Thursday, December 6, 2018
Equity Market Recap
· U.S. stocks slumped sharply for a second day as the sell-off in risk assets persisted with concern of increasing China/US trade tensions peaking overnight after Canada’s arrest of the Huawei CFO and reports it may extradite her to the U.S., adding to already fragile sentiment. Fears that the rate of global economic growth has peaked also weighed on sentiment. Oil prices fell as much as 5% before paring losses as OPEC ministers met in Vienna without a meaningful conclusion on future oil production cuts (though reports that OPEC leaders will reconvene on Friday at 9:00 AM EST). Shares of industrials, materials and technology dropped the most on the China fears while banks fell on lower yields and energy dropping on lower prices. Investors also digested a heavy dose of economic data, with some reports pushed out a day due to the closing of stocks markets yesterday in observance of President Bush’s funeral (details below).
· The S&P 500 fell as much as 2.9% and losses in the Dow Jones Industrial Average topped 780 points before major averages bounced off of key technical levels. Technology stocks rallied back as the NASDAQ recovered all of its near 175-point losses from earlier turning positive late day. Financial shares led the drop, as Treasury yields fell to the lowest since August with traders starting to doubt the Federal Reserve will raise rates next year as economic growth falters. Oil continued to be a drag with WTI crude hitting lows of $50.08 before paring losses after weekly inventory data and commentary out of OPEC ministers.
· The UK Brexit vote is also nearing, with European markets hammered as Germany’s DAX fell more than 20% from its 2018 highs (down over 3% today) and dropping near bear market territory while the UK FTSE 100 index also fell over 2% ahead of Brexit vote and the uncertainty that surrounds it. The Stoxx 600 index falls 3.3% posting its worst daily return since Brexit vote back in 2016, with most major European averages down over 3% (Germany, France, Italy, UK), all closing at or near the lows of the day. Note the S&P 500 registered the best weekly gain in seven years last week, only to give it all up, and more, this week.
· ADP Employment data showed private-sector employment stayed strong in November, as employers added 179,000 jobs but missed the 195K estimate ahead of tomorrow’s nonfarm payroll data; October’s gain was revised slightly to show 225,000 growth instead of a previously estimated 227,000. ADP’s report showed that small firms added 46,000 jobs in November, medium-size businesses added 119,000 to large companies added 13,000.
· ISM Non-Manufacturing for November rises to 60.7, above the 59.0 est. while the non-manufacturing index at 60.7 vs 60.3 prior month; component breakdown showed: business activity rose to 65.2 vs 62.5 prior month while new orders rose to 62.5 vs 61.5 and employment fell to 58.4 vs 59.7; prices paid rose to 64.3 vs 61.7 and backlog of orders rose to 55.5 vs 54
· U.S. nonfarm productivity growth in Q3 raised to 2.3% from 2.2% prior while the increase in output was unchanged at 4.1%, as was the increase in hours worked at 1.8%; Unit-labor costs rose a revised 0.9%, smaller than the initially reported 1.2% advance (est. 1%)
· Weekly Jobless Claims fell 4K to 231K, slightly above the 225K estimate while prior week claims revised up to 235K from 234K; continuing claims fell 74K to 1.631M in the week ending Nov. 24; the decline broke a string a three straight increases that pushed claims up to the highest level since the end of March; the 4-week moving average rose by 4,250 to 228.000 (8-month high)
· The U.S. trade deficit rose 1.7% in October to a 10-year high amid a record shortfall with China, keeping the U.S. on pace to record the largest annual gap in a decade. The deficit edged up to $55.5 billion from a revised $54.6 billion in September, Imports rose 0.2% to $266.5 billion in October, also a record while exports slipped 0.1% to $211 billion.
· Factory Goods Orders for Oct fall (-2.1%) vs. est. (-2.0%) as Factory orders for Sept. revised down to 0.2% gain; new orders ex-trans. for Oct. rise 0.3%; new orders ex-defense for Oct. fall 0.4% after falling 0.4% in Sept.; durables orders for Oct. fall 4.3% after unchanged in Sept.
