Tuesday, October 23, 2018
Equity Market Recap
· U.S. stocks end the day lower…but doesn’t exactly describe today’s market action, not by a long shot! U.S. stocks opened under tremendous pressure, with major averages falling to their lowest levels in several months and well below key technical support levels…but markets posted an astounding rebound off those lows, with the Dow rising more than 500 points off its worst levels, the Nasdaq a 200-point bounce and the S&P 500 more than a 60-point bounce. The Russell 2000 also rebounded, recovering after earlier turning negative on the year. Stocks opened lower to start, following a rout in Asian markets overnight with trade concerns, impact of tariffs becoming more pronounced after quarterly earnings and lower outlook from various industrial giants this morning (CAT, MMM), which took machinery and material names lower. However, there were a few positive earnings standout as VZ, MCD and UTX all advanced on better results. In addition to the weaker earnings, concerns over Italy’s budget, Saudi Arabia, rising borrowing costs and Brexit issues between the UK/Europe continue to weigh as well on sentiment. Energy stocks led the declines as oil prices fell over 4% on the day (ahead of inventory data), while defensive assets such as telecom, REITs and staples outperformed. Gold touched multi-month highs, bonds rallied sending yields lower and the dollar ended mixed.
· Despite the late day bounce, the S&P 500 index still extended its losing streak to five-straight sessions (touching lows of 2,691.43), lowest levels since May. Asian markets started the drop after the Shanghai Composite dropped 2.3% overnight after a two-day rebound fueled by verbal intervention by Beijing following last week’s equity weakness. European stocks dropped again, led by anxiety about Italy debt/budget, disappointing earnings, Brexit (EU/UK) and a range of other geopolitical concerns as well. In an interesting stat ahead of a busy week of earnings: 201 stocks in the S&P 500 are more than 20% below their 52-week high. Of the 32 stocks with market caps over $150 billion, only three are 20% below their high.
· Crude oil prices fall; after touching their highest levels in over 4-years just 2-weeks ago, WTI crude slumped to fresh 2-month lows, falling $2.93 or 4.2% to settle at $66.43 per barrel its lowest settlement since late August after Saudi Arabia said it could supply more crude quickly if needed. Saudi Energy Minister Khalid al-Falih said at a conference in Riyadh that the oil market was in a “good place” and the kingdom would “continue with the mindset we have now, which is to meet any demand that materializes to ensure customers are satisfied.” Falih also said he would not rule out the possibility that Saudi Arabia would produce 1M-2M bbl/day more than current levels in future. The comments, coupled with concern ahead of weekly inventory data tonight (API) and tomorrow morning (EIA) which has shown a buildup in inventories the last 2-weeks, weighed on prices. A China-led global equity rout was also seen weighing on sentiment, putting pressure on assets perceived as risky, including most commodities.
· Gold prices jumped, with December futures rising $12.20 or 1% to settle at $1,236.80 an ounce, as investors rotated into defensive and safe have assets. With today’s gains, gold prices ended at their highest levels in three-months (mid-July) – perhaps with though that given the recent market volatility, tariff impact the Fed may take the “foot off the pedal” on raising rates). December silver rose 19.3c, or 1.3%, at $14.78 an ounce, while palladium hit highs.
· The U.S. dollar was mostly lower with the index (DXY) pulling back after earlier highs of 96.15. The dollar fell against the British Pound following positive Brexit headlines as the pound perked up to a session high of $1.3044 before fading back to 1.30. The US dollar gained vs. the Canadian dollar as oil prices continue to drop after posting 4 ½ year highs last month. The “safe-haven” Japanese yen gained against the greenback, while the euro made the biggest afternoon push, bouncing off overnight lows of 1.1439 to end higher around 1.1475.
