Market Review: December 11, 2018

Terrie AmengualDaily Market Report

Closing Recap

Tuesday, December 11, 2018

Equity Market Recap

· U.S. equities slowly lost steam mid-morning, posting steep declines by mid-afternoon as another market worry surfaced. Fears of a government shutdown overshadowed the trade hopes with China that had stocks higher overnight following reports China vice Premier Liu spoke with U.S. Treasury Sec. Steven Mnuchin and U.S. Trade Representative Robert Lighthizer via phone. The reports indicated China agreed to reduce tariffs on U.S. autos to 15%, down from 40% currently. All was moving smoothly until stocks petered out late morning, with financial shares falling the most as President Trump said he’d be “proud” to shut down the government if his demands for border funding aren’t met. The comments were followed by bickering between Trump, Nancy Pelosi and Senator Chuck Schumer in front of the cameras about the shutdown.

· After trading up as much as 368 points, the Dow Industrial Average dropped more than -200-points’ mid-afternoon in another about face for U.S. stocks. The tech heavy NASDAQ plunged from intraday highs of 7,129 to afternoon lows of 6,983 while the benchmark S&P 500 fell more than 50-handles from its intraday highs. Investors rotated into defensive sectors with utilities moving to session highs late, while financials, tech and energy fell from highs. The dollar was mixed while oil tumbled late day and Treasury prices remained lower. Stocks spiked late day after reports that House Republicans are considering putting a bill on the floor to spend $5 billion on a border wall — a way to back Trump up – helping ease market fears. Overall, volatility has been incredible over the last few weeks, with 1-2% moves becoming the norm.

Economic Data

· Producer Price Index (PPI) for November rose 0.1% vs. est. 0% while core prices (PPI ex food & energy) rose 0.3%, more than the 0.1% estimate; final demand rose 2.5% y/y, matching estimates. Most of the Nov. advance in prices for final demand services from margins for fuels and lubricants retailing, which rose 25.9% the most since May 2010

· The National Federation of Independent Business (NFIB) small-business optimism index fell 2.6 points in November to a seasonally adjusted level of 104.8, the lowest in seven months. Most of the decline coming from expectations about future sales and business conditions

Commodities

· Oil prices rebounded following yesterday’s 3% decline yesterday, rising 65c to $51.65 per barrel (but off earlier highs of $52.43 per barrel). The bounce in oil comes ahead of weekly inventory tonight (API) and tomorrow (EIA) and on optimism about the prospects for success in American-Chinese trade talks. Also helping prices, Libya’s national oil company has declared force majeure on exports from its El Sharara field after a weekend militia attack on the facility as per the WSJ. Gold prices reversed lower late day, sliding -$2.20 to settle at $1,247.20 an ounce, extending some of the ground it lost the previous session, pulling back from 5-month highs. Gold prices have been active as markets focus on a weaker dollar and the softer Fed rate outlook.

Currencies

· The U.S. dollar was higher, bouncing off overnight weakness and resuming its upward momentum from yesterday, following broad gains over the past week. The dollar has surged vs. the British Pound after UK Prime Minister May delayed the vote in Parliament (scheduled for today) on Brexit on expectations it would not pass. The Pound fell back to 18-month lows, briefly breaching the 1.25 level, to the downside, while the euro fell to around 1.13. The dollar also gained vs. the Japanese yen.

Bond Market

· Treasury markets slipped late afternoon as stock rebounded, with yields on the benchmark 10-year rising off multi-month lows to around 2.88% (after holding near 2.86% all day). Prices jumped last week amid a dovish Fed outlook on rates and global macro concerns (UK Brexit, China trade) which sent investors scurrying to safety of bonds; the 10-year yield down stood around 2.86% all day before the late surge, with the 2-yr yield at 2.77% and 30-yr at 3.13% most of the day. The U.S. Treasury sold $38B of 3-year notes at 2.748% vs 2.745% WI yield while 37% primary dealer award was lowest since January as direct award rose to 12.5%, highest since July 2016, and indirect award rose to 50.5%, highest since June; bid-to-cover was 2.59.

