Wednesday, November 14, 2018
Equity Market Recap
· U.S. stocks on another roller-coaster ride today, finishing off their worst levels, but did slide into the bell. Today’s market action was dominated by headlines out of the UK regarding Brexit, a rebound in oil prices (snapping the 12-day losing streak), tech darling APPL falling near bear market territory (20% pull from record highs) and a pullback in Treasury yields to the lowest levels in over a month. Financials were a big drag on major averages, with GS, JPM, and TRV among the top declines in the Dow Industrial Average. Natural-gas futures climbed by about 18%, settling at their highest since February 2014, ahead of cold weather hitting the Northeast. December natural rose 73.6 cents to settle at $4.837 per million British thermal units. Regarding the UK Brexit (which shook currency markets), British Prime Minister Theresa May said her Cabinet has backed a draft Brexit deal with the European Union after an “impassioned” debate. May emerged from a five-hour Cabinet meeting to say agreement had been reached. May said “this is a decisive step which allows us to move on and finalize the deal in the days ahead.” Inflation data in the U.S. (CPI) was in-line with estimates but still showed a spike in prices. Despite the late day rally, the S&P 500 index closed lower for a 4th straight session. The Dow Industrials traded in a range of over 560 points from high to low (moved below 25K), while the NASDAQ touched a low of around 7,100 (off highs of 7,285). Retailing giant Wal-Mart expected to report earnings tomorrow morning and Dow component Cisco tonight.
· Inflation data mostly in-line (but still biggest increase since January) as consumer prices for October rose 0.3%, matching the economist estimates while core prices (ex: food & energy) rose 0.2%, also in-line; Year-over-year, headline CPI rise 2.5% (in-line) and core was 2.1%, slightly below the 2.2% estimate. The CPI data comes in lighter than last week’s surge in producer prices
· Gold prices spiked higher late day, rising $8.70, or 0.7% to settle at $1,210.10 an ounce, getting a boost as investors rotated into defensive sectors given the downdraft in stocks this week. Gold prices managed to rise despite a late day reversal higher in the dollar. Gold had been spiraling lower over the last week, falling from recent 7-month highs just last week. Silver prices rise 10.3c, or 0.7%, to $14.08 an ounce, bouncing off lowest settlement since January 2016.
· Oil prices finish higher, as WTI crude rises 56c or 1% to settle at $56.25 per barrel, snapping its record 12-day losing streak after prices collapsed over 7% yesterday to its lowest levels in over a year after OPEC warned that demand for its crude is falling faster than expected. The move today more a function of buying the dip, as prices have declined as much as 25% from its recent 4 ½ year highs above $80 per barrel, edging higher ahead of inventory data tonight/tomorrow.
· The U.S. dollar was volatile, spiking up and down with Brexit headlines out the UK, but the greenback ended lower as Prime Minister May secured backing from her cabinet for the draft Brexit agreement after a five-hour meeting. The pound rebounded on the news to around 1.3050, bouncing off afternoon lows of 1.2882. May said choice is her deal, no deal or “no Brexit at all.” The euro advanced as well on the May headline. Today’s inflation data (CPI) was in-line with forecasts, but still showed a spike in prices, following “hotter” PPI data last week, which is dollar favorable. Crypto currency prices dropped across the board as Bitcoin dropped below $6,000 for the first time since August, falling to its lowest level this year, down as much as 13% (and now down more than 60% in 2018). Meanwhile the whole crypto market (Ethereum, Litecoin) also dropped sharply.
