Wednesday, October 17, 2018
Equity Market Recap
· U.S. stock markets eased following the release of the minutes from the Federal Reserve’s September meeting, which revealed the central bank planned to push ahead with interest rate hikes this and next year. Earlier, markets bounced off the lows, with gains led by financials, large cap pharma and telecom, while technology pared losses, as the Dow Industrials rallied after falling more than 300 points this morning. Generic pharma, retailers, homebuilders and energy stocks were among the top sector decliners The NASDAQ turned positive late, rebounding off losses of more than -90 points (earlier lows 7,563.09) before sliding again. Technology was mixed with NFLX giving a boost after earnings and strong sub guidance while semi’s got better results from LRCX, ASML, but was overshadowed by declining revs in Dow component IBM and broader macro fears. Energy stocks sunk fast, tracking along with a drop in WTI after another sizable build in inventories, as WTI crude settled below $70 per barrel.
· Minutes from the September meeting where they raised bates by 25 bps to 2%-2.25% range showed Federal Reserve officials stepped deeper into a debate over how high to push interest rates, with a majority appearing to favor an eventual and temporary move above the level they deem neutral for the economy in the long run. “A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level,” according to minutes of the Federal Open Market Committee’s Sept. 25- 26 meeting. A “couple” of FOMC members argued against adopting a restrictive policy “in the absence of clear signs of an overheating economy and rising inflation,” according to the minutes.
· Trade tensions with China not getting better after the NY Times reported this morning, citing unidentified senior officials that President Trump plans to withdraw from global postal treaty that has allowed Chinese companies to ship small packages to the U.S. at a discounted rate. Europe closely watching Brexit talks and debt issues (several headlines all day related to openness from both UK/EU to transition an extension from leaving). Tensions with Saudi Arabia strained as details begin to leak out about disappearance of journalist from two weeks ago. Also note after the close yesterday, President Trump said the Fed is his biggest threat to the markets as the Fed hikes are pushing yields up and threatening to slow the pace of U.S. growth.
· Housing starts for September fell to 1,201M, missing the est. 1,210M and was down from 1,268M in the prior month; starts fell 5.3% in Sept. after rising 7.1% the prior month; building permits fell to 1,241k vs 1,249k in Aug.; est. 1,275k; permits fell -0.6% in September after falling 4.1% MoM
· Oil prices dropped on the day, with WTI crude slipping back below $70 per barrel (down $2.17 to $69.75 per barrel) and Brent falling below $80 per barrel after the EIA reported a larger than expected weekly inventory build of 6.49M barrels, topping the 2.5M estimate The weekly build followed three consecutive weeks of gains, showing slowing demand. Prices had been rising in recent weeks to near 4 ½ year highs two weeks ago ahead of Iran sanctions in November, but have pulled back with broader stock markets over the last few days.
· Gold futures erased earlier gains, slipping a little more than $3 to move back below the $1,230 an ounce level, down from their highest levels since July, pressured by a firmer dollar. The dollar fell in extended trading after the FOMC Minutes release. Gold has been slightly underpinned as global markets take in the handling of U.S. and Saudi Arabian relations after the disappearance and alleged murder of a journalist at the Saudi consulate in Istanbul.
Currencies & Bonds
· The dollar moved higher vs. most currencies, getting a boost late day; the Turkish Lira bounced after secretary of state Pompeo said that “there’s a logic” to lifting some sanctions the US on Turkey after the release of American pastor Andrew Brunson. The euro slipped to lows mid-afternoon as U.S. stock recovered while the U.S. dollar touched afternoon highs against the safe-haven Japanese yen after the FOMC minutes release this afternoon, rising up near 112.50. The Pound continues to move in line with Brexit headlines between the UK/EU.
· Treasury yields held near best levels of the day, as 10-yr at 3.17% after minutes (no movement after release), with bonds having sold off earlier following a rebound in stocks off session lows. Bonds had generally held steady despite the pullback in stocks, as the 10-year yield only up 1 bps to around 3.17%, with the 30-yr at 3.34% and the 2-yr 2.87%. Treasury prices have not been volatile this week despite the market “whip” for stocks the last few days – though note Treasury yields have risen almost 30 bps since the end of August. Lone piece of economic data today (housing starts) came in slightly weaker than expected.
