downgraded to sell at Goldman Sachs and cut tgt to $208 saying it is now the most expensive stock in his Defense coverage on economic, price-to-earnings and free cash flow yield; LMT shares active after the Pentagon temporarily halts F-35 flight operations after crash/for a fleet-wide inspection of a fuel tube within the engine on all aircraft
· Transports; After getting decimated the last 2-days, airlines rebounding after DAL earnings; DAL with mixed Q3 results as EPS beat by 6c though revs of $11.85B misses views slightly/guides year revenue growth at the high end of its prior 7%-8% view results (AAL, JBLU, UAL rebound)
· Metals & Materials; gold miners among the top performers given the big surge in gold prices on the day, lifting AEM, GG, NEM among others; LTHM 20M share IPO priced at $17.00; DWDP shares try to rebound off 2-year lows as chemical space has been hammered in recent weeks after recent profit warnings from PPG and TSE; Corn prices climbed to their highest settlement since late August after the U.S.D.A forecast a significant drop in global supplies of corn. The USDA confirmed that “global corn supplies will fall almost 20% from last year while global corn was expected to decline by 19.6% to ending stocks of 159.35 metric tons for the 2018/2019 crop year.
Technology, Media & Telecom
· Internet; group slammed yesterday in market rout but trying to rebound today; SNAP tgt cut to $11 from $17 at Goldman Sachs though rates buy and cuts user growth forecasts to reflect recent traffic data, but says still believes “a Twitter-like turnaround is possible,” particularly with a new Android app; GDDYupgraded to buy at Citigroup with $86 tgt as believes GoDaddy has reached valuation levels that warrant a Buy rating; SFIX tgt cut to $23 from $31 at Piper after factoring in the firm’s Fall 2018 Women’s Survey; firm found a substantial churn rate of 60% to 70% for the Stitch Fix platform and low usage frequency per year; AMZN shares dipped below $1,700 level
· Semiconductors; Dialog Semi (DLGNF) shares jumped overnight after AAPL signed a deal with the company to license the U.K. chip designer’s power management technology and acquire certain assets, including more than 300 staff; Philly semi index (SOX) bounces back above the 1,250 level, recovering after its worst levels since April, led by gains in ON, AMD, MCHP, MXIM, though equipment names remain depressed with AMAT top decliner; seven semi names made 52-week lows earlier today AMAT, KLAC, ENTG, MRVL, CY, ON, SLAB
· Hardware & Component news; HEAR pre-announces Q3 results: Revenues of $73M-$74M vs. $65M guidance, EPS 74c-78c vs. 44c guidance, adjusted EBITDA $17M vs $11M guidance; CLS shares jumped as analysts cheered the news that it was acquiring Impakt Holdings for $329M
· PC Market; Lenovo Group Ltd. took the top spot in both IDC’s and Gartner’s reports on personal-computer shipments for the September quarter. Lenovo reclaimed the top spot from HP Inc. (HPQ) according to IDC’s numbers, amassing 24% of the market compared with 22.8% for HP. Dell Inc., Acer, and Apple Inc. (AAPL) rounded out the top five