Market Review: September 05, 2019

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Closing Recap

Thursday, September 05, 2019

Index

Up/Down

%

Last

DJ Industrials

371.86

1.41%

26,727

S&P 500

38.20

1.30%

2,975

Nasdaq

139.95

1.75%

8,116

Russell 2000

26.11

1.76%

1,510


 

Equity Market Recap

·     U.S. stock markets were on cruise control all day, with the S&P 500 moving to within 2% of its all-time highs and rising for the 5th time in the last six days (along with the Dow), getting a boost from better economic data, easing political tensions in Asia and Europe and news today that China and the U.S. will hold new trade negotiations in October. It appears that market fears that had weighed on market sentiment has de-escalated quickly, helping Treasury yields rebound off multi-year lows and send gold prices down over 2.2% for its biggest one day-decline in three years. Small caps (Russell 2000) and the Nasdaq Composite outperformed, with tech jumping roughly 2% back above the 8,100 level (best since the end of July). News overnight set the stage for gains today as China’s Commerce Ministry said its trade team will hold talks with U.S. counterparts in mid-September in preparation for high-level negotiations in early October, while the ministry spokesman said Beijing opposes any escalation in the trade war. Better U.S. economic data took stocks to the next level with ADP private payrolls solidly above views, ISM services topping views at 56.4 and non-farm productivity beating as well. Technology led by strength in software and semis (SOX +4% to new highs), as the industry seen among the top beneficiaries to improved trade negotiations news.

Economic Data

·     August ADP private payrolls reported at 195K vs. est. rise of 148K; July revised by -14K to 142K from 156K as reported last month. The goods sector increased 11k, with an 8k rise in manufacturing and 6k gain in construction. The service sector added 184k jobs, led by education with a 58k jump, followed by a 42k gain in leisure, and a 39k pop in trade/transport.

·     Nonfarm productivity, Q2-F up 2.3% vs. est. 2.2% while Unit Labor Costs, Q2-F higher at 2.6% vs. est. 2.4%; Output rose 1.9% in 2Q; up 1.9% preliminary while employee hours fell 0.4% in 2Q; down 0.4% preliminary and compensation per hour rose 4.9% in 2Q; up 4.8% preliminary

·     Weekly Jobless Claims rise 1K to 217K vs. est. 215K (prior revised to 216K from 215K), continuing Claims reported at 1.662M vs. est. 1.688M; the 4-week moving average stood at 216.25K

·     Factory Orders for July rises 1.4% vs. est. 1.0%; Factory orders for June revised down to 0.5% gain, from 0.6% rise previously reported; new orders ex-trans rose 0.3% in July after falling 0.1% the prior month and new orders ex-defense for July rise 1.1% for second month. Durables orders for July rise 2% after rising 1.8% in June

·     ISM Non-Manufacturing Index for August reported at 56.4 vs. est. 54.0; component breakdown includes: new orders rise to 60.3 vs 54.1 last month (best levels since February) while prices paid rose to 58.2 vs 56.5; employment fell to 53.1 vs 56.2 MoM at March 2017 lows), while backlog of orders fell to 49.0 vs 54 and new export orders fell to 50.5 vs 53.5

·     The 30-year fixed mortgage rate for week ended today fell to 3.49% from 3.58%, its lowest level since October 2016 while the 15-year rate avg 3.00%, down from 3.06% a week earlier

 

Commodities

·     Oil prices fell from their intraday highs to finish nearly flat, with WTI crude up 4c at $56.30 per barrel (off earlier highs $57.76), while natural gas dips -0.4% to $2.44 mln btus after bearish weekly inventory data. Prices had jumped earlier following bullish inventory reports from the EIA, posting larger than expected weekly drawdowns, but wasn’t enough to hold those gains. The Energy Information Administration reported a 4.8M-barrel drawdown in U.S. supplies vs. est. of 2M draw. Prices also benefitted from plans for U.S.-China trade talks next month.

·     Gold prices retreated in a big way on Thursday, as December gold fell -$34.90 or 2.2% to settle at $1,525.50 an ounce, its biggest one day loss in roughly 3-years (Nov ’16) as gold pulled back from 6-year highs with investors booking profits amid easing global macro concerns (Hong Kong) and news of a new trade meeting scheduled between the US and China next month. Note gold has jumped about 20% this year amid fears of a deceleration in global economic growth and encouraged interest rate cuts by major central banks around the world.

 

Currencies

·     The U.S. dollar index with a nice bounce off morning lows (98.085), paring losses to flat around the 98.40 level, having pared losses vs. the euro and Canadian dollar. The dollar had touched fresh 2-year highs earlier this week, helped by a rebound in U.S. economic data the last few days and signs the trade tensions with China and the U.S. may be improving as they schedule a new date in October to talk things over. The dollar rose against the safe-haven Japanese yen (back above the 107 level) to its best level since early August as investors rotate into riskier assets. The British Pound rises a third day, well off recent October 2016 lows below the 1.20 level Tuesday, having topped $1.23 after UK PM Boris Johnson lost control of Brexit after MPs paved the way to force an extension to the October 31 deadline. Things could change in a flash, of course, and there remains concerns that the U.S. and major European economies are heading toward recession, and the Chinese economy is slowing as well.

