Tuesday, October 30, 2018
Equity Market Recap
· U.S. stocks rallied on Tuesday, recovering all of yesterday’s declines, as investors scooped up beaten up stocks and markets were hopeful for a trade deal with China as U.S.-China trade talks set to be a focus for investors in coming weeks, with a looming Trump-Xi meeting at the G-20 summit scheduled for next month. President Donald Trump blamed Democrats for what he called a market “pause,” earlier today as the party is favored to win control of the House in next week’s midterm election. A week ago, the president blamed the Federal Reserve amid their rising interest rate hike cycle. Overall, markets rebounded out of correction territory in what has been a 3-week stretch of extreme volatility following months of complacency.
· A couple of top headlines today (outside of the earnings barrage which continues all week), included a further rebound in beaten up sectors like homebuilders, GE trades to single-digits for lowest level in 9-years after earnings miss and slashing dividend; Internet stocks hit again (NFLX, AMZN) ahead of FB earnings tonight; Pharma weaker (PFE, AGN) after earnings misses; energy stocks remain depressed as oil sinks further and there were two M&A deals as CHK buys WRD in oil patch while MKSI buys ESIO for 100% premium in the chip sector. Speaking of the semi sector, better earnings from KLAC helped lift the group, while analysts defend some names after sell-off (NVDA upgraded at JPM). The dollar index (DYX) traded to 52-week highs amid a decline in the British pound and Euro, while Treasury yields inched higher. Consumer confidence came in at 18-year highs today as US data remains better, while GDP in Europe disappointed.
· In an interesting data point according to Dow Jones market data, if the S&P 500 index ends lower in either of the final two sessions of October, it will mark its 17th down day, representing that the highest number of down days in a month since April 1970. The broad-market index’s current number of declining sessions already ranks as the most since 2008.
· Consumer Confidence for Oct rose to 137.9 from 135.3 in the prior month and above the est. 135.9; the present situation confidence rose to 172.8 vs. 169.4 last month while consumer confidence expectations rose to 114.6 vs. 112.5 last month.
· The S&P/Case-Shiller 20-city index rose a seasonally adjusted 0.1% and was 5.5% higher compared to its level a year ago, the lowest annual increase in 20 months. S&P CoreLogic Case-Shiller National Home Price index rose 5.77% y/y in Aug. after rising 5.99% in prior month. S&P/Case-Shiller 20-city NSA index at 213.72 after 213.77 in July
· Precious metals dropped slightly, falling by -$2.30 to settle at $1,225.30 an ounce, adding to small declines yesterday and pulling further back from multi-month highs reached last week. Given the volatility in global stock markets, gold prices have found footing in recent weeks, but dipped today as the dollar index moved back near 52-week highs as the euro and pound sunk.
· Energy futures were under pressure the whole day, but WTI crude ended off its worst levels, falling 86c to settle at $66.18 per barrel (off earlier lows of $65.33 but at 2-month lows) ahead of weekly inventory data later tonight (API) and tomorrow morning (DOE). The same issues are plaguing energy sentiment such as rising inventory (data last few weeks been very bearish), Saudi Arabia raising production to offset the expected decline in barrels from Iran amid upcoming sanctions, and slowing global demand with China growth slowing.
· The U.S. dollar rises to 52-week highs, as the dollar index (DXY) topped the 97 level (vs. year high 96.98), gaining ground again the Pound and euro. The euro dropped following another negative data point after a Q3 EuroZone GDP reading disappointed. The dollar rises vs. the safe-haven yen as well with money moving back into US stocks today. The midterm elections and FOMC rate hike trajectory are potential risks to the buck which is up roughly 5% for the year. The British Pound was under pressure, falling as much as -0.5% to around 1.273, lowest levels since mid-August (which was also 52-week lows of 1.2662), on fears a no-deal Brexit, which S&P said could push U.K. into a moderate recession and lower the economy’s long-term growth potential). The Aussie dollar was higher across the board on hopes for a trade deal between the US and China.
