***There will be no Closing Recap tomorrow Wednesday 11/21 – will resume on Friday 11/23.***
Tuesday, November 20, 2018
Equity Market Recap
· Another day of heavy U.S. stock market losses, as selling accelerated in the final hour of trading, with the Dow Industrials and S&P 500 each touching fresh afternoon lows before bouncing. After underperforming in recent sessions, the tech heavy Nasdaq Comp finished well off its lows, after earlier breaching its October 29th lows (traded 6,830.76). The Dow Industrial Average fell more than 600 points late day, with all 30-components negative as investors fled stocks again on good volume for a holiday shortened week. With today’s losses, major indexes wiped out their gains for 2018. Energy stocks were among the top decliners amid another flush of oil prices, with WTI crude falling over 6% to its lowest levels since October 2017, while the dollar rallied and Treasury prices were mostly steady. Retailers plunged following several disappointing earnings or outlooks from TGT, LB, ROST, KSS, TJX and LOW all falling. Transports also under pressure, with investors selling off railroads today (UNP, NSC), while airlines held up relatively well. Tech tried a comeback with beaten up stocks (NVDA, FB) attempting a rebound earlier before failing as growing fears of slowing Apple iPhone demand and valuation concerns in software and Internet space have sunk stocks. Financials also dropped (GS 2-year lows) as weak stock market returns and mixed data have raised expectations the Fed may dial down the pace of rate hikes in 2019.
· Goldman Sachs earlier today suggested that investors should pare back on risk saying that while equities have had a great run, it is time to increase cash holdings and move to more defensive stocks. Don’t forget about the impact of trading tensions with China and tariffs on stocks (ahead of upcoming Trump/XI meetings) as well as fears the Fed continuing its steady pace of rate hikes and its potential to slow the economy. Plunging energy prices, while positive for consumers and transports, has been crushing shares of energy related stocks in the E&P, drilling, integrated and services sectors lately. The CBOE Volatility index (VIX) rose to its highest level in three weeks, touching highs of 23.81 before paring gains, as US stocks were hammered in early action amid another wave of selling.
· Housing Starts for Oct rise 1.5% to 1,228M (after falling -5.5% last month), in-line with estimates and above prior month reading of 1,210M; single family starts fell to 865K; Building permits fell (-0.6%) to 1,263M from 1,270M in Sept, but above the 1,260M est
· Oil prices slammed again, falling -$3.77 or 6.6% to settle at $53.43 per barrel, the lowest levels since October 2017, while Brent fell more than 7.5% to its lowest levels since last December. Slowing global growth has certainly taken its toll on commodity and stock prices over the last few weeks. Gold prices dropped -$4.10, or 0.3% to settle at $1,221.20 an ounce, snapping its 4-day win streak as the U.S. dollar strengthened against most of its currency rivals.
· The U.S. dollar bounced firmly after weakness yesterday on softer housing data, as the dollar index (DXY) jumps over 0.5% midday to highs around 96.70. The euro slipped to the lows, down -0.7% to 1.137 midafternoon while the pound also moved to lows, down -0.5% below the 1.28 level. On the Brexit front, Bank of England Gov. Mark Carney testified before parliament on the U.K.’s inflation and economic outlook, saying that if there was a hard Brexit in March of next year, monetary policy considerations were secondary to the effect such an outcome would have on the economy. Note the expected EC response to Italy and its budget plan, which Brussels says violates EU fiscal rules, is due Wednesday. The dollar rose to 4-month highs vs. the Canadian dollar amid the drop in oil prices. Bitcoin prices dropped as low as $4,220, lowest in over a year before moving back above $4,500 late day (well off highs $19,511 last December).
· Treasury prices were mostly steady despite the big swings in U.S. stocks, with yields holding near lowest levels in over a month; the 10-yr yield down 1 bps to 3.05% while the 2-year yield holds under 2.80%. Over the last few weeks, Treasury prices have gains and yields pulled back from multi-year highs as weaker economic data and a roll in the stock market has boosted hopes that the Fed may slow the rate of interest rate hikes next year after likely raising in December.
