Friday, November 9, 2018
Equity Market Recap
· U.S. stocks end the day lower, paring its gains for the week amid a rout in tech and energy stocks. U.S. markets opened on the highs, only to bleed lower and fall alongside weakness in Asia and Europe overnight, capping a very volatile week of trading that included mid-term elections, an FOMC meeting and corporate earnings. There were several factors weighing on sentiment today as investors focused on plunging oil prices and the Federal Reserve’s expected rate hike in December. After a volatile October, Wall Street mounted a comeback early this week but China fears, rising rate hike fears and collapsing oil prices have took a toll on sentiment the tail end of the week. Semis fell on earnings/guidance, financials dropped, car makers and suppliers tumble on trade fears, retailers on China growth concerns and energy tumbled on lower oil. Meanwhile, media stocks jumped on DIS earnings, trading to a 52-week high.
· Following a spike in producer prices (inflation reading), rising rate hike fears gripped markets with the producer price index showing prices rose 0.6% vs. est. 0.2% as well as spike in core prices (excludes food and energy). That data, coupled with yesterday’s Fed policy meeting which left interest rates unchanged at 2%-2.25% and stayed on course to hike in December as strong economic growth, higher tariffs and rising wages, boosted market expectations the Fed will keep on course to raise rates. Oil prices also collapsed as WTI crude fell for a record 10th straight session (more than 20% off its October highs), while gold prices tanked as the dollar jumped.
· China, tariffs and trade also remains a focus, with several stories on China overnight as Bloomberg noted Hong Kong and Chinese stocks led declines in Asia, with financial shares tumbling after Beijing said it plans to set quotas for banks to pump credit into private companies. Internet-related China stocks fell after the National Security Agency said the country is violating a 2015 cybersecurity agreement and the U.S. could respond with sanctions. A general concern of slowing growth has plagued China markets this year, as GDP has slowed amid softer prices. Also overnight, China’s inflation rate held at 2.5% last month and factory-gate price growth slowed as domestic demand stayed sluggish. Producer-price inflation eased to 3.3% from 3.6%
· Producer prices (PPI) for October rose 0.6%, much “hotter” than the 0.2% estimate, while core prices (ex: food & energy) jumped 0.5%, topping the 0.2% estimate, raises inflation concerns and likely keeps the Fed on its path of more rate hikes in 2019. Final PPI demand ex food, energy rose 0.5% m/m vs est. up 0.2% while final demand ex food, energy rose 2.6% y/y vs est. up 2.3%
· The Preliminary Nov. Michigan Sentiment fell to 98.3 from 98.6 in prior month and slightly above the est. of 98; current economic conditions index rose to 113.2 vs. 113.1 last month; the expectations index fell to 88.7 vs. 89.3 last month; the expected change in median prices during the next 5-10 years rose to 2.6% vs. 2.4% last month
· Oil prices plunge on the day and week, adding to the October 10% decline. Energy prices absolutely collapsing over the last 2-weeks, ahead of this weekend’s gathering of OPEC oil ministers in Abu Dhabi, as WTI falls more than 2% and broke below $60 per barrel (lows $59.26) before settling at $60.19 per barrel, down 48c. WTI crude posted a record 10th straight losing session, while Brent crude follows WTI into bear market territory (down over 20% from October highs and joining WTI) moving below $70 per barrel, the first time since April. Natural-gas futures climbed as much as 6% on Friday, its highest front-month contract settlement since December 2016, rising over 21.2c, or 6%, to trade at $3.755 per million Btu’s.
· Precious metals slide, with gold prices dropping to its lowest level in a month as the dollar finishes with its 4th straight weekly advance. December gold dropped -$16.50, or nearly 1.4%, to settle at $1,208.60 an ounce, bring its weekly decline to 2%. Gold prices fell this week on the aforementioned firmer dollar, helped by higher inflation data and boosting expectations for the FOMC to maintain its rate rising cycle into 2019 (which was confirmed at their policy meeting). Gold prices have now dropped five of the last six sessions
Currencies & Treasuries
· The U.S. dollar posted its 4th straight weekly advance, getting a boost following the Fed policy update mid-week, in-line mid-term election results and comments today from White House trade advisor, Peter Navarro, in which he called out Wall Street for pushing President Donald Trump toward a trade deal with China. The dollar rose midday vs. the euro, pound and other major currencies, also helped by economic data which is conducive to rising interest rates as producer prices came in well above expectations. The US dollar rose to a fresh 2-month high against the Canadian dollar above 1.321 as oil prices decline, weighing on emerging market currencies that benefit from higher prices for their economy. The Mexican peso fell more than 1% against the dollar before rebounding. Treasuries rally as yields fall following the pullback in US stocks. The yield on the 10-year dropped back below 3.19%, down 4 bps and the 2-year below 2.93%.
