Monday, November 12, 2018
Equity Market Recap
· Monday marked another big sell-off on Wall Street, as concerns about tech and financials sunk major averages, with the S&P 500 dropping for a third straight day (and also dropped back below its 200-day moving average support of 2,762). Semiconductor stocks were the biggest drag on major averages as a sell-off in Apple following lower guidance from a top supplier (LITE) weighed on demand sentiment in the supply chain. Financials also a big loser, with shares of Dow component GS falling the most in several years, down 7%. Energy stocks also couldn’t hold early gains, as WTI crude slipped back under $60 per barrel late day, extending its losing streak to 11-days in a row. The Dow Industrial Average dropped as much as 600 points (AAPL and GS the biggest drags on the index), while the NASDAQ underperformed, falling 2.7%. The US dollar touched an 18-month high, which also hurt commodity prices.
· Outside of the stock sector weakness, Brexit fears also weighed on markets after reports that if UK Prime Minister Teresa May puts version of Withdrawal Agreement and Northern Ireland backstop currently insisted upon by Brussels to Cabinet tomorrow, there is big danger cabinet will reject it. In Europe, Euro Stoxx 50 down 1.1%, FTSE 100 down 0.7%, DAX down 1.8%, CAC 40 down 0.9%, as developments surrounding Italy’s budget and Brexit pushed the euro and British pound down and gave way to a rallying U.S. dollar. Markets can also add China trade concerns (which have remained as an overhang) and only 25 days until a partial government shutdown, as other factors playing with investors’ minds heading into the holiday season. There are still a handful of key earnings results in the next few weeks (retailers such as HD tomorrow – and a few key tech players like CSCO on Wednesday = both Dow components), but the Fed, and macro concerns are likely the key drivers over the next few weeks.
· Oil prices slide, unable to hold earlier gains, with WTI crude falling 26c to $59.93 per barrel, well off prior highs of $61.28 and extended its losing streak to 11-straight days. Oil prices gained initially after reports that major oil producers discussed potential reductions to crude production at their latest meeting this weekend. The meeting, held in Abu Dhabi comes ahead of the latest updates on supply and demand due out this week from the Energy Information Administration (EIA), OPEC and the International Energy Agency (IEA). But WTI crude slipped back below the $60 per barrel mark after U.S. President Donald Trump said in a tweet that he hopes Saudi Arabia and OPEC won’t cut oil production and said oil prices should be much lower based on supply.
· Gold prices slide to its lowest settlement in a little more than a month, down -$5.10 or 0.4% to end at $1,203.50 an ounce as the dollar advanced. December silver slipped by 11.5 cents, or 0.8%, at $14.025 an ounce, following a decline of 4% last week.
Currencies & Treasuries
· The US dollar outperformed vs. most major currencies, surging to 18-month highs vs. the euro (euro lows around 1.124, down -0.85%) on Italy Budget and UK Brexit fears, while the British Pound fell nearly 1% to 1.2850 vs. the greenback; the dollar was flattish vs. the Japanese yen; the Canadian dollar gained initially as oil prices rebounded…but as oil reversed lower late day, the CAD ended little changed. Treasury markets were closed in observance of Veteran’s Day. Rising rate expectations and a strong economy has bolstered the US dollar.
Sector News Breakdown
· Retailers; KORS was upgraded at Bernstein given a more balanced risk reward profile at current valuation levels; LB was upgraded to outperform at Wells Fargo as now see LB as the next retail turnaround story poised for positive shift in the narrative/appears to be embracing change with an “all options on the table” mentality; SCVL upgraded to buy at Pivotal as believe that boots performed well in late 3Q, and we are also now more bullish on boots for 4Q, based on favorable near-term weather forecasts; CROX upgraded to neutral at Susquehanna after earnings; TIF and SIG shares slipped after De Beers is said to cut low-end diamond prices by as much as 10%, Bloomberg reported
· Consumer Staples; tobacco stocks decline amid news of a possible ban on menthol cigarettes in the U.S., which would eliminate certain products/a senior FDA official said last week that the agency is looking at restricting menthol in traditional cigarettes (shares of BTI, MO, PM fell); BUD was downgraded at Argus saying mgmt cutting the dividend in half, reducing the attraction of the stock for the income it generates; COTY CEO s stepping down with immediate effect for family reasons; GNC falls after Q3 earnings missed the lowest estimates
· Restaurants; SBUX upgraded to buy at Argus as reflects expectations for continued revenue growth and new store openings, along with ongoing stock buybacks and dividend hikes; CAKE downgraded at Barclays on fundamental headwinds, coupled with shares above our recently reduced price target; DFRGQ3 revenue of $105.3M missed the $118M estimate
· Casino & Leisure movers; ISCA rises as Nascar offered to acquire the company in a deal valued at $1.85B, or $42 and would combine the companies into a privately held group owned by Nascar family trust https://on.wsj.com/2z3kW1B; PLNT was downgraded at Macquarie; casino stocks were stronger on an overall down day (WYNN, MLCO)
· Energy stocks tried to get a bounce as oil prices rose for the first time in over 2-weeks, but the broader stock market pressures weighed on stocks in general; oil service giants BHGE and SLB each traded to 52-week lows today; the E&P sector was also mostly weaker; Credit Suisse repositioning its recommendations post 3Q, upgrading CPE and WLL to Buy, and downgrading CDEV and XOG to Neutral, while top picks in the SMID-cap universe are WPX, VNOM, and CLR; OIS was upgraded to buy at SunTrust as expect (delayed) new product introductions in downhole tools in early 1Q19, accelerating completions activity in the back half of 2019, and increasing deep water FID’s through 2020 to drive improving results
· Utilities & Solar; overall index rallied as defensive stocks gained steam on broader tech/financial stock pullbacks; shares of PCG and EIX under pressure early again amid impact of wildfires in California/so-called Camp Fire in Northern California and the Woolsey Fire in suburban Los Angeles have destroyed more than 6,700 structures and could cost the state, insurers and homeowners at least $19 billion in damages; 52-week highs for EXC, NEE, FE, AEE, ES, DTE
· Bank movers; financials were among the top sector decliners on the day with Dow component GS falling as much as 6.4% at one point to a fresh 52-week low, as banks and insurance names dropped broadly: MHLD shares fall after the company on Friday reported a Q3 operating loss per share of $2.83 vs. est. for 18c and agreeing to a loss portfolio transfer (LPT) with Enstar; insurance stocks active as investors keep a watchful eye on the damage from the California wildfires; P&C stocks were active (ALL, TRV, CB, RNR, RE)
· Morgan Stanley recommends buying midcap banks after the recent selloff as fundamentals remain relatively solid (“still-positive NIM expansion from further Fed rate hikes, excellent credit quality, and mid-single-digit loan growth, despite growing nonbank competition”) as the firm upgraded both CMA and SNV to an overweight and downgrade CFR to an underweight.