· Challenger Job-Cut announcements rose 51.5% Y/y in Nov. as said there were 53,073 job cuts in Nov. (494,775 year to date); retail continues to lead all sectors in year-to-date job cut announcements with 96,504, report notes
· Markit Nov Composite PMI 54.7 vs. Flash Reading 54.4; index falls to 54.7 from 54.9 in Oct.; Year ago 54.5; employment falls to 53.3 vs 53.8 in Oct.; Lowest reading since June 2017; new orders fall vs prior month; lowest reading since Oct. 2017
· WTI crude oil dropped -$1.40, or 2.7% settling at $51.49 per barrel after Saudi’s oil minister said need at least 6 months to cut production while Brent trades below $60. Overall commentary from the OPEC meeting in Vienna today showed OPEC members agreed to production cuts but must await Russia before making a final decision on the exact amount and the allocation. CNBC notes markets had been looking for a 1.4 M bpd output cut by OPEC and Russia, though Saudi has said 1.0 M bpd would be enough. There was no press conference following the OPEC meeting today as they are set meet again tomorrow morning. Gold prices end higher, but off their best levels, rising $1.00 to $1,243.60 an ounce; gold prices had traded near highs around $1,250 earlier before slipping as the dollar and U.S. stocks recovered off the lows. Copper sank to a three-week low and other base metals tumbled.
· The U.S. dollar was lower throughout the session as the dollar index (DXY) fell to lows, down as low as 96.55, falling -0.4% (off overnight highs of 97.20) with the euro bouncing above the 1.14 level, the British Pound rising, and the Japanese yen gains vs. the greenback (though recovered from 5-week lows); currencies whose economy is leveraged to oil for their economy (Canada) falling vs. the dollar as oil tumbles further. The dovish Fed and slowing economic growth concerns have weighed on the greenback over the last few weeks.
· Treasury markets spiked early, sending Treasury yields tumbling to multi-month lows, with the 10-yr hitting lows of 2.82% (more than 40 bps from October highs) before paring losses (still down over 4 bps on the day), with the 2-yr hitting lows of 2.71% and the 30-yr at 3.12%. Federal Reserve Bank of Atlanta President Raphael Bostic, speaking at an economic outlook said the central bank faces risks from moving too aggressively to raise interest rates or moving too slowly and he wouldn’t predict the outcome of the December meeting. Earlier today, the Treasury auctioned $40 billion in 4-week bills and $30 billion in 8-week bills.
Sector News Breakdown
· Retailers; PLCE shares fall after cutting year forecast and saying 4Q would be hurt by added fulfillment costs, as well as sales and margin impact of potentially significant liquidation events from competitors; COST reported total comparable sales for the November +9.2% above the estimate +5.4% while U.S. comps ex: fuel, currencies +10.1% vs. estimate +4.90%; LB reported an unexpected rise for the November Victoria’s Secret comp sales (2% vs. est. -1%) as overall comps rose 9% topping the 2.8% estimate; GIII, FIVE, DLTH, MIK, other retailers moving after quarterly results and guidance; jewelry names slide as SIG said is seeing a “more competitive environment as department stores continue to invest in the category and consumers are highly responsive to value” and as a result, will have additional promotional activity in 4Q to support holiday sales
· In retail research, TLYS was upgraded to buy at Pivotal purely valuation related as risk reward now looks favorable at current levels; Macy’s (M) downgraded to underweight at Atlantic saying they see limited scope for further sales or earnings outperformance; COLM was upgraded to buy at Pivotal saying the winter season is trending well for Columbia and sees a better risk-reward profile at the current share price.
· Consumer Staples and Restaurants; YUM issued long-term financial targets that were largely reiterated (2%-3% comps, HSD operating profit growth) with unit growth ticking up slightly to 4% and double-digit EPS growth; TWNK was upgraded to overweight at JPMorgan; consumer staples also not immune to the broad sell-off with PG, CHD, KMB down
· Housing & Building Products; homebuilders were a stand out to the upside on lower rates with LEN, PHM, MTH, TOL among those moving higher; HOMEshares drop after a disappointing Q4 forecast that one analyst said suggests a “significant deceleration” in revenue.
