Friday, December 14, 2018
Equity Market Recap
· Stocks sink to end the week lower! Slowing global growth concerns weighed on U.S. stock markets Friday after a round of negative manufacturing reports (US/China/Europe) disappointed, but there still remain a handful of macro concerns including: the possible US gov’t shutdown, the UK Brexit issue, Italy’s budget and trade issues between China and the U.S. With today’s declines, the S&P 500 re-entered correction territory as all 11-S&P sectors were lower and the benchmark index fell as much as 2% to move under the 2,600 level, while the Dow Industrials dropped over 550 points. The Russell 2000 traded to new 52-week lows, underperforming major averages in recent weeks. Also with today’s declines, major averages erased gains to finish the week in negative territory. After years of “buying the dip” the more recent market mantra appears to be “sell the rip,” as stocks failed to hold early gains all week.
· Slowing growth was the issue today as China’s business activity mostly slowed in November, with industrial output showing a weaker-than-expected year-over-year rise of 5.4% in November after a 5.9% rise in October. Retail sales rose 8.1% year-over-year versus 8.6% in October, also coming in below expectations. Also, the EuroZone composite index slipped to 51.3 versus 52.8 expected, with a slowdown in both the manufacturing and the services component (France also showed a contraction). Headlines pushed European and Asian markets lower overnight, which carried to early U.S. trading as well.
· Dow component JNJ was a big drag on the Industrial Average, falling as much as 11% (before paring losses), after a report from Reuters stated that the company knew for decades about asbestos in baby powder (JNJ made a statement refuting the article while several analysts also defended the shares). Dow component AAPL another drag on the index, falling to 7-month lows as more analysts take down estimates, numbers and targets on warnings of iPhone sales. Dollar strength may also be hitting the market as the dollar index (DXY) trades to new 2018 highs.
· Sentiment most bearish since 2103: The American Association of Individual Investors late Thursday said bearish sentiment, expectations that stock prices will fall over the next six months, jumped 18.4 percentage points to 48.9% in the seven-day period ended Wednesday. That’s the highest since a reading of 54.5% on April 11, 2013, and marks the 10th straight week bearish sentiment was above the survey’s historical average of 30.5%.
· Retail Sales in November rose 0.2% topping the 0.1% estimate while retail sales less autos rose 0.2% in November, in-line with estimates; the increase in sales in October was raised to 1.1% from 0.8%; E-tailers recorded a robust 2.3% increase in sales last month while department store sales rose a smaller 0.4%; auto dealer y/y sales rose $1.3B in Nov. to $96.0B
· Industrial production rose 0.6% in November, the strongest gain in three months and topped the 0.3% estimate on strong mining and utility output. Manufacturing output was flat and there was a large downward revision in the prior month – to a fall of 0.1% from a gain of 0.3%. Capacity utilization rose 0.4 percentage point in November to 78.5% vs. the 78.6% estimate
· Flash U.S. services PMI slips to 53.4 in December vs. 54.7, an 11-month low while the flash U.S. manufacturing PMI slips to 53.9 in December vs. 55.3, a 13-month low
· Commodity prices dropped across the board, led by declines in the energy complex (nat gas biggest loser), with WTI crude oil falling -$1.38 or 2.6% to settle at $51.20 per barrel and posting a weekly loss of about 2.7%. A round of weaker-than-expected Chinese economic data spooked investors, as the dollar jumped, putting pressure on dollar denominated commodities. January natural gas drops 29.7c, or 7.2%, to settle at $3.827/mln Btu’s, down roughly 15% for the week and well off its November highs of $4.964 mln btu’s.
· Gold prices dropped -$6.00 or 0.5% to settle at $1,241.40 an ounce, finishing off the worst levels of the session, but still posted a weekly decline of about -0.9% as the dollar traded to fresh 52-week highs earlier today. Gold prices had found strength in recent weeks with the Fed becoming more dovish and expectations growing for the Fed to hike less than expected in 2019.Copper prices fell after disappointing Chinese economic reports stoked fears about demand.
· New 2018 highs for the U.S. dollar was a hot topic today, with the dollar index rising as high as 97.71, its best levels since June 2017 as currency investors fled weaker European rivals on softer data and emerging markets currencies drop on weaker oil prices. Risk appetite weakened following weaker-than-expected economic data from the EuroZone and China. Commodity and global growth-linked currencies, such as the Canadian dollar, also dropped. The euro fell to a 1-month low around $1.127 before recovering back around the 1.13 level while the British Pound also slumped. The Japanese yen did rise, as investors rotated into defensive/safe-haven currency assets with stocks dropping. Bitcoin extended its recent declines, falling over 2% as drops under $3,200 today – new 52-week lows.