· Despite the increased volatility and market gyrations for U.S. stocks over the last three weeks, Treasury markets have traded fairly orderly, with yields edging higher today as investors rotate back into stocks and out of defensive plays (gold, yen, bonds slipped). The 10-year yield edged up a few basis points to 3.106%, but remains off its multi-year highs around 3.27% earlier this month, while the 2-yr was around 2.84% (off its decade highs of above 2.9%). Treasury markets slipped on better US data (confidence at 18-year highs) and a stock rebound, while markets keep a close eye on the Fed and its interest rate path (does it change given the stock rout?)
Sector News Breakdown
· Retailers; UAA a standout to the upside after posted better-than-expected earnings for Q3, beating by 12c while inventories were down 1% to $1.17 billion/boosted its EPS forecast for the full year to as much as 22c from as much as 19c and full-year revenue-growth expectations remained flat; JWNupgraded to outperform from neutral @ Wedbush – as see upside of ~20% from current levels to $75 per/share, and are adding shares of JWN to the Wedbush Best Ideas List; DDS was removed form best ideas list and downgraded to neutral; TPR beat for the quarter – note retail has been a strong sector over the last week despite the stock market pullback; ACCO drops sharply on Q3 miss and lowered outlook
· Consumer Staples; MDLZ Q3 EPS beat and FY18 guidance was reiterated; net sales were -40bps vs. Street; Dow component KO Q3 EPS/sales just above consensus and reaffirms year outlook while Q3 3Q organic sales growth of 6% was relatively in-line with consensus; HSY was upgraded to neutral at Credit Suisse
· Auto’s; GPC was downgraded to underperform at Bank America saying with the planned spinout of GPC’s office products division to Essendant (ESND) now terminated, the company is left with an unloved asset that lowers the overall company’s margin and growth profile; FCAU Q3 profits beat expectations thanks to sales in North America/announces $2.3B extra dividend
· Restaurants; TXRH falls following the company’s 3Q EPS miss reflecting lower margins (labor, G&A) that more than offset continued strong comp outperformance; WING posted better Q3 comp sales of 6.3% topping the 4.1% estimate; EAT mixed Q3 as EPS beat, while comp and overall sales fell just short of consensus views
· Housing & Building Products; several building product related companies moving on earnings today including, LL, AWI, MAS, SSD, TREX; in housing, WLHslides after it softens guidance for the rest of the year as higher house prices and interest rates make home ownership less affordable; VMC Q3 results and full-year forecast beat market expectations, helped by higher aggregates pricing and declining unit costs (EXP, SUM, MLM active today)
· Energy stocks; oil prices opened the day weak, with WTI crude sliding below $66 per barrel before rebounding; in earnings, BP handily beat Q3 earnings expectations, with its $3.8B underlying profit more than double the year-ago quarter and the company’s highest tally in five years, and increasing revenues 32% Y/Y to $79.5B; HES was upgraded at Barclay’s following the pullback in shares ($66 tgt); in refiners, PSX upgraded at JPMorgan to overweight
· E&P sector; WRD to be acquired by CHK in a cash and stock deal valued at about $3.977B; under the terms of the deal, WildHorse shares will receive 5.989 Chesapeake shares or a combination of 5.336 shares plus $3 in cash, for each WildHorse share owned ; CLR Q3 EPS beat as company cut debt; earnings tonight from APC, CXO
· Drillers and services; drillers active after RIG and ESV report earnings *ESV guided Q4 revs below views); BHGE dipped on earnings and said decided not to continue with its share buyback program in Q3, and that resumption waits on clarity from GE’s next steps
· Utilities, solar, and coal; SCG spiked after South Carolina ORS recommended that the new settlement be approved on Dominion deal, according to testimony in regulatory filing, Bloomberg reported; CNX reported Q3 EPS miss while BTU rises on results in coal space; AQUA falls after warning it now expects FY 2018 revenues of $1.33B-$1.34B, up 7%-7.4% Y/Y vs. its prior expectation of $1.34B-$1.37B