Sector News Breakdown
· Retailers; bloodbath in retail after disappointing earnings results heading into the key holiday season: TGT shares fell more than 10% after it misses profit expectations and narrowly missed estimates for same-store sales; KSS quarterly results topped views but the bad news was weak full-year profit guidance, hitting shares that were up big YTD (over 75%); LB raised guidance for the first time in 18-months, announced the hiring John Mehas (President of Tory Burch) to run Victoria’s Secret, while Q3 results beat, but cut its annual dividend in half from $1.20 to $2.40; ROST Q3 results in-line with estimates for EPS/sales/comps with next quarter EPS just below views, but year slightly above while notes fiercely competitive holiday season; TJX slides as Q3 EPS missed by 7c, though sales of $9.83B beat as well as comps of 7% (est. 4.1%), though margins weak and guidance below estimates; URBN Q3 EPS/sales and comps (Q3 comp sales 8% vs. est. 6.3%) all top consensus views; earnings results tonight from GPS, FL, BJ
· Non-apparel retail; consumer electronics retailer BBY lifted its full-year outlook (to $5.09-$5.19 from prior $4.95-$51.0) and posted upbeat quarterly results boosted by a “favorable environment”; book retailer BKS posted slightly smaller than expected Q2 EPS loss on in-line sales, while comp sales fell (-1.4%) and reaffirmed year Ebitda view
· Consumer Staples; CPB Q4 EPS and sales topped consensus and reaffirmed FY2019 guidance, while organic sales fell 3% in Q1, driven primarily by higher promotional spending; POST terminates planned convertible preferred stock offering and Barclays hikes its price target; HRL Q4 sales of $2.52B missed the $2.57B estimate
· Restaurants; JACK Q4 EPS missed by 8c on slightly better than expected revs of $177.5M, while Jack system and company comp sales also fell short of consensus (did boost share buyback); CBRL was downgraded to hold at Maxim on valuation
· Housing & Building Products; home improvement retailer LOW posted mixed Q3 results as EPS/sales beat but comps of 1.5% missed the 2.9% est. and 2% U.S. comps are light and revised down its full-year guidance; in building products, BECN shares downgraded by a few analysts after reported Q4 results, with revenue, EBITDA, and EPS coming in shy of consensus estimates and provided FY19 guidance ranges for revenue, EBITDA, and EPS below expectations; Dow component HD shares traded to fresh 52-week lows today
· Casino & Leisure movers; in lodging, MAR was downgraded to hold at Argus citing a recent slowdown in RevPAR growth and a potential end to the multiyear upturn in the lodging industry
· Energy stocks plunged early with Brent tumbling by nearly 5% and WTI about 6% on concerns about swelling global supplies, despite big producer nations weighing a cut in production; energy stocks were down across the board early with WTI crude down over 20% from its 52-week highs just a month ago
· In energy research, Raymond James upgraded BP to outperform saying among European Big Oils, BP shares have had the second-worst quarter-to-date performance, creating, in our view, an attractive entry point, while the firm downgraded XOM to underperform calling it one of the least appealing ways to play our bullish oil call, particularly after the painful but transitory oil price selloff over the past month; KEG downgraded to neutral at Piper citing its 3Q earnings miss, somber 4Q commentary and massive U.S. Well Service industry fragmentation.
· E&P sector; EQT upgraded to buy from neutral at Goldman Sachs as the company’s 2019 production guidance for 5% asset sale-adjusted growth is conservative, while firm downgraded COG to neutral as sees less relative upside after recent share gains on temporary improvement in natural gas prices; QEP was upgraded at Credit Suisse saying the accretive sale of its Haynesville assets leaves the residual pure-play Permian E&P trading at a large discount to peers.