· Treasury prices gained on Friday, picking up steam late day as stocks tanked, pushing yields lower on the day. Weaker-than-expected economic data in China raised concerns around the global economy’s health, drawing investors into haven assets like U.S. government debt. The 10-year yield slipped 3 basis points to 2.880% while the 2-year note yield also dropped 3 bps to 2.73%. Signs that the Fed will ease off the gas on rate hikes has helped push Treasury yields well of 2018 highs in October (10-year was up around 3.25% and the 2-yr 2.95%). The Fed is expected to raise rates next week in its final meeting of the year but then likely to halt early 2019.
Sector News Breakdown
· Retailers; after leading the declines yesterday, retail bouncing back on the day for apparel and department stores; COST Q1 EPS were hurt by greater-than-expected gross margin pressure amid increasing competition and rising costs/adj. gross margin declined 37 bps while “core on core” (ex-gas) gross margin declined 6 bps; GCO agreed to sell Lids Sports Group for $100M in cash to FanzzLids; DLTR was upgraded to outperform at Bernstein
· Auto sector; Deutsche Bank initiates auto sector with cautious view which reflects cyclical and macro risks for the industry across the globe, as well as secular pressure from the shift towards electrified vehicles and autonomous shared mobility (buy rated on APTV, BWA, DAN, F, GM, LEA…sell rated ALV and VNE); EU new car registrations, a reflection of sales, fell 8.0% in the EU compared with a year earlier to 1.12 million vehicles; TSLA initiated outperform and $440 tgt at Wedbush saying has evolved into one of the most dynamic technology innovators last 30 years
· Consumer Staples; PG receives its second analyst in as many days as Morgan Stanley upgraded to overweight (BoFa raised to buy Thursday) saying that P&G’s broad-based market share momentum, an improving gross margin outlook and greater earnings achievability are not adequately reflected in relative valuation vs peers
· Restaurants; SBUX shares slip after lowering its adjusted EPS growth view to at least 10% per year over the longer term, below the company’s previous forecast of 12% growth on this basis, while also said same-store sales growth in China could be as low as 1% over the long-term
· Housing & Building Products; RH said it is no longer exploring $300M Convertible notes offering; BECN was downgraded at Wedbush saying its $30 price target had been achieved, and that a recent investor day conference did not provide any new catalysts
· Casino & Leisure movers; in lodging, luxury goods maker LVMH has agreed to buy BEL the owner of hotels including Venice’s landmark Cipriani, for $3.2B w/debt ; casino stocks (WYNN, MLCO, MGM) held up well in the weaker overall market today; cruise lines were mixed (CCL, RCL, NCLH)
· Energy stocks dropped with a decline in oil prices as the dollar spike weighed on commodity prices. Baker Hughes (BHGE) weekly U.S. rig count fell -4 to 1,071 rigs with oil rigs down -4 to 873 and gas rigs unchanged at 198. In stock news, PXD announces $2B common share repurchase program; SU said it sees its 2019 capital program between C$4.9B and C$5.6B, compared to estimates of C$5.25 billion/sees 2019 average upstream production 780,000 to 820,000 boe/d
· Utilities & Solar; UBS upgraded CNP ahead of management plans to update forecasts with its VVC deal due to close in the first quarter of 2019, which may offer a positive catalyst while the firm also downgraded ATO to neutral as its growth profile is likely priced-in and cut UGI to neutral after YTD outperformance; 52-week highs for AEP, CMS, CNP, DUK, ES, ETR and XEL; LNT 7.23M share Spot Secondary priced at $44.85; SCG shares jumped late day on reports Dominion’s (D) $7.9B takeover of the company was approved with conditions
· Bank movers; Regional banks (KRE) trading at fresh 52-week lows (lowest levels since Sept 2017) as lower Treasury yields, the softening tone by Fed on rates and slowing growth all meaningfully hurting the banking sector; large cap banks also failing to rally (WFC, JPM); trust banks mentioned at JPMorgan as remains on the sidelines despite attractive valuations given equity market uncertainty; long-term he prefers NTRS on a relative basis (given its strong wealth mgmt. franchise) while STT’s outlook is clouded by its expensive CRD acquisition
· Brokers, Asset Managers, Services; ETFC reports November daily average revenue trades of 275,319, down from 301,625 in October; up 11% from November 2017/adds 943,276 net increase in brokerage accounts
· Consumer finance and lending; AGNC and NLY were both upgraded to overweight at Barclays, turning constructive on mortgage real estate investment trusts saying if a recession occurs, these stocks could be big outperformers as a flight to yield and quality pushes book values and multiples higher, potentially generating 20%-plus total returns
· Pharma movers; Dow component JNJ shares fell after Reuters reports that J&J knew for decades that asbestos had been found in its talc products, that from at least 1971 to the early 2000s, and some of the 11,700 plaintiffs claimed the talc caused their cancers ; CNC provided its 2019 financial guidance and reiterated its previously announced 2018 guidance and announced it will conduct a two-for-one stock split in the form of a 100% stock dividend; WCG was upgraded and added to Goldman Sachs conviction buy list and $323 tgt; BHC was upgraded to buy at HC Wainwright saying now is the time to get more bullish; PFE authorized a new $10B share repurchase plan and boosted its dividend to 36c from 34c quarterly; generic pharma names slumped midday, led by ENDP, MYL on reports CBS to air report on opioid makers/manufacturers
· Biotech movers; REGN was upgraded and added to conviction buy list at Goldman Sachs saying robust and internally developed pipeline offers a call option that could start to reward investors with key data at the beginning of next year; CLVS shares slipped after documents on the GSK $5 billion deal for Tesaro show that the U.K.-based company was the only bidder for the U.S. biotech
· Medical equipment and devices; Barclay’s initiates coverage of six stocks in the Dialysis and Post-Acute sub-sectors, within the broader U.S. Health Care Services sector, with a preference for the Dialysis space. (AMED, ARA, EHC, LHCG, SEM initiated EW & DVA initiated OW). Within Dialysis, likes the risk/reward heading into 2019 for DVA particularly given the expected sale of DMG and what he expects to be material share repo next year.
