Wednesday, October 24, 2018
Equity Market Recap
· U.S. stocks were absolutely pummeled again, falling well below last week’s lows in unrelenting fashion as the sell-off weighed heavily on technology, industrial, material, financial and energy as the Dow Industrials and S&P 500 erased their year-to-date gains! The S&P 500 index fell for a 6th straight day (down 13 of last 15 days) and is off nearly 7% so far in October. The Dow Industrial Average fell for a third straight day and has declined 6% thus far this month while the Nasdaq Composite has underperformed peer benchmarks, down over 10% in October. Rising rate hike fears, China’s recent stock market troubles and political drama in Europe surrounding Italy’s budget with the European Union as well as the UK’s efforts to leave the trade bloc has hurt investor sentiment. Overall, every attempted rally today was met with more selling!
· Also unsettling markets today were reports of various media outlets and political figures being targets of suspicious packages. Hillary Clinton and Barack Obama were targeted by potential explosive devices sent in the mail, the Secret Service said. ABC News reported a bomb-containment unit moved the suspicious package found in the Time Warner Center, New York home of CNN, to a facility outside of New York City. New York Gov. Andrew Cuomo says a “device has been sent to my office in Manhattan, which we were just informed about. That device is also being handled.” President Trump said there’s a major investigation into suspicious packages.
· It has been a perfect storm of negative news over the last few weeks – with no rally in markets: 1) FOMC has held steadfast in that they believe best course of action is continued rate hikes and pullback on easing, 2) Saudi conflict about murdered journalist raising tensions between US and largest member of OPEC (and a big US investor), 3) UK/EU Brexit talks have not gone smoothly, leading to uncertainty, 4) EU/Italy budget fears has raised prospect of Italy possibly leaving the EU, 5) China trade talks have gone nowhere and tariffs in place are being cited by several industrial companies for lowering of profit outlooks this quarter, 6) oil markets have tumbled over the past month from 4 year highs to now 2-month lows, 7) add mid-term election uncertainty to the mix as well, 8) earnings growth is set to slow from recent tax-cut fueled highs (though Trump has been talking of more cuts for the middle-class).
· Markets have to be wondering with all the concern President Trump has exhibited about the rising rate environment in his criticism of the Fed over the last few weeks (including again last night)…and given the sharp pullback in October off record highs to start the month for major averages… will the Fed acquiesce and slow the pace of hikes next year as markets slide? Markets/investors have come to believe the Fed will “work” with markets after prior market “tantrums” had led to an easing of hikes or maintaining the current course of action.
· Sector movers; Industrials and metals were again among the biggest drags in the S&P 500 as trade fears, impact of tariffs continue to pummel the sector (MMM, CAT plunged yesterday on lower outlooks based on tariffs, rising material costs); metals fall as well (FCX, NUE, AA, CLF) as weakness in China markets and slowing growth in the country (recently lower GDP) takes “shine” off sector; Dow Transports slide under 10,100 (hasn’t been below the 10K level since February) as the recent drop in oil prices has not been enough to offset slowing global growth fear; after a brief reprieve yesterday, housing and building product names down again today after softer new home sales data; few places to hide today, with defensive utilities jumping.
· The Fed Beige Book revealed that wages and prices moved higher in the Federal Reserve’s 12 districts through mid-October but not faster than a “modest to moderate” pace. Districts across the country reported tight labor markets. Firms were using “non-wage strategies,” like bonuses and lengthy vacation allowances, to recruit workers. Overall economic activity expanded at a “modest to moderate” pace, the Beige Book said. St. Louis and New York saw weaker growth, while Dallas reported more robust conditions. There were also 51 mentions of the word tariff in the report vs. 41 in September and 31 in July.
· Important factors tomorrow in Europe as UK Cabinet ministers to hold a meeting Thursday morning at 11:00 AM on Brexit update. Also, the European Central Bank policy meeting (7:45 AM EST) and Draghi press conference following (8:30 AM EST). The Bank of Canada raised its benchmark interest rate (as expected) to 1.75%.
