Tuesday, October 16, 2018
Equity Market Recap
· U.S. stocks surge on Tuesday, with all 11-S&P related sectors moving higher as the recent underperforming Nasdaq Composite outperformed, led by semi’s and software as well as a more than 4% jump in the biotech sector. The NASDAQ rose as much as 225 points (up 3%), topping the 7,650 level and handily moving above its 200-day MA resistance of 7,504 that it had difficulty doing the last few sessions. The Dow Industrials jumped more than 500 points, while the S&P index traded back above 2,800, rising more than 2% (best gain since March). Stocks initially opened strong following a rise in Europe while better earnings results this morning from bank/brokers (MS, GS) and healthcare giants (JNJ, UNH) helped extend the gains. Some influential earnings tonight from NFLX, IBM, LRCX in tech and CSX and UAL in transports. Macro problems have not gone away with EU/UK Brexit issues, China trade dispute, EU/Italy debt problems, rising borrowing costs and the new found problems with Saudi Arabia…but after the aggressive selling conditions last week in stocks, markets hoping earnings can right the ship. Economic data was also favorable today with a better jobs, housing and production reports. Volatility has returned with the start of earnings season: after not seeing a 1% closing move since June 25th, the S&P 500 has registered more than 1% moves four of the last 5 days!
· European equities ended the day higher, getting a lift on hopes for an orderly Brexit deal ahead of a meeting of EU ministers on Wednesday, as Europe’s Stoxx 600 rose 1.6%, the most since early April, to close just off the intraday high of 365.06, after all sectors advanced.
· Here are some interesting numbers about the S&P 500, according to data provided by FactSet. Among the S&P 500, 250 stocks were down 20% or more from their all-time closing highs (adjusted for splits and spin-offs) as of the close on Oct. 15…162 were down at least 30% from their all-time highs…113 were down at least 40% from their all-time highs…and 69 were down at least 50% from their all-time highs (heading into today’s trading)
· Industrial Production for Sept rose 0.3% vs. est. 0.2% and after rising 0.4% in August (which was unchanged); Capacity utilization unchanged in Sept. at 78.1%; prior month unrevised; factory production rose 0.2% in Sept. after rising 0.3% in Aug.
· Home Builders’ Confidence in October rises to 68 vs. est. 66 and compares to 67 last month, according to NAHB/Wells Fargo; the present single family sales rise to 74 vs 73 last month, future single family sales rise to 75 vs 74 last month and prospective buyers traffic rises to 53 vs 49
· U.S. job openings (JOLTs) rose 59K to 7.136M in August, up from 7.077M in prior month; the Aug job opening rate (job openings as a % of total employment plus openings) 4.6% vs 4.5% prior month; Aug. pace of hiring3.9% vs 3.8% prior month
· Crude oil prices end modestly higher, rising 14c to settle at $71.92 per barrel (highs $72.27 lows $71.02), bouncing off earlier lows ahead of weekly inventory data tonight (API) and tomorrow (DOE). Prices have been volatile over the last week, on expectations for rising U.S. inventories and tensions between the U.S. and Saudi Arabia over the disappearance of a Saudi journalist that could result in the kingdom curtailing supplies. Markets also prepare for the reimposing of sanctions to Iran starting in November.
· December gold ends higher by a modest 70c to settle at $1,231 an ounce, while silver prices slip to snap their 3-day win streak, as the stock market spike pared recent gains in defensive/safe haven related plays. Gold futures managed to hang on to small gains, though ended near the lows amid an upbeat tone with volatile stock markets rising. Prices had pulled back from a high of $1,235.90, but the settlement was still the highest since July 31. Gold is up 2.6% so far for October, trimming its year-to-date drop to close to 7%.
· Currency markets fairly quiet, trading in a tight range; as stocks markets continued to push higher, currency markets remained little changed, as the euro held around 1.585 (flat on the day), while the Pound sips back below the 1.32 level vs. the buck (still up on the day), though the greenback rises vs. the yen to 112.15 (off overnight lows 111.73); the dollar index (DXY) also little changed holding around the 95 level. Another positive round of economic data this morning in the U.S. along with a hawkish outlook/rising rate env’t from the Fed, keeps dollar steady.
· Treasury markets pared recent gains early on as yields moved higher across the board as the 10-year traded above 3.17% 2-year 2.865% and 30-year 3.35% as stocks jump in both the U.S. and Europe. However, even as stocks extended their gains into the afternoon, bonds modestly reversed high as yields ended off their best levels.
