Market Review: August 29, 2019

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Closing Recap

Thursday, August 29, 2019

Index

Up/Down

%

Last

DJ Industrials

325.88

1.25%

26,361

S&P 500

36.64

1.27%

2,924

Nasdaq

116.51

1.48%

7,973

Russell 2000

24.07

1.63%

1,496


 

Equity Market Recap

·     U.S. stocks opened strong and just kept surging, with the Dow rising more than 350 points late day before paring gains, as all major averages advanced more than 1.25%, with the Russell 2000 Smallcaps rising 1.7% to outperform large caps for a 2nd day. The gains started overnight on trade optimism after China Commerce Ministry spokesman Feng eased trade-war tensions by saying the country would not immediately respond to the latest tariffs imposed on it by the U.S. He also said that China remained in contact with Washington and that discussions should move toward removing tariffs to prevent escalation. The headlines coupled with in-line GDP data (lower inflation rising spending) as well as strong earnings results from a majority of retailers (DG, DLTR, GES, PVH, SCVL, TLYS, BURL) helped propel stocks. Semiconductors paced the strong gains in tech given the softer China stance on trade. Defensive, safe haven investments declined as stocks made new highs with gold falling just shy of 1% off 6-year highs, the dollar rising vs. the yen and Treasury yields inching higher (also helped by a weak 7-year auction). Stocks had a brief (very) pullback late afternoon after Dow Jones news reported U.S. prosecutors are looking into new alleged technology theft by China’s Huawei Technologies. Heading into the Labor Day holiday weekend, the National Hurricane Center said warm water and low vertical wind shear is expected to allow for the storm to intensify in the next 2 to 3 days and Dorian will become a “major hurricane” on Friday (category 4 storm in next 72-hours). Industries that tend to be volatile into storms include insurance companies, restaurants and retailers on the negative side while home improvement retail, generators, E&P beneficiaries.

Economic Data

·     Weekly Jobless Claims rise 4K to 214K (in-line) while continuing Claims at 1.698M vs. est. 1.687M

·     Gross Domestic Product (GDP) Annualized for Q2-S in-line with estimates at 2%, while Personal Consumption, jumps to 4.7% vs. est. 4.3% and the GDP Price Index for Q2-S steady at 2.4%; core PCE QoQ for Q2-S slips to 1.7% below est. and prior 1.8% – recap

·     Advance Goods Trade Balance for July deficit narrowed to (-$72.3B) from (-$74.2B last month and vs. est. (-$74.4B); Imports fell 0.4% in July to $209.681B from $210.613B in June and exports rose 0.7% in July to $137.341B from $136.452B in June

·     July Pending Home sales fell -2.5% vs. est. flat weaker than expected and largely offsets the 2.8% climb in June to 108.3 in June

 

Commodities

·     Commodity prices were mixed as gold futures erased earlier gains, rolling -$12.20, or 0.8% to settle at $1,536.90 an ounce, down off earlier highs of $1,559.80 an ounce, with defensive/safe haven assets rolling as stocks jumped across the board. Oil prices meanwhile added to yesterday gains, with WTI crude rising 93c, or 1.7% to settle at $56.71 per barrel, while natural gas prices jumped 3.2% to $2.30 mln btu on Hurricane Dorian impact fears. The larger than expected drawdown in weekly inventories reported yesterday by the EIA and API helped support oil along with the easing trade tensions with China and the U.S. that lifted stocks.

 

Currencies

·     The U.S. dollar was broadly higher as the dollar index (DXY) gained roughly 25 bps to 98.50 level (more than 100 bps move off the Monday lows of 97.38) as the US dollar back near 2-year highs against the euro (traded lows of 1.1042), while gained further vs. the Canadian dollar, British Pound and Japanese yen (up at 106.64 hi’s and 200 bps off weekly low of 104.46). Continued progress on the trade front should see the pairing hold recent gains. The euro extends its slide vs. the dollar (now down -0.7% for the week) amid political uncertainty in Europe, Brexit and ongoing weak German data.

