Friday, December 7, 2018
Equity Market Recap
· U.S. stocks were absolutely pummeled on the day and week, as the Dow fell as much as 650 points or over 2.75%, the Nasdaq fell more than -230 points or over 3% (dropping back below the 7,000 level) and the benchmark S&P 500 index fell over 70 points turning negative YTD. The declines come after major US averages posted their best week in 7-years just last Friday after dovish Fed commentary boosted market sentiment. There wasn’t one specific headline for the sharp move lower today, but likely just a culmination of several market moving stories over the course of the week which included: dovish Fed talk, surprising developments with China (trade truce Monday only to have the concerns reignite after the Huawei CFO arrest), weaker U.S. jobs data, plunging oil to 52-week lows into OPEC’s meeting (only to rebound today after larger OPEC production cuts today), and volatile currency and Treasury markets that saw some yield spreads invert, signaling recession. Markets also on edge into next week Brexit vote. Earlier today, Peter Navarro talked about the U.S. moving forward with tariff hikes if the trade talks don’t get resolved in 90 days – in contrast to White House economic advisor Larry Kudlow’s saying trump may being willing to extend the 90-day period (may have factored into today’s decline). Tech slammed on China trade fears as well, with Dow component AAPL falling below $170 to its lowest level in six-month (erasing YTD gains) as several analysts have lowered rating and target in recent weeks on slowing demand concerns of newest iPhones.
· Sector movers: Energy stocks were mixed (one of the few bright spots) as OPEC ministers, Russia and other non-OPEC allies worked toward an agreement to cut oil production by more than previously suggested (cutting by 1.2M b/d, with OPEC shouldering 800k and non-OPEC 400k), helping boost oil prices on the day. Bloomberg noted health care stocks were among the biggest percentage and point decliners in the S&P 500 brining its three-session drop is on pace to be the biggest since March, falling over 2.5% – this after stocks had posted strong gains earlier in the week (MRK, LLY, JNJ, UNH all touched 52-week highs Monday). Transports were obliterated as the Dow Transport Averages dropped as much as 4% to below the 10K level (was above 11K just 4 days ago)! Interest rate sensitive sectors outperformed as utilities and REITs both saw modest gains (52-week highs for AMT, AVB, UDR, AIV, ESS in REIT space and AWK, NRG in utility).
· Nonfarm Payrolls for November rose 155K, missing the 198K estimate (net revisions, -12K from prior two months), while Nonfarm private payrolls rose 161K, missing the 198K estimate and below last month number of 251K; the participation rate 62.9% vs prior 62.9%; wages grow, but less than forecast at 0.2% vs. est.0.3% (but above last month 0.1%); manufacturing payrolls rose 27k after rising 26k in the prior month; the unemployment rate held steady at 3.7% (in-line with estimates)
· The preliminary University of Michigan consumer sentiment survey for Dec. at 97.5, unchanged from the prior month while the current economic conditions index rose to 115.2 vs. 112.3 last month and the expectations index fell to 86.1 vs. 88.1 last month.
· Wholesale Inventories rose 0.8% in Oct., slightly above the 0.7% est. as wholesale inventories increased to $652.1b vs $646.8b in prior month; Sept. inventories revised to 0.7% from 0.6%; wholesale inventories excluding oil rose 1.2% in Oct.
· Oil prices jumped as much as 5% earlier before paring gains, closing higher by $1.12, or 2.2% to settle at $52.61 per barrel (off earlier highs of $54.22) after OPEC broadly agreed a deal to cut oil production by 1.2M barrels a day with OPEC itself shouldering 800,000 barrels. Iran emerged as a winner on reports it secured an exemption from cuts as it suffers the effects of U.S. sanction. UAE oil minister also noted that Venezuela and Libya were also exempt from cuts. For the week, WTI crude registered a 3.3% gain.
· Gold prices rise $9.00 or 0.7% to settle at $1,252.60 an ounce, as the weaker-than-expected monthly payrolls report further lessened chances of an aggressive rate hike cycle by the Fed, sending the dollar lower. For the week, gold advanced roughly 2.2%, its biggest weekly gain since August following market turmoil that sent stocks reeling and ended at 5-month highs as it trims its year-to-date loss to under 5%. A weaker dollar can boost commodities priced in the greenback as it makes it cheaper to users of other currencies.