Sector News Breakdown
· Retailers; luxury retailers active after Swiss luxury-goods maker Richemont signaled that Chinese sales growth has slowed and warned that trade disputes may dent demand for its jewelry; KORS was downgraded to neutral at Credit Suisse and cut tgt to $52 citing disappointing Q2 trends; PRTY upgraded to Overweight at Barclay’s given the potential for significantly improved results in 2019 combined with an attractive valuation; ICON cuts full-year revenue guidance; OSTK and FNKO other retailers that dropped on earnings
· Consumer Staples; REV said it will reduce costs by as much as $150 million by the end of next year in a plan that will include job cuts; DF cut its quarterly dividend to 3c from 9c; MKC was downgraded to neutral at Credit Suisse on valuation; SPTN was downgraded at BMO Capital citing declining profitability after earnings missed yesterday
· Restaurants; PBPB shares fell as Q3 comp sales fell (-0.2%) vs. consensus expectation for a 1.1% gain/said costs of goods sold fell 20 bps to 26.6% of sales during the quarter, while labor costs rose 110 bps to 30.3% of sales and posted wider net income loss YoY; NDLS was upgraded at Piper as believe the risk/reward is balanced within the context of the stock’s recent re-rating
· Auto’s; ADNT plunged as suspended its quarterly dividend in order to reduce debt, and flagged higher freight costs, operational waste and foreign exchange effects as factors that weighed on Q4; MPAA shares plunge after the company said it would delay the filing of its Q2 financial statement as it continued to evaluate its accounting policies related to new business contracts; SUP another auto parts company with weaker earnings results
· Energy stocks getting crushed as Energy prices absolutely collapsing over the last 2-weeks, ahead of this weekend’s gathering of OPEC oil ministers in Abu Dhabi, as WTI falls more than 2% and breaks below $60 per barrel; broad weakness in the drilling space, equipment and services. The Baker Hughes (BHGE) weekly rig count showed the total rig count jumped 14 to 1,081, oil rigs gained 12 to 874 and gas rigs rose 2 to 195.
· E&P sector; OAS agreed to sell additional interests in DevCo and Beartooth DevCo to Oasis Midstream Partners for $125 million in cash; BCEI Q3 EPS topped views but shares slipped; SN said Q3 total production is lower than expected and reports total production as 98Mboe, down 48% Y/Y; average production is 1,065 Boe/day.
· Utilities & Solar; PCG shares drop after a wildfire in Northern California’s Sierra Nevada foothills quadrupled in size late Thursday as winds threaten to make it spread faster (state’s largest utility as blaze near Chico has left more than 23,000 homes and businesses without power); shares of another utility in California EIX also under pressure
· Pipelines/MLPs; TRP shares slip after a federal judge in Montana on Thursday blocked the Trump administration’s permit allowing the Keystone XL pipeline and barred any construction of the long-delayed project until completion of a supplemental environmental review; EQGP upgraded to buy at Jefferies given the decline in EQGP’s price (~30% over the last three months)
· Bank movers; a proposal to cap banking fees in Mexico by the ruling Morena party is sending shudders across European banking stocks that have exposure to the region; AXP shares active after the People’s Bank of China approves American Express’s venture in China to start preparation for setting up bank card clearing agency and operate the Amex brand; in consumer finance and lending; MGI cuts FY18 revenue view to decline ~10% vs. decline of 4%-6% prior after Q3 revs missed consensus expectations
· REITS; BKD active after Macquarie Investment Management urges BKD shareholders to push management to consider selling its real estate holdings or the entire company; RDFN shares fall on Q3 results that beat EPS estimates on better revs, but Q4 revs of $115.1M-$118.3M miss $121M estimate