 

Bond Market

·     Treasury yields bounce off multi-year lows (in some instances record lows such as the 30-year which hit 1.90% yesterday), helped in part by a rally in stocks as well as a very poor 7-year Treasury auction with the lowest demand in over a decade. Prices initially slipped overnight on easing trade tensions with China, as well as better economic data and a small unwind after yields touched their lowest level in 3-years for the 10-year this week (1.44%). it was a poor Treasury auction as the U.S. sold $32B in 7-year notes at a yield of 1.489% compared to 1.468% when-issued prior, with a bid-to-cover (demand) at 2.16 below the prior 2.27 .and indirect bidders awarded 50.2% of the auction.

 

 

Macro

Up/Down

Last

WTI Crude

0.93

56.71

Brent

0.59

61.08

Gold

-12.20

1,536.90

EUR/USD

-0.0023

1.1054

JPY/USD

0.53

106.65

10-Year Note

0.033

1.513%

 

 

Sector News Breakdown

Consumer

·     Dollar stores a bright spot in retail with results from DG, DLTR while FIVE mixed; DLTR raises year EPS to $4.90-$5.11 from $4.77-$5.07 prior and narrows year sales view, though mixed Q2 results as EPS missed by 5c but sales of $5.74B beat; DG a beat and raise as Q2 adjusted EPS $1.74/$6.9B vs. est. $1.57/$6.89B while Q2 comp sales rose 4% above the 2.4% estimate and raises FY19 EPS, sales and comp outlooks; FIVE reported Q2 with a rare comp miss (up 1.4% vs. est. 2.6%) that was driven by unfavorable weather trends in May-June, but delivered on the bottom line

·     Apparel retail mixed; GES shares jumped over 20% after Q2 profit rises and boosts its outlook (raises year EPS to $1.28-$1.36 from prior $1.19-$1.30 and ups year op margin to 5.3%-5.6% from 4.8%-5.2%); ANF shares fell after posting a Q2 loss and setting soft sales guidance as comp sales were flat during the quarter vs. +0.2% consensus. U.S. comparable sales rose 2%, while international comparable sales were down 3% (guided year sales growth flat to up 2% vs. +2% to +4% consensus and gross profit rate to be down in the range of 50-90 bps YoY); PVH lowers its full-year revenue forecast significantly (+1% vs. +3% prior) as it cites pressure from the Hong Kong protests and the U.S.-China trade war and says the two factors led to a more promotional environment in China; in research, MOV, TPR downgraded at Cowen and GIII downgraded to hold from buy at Stifel; BURL EPS beat and raised guidance; raises FY19 adjusted EPS view to $7.14-$7.22 from $6.93-$7.01 – ups FY19 revenue growth view to 8.8%-9.3% from 8.5%-9.2% and raises FY19 comparable store sales view; SCVL, TLYS also jumped on earnings

·     Other retailer related names, electronics; BBY overall okay quarter as EPS beat by 9c and guides Q3 EPS higher at $1.00-$1.05 vs. est. 94c and revs $9.65B-$9.75B vs. est. $9.78B while narrows FY comp sales view, but Q3 comp sales of 1.6% missed the 2.2% estimate; CASY was downgraded to underperform at RBC Capital on valuation, raising PT to $158 from $144 on roll forward and target multiple re-rating; OLLI shares plunged after posted its first negative comp as a public company with 2Q19 earnings, 2Q EPS of 35c below the Street at 46c with -1.7% same-store-sales and 194bps of gross margin contraction, and lowered outlook; WSM delivered F2Q19 revenues and earnings above estimates, driven by strong comp growth from West Elm and Pottery Barn

·     Consumer Staples; in the protein sector, SAFM missed quarterly earnings estimates due to lower prices for breast meat at the company’s plants; HAIN topped EBITDA and margin expectations, but came up short on revenue, while guided year EPS 59c-72 on adjusted EBITDA of $168M-$192M, below the est. 80c/$206M (but might not fully include the impact of the Tilda sale and currency swings); LMNR pre-announced Q3 results well below expectations as the same problems hurting Q2 accelerated in Q3, with an industry overabundance of large lemons leading to lower carton prices and margins; Dow components KO, PG touch 52-week highs; in tobacco, MO, PM shares dipped after the WSJ reported the FTC is investigating e-cigarette maker Juul over targeting young people