· The U.S. dollar slipped after Friday’s jobs report missed estimates (jobs 155K vs. est. 198K an) while unemployment rate remained at a 49-year low of 3.7%, and average hourly wages rose by 0.2% (missing the 0.3% est.). While the Fed is expected to hike interest rates next week, its path for increases in 2019 is less certain given the recent data and stock market collapse over the last month on trade and tariff impact fears with China. The dollar was broadly lower vs. major currencies (though gained vs. the British Pound into Brexit vote). Currencies leveraged to oil for their economy (Canada dollar, Russian Ruble) saw a rebound as prices rise on OPEC news. Bitcoin slumped to a new year-low after falling as much as 9% to around $3,200 before paring losses. The Canadian dollar jumped after the country added a record number of jobs, which helped ease some of the recent concerns over the strength of the economy.
· Treasury markets whipsawed following weaker than expected payroll data and another broad equity market sell-off that sent investors scurrying for the safety of defensive assets such as Treasuries. The 10-yr yield rose as high as 2.89% before falling back to 3-month lows below 2.85% in a week that has seen Treasury spreads invert (signaling possible recession). Today’s weaker nonfarm payroll report also helped support the view of slowing rate hikes by the Fed into 2019. It has been a turbulent week to say the least for Treasuries as the gap between the 3-year note and the 5-year note yield turned negative earlier this week, while yields fell.
Sector News Breakdown
· Retailers; BIG shares fall, leading discount retailers lower after said expects near-term results this holiday season “to be challenging” as the company cut its full-year EPS outlook for the third time (guides FY19 to $3.55-$3.75 from prior view of $4.40-$4.55 and est. $4.45); LULU shares slipped as Q3 earnings/sales beat, but not as big as prior quarters though improved gross margins and raised guidance for year but Q4 comp sales view implies a slowdown; ZUMZ shares slumped after Q3 results beat views, but guided Q4 earnings below consensus
· Consumer Staples; tobacco giant MO has struck a deal to take a stake in Canadian marijuana company CRON for C$2.4B ($1.86B), as part of the tobacco giant’s efforts to diversify its business away from vaping products. MO agreed to acquire 146.2 M newly issued shares representing a 45% stake in CRON at C$16.25 per share, for a deal total of $1.8B ; in cosmetics, ULTA shares fell as reported Q3 EPS beat on in-line total and comp sales though posted margin shortfall while Q4 comp and overall outlook missed estimates/one analyst noted clearance headwinds were the primary driver of the gross margin miss; in beverages, FIZZ upgraded to neutral at Guggenheim on valuation after three-month sell-off; CAG approved an integration and restructuring plan related to its acquisition of Pinnacle Foods and expects up to $440M of overall charges under the plan, according to a filing; UNFI shares weak as Q1 sales and Ebitda disappointed and 2019 guidance was below analyst expectations; Q1 EPS missed by 14c
· Casino & Leisure movers; in leisure, gun stocks rise as AOBC reported Q2 results that easily exceeded expectations on all fronts while 2019 guidance was increased as new products/bundled promos drove market share gains; MTN shares fall after posting a wider-than-expected Q1 EPS loss while revs of $220M missed the $235M est., but reaffirmed year guidance; JOUT shares fell after the seller of outdoor recreation equipment swung to a Q4 loss, on a surprise sales decline
· Auto sector; TSLA upgraded to buy from hold at Jefferies and raise tgt to $450 from $360 saying the company looks positioned to outperform electric-vehicle peers in the coming year (shares erased earlier gains amid the market collapse and decline in autos); NSANY recalls 150,000 vehicles in Japan after improper inspections
· Energy stocks mostly higher as oil prices jump on OPEC production cut agreements; among the top S&P top gainers, energy dominated with large advances for MRO, FANG, EOG, APC, SLB, HP among others; CVX raised its spending budget for the first time since 2014 bosting investments by 9.3% to $20 billion next year; Baker Hughes (BHGE) weekly total rig count fell -1 to 1,075, with oil rigs fell -10 to 877 and gas rigs down rose 9 to 198
· E&P sector rating changes: JPMorgan downgrades XOG, HPR two notches, to underweight from overweight; downgrades DVN, GPOR, MTDR, and SRCI to neutral from overweight; downgrades CHK, CRZO, HK to underweight from neutral; upgrades EOG to overweight from neutral as sees risk for material consensus estimate revisions at strip pricing, with JPM’s updated cash flow forecasts 16% below the Street in 2019, and more than 20% in 2020. Seaport Global upgraded HP to Neutral from Sell, downgraded ERII to Neutral and withdrew rating and price target for EMES
