Friday, October 19, 2018
Equity Market Recap
· U.S. stocks end the day mixed, with major averages fading mid-morning amid a decline in technology, small caps and industrials, as major averages end a rough week lower from where it started. Rising borrowing costs, geopolitical tensions, tough Fed talk, declining energy prices and mixed guidance outlooks in the industrial and material sector sunk sentiment, overshadowing what has thus far (about 20% of the S&P has reported) been a better quarter of earnings. The dollar was mixed, falling vs. major currencies, while rising vs. emerging markets such as the peso after Pompeo reinforced Trump’s comments, saying the U.S. is fast approaching a “moment of crisis” due to the migrant situation. The 10-year Treasury yield pushed above 3.20% and the dollar fell while the pound gained after Prime Minister Theresa May was said to ditch one of her key Brexit demands in order to resolve the Irish border. Defensive assets continued their rise with Consumer Staples (behind PG earnings) and Utilities shining. Technology stocks couldn’t get out of their own way, with semis falling over 1%. The biggest decline continues in the housing industry, as the homebuilding ETF fell for the 21st time in 23 days, as a softer outlook, rising rates and higher commodity costs hurt builders, home improvement retail and building products as several trade at 52-week lows. Lastly autos got another negative piece of news with a profit warning from Daimler. Note it was over 30-years today in 1987 when the Dow fell 22% with the over 500 point drop a top story….the same 22% fall today would drop the Dow over 5,500 points!
· Macro concerns remain into weekend: 1) President Donald Trump warned of “severe” consequences for the disappearance of journalist Jamal Khashoggi, with his administration awaiting the conclusion of investigations. He added it “certainly looks” like the Saudi national is dead. 2) China remains an issue on trade while also last night, China Q3 GDP rose at a slower than expected 6.5% rate, the slowest pace since the aftermath of the financial crisis in 2009, but the Shanghai index rebounded off multi-year lows to finish higher. 3) Italy budget problems with the EU and the ongoing UK/EU Brexit saga also continued this week with no official resolution
· Atlanta Fed dove Bostic said trade policy remains a risk to the outlook, given uncertainty around the rules that might emerge, he said. Yet on the outlook, he sees no sign of dark clouds on the horizon that could trip an economy that is “chugging along.” Bostic also said that the Saudi Arabia Khashoggi incident could pose possible risk to the outlook, if it leads to sanctions. Meanwhile, Federal Reserve Bank of Dallas President Robert Kaplan says he’d worry about a yield curve inversion because it might slow credit creation. Kaplan favors “likely three’ hikes to neutral rate”
· Existing-Home sales for September fell -3.4% to 5.15M rate, missing the 5.29M economist estimate while August was revised to 5.33M from 5.34M prior; existing-home sales fell 3.4% after falling 0.2% prior month; inventory fell 1.6% to 1.88M homes – sixth straight monthly drop in sales
· Oil prices close higher, rising 47c or 0.7% to settle at $69.12 per barrel, but ended the week with a 3.1% decline as another week of rising domestic supplies overshadowed a potential conflict or sanctions with Saudi Arabia following a tough stance by the Trump administration on the suspected death of a prominent Saudi journalist saying there would be “very severe” consequences if Saudi Arabia was found to be behind it.
· Gold prices end the day lower by $1 to settle at $1,229.10 an ounce but finish the week higher by nearly 0.6% (down from its weekly high of $1,236.90 on 10/15, its highest level since July) – gold has been supported as a safe haven asset amid the ongoing issues with the US and China/Saudi Arabia – but a bounce in the dollar and rising rate hike expectations keep a lid on gold
· The U.S. steadily slipped vs. most major currencies midday, while rising vs. the Canadian dollar and Mexican peso; the Canadian dollar slid into negative territory following economic data that missed consensus estimates (CPI for September read 2.2% YoY vs. est. 2.7%); the British Pound spiked early afternoon after the BoE’s Carney said to drop Brexit demand on Irish border to ease deal (a sticking point), lifting the Pound to around 1.31 on the headlines (up 0.6%) from around 1.304 prior; the euro also rallied with the pound vs. the dollar, topping 1.15; the Mexican peso fell to 6-week lows vs. the dollar (jumped to 19.34) following remarks by US Secretary of State that US and Mexico “still have serious issues between them,” indicating that they are “quickly reaching crisis levels on migrants at the border.”
