Market Review: December 18, 2018

Terrie AmengualDaily Market Report

Closing Recap

Tuesday, December 18, 2018

Equity Market Recap

· The U.S. stock rally stalled late day, sending stocks sharply lower and erasing gains (The Dow fell almost 400 points off the highs) – only to bounce back in the final 30 minutes of trading as stock volatility continues to whipsaw markets. The Dow Industrials, Russell 2000, S&P 500 and NASDAQ all recovered from their worst levels of the year yesterday. Stock weakness accelerated mid-afternoon after reports Congressional Republicans maneuvered to avoid a partial government shutdown after President Trump retreated from his demand for $5B to build a border wall, but Democrats immediately rejected the follow-up offer, leaving the two sides still at impasse. Senate Majority Leader Mitch McConnell said he’s still in talks with the Trump administration about ways to avoid a partial government shutdown after Democrats rejected the offer. The news pushed stocks broadly lower with the government shutdown looming later this week.

· The healthcare sector dropped sharply, with new 52-week lows for biotech (IBB), led by several large cap decliners (BIIB, CELG). Energy stocks also lagged, under pressure all day as WTI crude fell to 15-month lows (below $47 per barrel), dropping as much as 7% late day. Transports get a lift ahead of Fed-Ex earnings tonight, as the sector rebounds off 52-week lows led by airlines (helped by plunging oil prices), but also pared gains late. Next up: The Fed.

· The FOMC began its final meeting of the year on Tuesday, where it is expected to raise rates by 25bps tomorrow afternoon and marking the 4th rate hike of 2018. If the Fed surprises dovishly with a surprise hold of rates, markets may get the Christmas present that many have been calling for over the last few weeks (President Trump, Druckenmiller, Gundlach others) – for the FOMC to take a wait and see approach given the recent economic data/environment.

· Despite investors preparing for abbreviated trading weeks coming up (Christmas next week and New Year’s the week after), there is still a lot on the macro front this week including: The final FOMC meeting of the year concludes tomorrow followed by a press conference with Chairman Jerome Powell. The Bank of Japan’s monetary policy decision is due Thursday, followed by a briefing from Governor Haruhiko Kuroda and the Bank of England decision is also Thursday. Lastly, a partial U.S. government shutdown could start this week if lawmakers and Trump fail to resolve how much money to allocate for Trump’s wall along the Mexican border.

· The U.S. and China are planning to hold meetings in January to negotiate a broader truce in their trade wars but are unlikely to have any face-to-face contact before then, according to Treasury Secretary Steven Mnuchin in a roundtable discussion this afternoon. Mnuchin also called the strong U.S. dollar a “vote of confidence” in the U.S. economy.

· Alan Greenspan, the former Federal Reserve chairman said with stock indexes now negative for 2018 after this year’s stretch to record highs, “it would be very surprising to see it sort of stabilize here, and then take off,” Greenspan said in an interview with CNN. Leading stock indexes may have a little upside left, Greenspan said. But that’s only going to make the inevitable drop more painful. So, “at the end of that run, run for cover,” he said.

· Overnight, Asian markets dropped, led by declines in Japan and China after President Xi Jinping told an audience of party officials, military leaders and entrepreneurs that “no one is in the position to dictate to the Chinese people what should and should not be done” in a speech marking the 40th anniversary of the reform era.

· Bloomberg noted that the S&P 500 Q3 buybacks surpassed the $200B mark for the first time ever

Economic Data

· Housing Starts for November rose 3.2% to 1,256M annualized, topping the 1,228M estimate and above the 1.217M last month (after falling 1.6% the prior month); single family starts fell to 824k, lowest since May 2017 while multifamily starts rose to 432k in November

· Building permits for November rose to 1,328M vs. 1,265M in Oct. and above the 1,260M estimate (the November level the highest since April); overall, permits rose 5.0% in Nov. after falling 0.4% the prior month; completions rose to 1,099M in Nov. from 1,095M the prior month


· Oil prices plunge again, settling at 15-month lows and ending near the lows of the day. WTI crude oil prices fell -$3.64 or over 7.3% to settle at $46.24 per barrel ahead of weekly inventory data tonight (API) and tomorrow morning. Several factors have been responsible for prices dropping well above the $80 level this summer including: slowing global growth/demand fears (as data has disappointed in China), fears the recent supply cuts by OPEC nations won’t be enough to prevent a surplus, and trade tensions between the U.S. and counterparts. A U.S. government report Monday forecast surging shale-oil production, adding to worries about a glut while in Russia Energy Minister Novak said production is rising.