· Pharma movers; ADMP shares dropped after B Riley FBR downgraded to neutral from buy with lower tgt of $2.50 on a slower-than-expected domestic commercial launch of Symjepi; KERX was downgraded at Raymond James as believe the shares will trade in-line with the market until the merger with Akebia is complete; OPK rises after earnings results late Friday; AMRN shares volatile in reaction to the details of REDUCE-IT, the large-scale study showing the cardiovascular benefits of Vascepa
· Biotech movers; Biotech (IBB) falls over 3% with top decliners AMRN, AKAO, CLVS, CNCE, NK, SGMO – all down 10% or more at one point, as group flounders TSRO presented initial data for TSR-022 (anti-TIM3) + TSR-042 (anti-PD1) in post PD-1 NSCLC, showing a modest 13% PR across all doses, and 33% PR for PDL-1+ tumors; INFI downgraded to Underweight from Neutral at JPMorgan, as the data for IPI-549 needs to continue to mature in their view; NKTR active as a highly-anticipated clinical update from Nektar Therapeutics at a cancer meeting on Friday failed to impress, but showed encouraging complete responses in melanoma patient (Street high tgt $125 at Piper and low $34 at Evercore/ISI)
· Medical equipment, devices and services; ABMD shares dropped as released the results from STEMI DTU study over the weekend for Impella/Guggenheim said expect the data to strike investors as somewhat underwhelming, with no significant difference in infarct size observed between the two arms; ATHNrises as confirmed reports over the weekend, as agrees to be acquired by Veritas for $135 per share, in deal valued at $5.7B https://on.mktw.net/2OFeXox
Industrials & Materials
· Industrial & Machinery; GE shares fall (had been down 12 of last 131 days to 9 ½ year lows), with Credit Suisse the latest to be cautious on shares, cutting tgt to $10 citing poor visibility into fundamentals, such as Power and Aviation margin, as well as uncertainty around liabilities; ACM falls after the company sets disappointing guidance as sees full-year EPS is $2.60 to $2.90 below the $3.01 consensus
· Transports; over the weekend, the Teamsters approved UPS’s latest contract offer for the Freight (LTL) division. The contract was overwhelmingly approved with 77% voting yes and the turnout was heavy with 84% of eligible voters participating; airlines held up relatively well in the rough stock tape today, while rails (KSU, UNP) slipped
Technology, Media & Telecom
· Internet; BABA active after its “Singles Day” result of $30.8B in gross merchandise value/posted a 27% GMV increase; not much in way of individual stock news today, but Internet sector once again better for sale, with sharp declines in AMZN, NFLX, GOOGL, FB, TWTR
· Optical sector volatile again; group rallied last week behind IIVI $3B deal to acquire FNSR; however, the group crushed this morning after Apple supplier LITE cut its Q2 outlook (sees Q2 EPS $1.15-$1.34 on revs $335M-$355M below est. $1.67/$422.2M) as one of its largest Industrial and Consumer customers for laser diodes for 3D sensing asked to meaningfully reduce shipments for previously placed orders (AAPL is LITEs biggest customer); shares of OCLR (which is being bought by LITE), CIEN as well as Apple suppliers QRVO, CRUS lower
· Semiconductors; Citigroup downgraded SWKS to Neutral from Buy on broad smartphone weakness, disappointing iPhone XR unit sales, and high Apple concentration ~39% of sales in F17, also cut tgt on QRVO to $75 from $86 as weak iPhone XR units where Qorvo won incremental mid-high band $ content will have a negative impact on gross margins and cut tgt on NVDA ahead of earnings to $270 from $300 on market multiple compression. Longbow warned that Apple is facing weak iPhone demand in China
· Software movers; SAP agreed to purchase Qualtrics International Inc. for $8B in cash. Qualtrics had filed for an IPO in October hoping to raise about $200M https://on.mktw.net/2yZxd79 ; APTI to be acquired by Vista Equity Partners for $1.94B, with Apptio shareholders getting $38 a share, representing a 53% premium to Friday’s closing price of $24.85 https://on.mktw.net/2QzZo37