· Treasury market’s dropped despite the mixed action in stocks, as yields ended the week higher with the 10-year yield back around 3.19% and the 2-yr at 2.904% (back near decade highs). Between the hawkish FOMC minutes from the Sept meeting talking about raising rates again this year and next, and the volatility in stocks, yield prices ended the week near its best levels.
Sector News Breakdown
· Auto space slammed the past few days (GM, F came into the day at 52-week lows), and things did not get better today; German auto maker DDAIF said it sees FY group Ebit “significantly” below prior year citing an increase in expected expenses in connection with ongoing governmental proceedings; in research, Morgan Stanley downgraded Ford (F) to equal-weight citing factors including limited progress on restructuring and an increased credit and estimate risk and also cut estimates and tgt on GM and FCAU after weak 3Q and China auto shipment data
· Auto parts; JPMorgan lowered estimates to suppliers of automobile parts, especially those exposed the most in Europe and China’s light vehicle markets (recommends AXL, MTOR and DAN); DAN upgraded to overweight from neutral on share price underperformance; downgrades THRM to neutral from overweight; says ADNT, LEA, VC, and ALV “may be hardest hit relative to peers given their geographic profiles”; recall yesterday, tire maker Michelin lowered views (took GT to 52-week lows)
· Retailers; VFC posted Q2 beat, upsized guidance, and announced dividend hike, but shares fell from earlier highs (did post revenue declined at Timberland, Wrangler, and Lee); SKX rises as earnings come in “better than feared” and a strong forecast should ease near-term revenue concern, though comp sales missed (Q3 comp sales rose 1.9% vs. est. 3.6%); AEO was upgraded to buy at Citigroup after shares have fallen 30% since earnings late August
· Consumer Staples; sector among top gainers of late, getting a boost today from PG; household and personal products companies gain after Dow componentPG reports strong organic sales in its Q1 and maintained year EPS guidance, even when some analysts were expecting a cut/said Q1 organic sales growth, well ahead of the 1.9% growth estimate and reaffirmed its FY19 EPS estimate/CHD, KMB, CL among movers in sympathy
· Housing & Building Products; Housing stocks bounced after falling for the 20th time in last 22 days yesterday – bounce today – the XHB) – not being helped by the existing home sales data – Existing-Home sales for September fell -3.4% to 5.15M rate, missing the 5.29M economist estimate while August was revised to 5.33M from 5.34M – TOL, PHM, LEN lower while whole complex has been in downward spiral – home improvement (HD, LOW), building products (VMC, MAS)
· Leisure and casino stocks; HOG was downgraded to market perform at BMO Capital, touching fresh 52-week lows saying things they thought would happen to drive growth in sales and earnings did not occur; in casino space, Goldman Sachs removed LVS from conviction buy list and LVS, WYNN, MGM gaming revenue and margin estimates were reduced to reflect softer-than-expected Macau gross gaming revenue (GGR) and deceleration in China macro data, which most recently includes a drop in Sept. PMI, slowing China consumer consumption.