·     Restaurants; Cowen said on QSR that a favorable franchisee check suggests the highly anticipated plant based Impossible Whopper drove a 600 bps acceleration in two-year trends following the Aug 8 launch; Piper said CMG checks have come in below actual results by an average of (210) bps over the last 4-quarters, but July was steady sequentially in the +HSD% range leading us to increase our 3Q19 comp estimate from +7% prior to +9%

·     Casino & Leisure; HGV shares jumped early afternoon following a Reuters report it was to explore strategic alternatives, including a sale https://yhoo.it/2PmLIfJ – recall on 8/19, the NY Post reported is considering steps to buy Hilton Grand Vacations (HGV), and has given the company three options to consider; boating stocks higher after MBUU earnings results were positive forecast for a slight increase in Malibu and Cobalt units for 2020 and mid- to high-single-digit growth in net sales (shares of BC, HZO also higher on the day)

 

Energy

·     Energy stocks were higher along with the broader market, with beaten energy stocks rallying, led behind natural gas leveraged stocks (EQT, RRC, SWN, GPOR) extending a recent rally ahead of possible supply disruptions related to Hurricane Dorian, with Nymex gas for October delivery +3.3% to $2.296 per MMBtu. Prices took a small hit earlier after weekly natural gas inventory data came in bearish, rising over 60 bcf vs. the 57 bcf build expected – note nat gas prices are now about 10% off multi-year lows earlier this morning (but still down 20% YTD); in stock news, MTRX shares spike to its best levels since last November in response to earnings overnight and said it got a new 5-year contract

 

Financials

·     Bank movers; strong recovery in banking stocks today with broader market; Raymond James downgraded BAC, CADE, BSFT, ONK, WTFC and TCBI while upgraded FHN, CARO, OCFC, EWBC and HTH but overall reduced EPS estimates for nearly all banks within coverage universe, which primarily reflects a reduction in our NIM projections where we have moved our previously modeled 25 bps Fed rate cut in October to September and added an additional 25 bps rate cut in December. In total, we reduced EPS estimates for our SE/SW bank universe by a median of ~0.5% in 2019 and ~2.0% in 2020.

·     Services, RLGY shares fall after disclosing that the discontinuation of the USAA program at its Cartus affinity business will likely have a material impact at Cartus in 2020; HRB shares dropped early after mixed to weaker Q1 results (Q1 EPS loss (72c)/$150.4M vs. est. loss (75c)/$151.4M), while operating expenses advanced 5.6% YoY

·     Insurance; potential impact from Hurricane Dorian: Credit Suisse said including estimates of losses up to $30B at this time based on current hurricane models, but says if the track moves south towards Miami/Ft. Lauderdale/West Palm and maintains category 2-3 strength, insured losses would likely climb. Wells Fargo said a major hurricane hitting Florida could result in insured losses ranging from $6-$10 billion (or economic losses in the $9-$15 billion range), a manageable level for the industry. However, if Dorian hits as a strong Category 3 storm, we think insured losses could be closer to $25 billion (CB, AIG, PGR, BRKnames to watch)

 

Healthcare

·     Not much individual news for the Healthcare sector, but Raymond James noted the industry could be volatile in September given several possibly policy moves: 1) They anticipate Trump to announce an Executive Order on drug pricing with the possible release of the International Pricing Index proposed rule, revisions to the Stark anti-kickback provisions, an Executive Order on flu, and a new ACA replacement plan; 2) firm also says announces Speaker Pelosi to announce her drug pricing plan; 3) Leader McConnell to give some guidance on where the Senate Finance Committee drug pricing bill goes from here; 4) Congress to reach a decision on how to fund HHS for FY20 as well as pending Medicaid DSH cuts and community health center funding expiration; 5) another democratic debate where healthcare will undoubtedly be a major focus

·     Pharma movers; ABBV discontinues Rovalpituzumab Tesirine research and Development Program; TLRY announces that subsidiary High Park Holdings Ltd. will acquire 420 Investments Ltd, an adult-use cannabis retail operator based in Calgary, Alberta, for C$110M in TLRY Class 2 common stock; MRK traded to 52-week highs today

