Wednesday, October 31, 2018
Equity Market Recap
· U.S. stocks surged on the final trading day of the month, with the Dow and S&P posting their best two-day gain since February as major averages pare their monthly declines. The S&P 500 index and Nasdaq Comp also did something for the first time in a month…posted back to back winning sessions! With this month’s declines, the S&P 500 snapped its 6-month winning streak, falling over 6%, while the NASDAQ fell over 8% (was down more than 12% at one point) and the Dow fell over 4% for October. The Dow Industrials rose as much as 450 points after earlier moving back above its 200-day MA of 25,132 (CNBC noted the Dow Industrial Average has moved on average 266 points per day this month), while the Nasdaq nearly rose 3%.
· Overall, it was a nice bounce out of correction territory for major averages but risks still remain with upcoming midterm elections to potential contentious trade talks with China among other items (rate hikes, Europe, tariff impact). Oil prices fell over 1% to 10-week lows, ending October down nearly 11%, while the dollar posted 2% gains vs. the euro and Pound. It has been a very busy week of earnings, with tech getting a bounce after results from FB, EBAY came in better than feared, lifting the beaten up Nasdaq Composite. Food stocks dipped with Kellogg missing views and cutting forecasts while consumer staples in general mixed on results (CLX falls on outlook, EL rises). Autos rise as GM results easily top consensus, while transports in general rise with overall market. Energy stocks get a boost on better earnings results from HES, CXO, HFC though the rally was broad based. Financials, specifically regional banks outperformed, helped by the Fed proposing to ease regulations for all but the largest banks.
· Private payrolls jump the most in 8-months in October, as ADP reported 227,000 new jobs, topping the 187K estimate; large businesses, meaning those with about 500 employees or more, appeared to lead the way, as they added 102,000 jobs – data comes ahead of nonfarm payroll report this Friday with estimate for 195K jobs added
· Chicago PMI index falls to 58.4 from 60.4 in prior month and below est. 60; Prices paid rose at a slower pace, new orders rose at a slower pace, while employment rose at a faster pace; production rose at a faster pace, and order backlogs rose at a slower pace
· Employment Cost Index (ECI) for Q3 rose 0.8% vs. the economist est for up 0.7%; the prior quarter unrevised at 0.6%; wages rose 0.9% q/q and benefit costs rose 0.4% q/q; wages and salaries for private industry workers rose 3.1% for 12-month period ending in Sept
· Oil prices drop on the day and month; WTI crude ended the day down 87c, or 1.3% to settle at $65.31 per barrel, its lowest settlement since mid-August, posting a roughly 10.8% decline for October, its worst month return since July 2016. Concerns over the global economy (China slowing growth) and major producers (Saudi boosting production ahead of Iran sanctions in Nov) weighing on sentiment, coupled with rising domestic supplies. Earlier today, the EIA reported domestic crude supplies rose by 3.2M, in-line with estimates and followed five consecutive weeks of gains. Gasoline stockpiles declined by -3.2M barrels last week, while distillate stockpiles fell by -4.1M barrels. Meanwhile, API reported U.S. crude supplies rose by 5.7M barrels for the week ended Oct. 26 (sixth straight increase is the longest streak since March 2017).
· Gold prices slide -$10.30, or 0.8% to settle at $1,215.00 an ounce, falling as investors rotated back into risker assets and out of defensive/safe havens, while the recent jump in the dollar (52-week highs) also weighing on commodity prices. However, month-to-date losses for major U.S. stock indexes have helped to pull prices for the precious metal up in October, finishing the month with a gain of about 1.6% (but prices down from monthly highs just shy of $1,240 an ounce).