· Utilities; the utility index was higher, rising on the day given the weekly decline in Treasury yields, making dividend/defensive paying sectors more attractive; 52-week highs today for AEP, AWK and XEL; South Carolina’s PSC is set to decide on Dominion’s (D) proposal to buy SCG at a business meeting scheduled for Dec. 14, according to agenda for the meeting; PNM boosted its dividend and affirmed guidance
· Bank movers; a rough week for banks with the XLF down roughly 6.5% so far amid falling yields, weaker trading revenue comments (by JPM and Citi this week) and inverted Treasury yield spreads (effecting margins); Credit Suisse added to its “gray sky” valuation scenario for big banks, moving to 25% from 15%, and reducing its “blue sky” weighting to 25% from 35% as the firm along with rolling forward to 2019 fundamentals, scenario shift translates to 6% avg. cut in large-cap bank PTs (including GS, MS, BAC, C, JPM, WFC, CFG, PNC, STI, BK, NTRS, STT)
· Business services; Barclay’s upgraded MSCI to OW, and call out SPGI as attractive relative to MCO in a choppy issuance backdrop (both OW). They also upgrade FDS to EW given its steady growth algorithm despite end-market pressures. TRI remains at EW given the heavy execution required, but our raised $55 PT reflects RemainCo momentum, Refinitiv optionality, and its Canadian support
· Pharma & Biotech movers; MRNA 26M share IPO priced at $23.00; MNTA 17.4M share Secondary priced at $11.50; AZN tremelimumab comes up short in another phase 3 trial. Having failed to improve outcomes in metastatic non-small cell lung cancer (NSCLC), the anti-CTLA4 antibody has now missed the primary endpoint in a phase 3 advanced head and neck cancer trial; GBT 3.41M share Spot Secondary priced at $44.00; THOR 11.9M share IPO priced at $11.00; DMAC 4.1M share IPO priced at $4.00; AKRX shares fell after a US court upheld its decision to allow Germany’s Fresenius to walk away from a $4.8B
· Healthcare services and providers; DPLO was upgraded to neutral at Baird saying they are less cautious than they were following the 3Q18 report; QTNT9.23M share Spot Secondary priced at $6.50; FMS shares fall overseas after saying it won’t meet its financial goals through 2020, the second profit warning in two months/also said sales growth and net income may be comparable to this year’s level; COO mixed 4Q results, with EPS coming in lighter because of for-ex and some transitory product costs according to Piper/guidance for 2019 was below Street estimates
· Medical equipment and devices; QDEL shares dropped late day after saying Beckman Coulter won a summary judgment against them on aspect of Assay pact; INSP 2.5M share Secondary priced at $40.00; VIVE 13.333M share Spot Secondary priced at $1.50; KIDS 1.5M share Spot Secondary priced at $27.00
Industrials & Materials
· Transports; sector lower amid rising oil prices after OPEC agreed to cut production as airlines underperform with declines in AAL, ALK, JBLU, LUV, UAL as the Transport index drops nearly 300 points to lows just above 10,000 (index was trading above 11,000 on Monday); Wolfe Research downgraded airlines AAL, JBLU citing the double whammy macro backdrop of recession and oil concerns/prefers outperform rated DAL and LUV; EXPD was downgraded to sell as Goldman Sachs as expects earnings will be pressured by continued slowdown in the Airfreight business and structural headwinds in Ocean freight
· Metals & Materials; sector was little changed early before sliding late amid the broader market pullback, as steels were mixed; copper bounced back from Thursday’s biggest decline in five weeks; gold miners (AEM, NEM, ABX, GG) advanced as gold touched 5-month highs after the dollar fell; chemical stocks dropped midday after BASFY said that based on the earnings data for November, it now expects a “considerable decrease” in income from operations before special items for the FY18 in the range of 15% to 20% compared with the prior year (shares of DWDP, HUN fell in reaction)
Technology, Media & Telecom
· Semiconductors; AVGO reported a solid quarter, beating on both top and bottom line, with a 51% dividend raise and strong FY19 outlook/cuts CA spending from $2B+ to $900M, driving significant FCF; overall though, trade concerns with China really taking a toll on semiconductors the last few days (fell as much as 2.75% earlier today and down over 5% for the week) with AMD, NVDA, MU among biggest drags on the index
· Software & Hardware movers; DOCU strong Q3 results highlighted by robust billings growth of 40% year over year (above est. 23%) that accelerated from 32% in Q2, while Q4 guidance also topped consensus estimates; DOMO rises as reported better-than-expected Q3 results with EPS loss of ($1.06) narrower than ($1.38) est. on billings growth of 29% y/y (consensus 19% y/y) and revenue growth of 30% y/y; IBM announced it had divested certain software assets to HCL, a large offshore IT service provider and current licensee of certain IBM IP, for $1.8B