Market Review: December 21, 2018

Scott GreenDaily Market Report

Closing Recap

Friday, December 21, 2018

Equity Market Recap

· It was another dreadful performance for U.S. stocks on Friday, closing out the day and week in dismal fashion after erasing earlier gains on positive Fed speak, with markets fearful of the imminent partial government shutdown tonight. The shutdown standoff in Washington remains unresolved as President Trump appeared content to risk the shutdown by refusing to sign a continuing resolution that would fund the nation’s spending plans until February, arguing it didn’t include $5 billion for a proposed wall along the Mexican border. The news overshadowed a few positive developments earlier such as better earnings from Dow component Nike and China signaling an easier monetary policy as well as calmer comments from two Fed members. The Dow Industrial Average was up as much as 395 points this morning before a swing of over 650 points off the highs in what has become a common place reversal amid extreme volatility.

· Even Fed members speaking in two separate (impromptu) interviews failed to help bail out stock market weakness. Fed President John Williams walked back Wednesday’s FOMC policy statement and Powell press conference, saying in a CNBC interview that the Fed would promise to “listen carefully” to the market and said stands ready to “re-assess” its view. Williams emphasized in the CNBC interview that the language had been softened from suggesting those future hikes were projections. He said it’s not a matter of “right or wrong” with Wall Street and the Fed appearing on divergent paths right now. Separately, Cleveland Fed President Loretta Mester said the Federal Reserve doesn’t have a level of interest rates in mind and will raise or lower interest rates based on what the economy is “telling” policymakers. Mester declined to discuss the steep drop in stocks in the wake of the Fed decision, saying that markets have been volatile for months.

· In other noteworthy news items, oil prices fell to fresh 17-month lows while the dollar rebounded after a 3-day slide; FAANG stocks (FB, AMZN, AAPL, NFLX, GOOGL) sank for a 3rd day, trading to lowest levels in months; Third-quarter GDP growth in the U.S. was revised down to 3.4% from 3.5% by the Commerce Department; the S&P 500 index dropped over 1.3% erasing earlier gains and falling to fresh 15-month lows, while the Nasdaq Composite underperformed, falling as much as 3% to lows below 6,330; biotech stock drop to fresh 2018 lows; today also Quadruple Witching: simultaneous expiry of stock index futures, stock index options, stock options & single stock futures.

Economic Data

· GDP data slight miss; the U.S. economy grew at an annual 3.4% pace in Q3 instead of 3.5%, revised government data show as slightly weaker consumer spending mostly accounted for the downward revision (GDP rose 4.2% last quarter). Personal consumption rose 3.5% in 3Q after rising 3.8% prior quarter and was below the 3.6% estimate.

· GDP price index rose 1.8% in 3Q after rising 3.0% prior quarter (and was above the 1.7% estimate) while core PCE q/q rose 1.6% in 3Q after rising 2.1% prior quarter (above the 1.5% est.)

· Durable Goods Orders for November rise 0.8%, missing the 1.6% estimate while Durable goods new orders unrevised in Oct. at -4.3%; new orders ex-trans. fell 0.3% in Nov. after 0.4% rise and new orders ex-defense fell 0.1% in Nov. after 1.4% fall

· The U.S. Michigan Sentiment (Dec-F) rose to 98.3, topping the 97.4 estimate and was above the 97.5 in the preliminary reading (which was same last month); the expectations index fell to 87.0 vs. 88.1 last month and the current economic conditions index rose to 116.1 vs. 112.3 last month

· Personal Income for Nov rose 0.2%, slightly missing the 0.3% estimate while personal consumption rose 0.4%, topping the 0.3% estimate; real personal spending rose 0.3% (in-line with estimates) while PCE prices rose 0.1% (vs. est. 0.0%) and up 1.8% YoY; core inflation rose 0.1% (below the 0.2% est.) and rose 1.9% YoY; savings rate at 6.0% in Nov. vs 6.1% last month

Commodities

· Oil prices fall, bouncing off earlier lows of $45.13 before settling lower by 29c or 0.6% to $45.59 per barrel, and dropping a whopping 11% for the week to its lowest levels since July 2017. Oil failed to gain any traction from reports Saudi Arabia will cut more oil than first announced as part of an OPEC-led agreement, as a bounce in the dollar and another day of risk aversion cast dark clouds on the oil complex today. Between slowing global growth concerns and increased inventory production domestically, oil prices have been in a massive downtrend.