· Bank movers; financials helped lead gains yesterday, though were mixed on the day as investors put money to work in other beaten up sectors; in consumer finance and lending; MA Q3 EPS beat by 10c on higher revs of $3.9B with 3Q purchase volume +15% and 3Q cross-border volumes +17%; ELVT shares plunge after reporting disappointing Q3 earnings and slashing annual guidance; CACC posted a beat on both top and bottom line for Q3
· REITs; big night of earnings; UDR 3Q adjusted FFO was in line with expectations, and management’s 2018 adjusted FFO guidance ticked up 0.5% at the midpoint; TCO reported a big 3Q beat, driven primarily by a stronger core performance (and other income), which exceeded expectations and led management to raise the FY comp center NOI forecast for the second straight quarter; CBL falls as posted 1c miss though management maintained its FY 2018 FFO guidance/ slashed the dividend 63% for 2019 to an annualized rate of 30c from 80c; AVB reported a 3Q core FFO beat, and management increased 2018 core FFO by 0.3% at the midpoint
· Services; HRB announced that during the 2019 tax season it would reduce assisted tax preparation prices for many customers while increasing transparency by allowing customers to calculate how much they will pay before the tax prep process begins
· Brokers and exchanges; SCHW was upgraded to buy by two analysts after pullback in shares (Raymond James and Deutsche Bank both up rating); ETFC was downgraded at Raymond James to better reflect the absence of a likely sale scenario from their investment thesis
· Pharma movers; PFE lowered the top end of its full-year sales outlook partly blaming the strength in the US dollar and said its Q3 revenues missed estimates even as profits jumped 45%; ALKS falls as FDA briefing documents raise questions about Alkermes drug including statistical methods, safety; AGN 3Q results beat estimates and posted a 2018 forecast increase, driven by one-time factors like lower expenses and a delay to competition for the company’s eye treatment; IRWD falls after partner Allergan reported sales of Linzess that missed analysts’ estimates; AZN said that it has agreed to sell certain rights to two drugs to Gruenenthal Group for an upfront payment of $815 million
· Managed care active after earnings results from AET and WCG; WCG shares slipped as its implied 4Q EPS guidance of $1.40-1.50 fell short of consensus estimate of $1.66; AET reported Q3 EPS and revs above consensus as medical membership up to 22.1M/said given pending CVS transaction, not hosting conference call in conjunction with 3Q results
· Biotech movers; VCYT spiked higher after its Q3 results came in better and raises FY18 revenue view to $90M-$91M from $87M-$89M; HALO said it licensed its Enhanze drug-delivery technology to RHHBY for exclusive development of a new undisclosed clinical-stage therapeutic target,
· Medical equipment and devices; OFIX traded to 52-week highs following 3Q18 results which came in slightly ahead of expectations wile Spine-Fix (net of Spinal Kinetics) and Biologics continued to drag on overall growth, BioStim and ExFix each benefitted; QGEN shares rose after boosting its full-year EPS outlook and posted strong operating margins
· Healthcare services and providers; hospital providers report earnings as CYH 3Q adjusted EPS loss was wider than est. and cut its outlook, while HCA Q3 revs and Ebitda top views while boosted its year revenue outlook, but JPM noted 3Q Ebitda beat was derived from a reduction of HCA’s liabilities reserves; AMEDraised its full year 2018 outlook by less than the 3Q18 upside; CHE a top performer after Q3 EPS/rev beat and guidance above views for the year; AXGN rises as revenues saw a sharp rebound from 1Q/2Q and the company posted 41% 3Q rev growth; HIIQ after earnings/positive analyst comments (Lakestreet raised tgt to $75)
Industrials & Materials
