Monday, November 5, 2018
Equity Market Recap
· Major U.S. stock averages were split most of the day, as a rebound in beaten financial and energy stocks, along with gains in healthcare ahead of tomorrow’s mid-term elections, helped propel the Dow Industrial Average and S&P 500 Index, though the tech heavy Nasdaq Composite dropped (paring losses throughout the afternoon) amid more weakness in Apple and semi-chip companies on reports of tepid demand for its latest XR iPhone. There remain several market moving catalysts for global stock averages, including trade (between the US/China), sanctions of Iran (weighing on oil markets), rising borrowing costs (yields at multi-year highs), earnings (still about 40% of S&P yet to report), the FOMC and rate of interest rates, and economic data. But for the next 48-hours, markets turn to politics, with the potential split between the House and Senate, could trouble in Washington for Trump and his measures (tax cut, infrastructure, wall, etc.). Details of possible winners and losers of election below. Meanwhile economic data also playing a part in today’s action as economic data better as the ISM services PMI declined from 61.6 to 60.3, but that was considerably better than the 59.1 expected by the market. The dollar slipped despite the better services report, while oil reversed low and gold was little changed.
· Back to tomorrow’s mid-term elections, which could move the needle on several sectors. Bloomberg noted investors have honed in on a few key sectors ahead of Tuesday’s midterm elections, as pharma (effects drug pricing stalemate) and bank stocks look best positioned amid expectations for a divided Congress. Energy stock investors are more focused on local outcomes, including a statewide drilling referendum in Colorado (could affect APC, NBL, PDCE) and a push for renewables in Arizona. Technology sector also probably deals with increased regulation no matter which side takes the House. Note should the elections produce a split Congress, with the Democrats controlling the House of Representatives, it would make a second tax cut unlikely/also affecting as infrastructure program.
· ISM Non-Manufacturing for October (services index) falls to 60.3 from 61.6 the prior month but was above the 59 estimate from economists; business activity fell to 62.5 vs 65.2 prior month while new orders fell to 61.5 vs 61.6 and employment fell to 59.7 vs 62.4; inventory change rose to 56.0 vs 54.5 and prices paid fell to 61.7 vs 64.2
· U.S. Markit services PMI rose 1.3 points to 54.8 in the final October print (54.7 preliminary), erasing the 1.3 point decline to 54.8 in September. It was 55.3 last October and was as high as 56.8 in May. Prices paid climbed to 57.6 versus 56.6 in September and is the highest since September 2013
· Gold prices were little changed, trading in a tight range today before settling lower by -$1.00 to $1,232.30 an ounce, failing to rally despite the US dollar slipping to lows later afternoon. Overall, commodity markets keeping a close eye on the dollar ahead of tomorrow’s mid-term election outcome, which could move the needle.
· Energy futures reversed earlier gains, ending the day lower by 4c to $63.10 per barrel (off highs of $64.14 per barrel), failing to rally with the drop in the dollar and as sanctions against Iran take effect this month. Oil prices dropped on Friday as well after falling nearly 11% in October. The recent oil price weakness has reflected growing confidence that increased output by Saudi Arabia and Russia would offset much of Iranian crude lost to the sanctions.
