Market Review: May 30, 2019

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Closing Recap

Thursday, May 30, 2019

Index

Up/Down

%

Last

DJ Industrials

43.67

0.17%

25,170

S&P 500

5.85

0.21%

2,788

Nasdaq

20.41

0.27%

7,567

Russell 2000

-4.46

0.30%

1,485


 

Equity Market Recap

·     U.S. stocks end off the best levels of the day, but held up well overall despite another plunge in oil prices (fell nearly 4%) on renewed supply concerns, as well as another spike in Treasury prices, which took yields down across the board back to yesterday lows. Recession fears were renewed as the 3-month and 10-year yield curve inverts further to roughly 17 bps (2.38% vs. 2.21%), with the 10-year yield pulling back to 20-month lows around 2.21%. Not helping matters late day were comments from VP Pence saying he is hopeful Trump and China leader Xi will make progress on trade at the G20 end of month, but says China must agree to make reforms (more tough talk from both sides of late). U.S. equities have plunged almost 6% in May, but remain higher by 11% in 2019 after a strong Q1. Comments from the Fed’s Clarida offered no insight as to a reduction in rates upcoming, repeating the central bank’s view that soft inflation readings will be transitory and the economy is doing well. Economic data was mixed as GDP data showed a small beat of 3% for growth vs. estimates, while was down slightly from the prelim reading though inflation was sharply lower in the form of PCE.

·     Housing sector remains soft as pending home sales fell, posting a 16th straight month of annual declines. Financials remain weak (large cap and regional banks), limited because margins have come under pressure now that the Federal Reserve has moved away from raising interest rates further. Retailer’s active once again after several earnings results overnight/this morning (DG, DLTR, EXPR, PVH, and BURL). Energy stocks have been obliterated the last few sessions as oil tumbles over 11% for the month of May on oversupply fears. Overall market weakness comes amid concern that the trade spat with China could derail global growth. Food stocks tumbled as well, with 52-week lows for KHC, Kellogg. Transports slide again, led by weakness in trucking stocks after Citigroup issues a cautious outlook. Not a positive outlook for broader markets at this point with political uncertainty in Europe, China and U.S. trade dispute shows no signs of improving, oil tumbles, defensive gold and Treasuries rise, the Fed does not appear to be on an easing rate path and slowing global growth pressuring corporate profits.

Economic Data

·     The second estimate for Q1 GDP was 3.1%, topping the 3% estimate but below last estimate fo 3.2%, while GDP rose 2.2% in prior quarter. Personal consumption rose 1.3% in 1Q after rising 2.5% prior quarter (vs. est. 1.2%) while GDP price index rose 0.8% in 1Q after rising 1.7% prior quarter (vs. est. 0.9%). The core PCE q/q rose 1.0% in 1Q after rising 1.8% prior quarter (vs. est. 1.3%) – lighter inflation reading

·     Weekly Jobless Claims rose 3K to 215K vs. est. 214K while prior week claims revised to 212K from 211K); the 4-week moving average fell by 3,750 to 216,750; continuing claims fell 26K to 1.657M in the week ending May 18 (nearly 5% lower compared to the same time last year)

·     April U.S. trade deficit in goods widened slightly to a seasonally adjusted (-$72.1B) from (-$71.9B) and vs. est. (-72.7B); wholesale inventories climbed by 0.7% and retail inventories grew by 0.5%; nearly every category of exports, and every category of imports, fell in April (exports fell -4.2% and imports -2.7%).

·     Pending home sales for April fell -1.5% vs. est. up 0.5%, with a 1.8% decline in the Northeast and West and 2.5% drop in the South while the Midwest rose over 1% – recap

 

Commodities

·     Oil prices took a turn for the worse midday, with WTI crude sliding $2.22 or 3.8% to settle at $56.59 per barrel (lowest settlement in over 2-months), while Brent plunged -$2.58 or 3.71% to settle at $66.87 per barrel after a round of bearish inventory data raised supply fears. Front-month WTI came into the day down nearly 8% for May, adding to those losses today.

