Market Review: July 09, 2019

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Closing Recap

Tuesday, July 09, 2019

Index

Up/Down

%

Last

DJ Industrials

-22.38

0.08%

26,783

S&P 500

3.68

0.13%

2,979

Nasdaq

43.55

0.54%

8,141

Russell 2000

1.21

0.08%

1,562


 

Equity Market Recap

·     U.S. stocks end the day mixed, as the tech heavy Nasdaq managed to end firmly higher, while the Dow Industrials extended its losses for a third day. Volumes remained light into tomorrow and Thursday’s two-day appearance by Fed Chairman Powell on Capitol Hill in his semi-annual testimony on monetary policy where markets await hints on interest rate cuts. Powell speaks to the House Financial Services Panel (7/10) tomorrow and the Senate Banking Committee on Thursday (7/11). Stocks have slipped from record highs reached last week, falling on Friday after the monthly jobs report was strong, lowering chances of an aggressive rate cut at the end of the month…but comments from a handful of Fed speakers recently make it seem that a rate cut isn’t exactly a “slam dunk.” Energy stocks rebound late afternoon after early weakness, while defensive sectors once again led along with technology and financials. Consumer discretionary names sunk led by weakness in retail. In the technology space, one big M&A deal with CSCO agreeing to acquire optical/comm equipment maker ACIA on deal valued at $2.6B. Health insurers (CI, HUM, and ANTM) and hospital stocks (CYH, UHS, THC) were under pressure in an overall strong healthcare space today, as the Fifth Circuit Court of Appeals is set to hear oral arguments in the Texas-led lawsuit against the Affordable Care Act. MMM was a drag on the Dow Industrials early after the component was downgraded by an analyst.

 

Commodities

·     Oil prices with modest gains as WTI crude rises 17c to $57.83 per barrel ahead of API inventory data tonight and EIA tomorrow morning, while Brent crude rose 5c to $64.16 per barrel. Oil and energy stocks have remained in a rut amid the same story as OPEC supply cuts and Middle East tensions outweighed the U.S.-China trade dispute that has been dragging down the global economy and oil demand. Rising tensions between Iran and the United States have brought the two countries close to conflict. Last month, President Donald Trump called off air strikes at the last minute in retaliation for Iran shooting down a U.S. drone. It was another quiet session for gold futures ahead of Powell’s testimony, with August gold rising a modest 50c to $1,400.50.

 

Currencies

·     The U.S. dollar adds gains for a third day, rising vs. both major and emerging market currencies; the British pound fell to its lowest level in at least two years against the U.S. dollar (touched lows of 1.244 – well off the March highs of 1.3381) on a weaker UK growth outlook as well as political drama after President Trump said he won’t deal with the U.K. ambassador to the U.S., after confidential memos showed negative comments towards the U.S. The buck rose to highs of 108.96 vs. the yen before paring gains (failed before its 50-day MA resistance of 108.98) – but still best levels in roughly 5 1/2 weeks; the euro down slightly vs. the dollar, but back above the 1.12 level (lows of day 1.1193) as markets await Powell testimony next two days (euro 4-week lows). The Mexican peso slipped over 1% early afternoon after the country finance minister resigned.

 

Bond Market

·     Treasury yields extend their gains from Friday, with the 10-year yield up around 2.06% (up off lows of 1.94% last week) and the 2-year at 1.89% (up from June lows below 1.70%) as expectations for an overly aggressive rate cut by the Fed later this month have eased given the recent strong jobs data. The U.S. Treasury sold $38B in 3-year notes at a yield of 1.857% vs. the when/issued yield prior at 1.858%, with a bid-to-cover (demand) at 2.39, down from the 2.62 at prior auction and indirect bidders awarded 48.5%, and primary dealers 33.6%. There was no major economic data to move markets today which await Powell comments tomorrow.