Currencies & Bonds
· The U.S. dollar slipped as investors await the midterm elections tomorrow and the conclusion of a Federal Reserve policy meeting on Thursday. The British Pound advanced on another Brexit deal report, while the greenback sunk vs. the yen, euro and Canadian dollar. A stronger-than-anticipated read on the October ISM services index failed to lead the dollar higher, as Tuesday’s control of the House remains in the balance. Treasury prices inched higher as yields slipped from Friday levels, as the 10-year dipped under 3.2%. The U.S. Treasury sold $37B in three-year notes at a yield of 2.983% vs. 2.98% when issued prior, with a bid-to-cover (demand) at 2.54 vs. 2.56 in prior auction and indirect bidders awarded 49.1% of the auction and primary dealers 47.9%
Sector News Breakdown
· Retailers; UAA was upgraded to overweight and $32 tgt at Piper on view the favorable industry dynamics, DTC mix benefit will enable Under Armour to be on a path towards M/HSD sales growth over time; PLCE said that two of its executives, Pamela Wallack and Anurup Pruthi, have left the company after a streamlining effort to increase management efficiencies; AMZN said it will start offering free shipping with no minimum $25 purchase to all U.S. customers throughout the holiday season. Previously, only subscribers to Amazon Prime, which pay $119 per year, were eligible for free shipping comes after TGT began its free holiday shipping program
· Consumer Staples and restaurants; in food, SYY shares fall on earnings and sales miss and said it expects continued expense challenges in warehouses and transportation; DFRG falls after delaying its Q3 earnings report to November 13, accommodating for the additional time needed to finalize recent deal transaction; SBUX upgraded to buy at Mizuho
· Housing & Building Products; LOW said it will close down 51 underperforming stores in the US and Canada over the next three months as part of an ongoing efforts by new CEO to slim down; homebuilders were broadly higher, with solid gains for DHI, LEN, TOL, KBH, PHM
· Casino & Leisure movers; in casino, CZR active after the NY Post reported MGM has hired investment bank Morgan Stanley and law firm Weil, Gotshal & Manges to begin exploring the idea of a merger with them, though no offer is on the table ; SEAS falls after earnings results; rough quarter for theme parks after SIX shares dropped following its report a few weeks back
· Energy stocks Energy stocks leading early amid a rebound in oil prices and forecasts for colder temps coming in – group has been weak over the last 2-weeks; COG, EQT, APA, CVX, EOG all top gainers in the S&P 500; CVX was upgraded at Credit Suisse while ECA downgraded by a few analysts following their recent deal of NFX last week
· E&P sector; PDCE, SRCI, XGO and driller HP among most exposed to a proposal to restrict drilling on Colorado’s Nov. 6 ballot/Stifel says most polls suggest Prop 112 will fail by narrow margin; though a recent poll conducted by the University of Colorado shows the measure passing 52% to 48%/says if Prop 112 passes, Stifel’s worst case NAV estimates suggest HPR, PDCE and SRCI would have another 12%, 15% and 30% downside
· Utilities & Solar; PCG reported Q3 EPS and revenue miss; Utilities at highs as UTY rises as much as 1.6% or 10 points -with all 20-components in UTY higher by midday, led by PCG after earnings; EXC, AES, EE also outperformed; NS rises after Q3 results beat
· In solar, JKS to supply 255MWp solar panels to one of the year’s largest solar farms in Australia; CSIQ said its Special Committee recommends that the company board should stop its review of the proposed go-private transaction and not undertake a review of any future go-private deal proposed by CEO Qu unless the board receives “reasonable evidence” that the transaction is fully financed/Qu has agreed to withdraw the proposal letter with immediate effect
· Bank movers; beaten up banking/financial stocks leading markets higher early as BRK/A rally after earnings helping the index; GSBD upgraded to outperform at Wells Fargo as see improving credit, as management drives more senior exposures, combining with GSBD’s best in class ‘everything else; MAIN was upgraded to Outperform at Raymond James as a recent pull back in the stock and continued growth to the net asset value have brought the shares to recent lows for P/NAV trading multiples; BKCC downgraded to neutral at JPMorgan based on stock price appreciation and relative opportunities in the BDC sector
· Consumer finance and lending; GPN was downgraded at Guggenheim as they expect to see slowing revenue growth for GPN in Asia (8% of rev.) on macro headwinds and intensifying competitive pressures and market share losses for GPN in Europe; in insurance, L, CNA among movers following earnings results
· Pharma movers; large cap pharma names (ABBV, JNJ, MRK, PFE, BMY) rebound after slipping late last week; LLY’s Trulicity significantly reduced the risk of new or recurring heart complications in people with type 2 diabetes; generics/specialty pharma names BHC and TEVA both upgraded to overweight at Morgan Stanley; AKAO announces that it has begun a review of strategic alternatives, including a possible sale or merger, aimed at boosting shareholder value; CWBR tumbles after it temporarily suspended the Phase 1 trial of CB4211 as a potential treatment for NASH and obesity, to address unexpectedly persistent injection site reactions; NVS unit Sandoz announces that it will not submit a marketing application at this time for a biosimilar to Roche’s Rituxan citing the time required to generate additional data requested by the FDA.