· Gold prices reversed earlier losses, managing a small gain of $1.80 to $1,253.60 an ounce, but it was enough to close at its best levels since July ahead of the final FOMC meeting of the year tomorrow. Gold prices are up roughly 2% for the month thus far and could push higher if the Fed language at tomorrow’s meeting is overly dovish.


· The US dollar was mixed on the day, rising to highs vs. the Canadian dollar, around 1.349, its best levels of the year and highest since June of 2017 as oil prices plunged their lowest levels in over a year. Meanwhile, the broader dollar index (DXY) was little changed on the day, falling slightly (off 18-month highs) vs. the euro, yen and British pound ahead of the FOMC meeting results and press conference tomorrow afternoon.

Bond Market

· Treasury markets were higher sending yields lower, with the benchmark 10-year falling to 2.82% late day ahead of the 2-day FOMC policy meeting, where expectations are still for a 25 bps hike. The 10-year yield is now down over 45 bps from its October highs while the 2-yr yield falls to 2.65%, more than 30 bps off its decade high levels around 3.0% two-months ago. Investors have rotated back into bonds over the last month as the Fed gets more dovish amid slowing global growth concerns and weakness in stock markets amid trade/tariff impact fears.

Sector News Breakdown


· Consumer Staples; in tobacco, PM was downgraded to underperform at Credit Suisse and cut tgt to street-low $74 from $92 amid EPS risk and his expectation for IQOS to continue losing market share; STZ was downgraded to mixed from positive by OTR Global; meal-kit delivery company APRN had its shares fall under $1 for the first time (IPO was back in June 2017)

· Restaurants; DRI reported a slight beats in comparable sales and EPS and boosted its full-year forecasts/while posted same-restaurant traffic declines at two of its largest brands, Olive Garden (-0.8%) and LongHorn Steakhouse (-0.1%) was offset with higher pricing (+1.9%, +1.7%)

· Casino & Leisure movers; power sports price targets were cut by Wells Fargo saying 14 of his 19 Powersports Economic Indicators are decelerating, potentially confirming what we believe could be peak powersports earnings in 2019 (cuts tgts on BRP, HIG, PII, BC, MBUU and MCFT) as well as RV space with tgt cuts to CWH, PATK; Lodging REITs active after Barclays upgraded HST to overweight as believes the company is in a strong position to pursue accretive transactions given its $1.7B cash balance sheet while the firm also downgraded shares of SHO and DRH to EW

· Homebuilders and Building products; housing stocks posting strong gains today, with more than 3% advances for LEN, PHM, KBH, DHI, MTH midday following the better than expected housing starts/permits data earlier; note the group has held up well over the last few weeks given the pullback in Treasury yields and in return mortgage rates


· Energy stocks dropped as oil prices fell more than 4% late morning, extending its week, month and yearly losses heading into the year-end amid persistent concerns over supplies and a broader fall this week in risk assets; most sub sectors were lower led by major oils, E&P, drillers, services while refiners were mixed

· Utilities & Solar; a day after the utility index posted a drop of more than 3%, the group ended little changed (falling from recent 52-week highs on 12/13); Bloomberg noted a 3% drop in the index has occurred only 1.2% of the time since data began in September 1989 (a total of 91 occurrences out of nearly 7,400 observations).

· MLP Sector; Morgan Stanley upgraded the midstream energy MLPs and diversified natural gas sectors to an attractive view citing fundamentals and valuation, saying cleaner structures and key concerns, like FERC, rates, and technical trading factors, are now better understood; Morgan said they prefer ETand WMB given less structural overhang, attractive fee-based growth and improving balance sheets and remains overweight on KMI (notes the AMZ Alerian MLP index has fallen 15% year-to-date)


· Bank movers; strength in beaten up banks early before sliding late as several financials reported 52-week lows in the S&P 500 index, including DFS, ZION, COF, USB, BBT, STI, PBCT, HBAN, MTB; FDS reports Q1 beats with 7% Y/Y revenue growth/FY19 guidance is reaffirmed and said client count grew 155 in the period to 5,297 partly due to a methodology change; VIRT, NDAQ, CME, ICE shares fell mid-afternoon after U.S. Treasury Secretary Steven Mnuchin blamed volatility in equity markets partly on high-speed trading and the effect of the Volcker Rule, and said he planned to conduct an inter-agency review of market structure.