 

 

Macro

Up/Down

Last

WTI Crude

0.17

57.83

Brent

0.05

64.16

Gold

0.50

1,400.50

EUR/USD

-0.0004

1.121

JPY/USD

0.13

108.85

10-Year Note

0.013

2.061%

 

 

Sector News Breakdown

Consumer

·     Retailers; retailers were among top decliners in the S&P early, with declines for GPS, FL, LB, JWN, TPR; ETSY said it’s planning to make free shipping a core part of the Etsy shopping experience/is providing sellers with tools and support to help them guarantee free shipping to U.S. buyers who spend at least $35 in their shop; in mattresses, Wedbush said initial checks on July 4th mattress industry bricks and mortar retail sales trends indicate slightly positive y/y growth, a slowdown from Memorial Day’s +MSD y/y trend (TPX, SNBR) – said trends come despite more aggressive promotions at most retailers, not a positive sign for the industry; LULU tgt cut at Davidson to $175 citing lower SKU’s and increased markdowns; TUP traded to 52-week lows

·     Consumer Staples & Restaurants; PEP posted slight Q2 beat (core EPS $1.54/$16.45B vs. est. $1.50/$16.42B) and backed its year outlook; THS sold its Snacks division (nuts and trail mix) to Atlas Holdings for $90M, below many analyst expectations and well below what they originally paid for it ($875M in 2014), but analysts note it removes an overhang; SBUX has added Dallas, Houston and Orange County to its Starbucks Delivers program powered by Uber Eats; ELF was upgraded to overweight at JPMorgan and raised tgt to $17 from $11

·     Casino & Leisure movers; in leisure, SIX was upgraded to outperform at Wells Fargo and raise tgt to $56 from $52 as believe concerns around weather, China trade and dividend sustainability are fairly discounted; in vehicles, Raymond James said based on dealer survey results it appears that 2Q19 North American retail trends were down modestly for the second straight quarter following four consecutive quarters of growth (PII, HOG)

·     Hotels and lodging, JPMorgan downgraded MAR and HLT to Neutral from Overweight on more even risk-reward, and cut RHP and CPLG to Underweight from Neutral saying they see more risk to the downside as recent share performance, peak valuations, an extended cycle and decelerating industry trends all point to diminished upside from here

·     Auto’s; Fitch said the risk of up to 25% U.S. tariffs on all imported automobiles and parts may remain a negative overhang for the global automotive sector for the rest of 2019, according to a Fitch research note (GM, F, NSANY, FCAU, TM).

 

Energy

·     Energy stocks continue to lag the broader market, failing to lift with broader markets at any point in 2019; in stock news, CVX and Qatar Petroleum announce plans to jointly develop U.S. Gulf Coast petrochemical $8B project; MR guided 2Q production above 515 Mmcfe per day vs. prior view of 500 To 515 Mmcfe; sees FY cap-ex $345M-$370M vs. prior view $375M-$400M; refiner estimates (VLO, MPC, HFC) lowered at Raymond James; QEP was downgraded at Oppenheimer citing limited upside; utilities were modestly lower after having traded to record highs late June on plunging Treasury yields, flight to more defensive names

 

Financials

·     Bank movers; in broker news, PJC agreed to acquire Sandler O’Neill in a total deal valued at $485M, paying $350M in cash to Sandler O’Neill equity holders at the time of closing; and $135M in restricted consideration, primarily in restricted stock https://on.mktw.net/2LbE9Wh ; in research, Stephens with several banking rating changes as they upgraded: FMRE, FBK and CNOB, while downgraded BUSE, PNFP, TBK, BFST, CADE, HWC, FBMS and TCBK

·     Consumer finance and lending; ADS announces a $1.1B stock buyback; SQ upgraded to Market Perform at Raymond James saying their short thesis from the end of Jan has mostly played out and we now believe the risk/reward is more balanced and believes the B2B/seller card is gaining traction and could provide enough momentum to exceed expectations in 2H19; Visa (V) trades to fresh 52-week highs (Dow component)

 

Healthcare

·     Pharma movers; industry has been under pressure on Trump attack on prices (MRK, JNJ, LLY), but small reprieve today as a federal judge on Monday dealt a blow to the Trump administration by striking down a new rule that would have forced pharmaceutical companies to include the wholesale prices of their drugs in television advertising. Note the Trump administration has outlined other plans to tackle soaring drug prices, with President Trump outlining an executive order with a "favored nations clause" regarding prescription drug pricing; HQY shares fell after filing to sell $410M in stock

·     Managed care (CI, ANTM, HUM) and hospitals (THC, CYH, HCA) were volatile as the Fifth Circuit Court of Appeals heard oral arguments in the Texas-led lawsuit against the Affordable Care Act late afternoon.