· The U.S. dollar ends the day and month at highs, with the dollar index setting new 52-week best of 97.20, rising vs. its European counterparts over the last few weeks, while the “safe-haven” yen dropped after BoJ news last night and the Mexican Peso extends declines. Economic data in the U.S. has been solid, with strong private payroll data earlier today, while data from the EuroZone and China have recently weighed on those currencies. China’s October manufacturing purchasing managers index, slowed to 50.2, just above the contraction line. The British Pound rebounded back above the 1.28 level briefly against the dollar after the UK Secretary of State Raab said he expects a Brexit deal by November 21st – but pared gains (down roughly 2% this month – off Oct 12 highs 1.3258). The euro slipped to lows around 1.13 and was also down 2% for the month. The Bank of Japan left its monetary policy unchanged but reduced the number of days on which it will buy shorter dated bonds while increasing the amount it can buy. The Peso extends drop as Mexico airport move unsettles investors. Bitcoin prices edged higher today but has been stuck in fairly tight ranges the last few weeks above $6,300 (still down about 67% from all-time highs). Currency markets also eagerly watching potential impact of midterm-election risk. Turkey’s lira plunged and bonds fell after the government announced a wide range of tax cuts fueling inflation concerns.
· Treasury prices declined as investors rotated back into riskier assets, as the yield on the benchmark 10-year rallied to 3.15% and the 2-year back to 2.87% (off last week lows around 3.06% and 2.82% respectively). Stronger US economic data and the rising dollar helped push bond yields higher. The Treasury Department announced it will sell a record $83 billion in notes and bonds next week at its quarterly refunding auction. This is $5 billion larger than the package announced last quarter.
Sector News Breakdown
· Auto sector higher after GM posted a surprise increase in profit on strong demand for higher-priced Cadillacs in China and SUVs in the U.S. and hinted full-year EPS may be at the high end of the range; SPAR missed Q3 estimates and lowered FY2018 earnings guidance
· Retailers; BGFV weighs on sporting goods stores after same store sales fell 2.0% in Q3, and sees same store sales falling in the range of negative low single-digits to positive low single-digits; IRBT announces pact with GOOGL on Smart Home as vacuum users can direct the robot to clean a specific room using the Google Assistant with a simple voice command; TCS plunges as JPMorgan downgraded after company Q2 EPS missed by 4c on lower sales
· Consumer Staples; busy day of consumer staple earnings as CLX slips after the company reduced its year EPS outlook, citing fewer expected share repurchases and more pronounced FX and cost pressures (now sees FY19 EPS $6.20-$6.40, vs. prior $6.32-$6.52 on lower margins); in food, Kellogg (K) said it expects EPS growth of 7% to 8% vs. +11% to +13% prior range citing factors including a shift in mix are impacting Kellogg’s bottom line; beauty stocks active after EL Q1 results topped estimates, raised its dividend and buyback and raised its year adj. EPS forecast; TAP reports third-quarter profit up from year ago, tops expectations; HLF and NTRI also active on earnings results in the diet/supplement sector
· Restaurants; BJRI 6.9% comp in 3Q18 exceeded the +4.5% mean on better earnings; DENN was upgraded to overweight at Stephens following earnings, while HABT was upgraded to buy at Maxim after its earnings results; CAKE mixed results as beat on top and bottom line but comps of 1.5% blended missed the 1.9% Street est. and tightened guidance; YUMC was upgraded to buy at Bank America amid boosted buyback plan and stabilizing KFC results; YUMjumped the most in almost six months after posting same-store sales and profit that topped analysts’ estimates; DIN slips as Q3 EPS and sales beat while raises year comp view for Applebee’s but lowers iHop comps
· Casino & Leisure movers; in lodging, Hyatt (H) mixed results but boosts outlook lifting rival hotels; in gaming, IGT rises after bottom-line results topped expectations, despite a slight revenue miss; MGM also rises following its earnings results with a 39% jump in Q3 operating income for MGM China helping lift sector