Sector News Breakdown

Consumer

· Retailers; Shoe retailers active after DSW reported Q3 EPS and comparable-store sales that topped estimates while it also boosted its year-end forecasts (SCVL, GCO, CAL active); URBN indicated QTD comps are +MSD%, consistent with consensus/guidance and maintaining the 2-year stack trend from 3Q; CASY reported a F2Q beat last night with in-line in-store comps, robust fuel margins and strong opex control; ASNA Q1 EPS topped views on mixed Q2 guidance

· Auto movers; automakers and suppliers gained following news that China is moving toward cutting its trade-war tariffs on imported U.S.-made cars (GM, F, TSLA gained); also rising were auto suppliers such as DLPH, ALV, LEA;

· Restaurants and Consumer Staples; KO CEO said on CNBC that 2019 growth may be slower than in 2018; MCD said its new policy to reduce the use of antibiotics important to human health applies across 85% of its global beef supply chain; OTR Global said US beer Q4 distributor checks indicate TAP andBUD volumes lagged the overall beer category

· Services; ARMK falls after guides FY19 EPS $2.27-$2.37, below views of $2.50 as disclosed FY19 guidance in slides accompanying its investor day/sees FY19 revenue organic growth 2%-4%

· Casino & Leisure movers; the Lodging sector was downgraded to Underweight from Market Weight at Wells Fargo as believe deceleration in the outlook for domestic and global growth, rising labor costs and turnover, as well as the yield curve signaling higher risk of a nearing recession, will collectively make it challenging for the hotel sector to deliver accelerating growth

Energy

· Energy stocks moving with oil prices; the U.S. EIA cut its 2018/2019 forecasts for WTI and Brent crude prices, and hikes its domestic production outlook for next year. According to the latest EIA monthly report, the WTI price 2018 is now expected to average $65.18/bbl, down 2.4% from its November forecast, and cuts its outlook for the 2019 average WTI price by 16.4% to $54.19/bbl; CVE said it plans a 2019 capital spending program of C$1.2B-C$1.4B, 4% less than 2018, while raising its oil sands production forecast by 3% to 377K-395K bbl/day; Hess Infrastructure Partners signs an MoU to acquire HES existing Bakken water services business for $225M

· Oil service stocks downgraded at JPMorgan as favors short cycle over long, high-grading balance sheets; downgraded SLB, CLB, WFT to neutral from overweight and both NBR, SPN to underweight from neutral as moderating the pace of U.S. activity in its earnings models for 2019 (and severely reducing numbers for Canada), though long cycle assumptions are more anchored. Wells Fargo slashed 2019/2020 EPS/Ebitda estimates cut by ~10-20+% across coverage, citing slower global drilling, completions spending assumptions and lower oil price deck (downgraded WFT while upgraded HP and FTSI) – said biggest cuts are on pressure pumpers (15%-20%), while Ebitda ests. for large-caps including HAL, SLB, NOV, FTI are cut by 10%-15%

· E&P sector; Wells Fargo upgraded PXD to outperform and downgraded MTDR to market perform while updating ests for our coverage in addition to price tgts following recent update from OPEC. PXD upped due to strong balance sheet, premium Brent-linked pricing exposure and asset quality, and cut MTDR on near term outspending and balance sheet concerns.

Financials

· Bank movers; stocks slid as financials failed to hold gains, as weakness in banks/financials yet again a big drag on markets; Dow component GS shares fell more than $5 off the highs, while JPM also erased gains (more than $2 off the highs); AMTD reported average daily trades for the November of 844K vs. 759K y/y/Nov total client assets $1.24 trillion vs. $1.16 trillion y/y; BK

· Insurance; RBC Capital with several ratings changes in the sector: RGA was upgraded to outperform (and raised tgt to $165) saying valuation has fallen to very attractive levels while downgraded PFG to sector perform (and cuts tgt to Street low $49) saying lower guidance shows a more challenging market prompting a downgrade to sector perform from outperform; RBC also downgraded Dow component TRV to sector perform from outperform (PT $133 from $143) as they no longer expect significant multiple expansion and prefer other ideas

· Consumer finance and lending; Goldman Sachs upgrades FISV and FIS to Buy given less macro sensitivity and an ability to preserve earnings growth while downgrade WEX and FLT to Neutral to reflect headwinds from lower oil prices and a weaker backdrop for industrial end markets