·     Gold futures rose $6.10 or 0.5% to settle at $1,292.40 an ounce, its best level in about two weeks, getting a boost late day as the dollar reversed lower (erasing gains) while stocks pulled back from earlier highs as well as seen as a refuge for investors seeking safety amid all the U.S.-China trade tensions and global growth concerns.

 

Currencies & Treasuries

·     The dollar reversed early gains, falling vs. the euro, Canadian and Aussie dollars, but the dollar index finished little changed. The British pound fell below the $1.26 for the first time since the flash decline in early January, as the region continues to deal with tension over Brexit and domestic politics after UK PM May said she was stepping down in June. The Pound moved back above the 1.26 level as the dollar slid on mixed economic data. The yield on 10-year Treasuries decreased five basis point to 2.21%, the lowest in 20 months while the yield on the two year Treasuries dipped four basis point to 2.06%, the lowest in more than 15 months.

 

 

Macro

Up/Down

Last

WTI Crude

-2.22

56.59

Brent

-2.58

66.87

Gold

6.10

1,292.40

EUR/USD

0.0005

1.1136

JPY/USD

0.02

109.61

10-Year Note

-0.045

2.22%

 

 

Sector News Breakdown

Consumer

·     Retailers; PVH shares very weak, citing impact of trade/tariffs, as lowered year EPS view to $10.20-$10.30 from $10.30-$10.40 (est. $10.43) and sees year revs to rise approximately 3% – down from prior view of 4% (followed a beat for Q1 results); JILL plunged as guided Q2 EPS loss (8c-10c), well below the 21c profit estimate and sees 2Q comparable sales -1% to -3%; slashed year EPS to 17c-21c from prior 66c-70c (est. 69c); BURL Q1 EPS and revs just top consensus with full-year earnings guidance roughly in line with though same-store sales projections were weaker (sees year comp sales to rise 1.3% to 2.1%, slightly below the 2.2% est. after Q1 comps missed); EXPR Q1 EPS/revs beat and Q1 comp sales fell (9%), less than the (10%) decline expected while margins came in at 27.1% of sales vs. 26.0% consensus and 29.9% a year ago; watch maker MOV shares fell after Q1 EPS and sales missed estimates though reiterated FY20 guidance

·     Non-apparel; Dollar stores out with earnings; DG Q1 comp sales increased 3.8% in Q1 to top the consensus mark of +2.1% saying both customer traffic and average transaction amount were higher during the quarter with in-line guidance/gross profit fell 30 bps to 30.2% of sales due in part to higher distribution and transportation costs; DLTR mostly in-line Q1 results for EPS/revs while comp sales grew 2.2% (est. 2.1%) and comp sales rose 2.5% at Dollar Tree/cut year EPS view to $4.77-$5.07, down from its previous outlook range of $4.85-$5.25; sporting goods store SPWH sales fell off 3.4% in Q1 due in part to "difficult event-driven" comparisons in the firearm and ammunition categories/adjusted net loss widened to $5.2M from $3.6M a year ago; TLYS to 52-week lows after its earnings and guidance disappointed

·     Consumer Staples; recent IPO BYND to new all-time highs, toping $100 per share for the first time today; KHC another record low as Credit Suisse cut its tgt to $26 and forward estimates below management guidance due to the possibility that the SEC’s investigation into the company will continue to reveal breakdowns in internal controls; BUD was upgraded to buy at Argus noting shares have underperformed the market over the past 52 weeks, falling 12% compared to a gain of 3% for the index; Kellogg (K) to 52-week lows as food remains weak

·     Housing & Building Products; EXP said it plans to separate heavy materials and light materials businesses into two publicly traded corporations through a spin-off/is also actively pursuing alternatives for its Oil and Gas Proppants business; TOL was downgraded at Raymond James following a review of last week’s 2Q19 results, which leaves them concerned of reduced estimates, a lack of upcoming catalysts, and lingering West Coast issues 

·     Autos; TSLA cautious note at Barclays as updated probabilistic valuation model to reflect a higher probability of TSLA stalling as a niche automaker, reducing our PT to $150 from $192 and reiterate our underweight rating; BWA was upgraded to overweight at Barclay’s as sees BorgWarner as well-positioned to benefit from hybrid growth in the 2020s.