Sector News Breakdown
· Retailers; WMT rallies after 2018 Investment Community Meeting; earlier cut its FY19 adjusted EPS view to $4.65-$4.80 from $4.90-$5.05 (est. $4.79) while reiterates its FY19 total sales growth expectations and updates FY19 GAAP and adjusted EPS to include the expected 25 cents per share Flipkart dilution/eCommerce net sales growth is expected to be around 35% for FY20
· Consumer Staples; IFF upgraded to buy at Deutsche Bank and raise tgt to $154 saying the company’s recent acquisition of Frutarom strategically is sound; ELF shares underperformed in the cosmetics space as JPM said sell-through continues to decline
· Restaurants; DPZ posted a 20c Q3 EPS beat but revs of $786M missed estimates and Q3 total system-wide domestic store comp. sales up 6.3% vs. est. up 6.5% with weaker domestic company-owned comp. sales of up 4.9% (also said sees pressure from food, labor and insurance costs; NDLS upgraded to buy at SunTrust and raise tgt to $15 as believe that sales of ‘zoodles’ (launched in early May) remain strong and firm raises comp sales est. to +6.5%, from +5.3%; CBRL was upgraded to outperform and $175 tgt at Telsey Advisory
· Housing & Building Products; industry remains pressured with a profit warning last night, as JELD guided Q3 revs and EBITDA below views and cuts FY18 revenue growth view to 15%-17% from 16%-18% and cuts FY18 adjusted EBITDA view to $455M-$470M from $500M-$520M
· Auto sector; The auto parts sector is having a solid day in general after a settlement by Audi in Germany with regulators in the diesel emissions cheating case removes a bit of an overhang from the sector – VNE, AXL, DAN, MTOR, ALV edging higher; RACE was added to Bank America US 1 list as continue to believe that Ferrari is an iconic asset, with strong growth prospects, making it attractively priced stock after recent sell-off; Lyft Inc. recently selected underwriters for an initial public offering that is expected in the first half of 2019, WSJ reported
· E&P sector; DVN estimates 3Q U.S. net production will be about 418,000 Boe per day, which exceeds guidance range, adjusted for the non-core asset sales, of 398,000 to 417,000 Boe per day; RRC sold a proportionately reduced 1.0% overriding royalty in its Washington County, PA leases for gross proceeds of $300 million
· Refiners and Downstream; Jefferies with preview of sector as they believe will beat 3Q are EPD, where our EBITDA estimate is ~8% ahead of consensus, HFC, where we are 9% ahead on EPS and PSX where we are 8% ahead on EPS – firm upgraded OKE to buy after ~8% since mid-July despite a strong 2Q report; upped HFC to hold as expect strong 3Q and upgraded PSX to hold noting the company is the largest importer of Canadian crudes, capitalizing on the wide WCS differentials, and is well positioned with IMO 2020
· Bank movers; GS Q3 EPS and revenue top consensus handily as Q3 investment banking revenue $1.98B topped Bloomberg est. $1.75B, though Q3 FICC sales & trading revenue of $1.31B was below some estimates; MS shares bounce off 52-week lows after earnings results as Q3 EPS beat by 16c and revs of $9.87B topped views as 3Q FICC sales & trading revenue $1.18B and equities sales & trading revenue $2.02B (both above estimates); other bank earnings from regionals CMA and FHN today as well (FULT, HOPE, LTXB, UBNK report tonight)
· Asset managers; BLK shares fall as more investors pulled out money from the asset manager’s institutional index funds in Q3 with the company’s iShares ETFs $33.67B in new money, down from $52.31B a year ago, while investors pulled out $24.76B from its portfolio-managed index funds/total long-term net flows were down $3.1B
· Pharma movers; Dow component JNJ Q3 EPS and sales narrowly top consensus while boosted its full-year earnings and sales outlook though said pricing pressure impacted all Ortho divisions; SPRO was downgraded to underperform and tgt cut to $9 at Bank America following a review of SPRO’s key pipeline assets; KALA submits a U.S. NDA for KPI-121, a topical product which could be the first FDA-approved product for temporary relief of dry eye disease symptoms; AMRN tgt raised to $25 at Citigroup saying the company’s heart drug Vascepa will be easy for primary care doctors to prescribe with potential sales of $3b by 2025; ACRS agreed to acquire global rights to AGN’s RHOFADE (oxymetazoline hydrochloride) cream 1% for $65M; AMRX falls as SunTrust downgraded to hold citing earlier-than-anticipated competition on top drugs
· Managed care/services; names rise after UNH posted quarterly beat and raise quarter with positive outlook for 2019 saying that “the current market consensus estimate for adjusted earnings per share captures our 2019 outlook, within a typically sized range.”(AET, WCG, HUM, ANTM active); healthcare supply chain ABC, MCK, CAH rallied in the afternoon after Bloomberg reported WBA CEO saying he doesn’t rule out a deal with the drug distributor.