· Casino & Leisure movers; towables/RV names weak after THO Q1 EPS and sales missed consensus estimates by a wide margin along with weaker than expected gross margin of 11.8% (LCII, WGO, CWH shares weak in sympathy)
· Volatility in energy markets continue as stocks were lower most of the day with no meaningful bounce despite a bigger-than-expected drawdown in weekly U.S. crude inventories (as reported by the EIA). Markets kept a close eye on OPEC during its meeting in Vienna with no official word on production cuts for the time being. OPEC members said they agreed to production cuts but must await Russia before making a final decision on the exact amount and the allocation. Russian Energy Minister Novak flew to St. Petersburg from Vienna earlier to consult Pres. Putin and will return to the OPEC meeting for talks tomorrow. Energy stocks were broadly lower: XOM, CVX, BP, COP, PXD, EOG, SLB, HAL, APA, and drillers RIG, ESV, NE, RDC
· Inventory data mixed; the EIA posted a weekly drawdown in inventories of -7,323M barrels, more than the expected -2M barrel draw (bullish), while Cushing crude rose +1,729M; overnight the API reported that U.S. crude supplies rose by 5.4M barrels for the week ended Nov. 30; showed stockpile increases of 3.6M barrels in gasoline and 4.3M barrels in distillates
· Utilities & Solar; Baird upgraded AWK, CWT, and WTR to Outperform rating saying favorable regulatory dynamics and M&A activity should continue to drive EPS growth, and they think the names are insulated from some of the macro concerns which have been an overhang on other stocks in our sector (thinks the space could provide a safe haven in a volatile market); EE shares fall after DealReporter said the company’s board has elected not to proceed with a formal sales process, with Bloomberg reporting news
· Bank movers; financials were the biggest drag on markets Tuesday and again today with several negative catalysts; the flattening yield curve hurting banks as banks borrow at the short-end and lend at rates dictated by the long-end, so a flat curve would squeeze their profit; also hurting today, softer “trading” comments from big banks as Citigroup (C) CFO John Gerspach warned that Citi’s fixed-income trading revenue might fall Y/Y and volatility may hurt its ability to meet some 2018 targets while JPM CEO Dimon said Tuesday trading results are “roughly equivalent” to last year; WFC fell as the Federal Reserve rejected the banks plans to prevent further consumer abuses, and must draw-up a robust plan to improve its governance and risk management controls before the Fed will lift an asset cap imposed on the bank in Feb.
· Insurance; AIG said that a series of natural disasters in Q4 would cost the insurer between $750M-$800M; PRU said it sees 2019 adjusted EPS of $12.50-$13.00 vs. est. $12.97; sees ’19 share repurchase authorization $2 billion; HIG said it expects a Q4 current accident year net catastrophe impact of $350M-$365M, due primarily to the Camp Fire in California.
· Specialty Pharma movers; MNK announces plans to spin off a new company consisting of its Specialty Generics/Active Pharmaceutical Ingredients business and AMITIZA (lubiprostone) to shareholders/the separation is expected to create two independent, publicly traded companies; AKRX slides after the company argued in appeals court hearing in Delaware Wednesday that a trial judge improperly rewrote state law and used “guesswork” in allowing Fresenius to scrap the deal; SUPN falls though announced P301 and P303 each met primary endpoints with “robust” statistical significance in Phase 3 studies of SPN-812 to treat kids with attention deficit hyperactivity disorder/sees submitting new drug application for SPN-812 in 2H of 2019; CNAT falls in response to its announcement that its Phase 2 clinical trial, ENCORE-PH, evaluating emricasan in patients with compensated NASH cirrhosis at high risk of decompensation failed to sufficiently separate from placebo
· Pharma and Biotech; BMY was upgraded to outperform at BMO Capital saying risk/reward in BMY seems attractive here/following a number of R&D setbacks, street expectations for Bristol’s IO franchise seem low; PBYI tgt cut to $26 at RBC as reduce forecast sales for increased competition; large cap pharma down with broader healthcare space, pulling back off recent 52-week highs for PFE, LLY, MRK
· Medical equipment and devices; DXCM slides as the company’s growth path out to 2023 that was given at a meeting Tuesday showing initial revenue guidance of $2B-$2.5B; EW issued 2019 guidance that demonstrates the sustainability of double digit growth in TAVR despite increased competition and pricing/reimbursement headwinds as per RBC Capital
· Healthcare services and providers; TDOC shares slipped with several analysts defending after a report from Southern Investigative Reporting Foundation (SIRF) alleged CFO Mark Hirschhorn had an affair with a colleague and the two discussed when would be a good time to sell shares. TDOC released a statement late Wednesday defending itself, saying the board “took swift and appropriate disciplinary action to address the violations”; MDXG shares slide as announces management shake-up and cuts 24% of sales force; HQY slides following earnings and as after SunTrust analyst Sandy Draper downgraded shares to hold from buy, noting the interest rate environment will be less of a tailwind for custodial revenue after recent Fed comments