· Healthcare services and providers; WBA among top Dow decliners after Goldman Sachs downgraded to sell as challenges in its retail pharmacy business have intensified, forcing the company to search for other avenues of growth,”
· In hospitals; sector was weak after JPMorgan November survey suggests weakness across most geos – total inpatient admissions/commercial admissions/outpatient procedures/ ER visits declined by approximately -3/-2/-1/-3% YoY (THC, CYH); UHS was downgraded to sell at Goldman Sachs saying a healthy macro env’t helps acute hospitals’ commercial mix, but behavioral health providers like UHS over-index to Medicaid and Medicare, leaving them less exposed to the supportive backdrop
Industrials & Materials
· Transports; Dow Transports fall on day, touching intraday lows of 9,499.70 earlier as a rebound in airlines (ALK, UAL, AAL, DAL) fails to offset weakness in truckers (JBHT), rails (CSX) and delivery (UPS); XPO announced a stock buyback plan up to $1 billion of its stock (shares fell yesterday after a negative short report sunk shares); ALK said revenue passenger miles increased 1.0% to 4.440B in November/load factor fell 10 bps to 84.1% during the month; FDX shares down around 20% over the last 2-weeks ahead of earnings next week; YRCW falls after the Justice Department sues freight companies for overcharging government
· Metals & Materials; in packaging, SEE was upgraded to buy at Bank America after the company unveiled a new restructuring plan which aims for total annualized savings by the end of 2021 of $215 million to $235 million; in steels, NUE guides Q4 EPS $1.90-$1.95 vs. est. $1.98 but shares bounced off earlier lows
· Aerospace & Defense; JPMorgan said while they are wary of negative sentiment in the market and what it means for stocks, they see a positive outlook for Commercial Aerospace in 2019 barring a recession, and with valuations looking reasonable in this scenario. Top picks are BA, NOC, and the HRS/LLLcombination, while downgrading KAMN to underweight
Technology, Media & Telecom
· Semiconductors; Mizuho comments on NVDA and AMD GPU trends highlighting the first pricing stabilization and rebound since the peak of the crypto bubble earlier this year/says while they are not seeing any further significant uptick in pricing, believe: 1) price stabilization remains in NVDA and AMD GPUs, 2) Revenue at Taiwan GPU component suppliers are trending better YoY (adjusts AMD estimates and PT to $30 and NVDA PT to $230); LSCC was upgraded to outperform and tgt up to $9 at Baird citing confidence in the current management team’s ability to execute a credible turnaround strategy.
· Software movers; ADBE shares slide after results as reported a generally in line quarter and provided a healthy outlook for FY19 but analysts noted Marketo acquisition delays margin improvement and creates a noisy quarter but makes strategic sense (Bernstein noted Marketo pressured margins, which contracted 150 bps YoY, 220 bps below consensus); Hedgeye analyst noted upside call on PLAN (sees 45% upside) and sees downside of 20% for SPLK; SYMCshares dropped late day after CNBC reported Thoma Bravo is in early talks to acquire security software company McAfee from TPG and Intel for a significant premium over the company’s 2016 $4.2 billion valuation
· Networking and Equipment movers; CSCO was upgraded to buy at Nomura with a $50 price target as believe some tailwinds, notably IT spending strength, may reverse in 2019 to reveal imperfections in Cisco’s story
· Hardware & Component news; AAPL shares were pressured after further cautious analyst comments, as TF International Securities cut its iPhone shipment estimate for 1Q 2019 by 20% to 38M-42M according to CNBC; also, AAPL, facing a court ban in China on some of its iPhone models over alleged infringement of QCOM patents, said on Friday it will push software updates to users in a bid to resolve potential issues