Market Review: October 15, 2018

Terrie AmengualDaily Market Report

Closing Recap

Monday, October 15, 2018

Equity Market Recap

· U.S. stocks were mixed as a late day rally stalled out, leaving major averages on the defensive in the final hour of trading. Stock gains were paced early by defensive and dividend paying stocks, while technology shares lagged as investors prepare for a busy week of earnings, with many large cap, Dow components reporting (GS, JNJ, UNH, IBM, TRV, and AXP). The early rebound took the S&P 500 index back near its 200-day Moving Average (2,766), while the rally in the Dow sent it above its 100-day MA of 25,437 (topped its 200-day last week which was 25,145). The Nasdaq Comp still failed below its 200-day MA of 7,505 (highs 7,500). European stocks eked out gains following upbeat comments by U.K. officials late in the day on reaching a Brexit solution, after German Chancellor Angela Merkel earlier cautioned that time was running out. UK Prime Minister May said do not let Irish border issue derail Brexit talks. There was one big M&A deal with a tie-up between defense companies HRS and LLL, while banks slid after results from BAC and SCHW. Note the S&P 500 index has fallen for three weeks in a row and is coming off its worst week since late March as investors worry about rising interest rates and trade tensions between the U.S. and China. Trading has settled down somewhat but remains uneven. A new concern for markets is tension between the U.S. and Saudi Arabia, after President Trump warned that Saudi Arabia will face “severe punishment” if the regime murdered Jamal Khashoggi, the Saudi journalist who disappeared last week. Markets dipped in the final hour of trading after CNN tweeted that Saudi Arabia to admit Khashoggi was killed during a “botched interrogation” (nothing confirmed at this point – just a CNN comment). Economic data was mixed as Manufacturing in the NY region topped views, but consumer’s tightened spending again in September, making for back-to-back months of unexpectedly weak retail sales.

Economic Data

· Empire Manufacturing Index for October reported at 21.1, slightly topping the 20 estimate vs. general business conditions were 19 in the last month; component breakdown: prices paid fell to 42 vs 46.3 prior, while new orders rose to 22.5 vs 16.5 MoM (highest since Sept. 2017)’ the number of employees fell to 9 vs 13.3 prior and work hours fell to 0.2 vs 11.5

· Retail Sales for Sept rose 0.1%, well below the 0.6% estimate (prior month had risen 0.1% as well), while retail sales less autos fell (-0.1%) in Sept. also well below the 0.4% est.; retail sales rose to $509.041B in Sept. vs. $508.514b in Aug.

· Business Inventories for August rose 0.5% MoM, in-line with estimates after rising 0.2% the prior month; July business inventories rose 0.7% MoM, revised from 0.6% gain


· Gold prices rise for the fourth time in the last five sessions, gaining $8.30 or 0.7% to settle at $1,230.30 an ounce, but failed to hold above Thursday’s intraday high (finished near the highest close since July) as tension between the U.S. and Saudi Arabia and concerns about an escalation in the global trade war boosted the metal’s appeal as a haven.

· Oil futures rise, as WTI crude gains 44c to settle at $71.78 per barrel (well off earlier lows $70.85). Prices were fueled by tensions over Saudi Arabia’s role in the disappearance of a Saudi journalist; concerns about underlying demand had also put a lid on prices, but got a boost late day along with the bounce in stocks (oil also coming off a weekly loss of about 4% amid signs of rising crude supplies). President Donald Trump has dispatched his secretary of state Pompeo to meet King Salman of Saudi Arabia over the disappearance of journalist Jamal Khashoggi – and note several high-profile individuals (JPM CEO Dimon, Ford CEO, BLK’s Fink) have pulled from the Saudi investment conference on news.


· The U.S. dollar was mostly lower, falling against the euro, yen and Canadian dollar while the British Pound was volatile following apparent failed negotiations over the UK departure from the European Union this weekend Sunday as the two sides failed to resolve differences…though the pound rebounded as Britain’s PM May struck a conciliatory tone in her speech to Parliament today. The Canadian dollar gained after a strong 3Q business outlook survey bolstered optimism that the economy could weather a rate hike from the Bank of Canada. The euro touched intraday highs of 1.1606 before paring gains while the buck slipped vs. the safe have yen.

Bond Market

· Treasury markets were little changed to start the week, with yields inching slightly higher as the 10-year moved above 3.15% (touched 3.14% overnight and having ranged from 3.23% to 3.06% so far this month) and the 2-yr up around 2.85%. Bonds had rallied last week in a rotation into safe-haven, more defensive assets as stock prices plunged on trade fears (among other things). Though economic data remain mostly robust, markets have exhibited concern whether stocks will be able to maintain their lofty valuations. Yields have also slipped as President Trump call for FOMC to slow pace of rate hikes has dented yields over the last few days, though the Fed appears to be on course with an additional rate hike in December and three additional in 2019 – unwavering despite Trump petition.