· Bond prices jumped pushing yields sharply lower, as investors bailed on stocks and moved into defensive/safe haven assets (Treasuries and gold climbed). The yield on the benchmark 10-year fell below 3.10% while the shorter-term 2-year slipped to 2.85%. Concerns in Europe regarding the UK Brexit weighed heavily on European markets/currencies. Note tonight at 6:00 PM EST, Fed Chairman Jerome Powell will discuss national and global economic issues with Dallas Fed President Robert Kaplan at an event hosted at the Dallas Fed
Sector News Breakdown
· Retailers; Macy’s (M) boosted its adjusted earnings per share forecast for the full year to $4.10-$4.30, from prior $3.95-$4.15 (est. $4.03) after Q3 EPS beat by 13c and 3Q owned plus licensed comparable sales +3.3% topped the estimate +2.8%; GOOS reported better results on higher margins and boosted guidance for full year to rev growth of at least 30% from prior view of 20%; IRBT shares fell after a negative trading call by short seller SprucePoint Capital
· Consumer Staples; CAG was downgraded to underperform at Bernstein and cut tgt to street-low $31 from $34 amid slowing growth in frozen entrees, troubling trends at recently-acquired Pinnacle Foods, and demands from retailers for more investment; in tobacco, Wells Fargo moves PM to top stock pick as visibility further improves/set up heading into 2019 is even more positive than we originally thought (OW rated and $100 tgt); Kellogg (K) was cut to neutral at JPMorgan
· Autos; sector active as MTOR slides past consensus estimates with its FQ4 report on better revs and Ebitda driven primarily by conversion on higher revenue and the favorable impact of changes to retiree medical benefits; Bloomberg reported the Trump administration will hold off for now on imposing new tariffs on imported automobiles, according to Bloomberg (NSANY, HMC, TM shares were active on the reports); auto supplier price targets were lowered by about 20% at Morgan Stanley as sees limited support for the stocks until there is more clarity around China and the guidance for 2019 is de-risked. Says 3Q results were disappointing vs consensus estimates, and most U.S. auto suppliers lowered the guidance for 2018, largely due to lower production volumes in China and Europe (cut tgts on ADNT, APTV, AXL, BWA, DLPH, GT, LEA, MGA, TEN, and VC); Morgan also upgraded GPI to equal-weight saying sales pressures in the U.K. from a new regulation have been sufficiently discounted in the stock; ORLY announced $1B share buyback
· Leisure and gaming; PENN shares advanced after being added to the JPMorgan focus list saying valuation seems to be the most mispriced among the lot of downtrodden gaming operator stocks; PENN helped propel casino stocks higher following its proposed deal to acquire a Detroit Casino overnight (shares of WYNN, MGM, CZR, IGT were active)
· Energy stocks tried to rally as oil prices snap their 12-day losing streak ahead of weekly inventory data tonight (API) and tomorrow (EIA) which was pushed out a day due to Veteran’s Day holiday. The IEA said the U.S., Russia and Saudi Arabia are pumping crude at record levels, causing global supply to significantly outrun demand, according to its monthly report. Natural Gas E&P stocks were active (CHK, SWN, COG, RRC, GPOR) as nat gas prices spike more than 13% to $4.636/MMbtu (moved above $4 yesterday for 1st time since 2014) on an outlook for colder winter weather across most of northeast U.S. Nov. 19-23 according to NOAA
· E&P and services sector; EQT was downgraded to underweight at Morgan Stanley saying guidance appears optimistic and will be difficult to achieve on strip pricing, leaving little FCF for return of cash to shareholders, challenging EQT’s value proposition; BHGE 92M share Secondary priced at $23.00; group tried to rally with oil bounce, but broader market weakness weighed
· Utilities & Solar; pressure again today for PCG and EIX after an electrical power equipment owned by California’s largest utility company appeared to have malfunctioned in an area where the state’s deadliest wildfire started last week, according to a PCG securities filing/Citigroup said in a note today that PCG damaged from California wildfires may be $15B. Both PCG and its subsidiary utility Pacific Gas and Electric Co. have fully drawn on their revolving credit facilities, the company said in a filing (ad $3B in revolver, while PG&E revolver had $300M, per filing)
· Bank movers; SIVB announced acquisition of Leerink Partners for $280M and stock buyback authorization of $500M; SF announced that its board had increased the share repurchase authorization to 10M shares; Texas banks active as oil prices drop to 1-year lows, with BSVN, BOKF, MSL, CADE, CFR, TCBI, LTXB shares active; Dow component GS new 52-week lows breaking below the $200 level (a level not seen since Nov ‘16). Not helping banks, Representative Maxine Waters (D-CA), who’s poised to become chair of the House Financial Services Committee in January, says easing banking regulations will stop when she heads the committee