· New home sales for Sept fell (-5.5%) to 553,000 annual rate, the lowest since Dec. 2016 and well below the 625K economist estimate; the previous three months’ new home sales data revised down by 55K; median new home price fell 3.5% y/y to $320,000; average selling price at $377,200; 14% of new homes sold in Sept. cost more than $500,000, down from 20% prior month
· The flash reading of IHS Markit’s manufacturing purchasing managers index rose to a five-month high of 55.9 in October from 55.6, while the flash services PMI rose to a two-month high of 54.7 from 53.5 in September.
· WTI crude ends the day higher, settling at $66.82 per barrel, up 39c and bouncing off 2-month lows earlier of $66.05. Oil futures held onto earlier gains as U.S. gasoline stockpiles posted a drop that was three times bigger than expected, though crude oil inventories rose for a fifth straight week. Today’s bounce comes after global benchmark futures for crude sank by more than 4% on Tuesday, on worries about global economic growth and ample supplies.
· Gold prices slipped on Wednesday, with December gold losing -$5.70, or 0.5%, to settle at $1,231.10 an ounce as strength in the U.S. dollar pushed prices from a settlement at a three-month high a day earlier.
· The U.S. dollar was broadly higher, as the euro dropped below $1.14 for the first time since mid-August following weaker-than-expected purchasing manager’s index readings in Europe. Preliminary EuroZone services, manufacturing and composite indices for October all came in below expectations, with the euro falling to lows 1.1379 (-0.75%). Concerns about the state of Italy’s economy and the ripple effect a downturn in the Eurozone’s third largest market also weighing on sentiment. The pound fell to lows around 1.2867 (down as much as -0.85%) vs. the dollar, its lowest levels since early September as UK Cabinet ministers to hold a meeting Thursday morning at 11:00 AM on Brexit update. The dollar did dip vs. the Canadian dollar after the Bank of Canada raised its interest rates (as expected).
· Treasury market’s rise, with yields dropping below yesterday lows as investors rotate back into safe haven assets/defensive; 10-year yield drops over 5 bps to below 3.12% (after weaker housing data and yet another call from President trump to the FOMC to halt raising interest rates); the 2-yr yield down at 2.86% and 30-yr 3.33%. The U.S. Treasury sold $39B in 5-year notes at a yield of 2.977% vs. 2.971% prior to auction with the bid-to-cover (demand) at 2.30 vs. 2.39 prior auction and indirect bidders awarded 59% of the auction.
Sector News Breakdown
· Retailers; retailer group outperformed broader averages (JWN, KSS, M, ANF, NKE); LULU upgraded to buy at Canaccord and upped tgt to $160 as they recommend taking advantage of the stock’s 15% pullback over the last three weeks as we believe the risk/reward is now skewed to the upside citing LULU’s strategic initiatives; TUP Q1 EPS/sales both above consensus while profit guidance for year also above views; IRBT shares fall as tariff concerns overshadowed an impressive quarter for the robotic vacuum cleaner company after company raised its Q4 and 2018 estimates; VFC was added to JPMorgan focus list
· The National Retail Federation and Prosper Insights & Analytics released the 2018 edition of their annual consumer holiday spending survey, showing consumers say they will spend an average of $1,007.24 this year, up 4.1% from $967.13 last year
· Auto’s; TSLA and Ford (F) to report earnings after the close tonight; Bank America upgraded AN and LAD to buy from neutral saying solid operators will continue to leverage back end businesses such as “Used and Parts & Service”; LAD shares surge after big EPS beat and back year view (though revs were light) – upgraded at Bank America
· Restaurants; NDLS shares dropped after mostly in-line results and mixed guidance while also announced stock offering to sell 8.75M shares; Stifel downgraded BJRI, WING and YUM to hold from buy citing strong performance in shares as the stock’s valuation has improved to a level that they believe largely reflects the company’s significant growth potential
· Housing & Building Products; sector got a brief bounce yesterday after homebuilder PHM posted better quarterly results, helping stop the bleeding temporarily in beaten housing space; today however saw a weak New Home Sales data report (well below views), while another material company lowered its outlook as OC cut its forecasts