· Inventory data bearish: the Energy Information Administration reported domestic crude supplies rose by 3.2M, in-line with estimates and followed five consecutive weeks of gains. Gasoline stockpiles declined by 3.2 million barrels last week, while distillate stockpiles fell by 4.1 million barrels, according to the EIA. Last night, API reported U.S. crude supplies rose by 5.7M barrels for the week ended Oct. 26 (sixth straight increase is the longest streak since March 2017), showed supply declines of -3.5M barrels for gasoline and 3.1 million barrels for distillates
· E&P sector; HES tops expectations for Q3 earnings and revenues, helped by higher prices for its oil and a 62% reduction in costs; APC slightly better than expected oil volumes (US GoM) offset by weaker oil realizations for a largely in-line result; CXO rises on another strong operational quarter (beats on oil production, EPS, CFO), with its largely in-line 2-year guidance; WLL reported a 9%/6% cash flow beat relative to Street due to stronger NGL realizations but reported inline oil production/Q4, production volumes a bit lighter than anticipated; frac sand weak as HCLP sees a negative hit to 4Q volumes from continued weakness in completions activity, as well as typical seasonal slowdowns (EMES, SLCA, SND)
· In equipment and or services; refiners HFC Q3 earnings surge as refining margin expands, beating EPS by 30c on higher revs; PBF also active on refiner space, with better Q3 EPS and revs though cut its East Coast throughput forecast for the full year; in equipment, NBR outperforms in energy after earnings/despite cautious margin comments for Q4; BHGE was upgraded to buy at Guggenheim but downgraded to hold at Jefferies; WFT downgraded at UBS and Guggenheim
· Utilities & Solar; utilities lower as defensive sectors underperform; ETR up after operating EPS beat views, while EIX among worst performers despite EPS/rev beat as co said cant estimate losses from Thomas fire/sees material losses/higher borrowing costs from fire; SPWR shares fall as sees impact from solar; in solar, SPWR falls on earnings on slowing China demand
· Bank movers; regional banks higher with the KRE ETF outperforming as some of the largest regional banks in the US will no longer have to undergo annual stress tests on their balance sheets as part of a range of proposals by the Federal Reserve. The Federal Reserve set to vote on proposals Wednesday that would soften requirements for lenders with assets of $700 billion or lower. Banks with between $100 billion and $250 billion of assets would no longer have to adhere to liquidity coverage ratio and proposed net stable funding ratio. Firms between $100 billion and $250 billion would also face stress tests every two years, instead of annually. Non-Wall Street banks that have more than $250 billion of assets would move to a “calibrated” liquidity coverage ratio that is in the range of 70%-85% of full LCR, Quarles says
· Regional banks CMA, FITB, MBFI, RF, SNV upgraded at Raymond James saying now is the time to buy higher quality names on sale; in insurance, AIG was upgraded to buy at Deutsche Bank on valuation after sell-off; VOYA with new $500M stock buyback program, better-than-expected Q3 earnings, and its decision to cease new individual life insurance sales at the end of the year.
· Services; ADP rises after its Q1 earnings showed broad growth in profitability amid solid revenue gains as the company beat expectations and raised full-year guidance; DBD and NCR also both rally after better than feared results; DBD beat expectations slightly and provided a slightly better adjusted Ebitda outlook; FLT jumps on better earnings/outlook
· Pharma movers; NVS said the FDA approves its unit Sandoz’s MYRIMO, a biosimilar to ABBV’s Humira (shares of ABBV under pressure all day); SNY quarterly profit beats estimates while the low end of profit forecast raised
· Biotech movers; CLVS shares fall as EPS loss of ($1.71) worse than expected as a result of lower revenue and higher operating expenses while Rubraca sales of $22.8M missed $32M est.; KMPH shares rise after collaboration and license agreement with KVK Tech for U.S. commercial rights to APADAZ/KMPH will receive up to $3.4M in pre-launch payments, up to $53M in sales milestones; ACAD mid-stage study of Nuplazid in major depression narrowly met the main goal of showing an improvement in symptoms; AMGN boosts year outlook as 3Q EPS and revenue beat
· Medical equipment and devices; ARAY shares jumped as much as 30% after noted China’s health ministry released a new quota for large-scale medical equipment for up to 154 new surgical robots in China by end of 2020 (shares of ISRG also moved in reaction); EXAS 3Q sales beat and raised its outlook for the year as forecast that 910K Cologuard colon cancer tests would be completed in 2018 (prior view was the low end of 900,000 to 920,000 tests); IART falls as misses 3Q revenues and lowers guidance for the year; BEAT jumped on earnings while NUVA posted a mixed quarter