· Industrial & Machinery; GE cut its dividend for the second time in less than 12 months, as it reported earnings below analysts’ expectations and announced a radical restructuring of its divisions; FLIR falls on mixed Q3 as EPS beat but revs miss and guides year forecast below estimates; AOS rallied off early weakness after Q3 EPS miss and lowered guidance; KKR rises on earnings results
· Machinery; ALSN reported 3Q sales above estimates and raised its full-year sales growth outlook which reflects increased demand in Global On-Highway and Global Off-Highway products, price increases and continued execution of growth initiatives/expects 4Q net sales to be up from the same period in 2017 and down sequentially (peers PCAR, NAV, CMI, WBC, WNC, MTOR); ETN Q3 net earnings per share were $1.43 in Q3, an increase of 14% over the same period a year ago, but in-line with estimates; CMI and AGCO also with quarterly beats
· Truckers active after Bank America double upgraded ODFL to buy following the 30% pullback and says quality of business too good to ignore; XPO also upgraded to buy at Bank America as shares have fallen over 25% from all-time highs in late September; WERN was upgraded to overweight at KeyBanc following their annual shipper survey, as are incrementally confident in our 2019 estimates given more favorable pricing commentary relative to our expectations
· Airlines; JPMorgan with a few changes, arguing that the case for industry margin expansion remains the best they’ve seen in four years/says most stocks are within 10% of their autumnal lows, suggesting seasonal trade-winds may lift equities as they often do; they upgrade JBLU to overweight, downgrade LUV to underweight, and cut UAL and SAVE to neutral; AAL was added to the US focus list at JPMorgan
· Aerospace & Defense; BA shares dragged the Dow lower yesterday on crash news of 787 and on negative China/US tariff headlines; ARNC posts Q3 beat and raised guidance; defense stocks (NOC, LMT, LLL) have extended losses on fears of slowing gov’t spending and pared back deals with Saudi Arabia amid tensions with country on US journalist murder
Technology, Media & Telecom
· Internet; FB to report earnings after the close – could help a very beaten up FAANG space after weak earnings this quarter have sunk shares in AMZN, GOOGL, NFLX and SNAP; AKAM rises after Q3 beat and better guidance as analysts raise tgts (upgraded @ SunTrust)
· Semiconductors; MKSI agrees to acquire ESIO in a deal valued at $1 billion; MKSI will pay $30 in cash for each ESIO share a 101% premium ; KLAC reported solid results in F1Q, beating estimates across all metrics; NVDA upgraded to overweight with $255 tgt at JPMorgan saying it has a strong long-term growth outlook thanks to its gaming division and position in driverless car technology; IPGP shares fall as lowers FY18 revenue growth view to 1%-4% from 7%-9% after in-line Q3 results (guides Q4 below views); KEM up on earnings
· Software mover; APTI posted a solid beat and raise quarter, and raised 4Q revenue guidance but shares fell around billings volatility in 3Q and less incremental operating margin expansion; BLKB reported Q3 revenue and EPS above consensus expectations/reiterated its 2018 guidance in line with the previously lowered guidance earlier this month; APPF posted 3Q revenue higher than expected, though lower EPS on acquisition- and litigation-related expenses
· Video gamers; TTWO rises as reports its new game Red Dead Redemption 2 has achieved $725 million in worldwide retail sell-through during its first three days; SNE raised its earnings outlook for a second straight quarter, thanks to a series of hit video-game titles that have boosted its PlayStation business; NTDOY Q2 operating income of 30.87 billion yen missed the estimate 37.89 billion yen while net income beat, but sales were weaker
· Hardware & Component news; Carl Icahn reports a 9.3% stake in Dell’s (DVMT) tracking stock, up from the previously disclosed 8.3%; AAPL introduced a new MacBook Air with retina display at an event in Brooklyn, N.Y. The device has a 13.3-inch screen with limited bezels, and it has four times the resolution of the prior model; IBM boosted share buyback to $4B
· Other gainers on earnings; AMKR, AMT, INST, SANM, ST
· Other decliners on earnings: CTSH, HLIT, I, PI, RMBS, SSTK