· Casino & Leisure movers; amusement parks weak after SIX Q3 results came in softer than expected, driven by lower attendance levels and higher operating costs (shares of SEAS were weak in sympathy); in lodging, HLT mixed Q3 results just beat on EPS miss on revs on slightly better Ebitda and raised year EPS view in hotel space, but Q4 EPS view 66c-71c below est. 71c (H, CHH, WYN, STAY all lower); casinos fall again as WYNN moves below the $100 level – hasn’t been below that level since March 2017
· Consumer staples; USNA shares dropped despite Q3 EPS beat and boosted year guidance; CAG was added to Goldman Sachs conviction buy list; SBH was downgraded to underperform at Jefferies as believe Street expectations for durable improvement in comp sales are misplaced
· Energy stocks slumped with broader commodity weakness; same issues continue to drag sector lower including rising dollar, slowing China growth, tariff impact and lower oil prices; still big earnings from major oils this week CVX, XOM and COP; RRC posted better Q3 results given better than expected NGL production and nat gas price realizations/reiterated this year’s 11% production growth target and ~$941 million budget; RES shares slipped as weaker pressure pumping activity weighs Q3 results
· Inventory data showed: the API reported that U.S. crude supplies rose by 9.9M barrels for the week ended Oct. 19, showed supply declines of -2.8M barrels for gasoline and 2.4 million barrels for distillates. The EIA also bearish data with larger inventory build of 6,346M barrels, more than the 3.7M barrel estimate with Cushing crude +1,371K (though larger than expected draws for gasoline and distillates)
· Utility stocks outperform as investors look to defensive, high dividend paying sectors as global stock markets extend their recent declines; DTE shares rise to best levels since December after big Q3 operating EPS beat and raised guidance – most names in utility space move higher (shares of PEG AEE, NEE, FE, CMSand WEC trade at 52-week highs)
· Bank movers; European banks slide after DB posted its lowest Q3 revenue since 2010 as FIC and equities trading income dropped 15%/full-year revenue will take a bigger hit than it previously expected; BCS a bit better reporting FICC revenue up almost 10% and equities trading revenue soaring 35%; HAFC underperforms in banks after Q3 earnings miss; MS was upgraded to outperform at Wells Fargo and FITB upgraded at Nomura Instinet; UBS upgraded shares of TCBI and OZK after recent pullbacks in both following weaker earnings results; results out from other banks as well: BOKF, BKU, CHFC, UMBF; P&C insurers CB and WRB also out with earnings; in consumer finance and lending; COF core EPS of $3.44, handily beating consensus of $2.88, primarily driven by lower-than-expected provision (45c benefit) and higher NII
· Asset managers and brokers; AMP posted Q3 EPS and revs above views (but asset managers weakness has continued over the last month); AB another Q3 EPS beat saying active net inflows of $2.5B were led by equity net inflows of $2.9B
· Biotech/Pharma movers; CMTA surges as plans to file the Palovarotene NDA for the episodic treatment of FOP in 2019 based on Phase 2 studies, which points to an NDA filing and potential approval of Palovarotene about 12 months earlier than estimated; FWP patent application didn’t meet the requirements for approval, U.S. Court of Appeals for the Federal Circuit ruled; ALXN reversed earlier gains after quarterly results and also announced pact with DRNA to develop and discover RNAi – giving DRNA $22M upfront; the IBB Biotech ETF fell to lowest levels since May
· Medical equipment and devices; Medical device stocks fell yesterday after DGX and WAT missed estimates and issued cautious outlooks, while overnight, EW shares dipped after Q3 sales missed views and guided next quarter profit below forecasts while posting another soft quarter for TAVR growth; BSX another weak name in space after guiding Q4 below views and lowered its full-year outlook for revs and profit; ILMN delivered a strong Q3, with revenue and EPS beating, but did not raise its FY’18 revenue guide (despite the beat); VAR mixed Q4 as EPS miss/sales beat
Industrials & Materials