Sector News Breakdown
· Homebuilders LEN, MTH and KBH were all downgraded at Credit Suisse and lower tgts to Street low prices expect more tempered demand and increasing affordability worries to weigh on sentiment, while BTIG cut builder EPS estimates by an average of 1% for 2018 and 6% for 2019 after cautious survey results as metrics deteriorated markedly this month, especially sales relative to expectations (cuts tgts on DHI and KBH); lastly Zelman expects downside to consensus estimates across most main metrics, especially orders, as builders had a tough 3Q
· Building products and home improvement retail; WHR tgt cut to $125 at Credit Suisse reflect continued pressures from inflation and reduced overhead leverage; HD and LOW both downgraded to neutral at Credit Suisse as they take a more balanced view on the Home Improvement retail space, following an extended period of superior returns; building product names IBP and OC also downgraded at Credit Suisse; Bank America cuts VMC and MLM as they trim estimates to reflect concern over light volumes due to heavy rains and hurricanes in H2E
· Consumer Staples; into earning, Wells Fargo said they are cautiously optimistic heading into 3Q18 earnings for the broader Staples sector as see STZ, EL, KO,& PM as having the most attractive risk/reward profiles; UBS said KHC is sitting in oversold territory on investor concerns that a guidance cut is on the way and says the setup good into second half
· Restaurants; TACO shares sunk after mixed results as Q3 EPS beat, but comp sales missed, while BTIG downgraded to neutral given weaker sales performance, heightened inflation and diminished outlook; SONC mixed Q4 as EPS beat by a penny on slightly lower sales and comps rose 2.6%; DPZ was upgraded to buy at Maxim following Q3 results
· Autos; TSLA rises early after the company disclosed that CEO Musk plans to buy $20 million worth of newly issued Tesla common stock during the next open trading window at market prices; Goldman Sachs said Q3 will be a challenging one for the European auto industry, with potential downward earnings revisions by suppliers as cuts Ebit ests. for auto-parts makers under its coverage by 4% on average; Wolfe Research cautious on AZO saying they see the most peripheral risk as it struggles to adapt to more promotional online environment ; Cleveland Research said they are seeing POS trends 1-2% below supplier expectations over the last 30-45 days following upside POS trends through August for auto retailers (ORLY, AAP, AZO)
· Casinos and Leisure; gaming stocks were active after Reuters reported Golden Nugget owner Tillman Fertitta has reached out to CZR about merging the companies, ; camping stocks were strong after WGO Q4 earnings, Ebitda and revenue results topped expectations (THO, CWH, LCIIwere active);
· Energy stocks slip on bearish energy data: Weekly inventory data showed: the API reported that U.S. crude supplies fell by -2.1M barrels for the week ended Oct. 12; also showed supplies of gasoline declined by -3.4M barrels, while distillates fell -246K barrels. The EIA reported that domestic crude supplies rose by 6.5 million barrels for the week ended Oct. 12, that followed three consecutive weeks of gain and came in above the 2.5M barrel build forecast (bearish)
· E&P and drilling sector; UPL announced an exchange agreement that reduces long-term debt by ~$250M, extends the maturity of $560M of debt to mid-2024 from 2022 previously, and reduces cash interest expense; oil drillers RIG was upgraded to hold at Johnson Rice while downgraded DO to sell; Wolfe Research upgraded MRO, OAS, and XEC to Outperform while PE downgraded to peer perform based on updated commodity deck and takeaways from their conference.
· Utilities & Solar; JPMorgan said they are constructive regarding a handful of Alt Energy stocks heading into the 3Q print saying valuation looks more attractive in view of the recent sell-off (S&P500 down about 3.5% in October MTD)/top picks into the 3Q18 Print are FSLR, TPIC, HASI, and BE, all Overweight rated.
