Market Review: November 01, 2018

Terrie AmengualDaily Market Report

Closing Recap

Thursday, November 1, 2018

Equity Market Recap

· U.S. stocks extended their winning streak to three straight sessions, as markets continue to try and repair the damage done over the last few weeks which saw major averages fall over 10% from their record highs on trade and earnings concern. The tech heavy Nasdaq Composite outperformed, rising as much as 1.6% to touch highs above 7,425 (well off the lows of 6,922.82 late Monday). Semiconductors were among the biggest gainers, rising nearly 5% on the day, while tech in general recovers ahead of Apple earnings tonight. Biotech also a strong move off recent lows, gaining nearly 4% on the day. Transports surged, getting a lift from soaring airlines as that group also recovers from recent lows. The industrial and materials sectors benefitted from a President Donald Trump tweet of progress in trade negotiations with China during a phone conversation with President Xi. Reports indicated that Xi is open to talking with Trump about trade and other issues during the G-20 in Argentina. A batch of optimistic earnings also helped lift shares, with Dow components DowDuPont rallying the most since 2015 on its results. One sector failing to rally includes energy as oil prices fell another 3% after its 10% decline in October, while financials lagged after leading markets higher yesterday.

· The U.S. dollar fell on weaker manufacturing data, helping propel gold prices to their best levels since mid-July (after falling to 3-week lows yesterday) while emerging markets jumped. The British Pound spiked more than 2% after a London Times reported a Brexit deal has been reached for banks despite European officials denying the story. In the UK, policy makers voted unanimously to leave the Bank of England’s key lending rate unchanged at 0.75%. Concerns over the Brexit process were expected to make the central bank reluctant to further tighten policy at its November meeting.

Economic Data

· Weekly Jobless Claims fell 2K to 21K, slightly above the 212K est., while prior week was revised to 216K from 215K; the 4-week moving average rose by 1,750 to 213,750; continuing claims fell 7K to 1.631m in the week ending Oct. 20

· U.S. nonfarm productivity rises 2.2% in Q3, slightly above the 2.1% estimate; unit labor costs rose 1.2% in 3Q vs. down 1% prior quarter; output rose 4.1% in 3Q vs. up 5% prior quarter; employee hours rose 1.8% in 3Q vs. up 2% prior quarter; compensation per hour rose 3.5% in 3Q vs. up 1.9% prior quarter and real compensation rose 1.4% in 3Q vs. up 0.3% prior quarter

· ISM Manufacturing falls to 57.7 from 59.8 last month and was below the 59.0 estimate; component breakdown: new orders fell to 57.4 vs 61.8 prior (now lowest level since April 2017), while employment fell to 56.8 vs 58.8 and prices paid rose to 71.6 vs 66.9

· Construction Spending was unchanged, matching the consensus estimate, while Aug. was revised to 0.8% gain from 0.1%; Private construction rose 0.3% in Sept., private residential construction rose 0.6% and private nonresidential construction rose 0.1%

· Markit Oct. Manufacturing PMI 55.7 vs. flash reading 55.9, from 55.6 in Sept. and vs. year ago 54.6 (marks the highest reading since May 2018); employment rises to 55.5 vs 53.6 in Sept., while new orders rise vs prior month


· Oil prices fell further on Thursday, adding to Octobers 10% decline for WTI crude, with prices slipping -$1.62, or 2.5%, to settle at $63.69 a barrel, as WTI traded near a seven-month low as fears of a major economic slowdown in China, along with record U.S. production and increased output by Russia and Saudi have weighed on prices this week. WTI crude no bounce after suffering a 10% decline in October.

· Gold prices snapped back in a big way on Thursday, rising $23.60, or 1.9%, to settle at $1,238.60 an ounce, getting a lift from the decline in the dollar, as gold finished at their highest since mid-July, just a day after setting 3-week lows! Weaker US economic data (in the form of ISM) ahead of the monthly nonfarm payrolls report tomorrow, helped support gold.


· The U.S. dollar falls across the board, but biggest decline vs. the British Pound on the day. It was just a day ago that the U.S. dollar touched its highest levels of the year (rising more than 2% for the month vs. major currencies), but fall over 0.85% today to the 96.30 level (yesterday highs 97.20) amid a combination of weaker US data (ISM at 6-month lows), and Brexit headlines. The British Pound surged vs. the greenback rising as much as 1.9% to highs above the $1.30 level – off its lowest levels since mid-August just yesterday at the 1.27 level, following the Bank of England hawkish tone earlier about the path of future interest rate rises if Brexit goes smoothly next year. The euro also a big bounce, moving back above the 114 level (1% move). Positive Brexit headlines earlier as the Times of London reported that U.K. government sources indicated a tentative Brexit deal had been reached. The pact, the report said, would allow U.K. banks to keep operating in the European Union’s single market.

Bond Market

· Treasury yields dipped as bonds advanced despite the rally in the stock market; the yield on the 10-year fell below 3.14% as bonds rallied on weaker ISM manufacturing data in the U.S., touching 6-month lows, while jobless claims were mostly in-line. In Europe, U.K. Prime Minister Theresa May reached a “tentative deal” with Brussels to keep European markets open to the U.K’s financial services sector, according to the Times newspaper. But British and European officials downplayed the reports. Overall, bonds were quiet relative the strength in US stocks.