· Healthcare services and providers; OMI shares fall as Q3 revenue missed estimates and cuts its FY outlook, while cutting its dividend to 7.5c from 26c; ANTM posts Q3 beat and raise quarter; BAX Q4 EPS missed the lowest estimate and guided Q4 below views sending shares lower
Industrials & Materials
· Industrial & Machinery; after hitting its lowest level in a decade and breaking below $10 per share, UBS upgraded GE to buy today with a $13 tgt amid conviction that CEO Larry Culp can lead a turnaround of the business; GDI added to the Americas Conviction List with a $34 12-month price target at Goldman Sachs; in E&C sector, MDR shares fall after top/bottom line miss, cut the estimated value for some projects, announced the sale of assets to reduce debt, and planned to sell $300 million in preferred stock; AGCO upgraded to neutral at JPM on valuation; CMI was upgraded at both Baird and JPMorgan after pullback
· Aerospace & Defense; ARNC rises on Reuters report APO is in advanced talks to acquire the company for over $11B as the private equity firm could reach a deal as early as next week ; Dow component BA continues to rebound from its 6.5% decline on Monday, nearly recovering all its losses the last 2-days
· Transports; group strong with rally in overall market; SKYW upgraded at Evercore/ISI on the recent 22% share pullback since September, stable earnings outlook and sharp positive free cash flow inflection expected in 2019; trucker CHRW advanced as Q3 results matched estimates
Technology, Media & Telecom
· Internet; FB mixed results as 3Q results that were less than 1% below consensus revenue estimates, while EPS beat and user growth came ahead of consensus expectations/4Q outlook for revenue growth was modestly improved versus guidance given last quarter; EBAY reported 3Q, including total GMV growth of +5% YoY, decelerating QoQ, and EPS beating by a penny driven by a lower tax rate/operating margin below and the U.S. Marketplace business decelerated 4pts QoQ to +2%; SFLY 3Q18 results were mixed with core consumer growth missing guidance as reduction in free promotion continued to drag down revenue growth; IQ and BIDU posted slower advertising growth due to regulatory headwinds and macro uncertainties
· Semiconductors; QCOM was downgraded to neutral at Bank America; NANO upgraded to buy at Stifel after announced Q3 beats yesterday and acquired 4D Technology, an interferometric measurement company, for $40M; a few earnings overnight in semi space with MXIM, MXL reporting
· Software mover; ZEN beat on the top and bottom line and raised revenue guidance again for ’18/incrementally positive was an increase in enterprise revenue from 38% of revs in Q2 to 40%; CTSH downgraded at BMO Capital after earnings; PAYC falls despite beat and raise
· Video gamers jumped yesterday on better TTWO game sales and SNE raising forecasts; overnight EA Q3 revs missed estimates while earnings beat and changed guidance while mobile and live services net bookings are expected to see no and low single-digit growth, respectively, while full game download is expected to grow 20-25% Y/Y; BILI rises after announcement of partnership with Japanese mobile-game company
· Internet security; FEYE better Q3 results and guidance as product billings grew 5% y/y in 3Q18 compared with Deutsche Bank estimated high teens decline in 1H’18; QLYS posted quarterly beat and raised guidance but shares were soft initially
· Telecom & Media movers; TMUS reported a solid quarter with 773K postpaid phone adds, above Street-high 700K estimate, while revenue growth of 8% was in line, EBITDA (up 15% on a cash basis) was a 200bps normalized beat and churn low at 0.95%; Sprint (S) also good results as boosts FY adjusted Ebitda view, 2.0% above est. after topping quarterly profit and revenue outlook; Citi upgraded SBAC to buy and cut AMT to neutral; LKSD agreed to be acquired by QUAD, in a deal valued at $1.4B, including debt or $11.41 per share
· Hardware & Component news; 3D stocks slump after DDD missed on both the top line and bottom line, with EPS 2c/$164.5M vs. 3c/$165M lowest estimate (SSYS, XONE move); TTMI guided Q4 well below Consensus, with revenue of $740M at midpoint vs. est. $827M with shortfall primarily from the smartphone segment
· Other gainers on earnings: ATEN, CDW, CRAY, MOBL, MXL, QNST
· Other decliners on earnings: BHE, PAYC, QLYS