· Treasury markets advanced as investors rotated out of US stocks, sending yields lower in an apparent flight to safety as a renewed Chinese stock market rout and weaker than expected outlooks from top industrial companies (CAT, MMM) citing rising costs/impact of tariffs sparked global equity weakness. The yield on the 10-year Treasury note fell as much as 7 bps to 3.12 before paring losses to around 3.14% while the 2-year Treasury note yield dipped 4 bps to 2.85%
Sector News Breakdown
· Restaurants; Dow component MCD reported better quarterly results on the top and bottom line, while also warning that for the full-year 2018, costs for the total basket of goods are expected to increase about 2% in the U.S. and International Lead segments vs forecast in 2Q’s
· Housing & Building Products; probably the hardest hit group over the last 2-months on rising rate fears, increasing material costs – but group gets bounce today after homebuilder PHM reported a small beat for Q2 earnings and revs while net new orders rose a meager 1% to 5,350 homes in Q3 (shares of builders LEN, TOL, KBH, MTH have been under pressure of late along with products names VMC, MLM and suppliers LL, FBHS, DOOR, OC, TILE); LOW was upgraded to buy at Citigroup after the pullback in the shares
· Auto movers; DLPH and BWA were both upgraded at Bank America in auto suppliers sector; ABG shares outperform after handily topped Q3 eps and revs;GM positive mention by Citigroup saying management likely remains open to considering new ideas to unlock “billions in value”; TSLA shares rebound after noted short seller Citron Research said it took a long position
· Casino & Leisure movers; in leisure, HOG reported 3Q headline results that topped analysts’ estimates but domestic motorcycle sales fell 13.3% YoY in 3Q, accelerating from 2Q’s decline of 6.4% (also said they now see ending at low end of guidance range); in lodging, Bank America downgraded STAY and INN to neutral citing more acute softness in lower end chain scales; gaming stocks set new 52-week lows today for WYNN, LVS as analysts voice concern over muted growth in Vegas and slowing growth in Macau
· Consumer Staples; in tobacco, Piper said MO may benefit from potential FDA vapor regulation because the tobacco company derives a small amount of sales from e-cigarettes compared to BAT and JUU;
· Energy stocks dropped across the board as WTI crude oil dropped more than 4% to below $68 per barrel, dragging major oil names lower across the board; SPN reported a wider than expected Q3 EPS loss sending shares lower; group has been weak with oil falling and weak production outlooks over the last week from SRCI and XOG
· E&P sector; Frac sand stocks weak after SLCA posted big Q3 earnings miss (CVIA, SND, HCLP, EMES weak)/ reported lower than expected revenue, EBITDA and EPS as revenues came in at $423MM, below consensus of $461MM, as the Oil & Gas segment saw a greater decline in price per ton than expected.
· Utilities & Solar; SCG was defended at Wolfe and Mizuho after shares fell 11% yesterday on reports a SC circuit judge may rule the Base Load Review Act unconstitutional on a technicality in a class action suit/Wolfe new worst case scenario analysis reflects no nuke recovery and $2B refunds, which implies a $29 valuation
· Banks and brokers; financials look to rebound after a dreadful showing on Monday, with being one of the top underperforming sectors; AMTD reports slightly better Q4 EPS and in-line revs though issued guidance below views; MC shares fell on Q3 EPS/revenue miss; WFC got a boost late day after announcing an added 350M share buyback plan
· Regional banks; few earnings: HBAN lowered its 2018 revenue-growth forecast to about 4.0%-4.5% from the low end of 5.0%-6.0% while now expects 2018 noninterest expense to decrease about 2.0%-2.5% vs its prior forecast for a 3.0%-4.0% decrease; FITB posts Q3 non-GAAP EPS of 64 cents, beating consensus by a penny, and says it’s on track to achieve long-term financial targets for ROTCE, ROA, and efficiency ratio; ZION upgraded at Baird after Q3 beat on better net interest margin of 3.63% vs. 3.58% estimate; RF and SNV shares dipped on earnings; other bank earnings overnight from: EFSC, FBC, FNB, GNBC, IBTX, WASH, WSFS