·     Devices and Services; QDEL won a California appeals court ruling that overturns a decision in its fight with Beckman Coulter Inc. over a supply agreement as the California’s Fourth Appellate District ordered a trial court to vacate a Dec. 7 decision that favored Beckman Coulter; in the dental sector, PDCO shares dropped to 52-week lows after Q1 revenue missed

 

Industrials & Materials

·     Industrial & Machinery; TITN shares dipped as Q2 EPS of 31c/$315M just misses the 32c/$216M est while raises FY20 agriculture revenue view to up 2%-7% from flat but lowers FY20 International revenue view to up 2%-7% from up 10%-15%; shares of GNRC, BGG, PWR, MTZ among those being watched given the potential impact from Hurricane Dorian after Citigroup said think PWR (emergency electrical and telco restoration work) and FLR (FEMA recovery/disaster relief) could be potential beneficiaries

·     Transports; Dow Transports holding strong, rising as much as 2.25% and back above the 10K level today – all 20 names in the index were higher (off yesterday lows 9,676); the gains were broad based, led by airlines (AAL), truckers (JBHT) and rails (UNP)

·     Metals & Materials; OSB says Line 1 of its two-line oriented strand board mill in Georgia will operate on a reduced 10/4 schedule due to continued poor market conditions; in steel space, Spot reinforcement bar prices in China retreated to the lowest since June 2017 on Wednesday after a four-month tumble, while hot-rolled sheet sank to the cheapest since November; GEF shares jumped after mixed Q3 as EPS beat and revs missed though full-year EPS range with a midpoint higher than the consensus mark

 

Technology, Media & Telecom

·     Semiconductors; seen as one of the top benefitting sectors to improved trade tensions with China, the semiconductor Philly index (SOX) rose over 2.3% early just under 1,500 (off highs 1,505), but still far off the 1,625 highs in July, having topped the 50-day MA 1,497; SMTC reported upside on both the top and bottom lines in the qtr, but the company offered guidance that was below Street expectations

·     Software movers; OKTA reported strong F2Q20 results as billings growth of 42% y/y topped consensus/Cowen ests of 35%/ 32% and RPO growth of 68% y/y accelerated from 59% in F1Q20/billings, revenue and EPS all meaningfully exceeded Street estimates and upped views; ZUO shares bounce after quarterly results and slightly better guidance as Needham said better 2Q suggests revamped sales efforts have stabilized bookings & improved visibility into 2H oppty’s; MFGP fell as warned full-year sales could drop 6-8% on last year’s, due to a deteriorating macro environment (which was more than the forecast of a 4-6% revenue drop previously)

·     Hardware & Component news; AAPL had estimates cut at Nomura as thinks Q1 iPhone estimates might prove overly optimistic and notes that the "shape of the 5G cycle remains uncertain" (note AAPL also sent out invite to September 10th event where new iPhones are expected); JBL rises after Citigroup double upgraded to buy saying the stock price is below their target price and believe the customer concentration risk has played out; BOX reported a roughly in-line Q2 but shares slipped amid declining net retention rates, below consensus deferred revenue, and guidance that bracketed consensus; TECD rises as Q2 EPS $2.69/$9.09B beat est. $2.31/$8.71B and announces $200M share repurchase program; NTNX a big winner after results headlined by a strong top-line beat ($299.9M vs. $293.7M est.); while revenue and earnings outlook was below consensus, the billings guidance for F1Q20 and for all of FY20 was above consensus

·     Media & Telecom movers; ESTC posted Q1 revenue that beat expectations and lifted its full-year outlook, helping lift shares early (outperformance across all metrics while FY/20 revenue guidance was raised more than the Q1 beat)

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Content is provided by Hammerstone Inc., which has no affiliation with Regal Securities, Inc. (“Regal”) This commentary is provided for information purposes only, and is not a recommendation, offer or solicitation by Regal to buy or sell securities or to adopt any investment strategy. Regal has not participated in the creation of the Hammerstone content and does not directly or indirectly endorse the content. Any reliance on this material is at the sole discretion of the reader.

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