Industrials & Materials
· Industrial & Machinery; Dow component BA shares declined amid sharpening trade tensions between the U.S. and China along with other industrials; after having posting its biggest-ever point drop Tuesday (at its intraday worst, the index was down as much as 565 points, or 5.2%), Dow Transports fell more than 200 points today before paring losses; HA Nov. load factor 84.1% vs. 85.9% a year ago; cuts Q4 cost per ASM outlook to up 0.6%-3.3% from up 2.3%-5.8% citing lower-than-expected NA market pricing
· Metals & Materials; China concern weigh on metals again as miners have broken November’s lows in European trading (GLNCY, BHP, RIO as well as steel MT) while copper prices fall (hits FCX) and US steel makers (X, AKS, STLD) also lower; SCCO was upgraded to Neutral at JPMorgan as share prices have significantly dropped in the past few months (-39% YTD) on the back of increased political risks in Mexico and lower copper prices; BHP added to Goldman Sachs conviction buy list as sees 17% upside to their tgt and now expect net debt to fall below management’s US$10-15bn target range by February 2019
· Heavy duty machinery; CMI, PCAR, NAV active after November Class 8 preliminary orders came in at 27.9K units, below expectations that had been in the mid-thirties. Orders were down 15% y/y and down 36% relative to October which was a very strong month from an order intake perspective; NAV was upgraded to buy at Loop Capital saying shares have pulled back 22% since the start of the fourth quarter, while we have become more enthusiastic about the company’s prospects and strategic initiatives
· Materials and Chemicals; TROX falls over 20% after the company said late Tuesday that the FTC staff has indicated it would likely not recommend the proposed remedy of selling two plants in Ashtabula, Ohio, to Ineos as part of the Cristal acquisition; GEF shares fall, weighing on packaging stocks after Q4 EPS missed the lowest estimate and company said it started to see signs of market softness
Technology, Media & Telecom
· Internet; Internet stocks rallied off lows but still end weak; FB shares weak after company emails show the company threatened to cut off data to potential rivals added a new target for the regulatory armory that is being amassed by European regulators (FB was downgraded to hold by Stifel); China Internet names slump after Canadian authorities arrested a top executive of Chinese tech giant Huawei for extradition to the U.S. adding to tensions (BABA, JD, SINA, NTES, BIDU, VIPS, QD all weak); YY and HUYA were raised to buy at Goldman Sachs after Q3 revenue topped estimates last month on growth in paying users.
· Semiconductors; sector plunges as the Philly semi index (SOX) drops 100 points from Monday highs of 1,281.35 after the arrest of Huawei Technologies Co.’s chief financial officer; some Huawei suppliers include QCOM, SWKS, ADI, CY, QRVO, XLNX according to Bloomberg; LRCX shares slide after its CEO resigned Wednesday amid allegations of misconduct; MRVL OctQ estimates beat estimates but JanQ guidance fell below expectations, with headwinds in storage business from MPU constraints
· Software movers; CLDR reported a solid 3Q beating top and bottom line as opex and margins were better than expected, while Q4 guidance came in with smaller than expected loss; OKTA reported very strong FQ3’19 results with revenue 9% and billings 10% above estimates, a 12% beat on gross profit and better-than-expected operating losses/billings growth of 58% – representing an acceleration from 53% in FQ2; GWRE slides after big FQ1 beat, but FY19 revenue guidance meaningfully lowered due to some elongated sales cycles resulting from the added complexity of the company’s cloud transition
· Networking; JPMorgan said following year-to-date share price performance of +48% for CIEN they are removing it from the US Analyst Focus List but maintain OW rating with 24% upside potential from current levels. JPM adding OW-rated CSCO to the Analyst Focus List as a value idea; ANET was upgraded to buy with $300 tgt at Bank America citing the recent pullback and potential TAM expansion opportunities, which could lead to ANET doubling its revenues by 2020
· Optical stocks pressured (NPTN, LITE, FNSR, IIVI, IPHI, MTSI) after Canada arrested the CFO of Huawei (also the daughter of the founder) and is extraditing her at the request of the US. The sector falls after Craig Hallum notes they get about 1/3 of sales from China and says it is too soon to know what response the Chinese government will have, but it could certainly make acquisitions in progress less likely to occur; LITE obtained clearance from China’s State Administration for Market Regulation for its OCLR acquisition