· E&P sector; XOG pre-released a worse than expected 3Q, 4Q, and FY:19 guide, with oil being 10%, 11%, and 20% below consensus respectively while capex for FY:19 came in below (follows recent lowered production views from SRCI this week – shares of PDCE down in sympathy); GPOR pre-released 3Q18 production and pricing that both topped estimates as continues to benefit from shallower well declines along with a switch to ethane withdrawal
· Services and drillers; Oil services get first earnings as SLB reports a slight Q3 earnings beat and in-line revenues of $8.5B on higher oilfield services demand/says revenue from its international business gained 3% Q/Q to $5.2B while North America revenue rose 2% to $3.2B. The weekly Baker Hughes (BHGE) rig report showed total U.S. rig count rose 4 rigs to 1,067, with oil rigs up 4 to 873, gas rigs up 1 to 194, and miscellaneous rigs down 1 to zero
· Refiners; one deal in the space as VLO will acquire, for cash, all of the outstanding publicly held common units of the partnership VLP at a price of $42.25 per common unit, for an aggregate value of approximately $950 million. ; also the WSJ reported the Trump administration is aiming to slow the rollout of new international rules (IMO 2020) to power commercial ships with lower-emitting fuels due to concern the measures will increase costs for consumers and businesses, weighing on refiners (PBF, HFC, PSX, VLO)
· Other movers; Mizuho upgraded MRO to buy s shares continue trading at a discount to large-cap peers despite execution and a clear trajectory for free cash growth, and also upped MUR to neutral from underperform after recent JV with PBR; Utilities outperformed as the UTY rises back near recent highs of 700 level up over 1.75% as defensive sectors remain market leaders (Staples as well); shares of EXC, ETR, D, SO, ES, DUK among gainers
· Bank movers; OZK shares plunge following a substantial miss to Q3 earnings/a massive $41.9M provision vs. UBS forecast of $8.6M forecast drove the miss, while core and GAAP NIM dropped roughly 20 bps apiece; WTFC was upgraded to buy at Davidson saying current trading level is an attractive entry point; CMA announces $500M stock buyback; STT falls after EPS miss higher provisions; BK was downgraded at KBW amid concerns regarding future deposit betas, noninterest-bearing deposit run-off, and the pace of organic fee growth; other earnings out from ETFC in brokerage space, ASB, CFG, FFBC, STI in banks
· Insurance; AIG preannounced 3Q18 catastrophe losses of $1.5-1.7B, pre-tax, well above the losses expected by Deutsche Bank (formerly $530M), primarily driven by Typhoons Jebi and Trami, Hurricane Florence, as well as revisions to the loss estimates for the California mudslides; TRV was downgraded at Citigroup saying strategy has shifted from one of accelerating commercial pricing (for the past 8 quarters) to one of moderating pricing this quarter
· Consumer finance and lending; AXP reported a 3Q EPS of $1.88, topping estimates by 12c while revenue growth was a solid 9% YoY, and management now expects a full year growth of 9%-10% (up from prior view of at least 9%); PYPL rises after earnings/upgraded to buy at BTIG after better-than-expected Q3 results and forecasts calling PYPL’s progress monetizing Venmo more eye-catching than the earning beat, noting 24% of Venmo users engaged in a monetization event during 3Q vs 17% in 2Q; SYF posted Q3 EPS beat and higher NIM with provisions at $1.45B and net-charge offs $1.09B
· Pharma movers; generic pharma stocks rebounded after recent weakness (ENDP, BHC), while large cap Pharma was mixed (BMY falls for 2nd straight day on better rival MRK data); DCPH fell following updated early-stage DCC-2618 data in patients with gastrointestinal stromal tumors
· Biotech movers; BIIB was downgraded to market perform at Bernstein saying positive thesis was based on its execution in MS and odds of success in Alzheimer’s and both drivers have been now recognized by the market and current stock price roughly reflects that recognition; CLVS said mid-stage study showed Rubraca generated a 44% confirmed response rate in a target subset of patients with prostate cancer who have a genetic mutation known as BRCA