·     Biotech movers; SRPT tgt raised to $220 at Morgan Stanley citing increased confidence that the company will capture the majority of market share in DMD; ALT agrees to buy privately-held Spitfire Pharma Inc. for $5M giving it access to a drug candidate for treating NASH; SAGE shares outperformed after Stifel said given that investor expectations are fairly low, they think that Sage’s July pipeline update (7/24) may still represent an incremental positive for the stock, as there’s other data to look forward to

·     Medical equipment and devices; MYGN was downgraded to Market Perform at Cowen and cut tgt to $30 from $37 citing poor sales performance of some products in the last two quarters, lower overall conviction in MYGN leadership and a less attractive relative valuation; CUTR said 2Q preliminary results exceeded consensus growth estimates and its own revenue forecast; dialysis service providers (FMS, DVA) shares active after Politico report on Trump administration’s plan to encourage more kidney transplants and at-home dialysis. President Donald Trump is set to unveil a series of initiatives on Wednesday morning and is considering a possible executive order https://politi.co/2G2zIt0

 

Industrials & Materials

·     Industrial & Machinery; MMM was downgraded to sector perform at RBC Capital and cut tgt to $176 from $207 saying the stock has been worst-performing large-cap multi-industrial YTD and investor sentiment has turned negative as co stumbled through four guidance cuts in past five quarters; LNN reported a lower profit for Q3 as the company’s operating revenue fell amid constrained demand for irrigation equipment due to uncertainty in trade negotiations; ATU agreed to sell its Engineered Components & Systems segment excluding the Cortland U.S. business to One Rock Capital Partners for about $214.5M

·     Metals & Materials; copper sector weaker as Jefferies lowered its copper, zinc and thermal coal price forecasts to reflect weak demand while JPMorgan lowers its Q219 EPS forecast FCX and cut tgt to $13 to reflect actual copper prices coming in lower than initially estimated; AA was downgraded to neutral at Macquarie and also cut tgt on CENX to $6 in aluminum space

·     Aerospace & Defense; BA shares slipped after saying total deliveries for June were down -119 and net 737 orders were down -180 (deliveries fall 37%); European regulators have ordered inspections on some older Airbus (EADSY A380 superjumbo airplanes after some cracks were detected in wings on the world’s largest passenger aircraft; Citigroup downgraded LDOS and CACI to neutral, but upped tgts on both (CACI to $230 from $200, and LDOS to $83 from $75), in light of impressive YTD share performance (CACI +45%, LDOS +54%) driven by better #s and multiple expansion; LHX added to conviction buy list at Goldman Sachs with $240 tgt on solid near-term growth from recent wins and current DoD outlay strength, and market share gains from its focus on innovation; GD announced it has won a $2B contract to continue managing the U.S. Department of State, or DOS, global technical security supply chain.

 

Technology, Media & Telecom

·     Optical and Comm Equipment; ACIA agreed to be acquired by CSCO for $70 per share in $2.6B deal to meet the fast-growing consumer demands for data https://on.mktw.net/32dORRH (other optical/comm equipment related stocks moving after deal – AAOI, LITE, NPTN, CIEN, FN)

·     Internet; SNAP tgt raised to $18 at Credit Suisse on potential for better-than-expected user growth with a revamped Android app and advertising revenue growth acceleration by 2H19; COHU provided an update in an 8-K filed Monday after close saying that it no longer expects a recovery in revenue in the back half of the year, citing the US-China trade war, export restriction into Huawei and softness in the wireless and automotive end markets; FB shares traded above the $199 level (has not traded above $200 since July 2018); NFLX announced “Friends” will be leaving the streaming service as follows recent departure of “The Office”

·     Semiconductors; note SemiCon West being held in San Francisco on July 9-11; ADI tgt raised to street high $135 from $118 at Piper saying the company is executing "very well in the current environment" and that the rolling out massive MIMO for 5G should bring increased content

·     Media & Telecom movers; DIS rev estimates raised at Needham, but lower EPS for F19-20 to better reflect mgmt comments on implications of $70B Fox asset purchase, higher OTT investments, and strong US ad mkt which is being partly offset by weak TV ratings at ABC

·     Hardware & Component news; AAPL shares rebound after sliding yesterday on lowered estimates and downgrade call at Rosenblatt as today, JPMorgan raised its tgt to $239 and said checks suggests a stronger iPhone replacement cycle in 2020 that previously expected (raised is 2020 iPhone shipment outlook to 195M units from 185M); separately, AAPL cuts the price of MacBook Air to $1,099, with a lower price of $999 available for college students.

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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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