· Aerospace & Defense; Dow component BA reported surging cash flow and an improved outlook/said free cash flow jumped 37% to $4.1B in Q3 while also reported earnings that beat estimates, raised its profit forecast for this year and predicted that sales would reach a record $100 billion; LMT was upgraded to buy at Goldman Sachs saying the company increasingly looks to have growth differentiators in defense – a favored end-market; NOC also raising its full-year profit view and reporting 3Q sales above estimates; GD Q3 revenue missed the lowest analyst estimate, even as EPS topped expectations, while boosted guidance
· Transports; UPS shares fall, weighing on transports after Q3 EPS in-line on slight rev beat but midpoint of year profit view missed estimates; in rails, NSC Q3 earnings and revenue topped estimates as rising demand drives record quarter; in trucking, KNX reported better Q3 EPS on in-line revs of $1.35B, with CVTIbeating (LSTR tonight)
· Metals & Materials; FCX Q3 EPS and revenue both topped consensus views and boosts full year gold sales volume forecast helped by higher production from the giant Grasberg mine in Indonesia; CRS Q1 EPS missed by 10c though sales of $572M topped estimates in steel sector; SCHN Q4 EPS and revs well above consensus (though EPS included tax benefit)
· Machinery; sector slammed yesterday on CAT cautious outlook; in research PCAR was upgraded to overweight at Piper while firm downgraded NAV to neutral citing results from our 5th annual truck brand survey as 743 fleets responded to the survey (PCAR was downgraded at Argus)
· Industrial movers; CAT pulls back further after yesterday cautious outlook, touching fresh 52-week lows earlier; IR Q3 EPS/revs beat and slightly inches up its year profit outlook; waste industry weak after Bank America downgraded RSG and ADSW to neutral as predicts will be an “uninspiring” third-quarter earnings season for waste-management stocks; ITW full-year EPS midpoint of guidance missed ests; VMI falls to two-year lows after Q3 results; CSL drops on earnings with Oppenheimer saying 3Q EPS of $1.59, below $1.70E on weaker than anticipated CCM results
· Chemicals; SMG was upgraded at Bank America based on our belief that the Street under-appreciated risks to FY19, including cost reversal after deep cost cuts in FY18, Hawthorne organic delivery and potential SMG needs to lower Sunlight accretion; GRA rises post Q3 results; raises FY18 outlook
Technology, Media & Telecom
· Internet; ETSY was upgraded to Equal Weight at Morgan Stanley saying they were wrong about the company’s ability to successfully turn around its business; online travel names got a boost after TRVG boosted its profitability forecast for 2018 and said it’s improving the quality of traffic referred to advertisers; though TZOO weighs on industry after weaker Q3 results
· Semiconductors with bad guidance overnight; semi bellwether TXN disappointed with a forecast that suggests its customers are bracing for weaker demand/Q3 rev growth decelerated to 3.5% Y/Y from 11.4% and 8.8% in the prior 2 Qs and the company guided to below consensus for 4Q; STM said gross margins are likely to remain flat, even though it forecast sales growth this quarter (STM an AAPL chip supplier – weighs on supply chain SWKS, AVGO, CRUS); group was broadly lower on slowing chip demand fears (MKSI, TER also movers on earnings)
· Media & Telecom movers; AT&T (T) earnings results did not come in as strong as VZ did yesterday, with Q3 EPS missing while reported a loss of 232,000 regular monthly wireless subscribers (vs. est. +89K) with big factor the loss of 420,000 tablet customers in the quarter. If you strip out tablets and other devices, AT&T added 69,000 regular monthly phone customers; DXC falls as the head of DXC Americas has left, The Register reports, saying the reason for his exit is believed to be a double-digit drop in the region’s sales ; VIAB shares underperformed broader media names
· Hardware & Component news; 3d sector active after Piper upgraded DDD to neutral given a significant product win with Align, Figure 4 platform launch, and easy comps that will help accelerate product growth for the next few quarters, but said prefer investments in MTLS and VJET; JNPR reported in-line 3Q revenues and EPS above estimate due to margin outperformance yet guided down 4Q18 as sees continued project delays from cloud customers
· Software movers; few names in the sector report earnings with CHKP profit tops estimates, buys cloud security firm Dome9; MANH falls with broader tech despite posting beat and raise quarterly results; MSFT quarterly earnings after the close tonight