· Utilities & Solar; PCG shares gained after reports last night a bill that would help PG&E Corp. absorb liabilities from this year’s fatal wildfires in California is being drafted at the request of a state assemblyman (Chris Holden) who helped shepherd earlier legislation on the issue
· Refiners; Q4 EPS estimates were lowered at Morgan Stanley to 17% below Street consensus, and 2019 to 19% below consensus on “dismal” gasoline cracks weighing on refining margins; sees greatest negative revision risk to PBF, VLO and DK, with Morgan Stanley’s 4Q EPS estimates being 37%, 31%, and 25% below consensus, respectively; also cuts price targets by 14%
· Bank movers; group has been in sharp downturn over the last few weeks as yields pullback off highs but also as Democrats took over control of the House of Representatives in the Nov. 6 vote, making it likely that Rep. Maxine Waters, a California Democrat, will become chairwoman of the House Financial Services Committee, who has pressed for more regulation on banks; financials extending weakness as well today, with 52-week lows for C, MS, TROW, GS, PRU, SYF, ALL)
· Consumer finance and lending; lending and finance names have come under pressure over the last few days along with broader tech weakness, as shares of SQ and PYPL among the names getting hammered on valuation concerns; overnight, INTU posted strong results, conservative FY19 guide, with FQ1 with sales/EPS ahead of street; MA and V credit ratings were raised by S&P
· Pharma movers; Large cap pharma remains strong, with MRK, PFE and UNH now the top three Dow gainers on the year; CBM announced that it has agreed to acquire Avista Pharma Solutions for ~$252M; SAGE shares fall after U.S. regulators delayed a decision date for its postpartum depression therapy, Zulresso, by three months; TSRO shares rose as much as 18% after confirming it cancelled an upcoming Evercore/ISI conference yesterday; MYL slipped after the FDA issued a warning letter for CGMP violations
· Medical equipment and devices; LIVN a falls after CMS proposes to extend coverage for VNS in treatment-resistant depression with caveat that LIVN must conduct a double-blind, randomized, placebo-controlled trial with one year follow-up (BTIG said it expected shares down $10 on the news); BSX agreed to buy rival BTG Corp. for $4.2 billion to expand its offering of medical devices to treat cancer and other disorders; Agilent (A) posted strong 4Q results, with 9% core growth and 7c upside as revs/margins beat; MDT Q2 EPS and sales topped views while boosts FY19 organic revenue growth guidance to up 5%-5.5% from prior view 4.5%-5%
· Healthcare services and providers; INGN was upgraded at Needham as expect a significant new product cycle in 2019, anchored by 5G POC which can deliver meaningful upside to consensus; ACHC shares gave up earlier gains after CNBC’s David Faber said that KKR is not in talks for a buyout of ACHC, but for a significant investment in the company
Industrials & Materials
· Industrial & Machinery; DY reported better than expected Q3 results, but lowered Q4 EPS and rev guidance (6th straight quarter of lower guidance); BAcontinues to be a drag on the Dow Industrial Average after the company cancelled a conference call with airlines this morning to discuss the 737 Max aircraft issues; WWD was upgraded to buy at SunTrust while highlighting CW, FLIR, and MOGA as compelling Buy ideas considering recent multiple compression; markets await earnings in ag space tomorrow with DE results
· Transports; in marine shipping, MATX downgraded to hold at Stifel saying while expect 4Q to be strong and believe there is long-term value, they cut on valuation on the expectation for momentum to slow related to container volumes from China; transports underperform broader averages, falling more than 2.5% midday with MATX and rails (UNP, NSC) weighing
· Chemicals; LYB was upgraded at RBC Capital saying shares look attractive for investors who can look through oil/market volatility as raises tgt to $130; OECwas upgraded to buy at UBS noting stock is down ~30% from Sep. high, and est. the market is pricing in a ~20% decline in ‘19 EBITDA
Technology, Media & Telecom
· Internet; Group has been slammed over last few days, with some names trying to bounce back after the sell-off on valuation, privacy, regulation concerns (FB, GOOGL, SNAP); DBX fell below its initial offering price for the first time, 242 days after going public; SNAP shares dropped below the $6 level; Wedbush warned that GOOGL’s expansion into the travel business shows an evolving encroachment on metasearch engines and online-travel-agencies (OTAs) – BKNG, EXPE, TRIP shares active
· Semiconductors; weakness continues on lower AAPL iPhone demand fears; Bank America downgraded SWKS to underperform and tgt to $75 from $92 and TER to neutral from buy citing weak iPhone demand in 2019 noting recently heard multiple iPhone suppliers (LITE, AMS, QRVO, IQE, Japan Display) reduce their near-term outlook by 10-15M iPhone units. MU was downgraded to underperform at Baird saying continued deterioration in both DRAM and NAND pricing leads them to model eight consecutive quarters of gross margin and EPS contraction; ADI shares rally following better quarterly earnings results; NVDA got a boost late morning following a positive “tweet” from Citron research on the stock after its recent tumble
· Software mover; group crushed yesterday as the iShares North American Tech-Software ETF (IGV) fell the most on Monday, down -5.4%, with weakness in shares of CRM, ADBE, ORCL, SPLK, OKTA, ZS among them; today, group started out for sale with rest of tech, though some names bounced off lows; TLNDtgt lowered to Street low $50 at BTIG today; QLYS advanced after BTIG upgraded shares to buy with $100 tgt
· Hardware & Component news; AAPL tgt cut again at Goldman Sachs, down to $182 from $209 just after recently cutting from $222 level, saying they are likely to struggle amid signs of weak demand for its iPhones in China and other emerging markets; PSTG delivered another revenue beat for the quarter, as product growth continues to be over 30% y/y