· Pharma & Biotech movers; AKBA was a gainer in pharma after earnings results topped views; CLVS and TSRO shares active after the U.K.’s National Institute for Health and Care Excellence didn’t recommend AZN’s Lynparza for the maintenance treatment of relapsed, platinum-sensitive ovarian, fallopian tube and peritoneal cancer (Lynparza belongs to a class of drug known as PARP inhibitors); SGMO shares fell after backtracking on data presentation for hemophilia A gene therapy; other movers on earnings: DOVA, CHRS, KERX, SENS, XON
· Medical services, equipment and devices; ICUI after unexpected softness in 3Q revenue likely dinged market sentiment, Raymond James analyst Jayson Bedford (strong buy) writes in note cutting his PT to $315 from $350; GMED declined after earnings at BTIG said good implant growth but robots are a bit light setting up high expectations in 4Q; NTRA falls on Q3 revenue miss and lower guidance mid-point
Industrials & Materials
· Industrial & Machinery; GE tgt cut to $6 from $10 at JPMorgan saying the company’s recent earnings were worse than expected on almost all fronts. Forecasts for free cash flow and EBITDA moved materially lower, while a material change in language from the 10Q suggest a negative step down in leverage; AAXN upgraded at Baird; GDI upgraded at Morgan Stanley; MTZ downgraded at Baird on valuation
· Transports; car rental space with a bounce as HTZ extended gains on earnings and pointing to better volume and pricing in the U.S. market (CAR shares active in sympathy)/revenue per day growing 3% vs. flattish levels in 2Q; YRCW downgraded at Stifel to hold in trucking; airlines erased earlier gains, led by declines in AAL;
· Metals & Materials; metals have been lower all week as the dollar has surged; GFI reported a 3% Y/Y drop in gold production to 533K oz. from 567K oz. in the year-ago quarter; CDXS Q3 results came in ahead of street expectations boosted by some revenue that shifted from Q4 into Q3; in paper and packaging, Bank America upgraded CCK and OI to buy as the potential for gridlock in the U.S. Congress post-election suggests a slower rate of growth and a weaker U.S. dollar
Technology, Media & Telecom
· Internet; YELP plunged over 30% after the online review site axed its full-year outlook and posted disappointing revenues in Q3, when it added fewer new accounts; DBX rises after solid quarter of financial performance on accelerating ARPU growth and solid new user adds, with the bulk of ARPU being driven by new user growth;
· Semiconductors weak, led by AAPL chip suppliers; SWKS shares slide after a handful of analyst downgrades/tgt price cuts as the chip maker guided Q1 EPS $1.91 on revs $1.00-$1.02B, below the $2.08/$1.07B est. on weakness in the smartphone market; CREE was upgraded to buy at Goldman Sachs as sees Cree as one of the unique and more pure-play offerings for investors wanting leverage; SYNA was downgraded at KeyBanc citing the firm’s recent carrier survey that showed iPhone XR sell-through has been disappointing
· Software movers; Wedbush said they think MSFT could beat out AMZN for the $10B, winner-takes-all Pentagon cloud contract; HDP shares fell over 10% midday on its guidance; ASUR drops after posting as 3Q profit and revenue that missed analysts’ estimates.
· Video game makers active after ATVI shares drop following earnings, as results were slightly ahead of guidance and Street estimates while mgmt only reiterated 2018 annual guidance in spite of a very strong opening of CoD: BO4 in October as softness in Destiny 2, WoW, and FX headwinds prevented management from raising guidance
· Media & Telecom movers; Dow component DIS trades to 52-week highs as Studios and Broadcast help beat headline estimates/Q4 results were better than consensus on the top line and EPS; TTD shares fell initially despite beat on top and bottom lines, with record profits topping even high estimates, and boosted guidance above consensus for the current quarter; CTL fell as missed 3Q18 revenue and EBITDA by 1% but operating EPS of 28c was in line; AMCsharply lower after mixed results for Q3; media generally higher following DIS results and FOXA, DISCA yesterday; LGF/A another strong mover in media space following earnings
· Optical sector; one big deal in the space as IIVI said it will buy FNSR for about $3.2B, paying $26 per share in cash and stock ; OCLR mixed Q1 results with EPS miss while revs beat; rest of optical space failed to rally in sympathy with M&A news