· Biotech movers; CLSD shares plunge as its Phase III Sapphire study fails to meet primary endpoint and said plans to end clinical development of combination therapy to treat retinal vein occlusion, which includes Sapphire study and companion Phase 3 trial Topaz; FOLD cut its full-year 2018 net cash spending outlook to $190M-$210M from prior range of $220M-$250M and sees meeting higher end of year revenue forecast $80M-$90M, est. $89.8M
· Medical equipment, services and devices; XENT shares were defended by JPMorgan after shares fell following mixed quarterly results for Q3 and guidance; OHI shares gained on 2c FFO beat and reaffirms year forecast and sees resolving legacy Orianna facilities in next few months
Industrials & Materials
· Aerospace & Defense; BAH downgraded at Bank America saying it’s a beneficiary of defense spending, but is richly valued; Barron’s said defense companies NOC, RTN and LMT are oversold noting they should see increased revenue through the end of the decade, thanks to spending that’s already earmarked
· Machinery; WBT shares plunge after Q3 EPS missed by 3c on weaker revs $412.9M and guided year EPS 73c-81c, below the 88c estimate; heavy duty truckers active (CMI, NAV, PCAR) after preliminary October Class 8 net orders came in at 43.6k units, up 2% sequentially and 21% YoY/preliminary October Class 6-7 net orders came in at 16.6k units, down 3% sequentially but up 27% YoY; RBC a bright spot in machinery, rising on mixed Q3 results (EPS beat/revs missed)
· Industrials; IR and LII look ready to rally according to Barron’s saying the heating, ventilation, and air-conditioning group (HVAC) industry is a high-quality niche that can still deliver upside, despite recent housing concerns; GE got a lift after CEO Culp buys $2.2M worth of stock
· Transports; FDX said to boost shipping rates effective Jan. 7/FedEx Express shipping rates will increase by average of 4.9% for U.S. domestic, U.S. export and U.S. import services; airlines were mixed, while car rental space (CAR, HTZ) prepares for earnings this week
· Metals & Materials; BHP suspended rail operations in Western Australia, the home of its giant iron ore business, after it was forced to derail a runaway locomotive laden with the steelmaking ingredient; RYI was upgraded to buy at Deutsche Bank saying the 10% pullback after Q3 results was overdone
Technology, Media & Telecom
· Internet; SPOT announced a $1B share buyback; SOHU slides after its Q3 revenues dropped by double digits and guidance fell short of even low estimates/revenues fell 10.9% Y/Y and dropped 5% sequentially; CYOU was initially higher after better earnings, but sunk in sympathy with parent SOHU alongside some declining user numbers on mobile games; few earnings this week in Internet space: BKNG, JCOM, ZG, MTCH, TRIP and TTD
· Semiconductors; chip suppliers, specifically AAPL related supply chain (SWKS, CRUS, NXPI, AVGO, QRVO) were under pressure after Japan’s Nikkei business newspaper reported AAPL is asking assemblers in Asia to scrap some additional production plans amid tepid demand for its new iPhone XR; weakness in equipment names as well (AMAT, KLAC, MKSI)
· Software mover; NTES reported a collaboration with ATVI’s Blizzard Entertainment to co-develop a game in the storied Diablo franchise, Diablo Immortal, a mobile massively multiplayer action-RPG for Android and iOS devices; DWCH to be acquired by Altair for $13.10 per share in cash, in a deal valued at approximately $176M ; CLDR upgraded to strong buy at Needham and tgt to $31 from $23 citing deeper review of its combination with Hortonworks
· Media & Telecom movers; VIAB was downgraded to neutral at UBS as believe Viacom will face a tough renewal with AT&T in 2H19. AT&T is reevaluating programming lineups to help stabilize EBITDA trends in its Entertainment Group; NCMI slides after Q3 results and guidance and as CEO stepping down
· Hardware & Component news; AAPL shares slip after a report from Japan’s Nikkei business newspaper that the tech giant is asking assemblers in Asia to scrap some additional production plans amid tepid demand for its new iPhone XR (AAPL also filed a debt securities shelf); IBM rises after filings show CEO Rometty buys about $3M in shares after pullback