Sector News Breakdown


· Retailers; group weak initially following softer retail sales data; RL was upgraded to overweight at JPMorgan saying fieldwork points to North America same-store-sales inflecting positive in 2Q for the first time in 3+ years/predicts consolidated comps following suit in 3Q; LULU and AEO both upgraded to outperform from neutral at Wedbush citing positive data ahead of third quarter earnings, with the current price level as an attractive entry point; PVH at JPMorgan as we see upside to 2H18 Street EPS (both 3Q & 4Q) despite unfavorable weather QTD; SHLD officially announces bankruptcy; TPR was downgraded to hold at Lop Capital

· Consumer Staples; MNST was downgraded to in-line at Evercore/ISI as research suggests that the energy space may be at an initial point of disruption with fitness/sports energy drinks poised to take share from traditional energy drinks; NTRI downgraded to underperform at Davidson as they have lower confidence that NTRI can achieve the >30% EBITDA growth in 4Q18 that is implied by the guidance, and are lowering tgt to $28; Tobacco names outperformed with strong gains in both PM and MO

· Restaurants; CAKE was downgraded to neutral from buy at Kalinowski Equity Research based on checks that prompted a 40-basis-point decline in its third-quarter same-store sales guidance, to 1.8% growth; MCD was upgraded to outperform at Evercore/ISI citing upside comp sales potential in 2019, 2020, pullback in valuation vs last year and defensive nature; Barclay’s raises 3Q18 EPS estimates for casual diners & most fast casuals, while maintains estimates for QSRs

· Housing & Building Products; RBC Capital tempered earnings expectations and price targets across their building products sector to reflect both near-term headwinds and developing risks (they downgraded MHK to sector perform, see FBHS and CBPX as relatively well-positioned, while MHK, WHR, and OC have risk)

· Casino & Leisure movers; ABCD to be acquired by certain affiliates of private equity firm Veritas Capital, for $14.50 in cash per share; MTN was upgraded to outperform at Macquarie; Bank America downgraded MGP to neutral while upgraded VICI to buy as believes VICI has the strongest growth profile in Gaming REITS


· Energy stocks weaker with oil; OXY falls after Qatar Petroleum said it will displace the American crude explorer as operator of the Persian Gulf country’s third-largest oil field; MRO was upgraded Outperform at BMO Capital following the broader market pullback, plus an expectation for strong 2H18 execution and a differentiated 2019 outlook in terms of FCF with competitive production growth

· E&P and services; Jefferies upgraded CRZO and OAS to buy saying underlying commodity fundamentals remain supportive of shale returns and an outlook for increasing FCF generation across our coverage/despite a strong outlook for E&Ps, they continue to see valuations at extremely attractive levels, particularly for Permian players; WTI was upgraded to buy at Roth Capital and raise tgt to $10.75 citing the combination of lower debt and new higher price deck; CLR was upgraded to buy at Seaport Global and raised tgt to $75 from $64

· Power, Utilities, Coal sector; Seaport Global upgraded TECK from Neutral to Buy with $30 tgt while raise tgts for ARCH from $93 to $101, and METC from $9 to $10 saying the genesis of these changes is higher met coal price assumptions as now believe met coal prices will average $175/mt in 2019 and $150/mt in 2020; Utility prices outperform, as defensive assets rise


· Bank movers; group was among top decliners last week after mostly better to mixed results from large caps on Friday (WFC, C, JPM) and as borrowing costs pulled back from multi-year highs; this morning BAC reported better than expected earnings and SCHW posted in-line top and bottom lines; for BAC, reported Q3 trading revenue excluding DVA that was 1.6% below estimates; PNC was defended by a few analysts after falling sharply on Friday after mixed results; Deutsche Bank and Bernstein both upgraded shares to outperform/buy after sell-off; financial earnings coming this week: Tuesday MS, GS, CMA, BLK; Wednesday earnings MTB, MTG, NTRS, USB and Thursday BBT, BK, BX, KEY, TRV, AXP and Friday STI, STT, SYF; Fidelity Investments announced it had launched a new company that will offer digital-currency services to its customers