·     Services ; ARMK shares spiked after Reuters reported Mantle Ridge is looking into creating a consortium with private equity firms and sovereign wealth funds to make a bid for Aramark https://yhoo.it/2W36ZJA

 

Energy

·     Energy stocks were weak as oil prices on track to end the month with a decline of roughly 8% on a rising dollar, fears of economic growth slowdown potential demand impact from trade issues between China/U.S. – offsetting the impact of Iran sanctions. Today inventory data was bearish as the EIA said weekly oil stockpiles fell -282K barrels vs. est. draw of -1.36M barrels (smaller draw bearish), while gasoline stockpiles rose 2.2M barrels vs. an est. draw of -800K barrels and distillates fell -1.6M barrels. Last night, the American Petroleum Institute (API) reported U.S. crude supplies fell by -5.3M barrels for the week ended May 24, showed a stockpile increase of 2.7M barrels in gasoline, while distillate supplies fell by -2.1M barrels

·     Top stories; OXY shares were active after reports Carl Icahn may seek to call a special meeting to remove and replace OXY board members, according to a lawsuit filed over the company’s agreement buy APC as Icahn, who has built a $6.6B stake in OXY, calls OXY’s $38B deal to purchase Anadarko "fundamentally misguided and hugely overpriced”; BTIG lowered tgts for oil drillers RIG and ESV saying the bankruptcy of Weatherford two weeks ago has resulted in contagion which has shifted investor focus back to balance sheets and leverage ratios and away from the improving rig market

·     Utilities & Solar; in solar, CSIQ posted a better-than-expected Q1 EPS loss on better revs while also guided Q2 above consensuss lifting shares (sees 2Q revenue $970M-$1.01B vs. est. $864.6M)

 

Financials

·     Bank movers; US markets rolled over late morning, as banks erased earlier gains (JPM, BAC, GS) as Treasury yields slide well off highs (10-yr was above 2.27% earlier – now under 2.25% but still above yesterday 20-month lows of 2.21%); Citigroup (C) was upgraded to buy at Goldman Sachs saying sees a realistic path to a 13% return on tangible common equity in 2020 for Citi, or 100 basis points ahead of market expectations; BAC said it expects Q2 trading revenue down 7.5% from Q1 and investment banking revenue to be flattish QoQ, speaking at Bernstein conference

 

Healthcare

·     Pharma movers; No relief for specialty pharma/generic names on opioid lawsuit concerns as MYL, ENDP, TEVA, AGN extend losses after recent opioid settlement by TEVA in Oklahoma for the amount of $85M/bad pricing environment, increased competitive and payor pressures, lowered/missed earnings are also concerns for the industry; ZFGN shares fell after providing a regulatory update on ZGN-1061 saying it received minutes from its Type A meeting with FDA regarding the clinical hold; NVS said a Phase 3 clinical trial, QUARTZ, evaluating Novartis’ QMF149 in poorly controlled asthma patients met the primary and key secondary endpoints

·     Biotech movers; ICPT tgt was cut to $106 at Citigroup as feels the stock will remain range-bound; EPZM submitted a New Drug Application (NDA) to the FDA for accelerated approval of tazemetostat for the treatment of patients with metastatic or locally advanced epithelioid sarcoma not eligible for curative surgery

·     Medical equipment, services and devices; BSX tgt raised to $46 at BMO Capital and added to Top Picks list, joining PODD and WMGI as BSX stands out with high-single-digit organic revenue growth, operating leverage, and double-digit EPS; EHC was upgraded at Cantor as they now have increased visibility into the inpatient rehab Medicare reimbursement headwind set to begin in 4Q19 and believe the market is over-discounting the broader health policy risk; PEN was upgraded to overweight at JPMorgan saying since its IPO in the back half of 2015, Penumbra has been one of the standout stories within the SMid-cap MedTech space