· REITs; office REITs JBGS and WRE upgraded to hold at Stifel saying both companies could benefit from the potential openings of new Apple and Amazon offices near Washington, D.C; ACC in-line Q3 FFO of 44c on slightly better sales and narrows year view; DLR was upgraded to buy at Guggenheim view that organic growth is showing acceleration driven hyperscale and reiterated its buy rating on EQIX (which was initiated sector weight at KeyBanc today)
· Pharma and Biotech movers; BMY shares fell for a 4th day after trial delay yesterday sent shares lower by 6.3% (touched 52-wek lows earlier of $49.83); JNJ said it will buy all outstanding shares of Japanese skincare firm Ci:z Holdings Co Ltd (4924.T) that it does not already own for 230 billion yen ($2.05 billion) in cash ; BIIB posted stronger-than-expected Q3 earnings and sales, as sales grew 12% YoY led by strong sales of Spinraza, Biogen’s drug for spinal muscular atrophy
· Cannabis sector rebounded late day after earlier had extended declines early as the ETFMG Alternative Harvest ETF (MJ) had tumbled 20% over the past 5 sessions (cannabis sector) – TLRY, ACB, CRON, CGC have remained weak since the start of legal recreational cannabis use in Canada on October 17. Last night, TLRY issued an additional $25M aggregate principal amount of its 5.00% convertible senior notes due 2023 – TLRY rebounded late day after falling as much as 18%
· Medical equipment and devices; Life science equipment sector lower after WAT and DGX results both disappoint with weaker guidance – shares of MTD, A, BRKR, ILMN, TMO also lower); WAT falls after Q3 revenue growth missed expectations and Q4 guidance came in well below expectations; DGX shares drop after in-line Q3 EPS but lower revs of $1.89B and guided both year profit and revenue below consensus views; SENS rises after AET announced coverage of Eversense for its ~22M lives/size and timing of the decision are ahead of expectations; earnings results tonight from EW, ILMN and VAR in med-tech
· Healthcare services; HSTM Q3 revs slightly above estimates on in-line earnings while revenue growth guidance of 6-8% for 2018 is unchanged, but operating income growth guidance was increased to 45-60% from 35-45%; CNC shares drop after Q3 results slightly better but its year view missed estimates – sees FY18 EPS $6.90-$7.10 vs. est. $7.07
Industrials & Materials
· Metals & Materials; defensive gold, silver, and palladium (all-time highs) prices traded higher as investors sought safety of safe-haven assets amid stock market pullback (NEM, GG, AEM); ATI shares slide after 2c EPS miss, while sales beat and company warned of 4Q headwinds for its Flat Rolled Products (FRP) Segment; KALU was upgraded to buy at Jefferies in aluminum sector
· Packaging sector; GPK posted Q3 EPS and Ebitda that missed estimates citing commodity input cost inflation, specifically, increased freight, chemicals, wood, purchased external paper, and pulp substitute recycled fiber costs, along with labor and benefits./Q3 Ebitda of $256.3M missed the $269M estimate; shares of GEF, PKG, IP, KS, SON, WRK among movers
· Aerospace & Defense; ARNC is said to have received an $11B acquisition offer from Apollo Global on Friday, Reuters reports, citing people familiar with the matter. The offer of $23-$24 per share is only a slight premium to the company’s last close – Reuters ; in defense, LMT Q3 earnings topped estimates and said it expects sales to grow as much as 6% next year, topping the expected 5% revenue growth view; HXL reported mixed quarter (EPS beat/sales miss) while narrowing its year outlook for profit and raised rev view; note earnings in the defense sector tomorrow from GD, NOC
· Machinery stocks; Dow component CAT Q3 EPS beat by a penny and reaffirmed its view but shares sunk after the company said material costs are rising because of tariffs (common theme that has weighed on industrial and material stocks amid trade dispute between US/China); CAT said it sees full-year impact of the tariffs at the low-end of $100M-$200M range; PCAR posted quarterly revenue miss though net income came in at a record $545M for the quarter, up 35% from a year ago; ASTE another decliner in machinery on Q3 EPS/sales miss (30c/$256.6M vs. 59c/$276M est.)