Sector News Breakdown


· Auto’s; monthly auto sales released for October: 1) FCAU Oct. U.S. auto sales rose 16%, vs. est. up 12%/Oct. U.S. sales 177,391 vehicles vs 153,373 year ago with Jeep brand sales rose 9% YoY, Ram brand sales rose 14% and Dodge brand sales rose 38% YoY; 2) HMC Oct US auto sales fell (-4.1%) vs. est. down (-0.4%); 3) TM Oct US auto sales rose 1.4% vs. est. (-1.4%); 4) Ford (F) Oct. U.S. light-vehicle sales fell (-4.0%) vs. est. down (-5.5%)/Ford U.S. Sales totaled 192,616 vehicles; 5) NSANY Oct US auto sales down (-10.6%) vs. est. decline of (-10%)

· Retailers; HBI a drag in retail as EPS mated estimates on lower sales view while guided the year profit below consensus hurt by bad reserve charge due to Sear’s bankruptcy; TPX weighs on mattress stocks after the company falls short with its Q3 report and guidance update/revenue from the North America business was up 2.6% to $596M during the quarter, while international revenue rose 2.1% to $134M/weaker margins; Wayfair (W) shares fall as posted a wider than expected Q3 EPS loss of ($1.28) vs. est. ($1.11) though revs and adjusted Ebitda came in better; AEO was downgraded to neutral at Bank America; FIT blew out 3Q18 expectations and negative Street sentiment posting sales above the high-end of guidance, better op-ex and positive operating income and EPS; GIL Q3 profit edges lower

· Consumer Staples; CHD rises despite mixed outlook, after Q3 results topped views; protein names active as PPC Q3 EPS missed estimates by 8c calling it one of the most difficult pricing environment ever in U.S. commodity chicken (SAFM, TSN also active); INGR misses estimates with its Q3 report/sees full-year EPS of $6.80 to $7.05 vs. $6.91 est.; AVP Q3 EPS and margins missed while revs beat

· Leisure movers; CHDN announces that it plans to acquire a stake in Midwest Gaming from Clairvest Group for ~$291M and reports better earnings; SEASupgraded to overweight at KeyBanc saying derisked expectations following the 3Q18 preannounce create an attractive entry point, as see further upside to shares; in gaming, PENN shares slide after Q3 revenue and EBITDA marks fall short of consensus estimates/also expects Q4 revenue of $1.15B vs. $1.24B consensus and full-year below views; NCLH upgraded to neutral at Macquarie

· Lodging space very strong on heels of better earnings from WYND, STAY and HGV as all moving significantly higher after earnings results – nice bounce overall in lodging space after results (CHH, H, MAR, HLT) – good round of earnings lifting sentiment in hotels this week (H as well)

· Gun stocks/sporting goods stores weaker after RGR said 3Q sales were $115M, below one analyst est. of $130M while gross profit and Ebitda also declined YoY; also, AOBC was downgraded to hold from buy by Craig-Hallum as checks indicate firearm demand has remained stubbornly soft; shares of sporting goods names VSTO, BGFV also active

· Housing & Building Products; FND rises after Q3 EPS and net sales topped the highest estimates and reiteration of guidance, after cutting in the past two quarters; other building product stocks rise on earnings with PGTI and IBP both out with positive results and guidance


· Energy stocks active on earnings and M&A; higher oil and gas prices drove a more than 35% increase in RDS/A Q3 earnings, allowing the company to speed up the pace of its $25B share buyback; all eyes on Dow component CVX and XOM earnings tomorrow; one M&A deal in the E&P space as to be acquired by ECA in all-stocks transaction valued at about $5.5B; Encana will assume $2.2 billion of Newfield net debt.

· E&P sector; APA posted strong Q3 EBITDA (+9% vs. Street) and a modest production beat but on Q3 capex +15% vs. consensus as raised FY18 E&P capex to ~$3.1B from $2.9B prior); JONE Q3 EBITDA/capex miss and weak Q4 liquids/capex guidance; LGCY 4% production beat, but EBITDA miss and heavy capex; MTDR delivered a 7% oil production beat vs. Street expectations along with a strong ops update with impressive well results in the Delaware; WPX Q3 production missed by 6% and hot capex/EBITDA miss and inline 2019 guidance; other earnings in the E&P space include AR, ECR, FRAC, WTI and numbers tonight from EOG, SM, and PE

· Utilities & Solar; Dominion (D) agrees to sell its 50% interest in the Blue Racer Midstream joint venture to P-E firm First Reserve and affiliated investment funds for as much as $1.5B; EXC reported in-line earnings and raised the low end of its year forecast