 

Industrials & Materials

·     Transports; trucking stocks weak after Citigroup lowered estimates and targets for a few names while opened negative catalyst watches for JBHT, SNDR, and WERN after saying it appears that the truck and intermodal markets are softening, which likely keeps pressure on stocks due to potential estimate reductions; rails were among top gainers in the index (NSC, CSX), while airlines were mixed (slowing growth fears weighs on transports)

·     Metals & Materials; steel sector cautious at Deutsch Bank as they downgraded U.S. Steel (X) and NUE to sell from hold to reflect a more negative stance on steel and downgraded STLD to hold from buy (while upgraded RS to buy); gold miners EGO, KGC, and NGD were downgraded to underweight at JPMorgan saying gold equities are coming to terms with the realities of the gold sector with consolidation substituting for the lack of reserve replacement

·     Industrial & Machinery; TITN shares helped machinery stocks as Q1 EPS topped consensus on better revenue; Dow component MMM falls to 52-week lows today and down over 25% over the last month (since lowered guidance); in materials, TROX shares fell after offering softer FY19 guidance fell short of consensus; GE CEO speaking at Bernstein conference said Q2 to be a challenging quarter for free cash flow

 

Technology, Media & Telecom

·     Semiconductors; sector rallies for a second day, led behind gains in CY which surged on Wednesday after Bloomberg reported that Cypress is potentially looking into a sale of the company after receiving takeover interest (Morgan Stanley upgraded shares today based on the headlines); SMTC shares dropped after in-line Q1 results was coupled with lower guidance for Q2 revs $128M-$142M vs. est. $142M)

·     Software movers; VEEV with a strong quarter with F1Q20 delivering billings, revenue, and margins all exceeding consensus expectations. Calculated billings were exceptionally strong, coming in ~$12M above guide; security software names weak early after PANW posted Q3 EPS and revenue above consensus but total billings of +13 y/y were lighter due to shorter contract duration (est. 20%) and guided mixed Q4 (EPS $1.41-$1.42 on revs $795M-$805M vs. est. $1.55/$793.81M); VRNT reported Q1 numbers that beat the Street across the board, and were ahead of the pre-announced top-line guidance from earlier this month while increasing its FY20 guidance; ZNGA upgraded at Stephens and tgt raised to $8.25 citing increasing confidence in ZNGA’s three-pronged approach to growth: live services, new game launches, and M&A; TWLO filed to sell $750M in stock

·     Media & Telecom movers; CNBC’s David Faber reported CBS prepares for talks with VIAB, which are expected to begin mid-June https://cnb.cx/2WeCyFd ; AMT said it will acquire Eaton Towers for about $1.85B, including debt as the deal is expected to close before the end of the year; LGF was downgraded to hold at Argus saying it has had a remarkably fallow period in content production despite the recent success of "John Wick 4."/Starz has become the company’s primary profit driver, though it lost 2.8M cable system subscribers in FY19; VZ downgraded to neutral from buy at UBS, positive on wireless fundamentals but said valuation back in-line with historical levels and more difficult comps ahead; CMCSA upgraded to buy at Guggenheim and raise tgt to $52 praising the company’s fairly smooth transition from a video distributor to a connectivity company; SATS tgt raised to $68 at Raymond James due to valuation estimate of the YahSat Brazilian minority interest, as well as the liabilities being transferred to DISH

·     Hardware & Component news; KEYS shares rise after results as the company not only beat but also guided higher mostly notably on EPS as sales saw some Huawei pull in and guidance take down; TECD reported mixed Q1 results with an EPS beat on a slight miss on sales $8.41B vs. $8.46B), with lower guidance – but shares rallied; in networking, JPM said they recommend CSCO, CIEN as Safe Havens, and ANET, LITE as Opportunities

_________________________________________________________________

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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