· Frac sand stocks downgraded at Jefferies as they cut HCLP and SND to Underperform from Hold as well as CVIA and SLCA to Hold from Buy citing “sinking” Northern white sand demand and prices/sees weakness spreading to regional/in-basin sand, and ultimately to box/silo-based last-mile solutions as supply additions overtake demand growth
· Bank movers; NTRS weak after a 2% drop in Corporate & Institutional Services (C&IS) trust, investment and other servicing fees in Q3 compared to the prior quarter (STT, BK also move on news)/ C&IS custody and fund administration fees were hurt by FX as well; there were several regional bank earnings as well: MTB EPS beat helped by lower provision and taxes, USB beat on higher fee income/lower expenses; also results from FULT, HOPE, MTG, LTXB, PNFP
· Exchanges and Brokerage; NDAQ and ICE shares were weak early after the SEC said the New York Stock Exchange and NASDAQ failed to justify fee increases last night. In conjunction with this ruling, the SEC also remanded or essentially sent over 400 market data and market access fee challenges that had been filed with the SEC since the SIFMA case commenced in 2013 to the exchanges for review and potential resubmission to the commission; BLK was removed from conviction list at Goldman Sachs as near-term organic fee growth and continued fee-rate headwinds are likely to pressure the stock’s revenue outlook
· Pharma & Pharma movers; EIGR announced positive results from the Phase 2 PREVENT study of Exendin 9-39 (Avexitide), a first-in-class glucagon-like peptide-1 (GLP1) antagonist, in development for the treatment of hypoglycemia; shares in some of the big names in the marijuana industry were in the red on the first day of trading following the legalization of recreational pot use (CGC, APHQF, TLRY, CRON, GWPH); AKRX upgraded at Piper and $9 tgt; in medical equipment and devices; ABT posted a mostly in-line quarter while the lack of significant raised guidance took shares lower (guided $2.87 to $2.89, saw $2.85 to $2.91, estimate $2.89)
· Healthcare services and providers; ACHC was downgraded to hold at Craig Hallum citing limited visibility on ACHC’s growth partially due to competition, uncertainty in the U.K. and its highly levered balance sheet; Reuters reported ESRX to cover migraine drugs from AMGN and LLY but is excluding a medication made by TEVA after price negotiations with all three manufacturers; FMS lowered its outlook for FY net constant currency and guides year revenue growth to up 2%-3% from prior view 5%-7%; EVH to offer $125M in convertible senior notes due 2025
Industrials & Materials
· Industrial & Machinery; Bank America downgraded shares of CNHI to neutral and WBC to underperform saying the global truck markets are likely to decline for the next two years while North America Class 8 order cancellations may start to pick up (says global truck model predicts a 6% decline in 2019, accelerating to a 10% decline in 2020); GE bounced after the Financial Times reported the Iraqi government will give a $15B power-generation contract, rather than to rival bidder Siemens AG, the FT reports
· Transports; index fell despite better guidance from UAL in airline space and after CSX Q3 results exceeded elevated expectations, as better yields combined with continued cost momentum to drive a sub-60% operating ratio (CSX shares still fell dragging rails lower); UAL reported better quarterly results and boosted its year profit forecast; AAL, DAL, and UAL were all upgraded to buy at Deutsche Bank and raised tgts citing better than expected fuel expense as well as better UAL earnings and guidance last night/says both Delta and United showed Q3 fuel recapture rates of 85% and 100% respectively, far better than even their most optimistic projections
· Tankers/Dry bulk; JPMorgan downgrade SALT and upgraded NMM saying the dry bulk sector over the past quarter has behaved like a shipping segment that has reached a modest peak, as period rates and secondhand asset values have pulled back modestly over the past few months. They continue to see a fairly balanced outlook in 2019 before the positive supply effects from IMO 2020 kick in (slower speeds, higher scrapping). SBLK is favorite stock in the sector
· Paper & Packing; RBC Capital the latest to lower estimates for the group, as tweaks estimates on BERY and SEE on FX and resin; also Lowering CCK, ARD, and OI as they incorporate weakness in Turkey, Saudi Arabia, and greater FX headwinds/lowering GPK to build in conservatism on freight and raws inflation
Technology, Media & Telecom
· Internet; NFLX dominates today’s action after quarterly results handily topped views for EPS, revs and subscribers as the company reached 137M total streaming subscribers globally/Domestic Q3 Adds of 1.09MM came in materially above the Street at 0.67M, while International Q3 Adds of 5.87MM were also materially above the Street at 4.44M
· Semiconductors; sector strong as LRCX (bouncing off recent 52-week lows $135.99 on 10/11) after solid beat/raise following deteriorating expectations over last few weeks, plus record buybacks/the near-term outlook better than expected (AMAT, KLAC, TER move in reaction); ASML also positive earnings results, while CREE was mixed with better quarter, but revenue guidance for next quarter was below views; IDTI was downgraded to hold at Craig Hallum
· Software mover; group got a boost yesterday after better long-term guidance from ADBE; today, WDAY was upgraded to outperform at Bernstein citing long-term growth/market share gain potential; PVTL share weakness attributed to IPO lock-up expiration
· Hardware & Component news; after snapping its streak of 24 consecutive quarters of slowing revenue growth in January (rose last 2 quarters), IBM Q3 revenue fell and missed estimates this quarter/guidance in-line; ANET was upgraded to Outperform at BMO Capital noting shares have underperformed year-to-date but current levels are attractively valued; ROKU said it would resume sales in Mexico. Roku device sales had been banned in Mexico for more than a year amid a court battle resulting from hackers offering pirated content; ADTN shares slipped after earnings
· Storage sector: Goldman Sachs upgraded NTAP to buy (tgt up to $91 from $76) and PSTG (tgt up to $23 from $18) upgraded to neutral as it boosted estimates for the storage market with favorable spending trends expected to be supplemented by falling NAND prices, which should increase gross margins and gross profits for vendors