· Biotech movers; biotech (IBB) jumps more than 2.5% and moving back above the 200-day MA 112.04 led by gains in REGN, after Dupixent phase III trials met both the primary and secondary endpoints in adults with chronic rhinosinusitis with nasal polyps; ENZ falls as results came in below expectations on both the top and bottom line; BMRN outperforms as earned $15M in milestone payments from PFE, triggered by the U.S. FDA approval of Talzenna/Jefferies also had Franchise Note today looking at the multiple clinical catalysts ahead for BMRN in ’19 and ’20
· Cannabis related stocks (TLRY, CRON, GWPH, CGC) shares volatile as Canada’s legalization of recreational marijuana use goes into effect Wednesday – stocks have surged into it
· Medical equipment and devices; CRY guided Q3 revs about $64M vs. est $61.8M, reflecting growth of ~47% over Q3 GAAP results LY and ~17% growth on a non-GAAP basis; MedTech in general strong (BSX, ABMD) after positive initiation at Barclay’s saying that innovation trends in the space have continued to improve, due in part to a more favorable FDA environment
Industrials & Materials
· Industrial & Machinery; GWW shares slide after Q3 sales missed views and reported EPS slumped 35% which included $139M of non-cash impairment charges related to the Cromwell business in the U.K., reflecting a slower growth outlook and structural issues (shares of FAST, MSM fell)
· Transports; Dow Transports outperform as airlines play catch-up after recent decline (AAL, ALK, DAL); CAR cautious mention at Goldman Sachs as expect CAR to post an EBITDA miss in 3Q18 as we anticipate softer revenues, given their expectations for sequentially similar pricing but softer volume growth in the Americas; in trucking, JBHT reported mixed quarterly results as EPS and revs missed while volume slowed but pricing was strong; in rail sector, CSX to report earnings tonight after the close while UAL reports in airline sector
· Chemicals; IPHS shares dropped as guided 2018 revs up 10%-12%, below prior view of 12%-14% and lowers 2018 Ebitda to up 3%-7% from prior 15%-17%; not the chemical space has been hit hard over recent weeks as analysts have lowered views and on lower profit warnings (recently PPG and TSE reduced guidance)
· Metals & Materials; industrial metals were lower today on impact of trade conflicts on economy; gold holds its gain amid geopolitical tensions, particularly between the U.S. and Saudi Arabia, and recent weakness in the dollar (gold miners NEM, GG, ABX have risen lately); Goldman was positive on base metals and gold going into next year; RIO reported 3Q output results that saw weakness in the iron ore unit, partially offset by stronger volumes in both copper and aluminum
Technology, Media & Telecom
· Semiconductors; semi space kicks off earnings tonight in the equipment space with LRCX results expected out (note many equipment names around 52-week lows – AMAT, KLAC, TER); Leading Taiwanese memory chip maker Nanya Technology trimmed its full-year capital spending and warned that the intensifying trade war between the U.S. and China has dampened demand from users like Huawei; IDTI was downgraded at KeyBanc
· Software mover; one M&A deal in space as SEND agreed to be bought by TWLO for $2 billion in an all-stock deal; at the closing, expected for the 1H’19, SEND holders will receive 0.485 TWLO shares for each share of SEND, which equates to $36.9 per share price based on closing price ; ADBE backed its Q4 EPS view of roughly $1.87/$2.42B vs. est. $1.89/$2.42B and reaffirmed its 2018 sales and profit targets; SYMC upgraded at Cowen, while general software space rebounds in broader tech bounce
· Media & Telecom movers; defensive names such as Telco pared recent gains as stocks surged broadly (VZ among top Dow decliners); OMC Q3 EPS beat consensus by 3c on higher revs and operating profit; INFY shares rises after earnings beat earlier (CTSH rises early in sympathy)
· Towers (AMT, CCI, SBAC) positive outlook at Guggenheim as expect key items in the 3Q print to be (1) CCI’s initial 2019 outlook; (2) an update from AMT on the negotiations for the exit of a large customer in India, and (3) a discussion of the pace of acceleration that SBAC is seeing in domestic leasing and implications going forward