· Gold prices fell -$9.80, or 0.8% to settle at $1,258.10 an ounce as the dollar recovered on the day, but gold still posted a weekly gain of about 1.4% just off recent 6-month highs. Following the dovish Fed outlook from Powell on Wednesday and the volatile stock selling this week, investors parked some cash in defensive assets this week such as gold.

Currencies & Treasuries

· The U.S. dollar trades up as much as 0.75% to around the 97-level for the dollar index, recovering from a three-day slide after prices hit their best levels in 18-months on Monday. After sliding to multi-month lows vs. the safe-haven Japanese yen, the dollar inched higher late day while recovering vs. the euro and pound. A softer tone from the FOMC this week regarding rates and mixed economic data took a little steam out of the buck before today’s rebound. Meanwhile this week, Treasury yields fell broadly before finishing off their worst weekly level, with the 10-year at 2.79%, the 2-year at 2.62% and the 30-year at 3.03%.

Sector News Breakdown

Consumer

· Retailers; Dow component and footwear giant NKE rallied, upgraded by a few analysts (JPM, Pivotal) after reported better-than-expected 2Q19 sales and EPS and raised its sales and GM guidance for the year; the beat helping footwear/activewear names (FL); outside of NKE, it was a dreadful performance for retail, fearful of trade issues and a weaker economic outlook

· Autos; in auto retail, KMX reported 3Q used unit sales in comparable stores fell an unexpected (-1.2%), vs. estimate rise of +1.8, while Q3 sales just miss at $4.3B vs. est. $4.33B as EPS beat; Ford (F) issued a safety recall for certain F-150 and Super Duty vehicles (874K vehicles in total) to replace the engine block heater cable

· Consumer Staples & Restaurants; MO was downgraded to sell from neutral at Citigroup and cut its tgt to $45 from $67 noting Altria has just invested $12.8B for a 35% stake in Juul, at about 40x 2018 sales as they suspect this is destroying value but it is impossible to be sure because MO has not revealed any financial details; PEP head of PepsiCo North America, Albert P. Carey, will retire at the end of March and his role will be split into two; DFRGrises after saying it started a review of strategic alternatives, including a possible sale of the company or any of its dining concepts

· Casino & Leisure movers; SMGS and HAS extended the long-term license agreement for the exclusive use of 16 game brands through 2025/the agreement allows Scientific Games to use the brands for slots, systems, online digital gaming, lottery, social casino, eTables and table games

Energy

· Energy stocks starts the day stronger with oil prices bouncing off lows, but the group fell with the broader market decline in what has been a week to forget for the energy complex. Baker Hughes (BHGE) weekly rig data showed the total U.S. rig count rose 9 to 1,081, with oil rigs up 10 to 883 and gas rigs down -1 to 197

· E&P sector; GDP announced that it is reducing its 2019 capital expenditure budget by approximately $40 million, yet expects to maintain its previous production guidance for 2019 due to outperformance of its wells relative to its type curves; CDEV filed an 8-K this afternoon indicating that it was backing off of its 2020 production target of 65,000 Boepd

· Energy; Citigroup upgraded COG, CLR, MRO and PE to Buy saying despite lowering estimates sharply, they believe there is limited downside to oil prices apart from a global economic recession. And valuations for coverage group, on average, currently reflect $49/Bbl (WTI) and $2.65/MMBtu. Thus, while they remain cautious near term, they are more constructive longer term with an outlook for improving returns

Financials

· Bank movers; financials fall again (GS, C, MS, WFC), amid broad weakness in banks and financial technology shares as the same concerns that have weighed on broader markets hit again; lower yields hurting banks while fin-tech (SQ, PYPL, V, MA) weak again as Piper reducing its 2019 estimates across FinTech companies “to account for a cloudier macro cyclical outlook,” including slower consumer spending and payments volume growth in the year ahead; no lift in the beaten up group thus far into year-end