· Bank movers; after a big jump in banking stocks yesterday along with the broader S&P index, banks were again mostly higher, but more in line with market gains vs. outperformance yesterday; insurance space active on earnings as AIG core EPS missed estimates primarily driven by adverse prior year reserve development loss reserve development in General Insurance (28c) due largely to adverse development on the California Wildfires, and lower Life & Retirement earnings (17c), primarily due to adverse actuarial adjustments, and lower Legacy; ALL shares fall as Q3 EPS missed the lowest estimate ($1.93 vs. est. $2.21); in lending, TREE shares rallied behind Q3 EPS beat, though revs missed estimates


· Pharma movers; in generics sector, TEVA boosted its annual EPS forecast as cost cuts began taking hold/said will be as much as $2.95 as sales of the company’s top-selling branded drug Copaxone; PFE was downgraded at BMO Capital saying that while holding a positive long-term view on Pfizer, the risk/reward for shares appears fairly balanced; MOH posted a beat-and-raise quarter that as a lower tax rate also helped results;

· Biotech movers; strong rebound in biotech today across the board with many of the beaten up names rallying; HRTX submitted New Drug Application to FDA for HTX-011, which has Breakthrough Therapy and Fast Track designations from FDA

· Medical equipment and devices; PKI falls as Q3 EPS 90c/$674.3M vs. est. 92c/$676.4M; reports core organic revenue growth of 7%/lowers FY18 adjusted EPS view to $3.60 from $3.65; MYGN slides after competition concern over 23andMe’s newly-approved direct-to-consumer test for detecting genetic variants; IDXX among top S&P decliners on mixed results/guidance; MASI posted a small sales and EPS beat on consensus estimates

· Healthcare services and providers; AMN reported quarterly EPS and revenue beat sending shares higher; CI and ESRX both active after quarterly results (note merger between the two expected to be completed by year end); PRAH Q3 results beat but revs slowed weighing on shares

Industrials & Materials

· Aerospace & Defense; Bernstein lowered price tgts on defense names (GD, LMT, NOC and RTN) as recent broad market price declines have them to reduce terminal market multiple as well as a lower outlook for defense budget growth; UBS said after meeting with defense and DoD leaders the tone was upbeat as defense spending has accelerated and revenue pressure remains to the upside (passed budgets are 25% above current spending levels

· Materials, Industrial & Machinery; a busy day on industrial and building related earnings with movers including AME, FBM, GNRC, JBT, PH, USCR, OSK, PWRamong them; overall industrials and materials got a boost after positive headlines from both President Trump and China’s Xi willing to meet amid G-20; shares of CAT, DWDP, UTX, BA were among the top gainers in the Dow; DWDP rises after quarterly results as the chemicals giant raised its cost savings target and said global growth concerns aren’t hurting its businesses

· Transports; XPO slides after the company reported 3Q profit and sales below analysts’ expectations, and lowered full-year adjusted Ebitda outlook citing a customer bankruptcy (logistics and trucking stocks ODFL, ARCB, MRTN, JBHT, HTLD, CHRW active); rail cars weak after RAIL reported a bigger-than-expected quarterly loss and was downgraded at CL King citing the disappointing results; metals rose on China’s signal of more stimulus and as President Trump and China’s Xi spoke positively about meeting at G-20; YRCW shares tanked in trucking on earnings

Technology, Media & Telecom

· Apple (AAPL) – company reports earnings tonight: Bank America said sees marked deceleration in Apple App Store downloads and revenue for October. Revenue growth dropped to 11% Y/Y in the month from 20% Y/Y in September, 24% in August, and 26% in July.

· Internet; SPOT Q3 results that narrowly beat revenue estimates with EU1.35B compared to the EU1.34B est./operating loss was above guidance with a reported €6M/MAUS were 191M vs. the 188M to 193M guidance and 191.8M; STMP shares despite quarterly beat as Craig Hallum lowered its tgt to $265 (still above current levels)

· Semiconductors; The Philly semi index (SOX) surges as much as 4% or 50 points at 1,251 (well off the 10/29 lows 1,119) – led by NXPI after earnings/guidance overnight, a rebound in AMD after plunging last week on earnings and a further advance for ON in continuation of earnings; equipment names AMAT and LRCX gain while QRVO rises after results last night NXPI Q3 results beat estimates while Q4 guidance was roughly in-line on revenue and well above on EPS ($2,390M/$2.09 vs Street $2,404M/$1.90), with auto guided down a bit

· Media & Telecom movers; in media, NYT rises after earnings and as added 203,000 online subscribers in Q3, a 24% increase compared with the same quarter a year ago; CBS to report earnings after the close tonight; ROKU was upgraded to outperform at Wedbush after a recent pullback as it has built an exceptional platform on the back of its players, and now as it expands in the rapidly growing Smart TV category

· Optical sector; IIVI Q1 results strength incorporated solid guidance for the current quarter as revenues grew 20% overall with gains in all areas, and operating income rose 23% Y/Y on an adjusted basis/order backlog hit a record; AAOI weak after Rosenblatt cut tgt to $15 from $30 and reiterated sell saying laser quality issue seems to have returned, expect no revenue from Facebook going forward; LITE Q3 EPS/revs beat estimates and guides year $1.60-$1.75 vs. $1.50

· Other movers; SSYS jumps in 3D space after beat and raise just a day after weaker DDD results sunk the sector

Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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