· Asset managers; BEN reports preliminary AUM $683.3B as of November 30 compared to $682.7B at October 31, 2018; CNS preliminary assets under management of $58.6B as of November 30, 2018, an increase of $741 million from October 31

Healthcare

· Pharma movers; PFE was downgraded to neutral at JPMorgan following strong returns in 2018 as see this improved core story as better reflected in valuation; ACOR was downgraded to sell at Goldman Sachs citing limited market opportunities for Parkinson’s med Inbrija; VNDA was downgraded at Oppenheimer with $29 tgt; RHHBY announces collaboration with MRK to develop a companion diagnostic test to identify patients eligible for anti-PD-1 therapy based on the status of a biomarker in advanced solid tumors; ENTX announced a research collaboration in inflammatory disease and other serious illnesses with AMGN (Entera will be eligible to receive up to $270M in aggregate payments, along with tiered royalties upon reaching various milestones)

· Healthcare services and providers; Wells Fargo said the ide may be turning for health-care REITs as the risk-reward becomes more balanced, as raises the sector to market weight from underweight (upgrades WELL and downgraded MPW, HT); LCI active as has amended its credit agreement effecting the term A loans with regard to its financial leverage ratio covenant applicable to such loans.

Industrials & Materials

· Industrial & Machinery; ACM held its Investor Day in New York City today, and reiterated its long-term financial targets through fiscal 2022; NX shares dropped after Q4 earnings miss and weaker year Ebitda guidance ($97M-$107M vs. est. $106.7M)

· Transports; sector looks to rebound off recent decline that saw the Dow Transport index fall from highs above 11,000 just 2-weeks ago to lows below 9,700 yesterday; in airlines, UAL November Capacity +5.5% while November traffic +7.1; Railcars active (GATX, GBX, TRN, WAB) after AAR reports higher levels of railcars in storage/ November data reflects the first uptick in storage levels since June (to 18% from 17.8% in May)

· Metals & Materials; sector outperforms early on hopes of renewed trade talks with China and the U.S. after reports last night; steel stocks (X, NUE, STLD) as well other metals (AA, FCX) jumped early; in chemicals, VSM was downgraded to sell at Goldman Sachs as believe the market is under-estimating – partially due to what we view as bullish full-year company guidance – the extent to which weaker semiconductor capex could negatively impact the DS&S segment

Technology, Media & Telecom

· Internet; GOOGL CEO Pinchai testified in front of the House Judiciary today to defend data collection processes; SFIX reported stronger than expected F1Q19 and mixed F2Q19 guidance while company’s Active Clients of 2.93M were below expected 2.95M (downgraded at KeyBanc); overall Internet group was mostly higher despite the midday pullback

· Semiconductors; overall index (SOX) outperformed broader tech; CAMP falls as issued lower than expected Q3 guidance (lowers Q3 EPS view to 23c-25c from 29c-35c (est. 32c) and lowers Q3 revenue view to $88M-$89M from $94M-$99M); AMD was named a best idea by Cowen for 2019 citing the company’s move to 7-nanometer as an important catalyst; NVDA shares slid late day after Bloomberg reported SoftBank Group Corp. is planning to offload its stake early next year as shares in the graphics chipmaker continue to slide

· Software movers; ZNGA was upgraded to outperform at Macquarie based on increased confidence in mgmt. and potential for lower app commissions to increase ’20 EBITDA by 37-67%; SEAC shares dropped after posting smaller Q3 EPS loss, but guidance for Q4 (4Q revenue $16M-$20M vs. est. $25.3M) was well below consensus

· Media & Telecom movers; Dow component VZ said it expects to record a severance charge in the range of $1.8B-$2.1B or $1.3B-$1.6B after-tax in Q4 as a result of a buyout program and other headcount reduction initiatives; AT&T (T) was upgraded to buy at Citigroup saying that recent weakness in the stock had created a better risk reward scenario; in media, NXST was upgraded to outperform at Evercore/ISI while downgraded TRCO to in-line

· Hardware & Component news; NOK tgt raised at Bank America and adds it to the Europe 1 list; market-research firm IDC predicted that global smartphone shipments would grow 2.6% in 2019, following an anticipated decline this year. The Chinese smartphone market “is finally showing signs of recovery,” and could be flat in 2019 before showing growth again in 2020 through 2022. IDC predicts an 8.8% decline in China for 2018.

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Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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