Healthcare

· Pharma movers; PRGO shares drop following a tax dispute with Irish authorities, including a $1.8 billion tax assessment, which relates to the 2013 sale by a Perrigo subsidiary, Elan Pharma (specialty pharma MNK, TEVA, MYL, ENDP fell sharply as well); TLRY falls after shares jumped this week on two large strategic partnerships with market leaders in the pharmaceutical and the beverage industries; JAZZ said the FDA extends the review period for its new drug application for solriamfetol as a treatment to improve wakefulness and reduce excessive daytime sleepiness

· Biotech movers; Biotech sinks further, new 52-week lows down 1.5% on broad pullback; EDIT shares dropped over 10% after announcing its CFO stepped down; AXRX slides after announcing new CEO; IMMU rises following 19% downdraft yesterday, after being defended at GUGG this morning – firm said unnamed report cites receipt of a Form 483 that was received in August and Guggenheim says IMMU management believes issues raised have been addressed

· Healthcare services, medical equipment and devices; OBLN rises after announcing the FDA approval for its Navigation System, which removes the need for an x-ray when placing the Obalon Balloon System obesity treatment; WBA filed an automatic debt securities shelf

Industrials & Materials

· Industrial & Machinery; the Architecture Billings Index (ABI), an economic indicator for construction activity, with a lead time of ~9-12 months was at the highest level since January. And, the nonresidential portion (commercial and institutional combined) was above 50 for the 25th consecutive month (as per Seaport Global); MTZ announced a $100M share buyback plan

· Aerospace & Defense; stocks in the sector (LLL, GD, NOC, LMT, RTN) trading at 52-week lows today, with renewed selling coming as concerns of a government shutdown intensified, and after the Secretary of Defense James Mattis resigned last night following the President’s announcement about withdrawing troops from Syria.

· Transports; Dow Transports bounced briefly falling back below the 9K level (low day 8,994.88), led by rails with CSX, KSU, UNP outperforming – but the index sank to lows late day, falling below 8,900 amid broad weakness; car rental stocks (HTZ and CAR) under pressure all week while FDX shares dropped to fresh 52-week lows this week (down 40% YTD) following its lower outlook earlier in the week (Morgan Stanley cut tgt to $156 today)

Technology, Media & Telecom

· Internet; FANNG stocks bludgeoned (FB, GOOGL, AMZN, NFLX); NTES & TCEHY shares rise early after a senior official with China’s government watchdog says the first batch of game approvals had been completed; SHOP was upgraded to buy at DA Davidson; UXIN was downgraded to neutral at Goldman Sachs on valuation; TWTR extends 2-day decline to over 15% after Citron cautious call (had $20 tgt) yesterday; GOOGL dropped below the 1,000 level for the first time since April; FB shares fell over 5% amid ongoing concerns of the company’s management’s continued missteps

· Semiconductors; AVGO was added to JPMorgan’s Analyst Focus List calling it their top pick in semiconductors heading into 2019 citing multiple tailwinds that include the cloud datacenter networking upgrade cycle and broadband segment recovery; CAMP reported Q3 results generally in-line with the pre-announcement with the shortfall attributable to supply chain diversification efforts and European (UK) macro weakness; TER was downgraded to neutral at Baird; NXPI was initiated overweight and $100 tgt at Piper saying it has about 70% exposure to “two of the best” end markets for semiconductors, automotive and industrial and attractive valuation

· Software movers; the software sector has dropped sharply given the pullback in tech, with shares of SPLK, GWRE, CRM, ADBE, DATA, PVTL, WDAY,among the biggest drops; ZNGA rises after announced $560M acquisition of a top grossing Finnish mobile game called Empire & Puzzles and also raised the 4Q outlook, thanks to strong performance of key games; CYBR was upgraded to buy at Deutsche Bank as channel checks on the identity and privilege account-management space came back with positive data points

_______________________________________________________
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.

Live Trading

Open an Account

Paper Trading

Register