· Consumer finance and lending; RBC Capital upgraded NCR to its top pick while downgrades WP to outperform from top pick as the firm notes payments, processing, IT services stocks are up for the year, despite S&P 500’s decline, as EPS growth outweighed multiple contraction and says that trend may continue into next year amid more muted macro expectations

· REITs; sector bounces after recent downturn the last 2-weeks; today Evercore/ISI upgraded HST and PSA ratings while downgraded CUBE, INVH and LSI noting 2018 was a roller coaster ride for REIT investors but perseverance paid off as REITs have overtaken the S&P 500 YTD through December 14th (+2.3% vs. -0.9%) and with the bulk of the interest rate hikes in the rear view mirror, investors have fewer things to worry about moving into 2019


· Pharma movers; JNJ announced a $5B share repurchase program after shares slide on legal worries/this morning on CNBC the founder of Lanier Law Firm Mark Lanier said sees litigation resolution costing the company “much, much less” than the more than $40 billion that has been wiped from the drugmaker’s market value since a Reuters report last week; ITCI falls as company decides to discontinue study 201 on the treatment of agitation in patients with probable Alzheimer’s disease following conclusion that it is not likely to meet primary endpoint; TLRY rises as signed a global partnership with a division of Swiss drug giant NVS to develop and distribute its medical marijuana in legal jurisdictions around the world; CPRX signed an agreement with ENDP subsidiary, for the further development and commercialization of generic Sabril tablets

· Biotech movers; biotech (IBB) ETF falls to 52-week lows amid weakness in large cap (BIIB, CELG) and small cap with investors exiting positions into year-end; PBYI rises after announced top line results from the Phase III NALA trial of the company’s lead drug candidate neratinib in patients with HER2-positive metastatic breast cancer who have failed two or more prior lines of HER2-directed treatments; BIIB shares were among the biggest drags in biotech after analysts from Oppenheimer and Bernstein lowered their price targets ahead of potential risks in the beginning of 2019 and beyond; CELG tgt was cut to $77 at Citigroup;

Industrials & Materials

· Industrial & Machinery; WBC downgraded o Equal Weight from Overweight at Morgan Stanley and lowered price target to $117 from $124, losing conviction that Wabco can return to its normal margin and outgrowth framework in FY19; NAV rises as reported better-than-expected quarterly profit and revenue as strong freight demand helped drive sales of high margin items; Morgan Stanley assumes AME and FTV at Overweight, and downgrading ITW and FLS to Underweight and HUBB to Equal-weight as they expect a more healthy idiosyncratic stock environment based on cyclical differentiation in 2019 for sector

· Transports; FDX (as shares have plunged over 20% last week) is expected to report earnings tonight after the close; in rails, NSC was upgraded to overweight from neutral at JPMorgan and up tgt to $203 from $198 as estimates $600M of potential productivity gains based on his analysis and points out that he has long favored Eastern rails as a region (firm downgraded KSU rating in conjunction with call); Seaport Global raised Q4 EPS estimates for CP and CNI, while lowering estimates for UNP, CSX, NSC and KSU

· Metals & Materials; steel producer STLD guides Q4 EPS $1.25-$1.29, below estimate $1.38/sees Q4 profitability from steel operations lower than Q3 results; WOR reported Q2 net sales of $958M, missing the $982.7M estimate

· Aerospace & Defense; Dow component BA announced a dividend increase of 20% ($1.71 to $2.055 per share) as well as a replacement share buyback program with a $20B authorization; LMT shares active as the cabinet of Prime Minister Shinzo Abe approved an increase of Japan’s existing order for 42 F-35s to 147 of aircraft (around $10 billion) to become the largest customer outside the U.S. for Lockheed Martin Corp.’s (LMT) F-35 jet fighters

Technology, Media & Telecom

· Internet; AMZN said this year’s “Digital Day” will be on Dec. 28, the third annual event providing savings of up to 80% on digital content; SHOP was initiated with an outperform and $175 tgt at Wells Fargo as view SHOP as an attractive way to invest in both the strong secular growth of digital commerce as well as growth in DTC strategies by traditional retailers

· Semiconductors; AMD was added to the NASDAQ-100 Index which will become effective before market open on Monday December 24; the Philly semi index (SOX) outperformed, led by strong gains across the board, though equipment names stood out (LRCX, AMAT, MKSI, KLAC, TER)

· Software movers; ORCL posted modestly better than expected quarterly results on both the top and bottom line/guidance for Q3 was below consensus on revenue due to a higher than expected FX headwind while EPS was better

· Media & Telecom movers; CHTR agreed to pay $174.2M to settle consumer fraud claims by the state of New York about not delivering faster Internet speeds as promised; CBS will not pay Les Moonves any of the $120M in severance that he was due after stepping down as chief executive following sexual misconduct allegations; LGF/A upgraded to buy at Deutsche Bank

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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