· Brokers/Asset managers; SCHW reported net new client assets for the Oct. of $14.9B and Oct. new brokerage accounts 133,000; ETFC says it added 46,760 gross new brokerage accounts in October, and ended the month with 3.95 million brokerage accounts. Morgan Stanley upgraded AMTD to overweight as favor discount brokers saying its more defensive earnings profile and upside to consensus on BDA revs drive our upgrade. Morgan downgraded APO and CGto Equal-weight as they reduce capital markets exposure (top picks are AMTD, ETFC, SCHW, and VCTR)
· Consumer finance and lending; QIWI raises 2018 revenue growth outlook to 40%-45% from 26%-32% earlier and improves 2018 net income forecast to 15%-10% decline from 25%-15% decline/said board intends to review dividend suspension in 1Q 2019; in insurance, PGR fell after reporting $138M of October catastrophe losses, driven by $110M of losses due to Hurricanes
· Pharma movers; AMRN was upgraded to buy and $28 tgt at Citigroup saying detailed “Reduce-It” trial results paint an attractive drug profile for Vascepa (but shares fell). Cannabis sector active after earnings; TLRY shares initially fell on Q3 EPS (8c) on revs $10M and a lower average selling price per gram (average net selling price per gram was $6.21 (C$7.98), down from $7.53 a year ago) as the cannabis producer prepared for legal sales in Canada; its net loss was $18.7M, or 20 cents a share, compared with $1.8M; sold 1,613-kilogram equivalents of cannabis in the quarter, more than double the prior year’s sales of 684 kilograms; CGC shares fell following its fiscal Q2 report that missed consensus as revs were C$23.3M (+31.8%), gross profit: (C$10.9M) and net loss: (C$337.1M) (-999%) while kilograms and kilogram equivalents of cannabis sold up 8.8%
· Biotech movers; BLUE was upgraded to outperform at Bernstein as valuation has come down significantly; SGMO shares fell after being downgraded at JPM today as the company said it was no longer planning to present hemophilia results at the ASH conference in December; BPMC falls ahead of updated data for avapritinib in gastrointestinal stromal tumors presented on Nov. 15
· Healthcare services and providers; PETQ reported strong 3Q results, delivering robust top line growth while potentially accelerating its wellness center expansion; raises FY18 rev view to about $515M from $500M; MDRX downgraded at Argus to hold saying amid concern over the company’s above-peer-average debt ratios and declining cash balance
Industrials & Materials
· Industrial & Machinery; MMM announces $10B share buyback; REZI quarterly results beat, helped by solid growth at ADI, as revs were $1.2B while EBITDA of $110M declined $3M YoY, owing to $7M of spin-related costs/full-year guidance was raised to the high-end of the range; MIDD was upgraded to buy at Seaport on an expected recovery in the commercial food service sector, improving profits in the process
· Aerospace & Defense; BA shares active a second day in follow through weakness amid reports the company had not advised pilots of new safety systems on the 737 MAX – safety systems that may have been involved in the crash of Lion Air Flight 610
· Metals & Materials; PAAS agreed to buy TAHO for around $1.07B or $3.40 per share cash (or in stock at 0.2403 PAAS shares) ; nitrogen companies, led by CF and NTR slumped after India’s latest urea tender price of $335/tonne fell short of expectations, and indicated that Iranian sanctions have had little effect on the supply/demand of nitrogen
Technology, Media & Telecom
· Internet; SNAP shares slipped after the company said it was subpoenaed by DOJ, SEC for information about its March 2017 IPO, Reuter’s first reported/”Our understanding is that the DOJ is likely focused on IPO disclosures relating to competition from Instagram”; TCEHY shares rise as Q3 net profit rose 30% Y/Y and beat estimates with a reported 23.3B yuan (vs. est. 19.32B yuan) while revenue was in-line with a 24% growth to 80.6B yuan/Online ad revenue increased 47%
· Semiconductors; the Philly semi index (SOX) higher most of the session despite the broader Nasdaq sliding; AMD led gains while AAPL suppliers QRVO, SWKS weak; MTSI reported largely in-line F4Q results and guided F1Q near consensus
· Software movers; SVMK, in its first quarterly report as a public company, delivered stronger-than-expected results across almost every metric, including ending paying users, ARPU, and profitability, as revenue came in above estimates; ORCL lost a Government Accountability Office protest of the Pentagon’s approach to a potential $10B cloud services contract
· Media & Telecom movers; CDLX shares fell as reported softness in 3Q revenues and the 4Q outlook, due in part to a few advertisers not being in the channel in 3Q and less certainty around the timing of advertiser spend for new Chase users in 4Q; SWCH shares fell as results were mixed, as revenues and adjusted EBITDA just missed estimates, but full-year guidance was maintained/BMO said new customer activity has been slower than expected
· Hardware & Component news; AAPL was downgraded at Guggenheim to neutral noting iPhone ASP has increased a dramatic +$220, or 40%, reflecting its growing value to both consumer and business markets, but nearly HALF of all that just came in FY18 alone; meanwhile, UBS cut its tgt on AAPL to $225 from $240 but maintained its buy