· Medical equipment and devices; XRAY double upgrade at Goldman Sachs to buy from sell saying it has an opportunity to be an “early turnaround story” given a nearly 50% underperformance year-to-date; DXCM upgraded to buy at Goldman Sachs as previously thought ABT’s new device (FreeStyle Libre) would take significant share from DXCM. Instead, ABT’s investment in the CGM market has created a class effect that is driving new interest for all competitors; Goldman downgraded NVRO to sell as believe the cycle of negative estimate revisions is not yet over; ISRG shares upgraded to buy at Canaccord after company raises FY18 procedure growth view to 17%-18% from 14.5%-16.5% following a Q3 EPS/sales beat
Industrials & Materials
· Industrial & Machinery; HON mixed as said aerospace revenue growth drove better-than-expected 3Q results, with commercial original equipment and defense demand providing bright spots with double-digit gains, which helped offset lower year EPS/sales guidance; Swedish industrial tool maker Atlas Copco AB (ATLKY) warned that demand has weakened amid economic uncertainties that has seen some customers delay investment decisions, sending their shares lower; ORN preannounced lower than expected Q3 earnings driven by customer project delays in the marine construction business and production delays in in the concrete business on weather; CAT, BA and other industrials fell after cautious tariff commentary from HON conference call
· Transports; in rails, KSU quarterly profit soars, trade worry eases; CP reported adjusted EPS of C$4.12 driven by solid revenue growth (+19% y/y) and margin expansion while revenue came slightly below estimated, but posted a strong y/y growth as carloads were up 5.3% and RPU +13.8%; WERN was upgraded to market perform at Cowen in trucker space after earnings
· Metals & Materials; CLF shares fall despite earnings and revenue beat and begins quarterly cash dividend of 20c; overall metals group failed to hold early gains as materials and industrials dropped on trade and tariff woes (same issues that have held the group lower in recent weeks)
· Chemicals; DWDP detailed a $4.6B impairment to their intangibles assets, announced it intended agricultural spin-co Corteva’s Form 10; PPG was upgraded at JPMorgan following the recent sell-off in shares after lower guidance; CE mixed Q3 as EPS beat while sales just miss but guided year profit forecast $10.90-$11.10 above est. $10.76; SXT slides on rev miss and cautious outlook
Technology, Media & Telecom
· Internet; EBAY falls on downgrade at Stifel based on PayPal’s earnings release disclosure of weak eBay 3Q GMV trends/for 3Q, PYPL suggests eBay’s marketplace GMV grew 3.4% y/y FX-adj. relative to their prior estimate of 7.2%; overall broader Internet space modest bounce after getting crushed this week; even better NFLX numbers Tuesday has failed to rally the sector; GRPN shares fell after Bloomberg reported data analytics firm YipitData estimates North American 3Q gross billings were down by 16% Y/y vs. Visible Alpha consensus of down 7% Y/y
· Semiconductors; MU announced that it plans to exercise its call option to acquire INTC’s interest in the parties’ joint venture, IM Flash (IMFT), on Jan 1, 2019 paying $1.5B; earnings pick up steam for semi space next week (received weaker outlook form TSM day prior)
· Software mover; LLNW shares dropped after a largely in-line quarter and small guide higher, as Craig Hallum noted incrementally negative was the churn of two top 10 customers; TEAM shares slide despite mostly in-line to slightly better earnings results
· Media & Telecom movers; Dow component DIS was upgraded to overweight and tgt to $130 at Barclay’s saying the investor day expected early next year could be “a catalyst to frame the scale of the opportunity and help the company build a credible terminal value ‘story; in advertising, IPG posted a Q3 EPS beat on better revs of $2.3B and reaffirms year organic rev growth views; ERIC upgraded to buy from hold at Argus as the age of 5G wireless gets underway
· Hardware & Component news; ROKU was upgraded to outperform at RBC as near-term, see ROKU as one of the three SC Net Stocks with the least fundamentals risk/best opportunity for upwards estimates revisions; AAPL was initiated with an outperform and Street high $310 tgt at Wedbush today in broad software initiation; IBM extended to new 52-week lows, falling further after its revenue decline earlier this week sent shares falling; midday, AAPL CEO Chie Tim Cook took an extraordinary step of publicly demanding the retraction of a Bloomberg News story that claimed compromised motherboards made their way into Apple servers. In an interview with Buzzfeed, Cook said “There is no truth in their story about Apple,” and called for it to be retracted.