· Industrial stocks were weak as a handful of large cap earnings and lower outlooks sunk the sector; Dow component MMM falls after cutting its adjusted EPS view for the year/ lowers FY18 adjusted EPS view $9.90-$10.00 from $10.20-$10.45 and as Q3 EPS missed by 12c (shares of DE, ITW, CFX, DOV, EMR, MTW, OSK, TEX, ASTE, WCC, TSCO active); Goldman said CAT slowing construction industry orders do not bode well for TEX and MTW; CR Q3 EPS/sales beat and raised guidance for the year; Dow component UTX raised its full-year earnings guidance for the third time as it reported higher than expected Q3 earnings on strong aircraft and equipment demand; HUBB posted better Q3 results while narrowed its year profit forecast to $7.20-$7.30 from $7.05-$7.35 while shares fell with broader industrial pullback
· Chemicals; BAYRY failed to persuade a California state judge to set aside a jury’s verdict in the first trial over allegations that its Roundup weed killer causes cancer; though the judge on Monday said damages should be slashed to $78.6M from $289M; CE said it is implementing sales control measures in the European, Americas and Asia regions for its polyoxymethylene engineered materials product, including all grades and specifications; INGR falls as cuts FY18 EPS view to $6.80-$7.05 from $7.50-$7.80 (est. $7.48) after reporting Q3 miss ($1.70 vs. est. $1.96)
Technology, Media & Telecom
· Internet; SNAP tgt price target cut to $6 from $8 at Cowen as anticipate continued softness due to user declines and continued pricing pressure; EBAY was downgraded by a third firm in the last week as RBC Capital cuts as EBay faces negative data points from last week’s PayPal disclosure that its EBay Marketplaces total payment volume had decelerated; GRUB dipped after Uber said it plans to extend UberEats food delivery to 70% of the U.S. population by the end of the year, a 50% increase from the current availability
· Semiconductors; group down with broader market as investors prepare for earnings this week as the Philly semi index (SOX) fell as much as 3%, dropping under the 1,200 level – 52-week low before recoverings; in research, ASML, AMAT, LRCX cut to neutral from positive at Susquehanna after recent checks signaled incremental weakness for Cloud and Enterprise spending expectations in the first half of 2019 (tgts cut as well AMAT to $38 from $60, ASML to $200 from $240 and LRCX to $165 from $225); Barclays upgraded AMD and NXPI after the group’s continued underperformance this month, as sector fundamentals are not falling off as fast as stock prices
· Software movers; group mixed as stocks rally off lows; TEAM was upgraded to overweight at KeyBanc with a new $89 price target as the recent pullback has created an improved entry point into the “leading collaboration software provider; SSNC reported positive 3Q pre-announcement, inline revs, better EPS
· Media & Telecom movers; VZ reported Q3 EPS and revs ($1.22/$32.61B) above estimates while lowered its capex outlook to $16.6-17.0B from $17.0-17.8B (est. $17.19B)/sees year low single-digit percentage growth in adj EPS and remains on track to deliver against a goal to achieve $10 billion in cumulative cash savings by 2021/ subscribers who pay a monthly bill grew by 295K net adds in Q3; DISH downgraded to underperform at Macquarie citing an unfavorable backdrop for the stock near-term and more spectrum going to market; Intelsat (I) announced they are increasing their estimate of how much spectrum could be initially cleared, from 100 Mhz in the initial proposal, to up to 200 Mhz (out of 500 Mhz total).
· Hardware & Component news; EDA sector strong after CDNS reported a beat and raise highlighted by higher Verification and IP revenue, 32% operating margins and a raise to the full year guide; also in sector, JPMorgan upgraded both SNPS and CDNS to neutral from underweight noting both have underperformed coverage by 20% and 35% year to date, respectively. But now the valuations are more palatable and we believe each stock has catalysts; Enterprise hardware and memory/storage sector views downgraded at Susquehanna as cut NTAP (PT to $85 from $105), MU (PT to $45 from $75) and SK Hynix to neutral from positive while STX was cut to negative from neutral (PT to $32 from $53)