· Monthly Master Trust credit card data; SYF monthly Sept net charge-offs (NCO’s) were 4.50% vs. 4.81% MoM while delinquencies 2.88 vs. 2.74%; JPM said Sept NCO’s were 2.22% vs. 2.36% MoM and September delinquencies 1.14%, vs. 1.10% in August; ADS September net charge offs 5.9% vs. 5.8% last month and the delinquency rate 5.8% vs. 5.6% last month; DFS September charge-off rate 3.2% vs. 3.1% MoM and delinquency rate 2.3% vs. 2.2% last month


· Pharma movers; ACRX rises after an FDA panel on Friday voted to support its painkiller Dsuvia for approval/Jefferies upgraded shares to buy from hold, raised its price target to $8 from $3; ZTS was upgraded to overweight at JPMorgan noting missed big run in shares thus far but still sees enough future growth potential in the animal health sector to warrant upgrade; earnings start for the group this week with Dow component JNJ reporting tomorrow morning as well as UNH

· Biotech movers; KRYS rises after interim results in two patients of Krystal’s lead drug candidate, a topical gene therapy KB103, met a study goal; PBYI shares slide after Roche announced results from its Phase 3 “Katherine” trial, which RBC said sees as posing a risk to PBYI’s Nerlynx

· Medical equipment and devices; BTIG with a few tgt changes ahead of earnings as raises BSX from $37 to $45, MASI goes from $120 to $130, and VRAYfrom $14 to $13 saying heading into Q3, we don’t have any fundamental concerns about the backdrop

· Healthcare services and providers; TDOC was added to franchise picks at Jefferies based on traffic across the ‘Virtual Health’ pages of the CVS website and believe the new partnership is on track to deliver 200,000+ paid visits in 2019; WBA tgt raised to $74 at Mizuho post earning, primarily driven by stronger than expected free cash flow

Industrials & Materials

· Aerospace & Defense; one big M&A deal in the defense sector as HRS and LLL an all-stock merger that will create the United States’ sixth-largest defense contractor with a market value of $34B ; The Pentagon lifted a suspension on flights for most of LMT’s F-35s after the jet’s first crash prompted inspections of the fleet.

· Industrial & Machinery; PH and ROK were downgraded to underperform at Cowen as they see material risk to full year guides given likely deceleration in FY19 from high single digits currently to low single digits, creating very challenging comps through the first half of FY20

· Transports; as a whole outperforms the broader averages as airlines (AAL, JBLU, LUV) partially recover after last week’s steep sell-off (lower oil prices helping the group partially as WTI crude falls from recent 4 ½ year highs); in rails, KSU was upgraded to buy at Deutsche Bank and maintaining our target of $120, implying >15% upside from current levels

· Metals & Materials; the U.S. steel sector was downgraded to market weight from overweight at Credit Suisse and downgraded CLF, NUE and STLD to neutral due to cautious supply and demand outlook for the sector/firm sees limited potential for multiple expansion given late cycle fears/says while a near-term agreement with Canada remains unlikely, odds are in favor of a deal being sorted out by early 2019. Gold miners rise (NEM, AEM, GG) as investors sought refuge after a slide in European equities compounded jitters on global stock markets/gold best levels since late July earlier today before paring gains

Technology, Media & Telecom

· Internet; Deutsche Bank said they remain positive on FB over the medium term but see 3Q results unlikely to be a positive catalyst, particularly unless sell-side consensus estimates come down for 2019; Raymond James lowered NFLX tgt from $445 to $400 and SPOT from $220 to $200 to reflect higher discount rates in a rising interest rate environment/but remain bullish as upside drivers to revenue remain large while negative catalysts to the thesis

· Semiconductors; KLAC was downgraded to in-line at Evercore/ISI arguing it will have the “largest peak-to-trough decline of the front-end equipment supplier” (also cuts tgt along with tgts for peers LRCX and AMAT); the overall semi index bounced off earlier lows (1,237.48), bouncing along with the broader rebound in tech as semi earnings begin in the next week

· Software mover; ADBE falls amid another sell-off in sector outperformers this year/likely profit taking with CRM, ADBE, ADSK among top decliners early in the S&P (all software names); ATVI was upgraded at Barclays to overweight and raised tgt to $86 from $79 on the success of its latest release of “Call of Duty” (says every 2 million units sold represent ~$90 million revenue and 8c in incremental EPS)

· Hardware and component movers; AAPL shares slipped after Goldman Sachs said there are multiple signs of rapidly slowing consumer demand in China which we believe could easily affect Apple’s demand there this Fall; ARRS was downgraded at Raymond James based on view that it will be a victim of tariffs applied to its modem unit; Carl Icahn disclosed that he has boosted his stake in shares that track DMVT’s interest in VMW/said in a letter that he plans to vote against Dell Technologies’ plan to buy the stock

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.

Live Trading

Open an Account

Paper Trading