 

Bond Market

·     Treasury yields spiked across the board as prices dropped following strong economic data (potentially lessens aggressive stance to cut rates by the Fed), and better trade news (prompting stocks to rally), as the 10-year yield rises to highs of 1.58%, up 11bps before paring gains and more than 2 bps above the 2-yr yield of 1.54% (off 1.57% highs), marking the 3rd straight day the yield curve was not inverted. Global bond yields also bouncing as stocks surge on trade hopes, with the German 30-year yield turning positive for the first time in a month – helped unwind the growing fears of a recession.

 

 

Macro

Up/Down

Last

WTI Crude

0.04

56.30

Brent

0.25

60.95

Gold

-34.90

1,525.50

EUR/USD

0.0003

1.1039

JPY/USD

0.54

106.93

10-Year Note

0.098

1.563%

 

 

Sector News Breakdown

Consumer

·     Retailers; SIG shares jump after topping sales and profit estimates, with comp sales falling (-1.5%), better than the (-3.1%) est. loss with positive comps at Zale’s (+2.0%) and Piercing Pagoda (+11.4%) offset in part negative comps at Kay (-2.7%), Jared (-3.5%), James Allen (-1.5%) and Peoples (-0.9%)/guidance better as sees year EPS $2.91-$3.23 on sales $6.0B-$6.3B vs. est. $2.90/$6.01B; KIRK shares plunge after the company said it expects to report a loss for the year between $1.25 a share and $1.50 a share (in June, it said it was expecting net income to be between flat to 15c for the year)/also reported a wider net loss on an adjusted basis; TSCO and TTC announced a new long-term strategic partnership; GIII shares rebound despite mixed Q2 results (EPS beat/sales miss) and lower guidance (cuts year EPS view by a dime but ups sales view), having slipped after two analyst downgrades earlier this week

·     Consumer Staples; COTY shares active after insider buying as CEO Laubies Pierre (262K), Director Robert Singer (35K), Director Olivier Goudert (50K) and Director Peter Harf (1.051M) all buy shares; CVGW Q3 EPS of 91c beat by 4c on better revs of $359.3M and a 12% YoY increase in Q3 operating income; CHD shares slide after short-seller Spruce Point Capital issued a strong sell rating with 35%-50% downside risk

·     Restaurants; PZZA upgraded to outperform with $56 tgt at Credit Suisse amid increased confidence in the trajectory of the turnaround following PZZA’s appointment of former Arby’s President, Rob Lynch, as CEO last week; NDLS said that Executive Chairman Paul JB Murphy III is resigning from the company to accept another opportunity within the restaurant industry; BLMN upgraded to market perform at BMO Capital saying renewed potential for strategic changes at the company could mute the impact of industry fundamentals

·     Housing & Building Products; HOFT said Q2 profit was lower citing the decline in business to the impact of tariffs for imported goods from China and weaker retail demand; HOME shares plunged after lower guidance as cuts FY20 comp sales view to down 1.5% to up 0.5% from down 1% to up 1%, despite slightly better EPS and comps for Q2/said inventory has risen 32% compared with 19% rise in Q2 rev, which could pressure its gross margin in Q3; BBBY said will announce new CEO in coming weeks and said it expects to reduce inventory up to $1 bln over next 18 months and have a "rapid refresh" of more than 160 stores ahead of holiday season; GMS plunged well below the 6.83M secondary that priced at $27.20; LL shares extend yesterday’s rally, up another 17% (rose over 8% yesterday) after headlines Tuesday founder Tom Sullivan boosted his stake to 7.7% from 6% prior and said was in talks with PE/banks on buying

·     Casino & Leisure movers; Buffalo Wild Wings and MGM announce a ground-breaking sports betting pact as the partnership will deliver sports gaming experiences at a national scale inside Buffalo Wild Wings through MGM’s BetMGM digital gaming platform

 

Energy

·     Inventory data: overnight the API reported that U.S. crude supplies rose by 401,000 barrels for the week ended Aug. 30, showed a stockpile decline of 877,000 barrels in gasoline, while distillate supplies fell by 1.2 million barrels. The EIA with bullish data as EIA said crude stockpiles fell -4.77M barrels vs. est. draw -2.00M; gasoline fell -2.396M barrel vs. est. draw -1.75M barrels and distillates fell -2.538M barrels vs. est. build of 400k barrels – bullish data for energy

·     Stock movers; RDSA was downgraded to market perform at Cowen and cut tgt to $60 from $69 and lower ests due to peer high relative exposure to international gas which they expect to be lower for longer and a subpar financial framework; OXY initiated positive and $55 tgt at Susquehanna underpinned by view that there’s upside to the capital efficiency implied in OXY’s longer-term production/capex targets as the APC assets are fully integrated

·     Equipment movers; NOV was upgraded to buy at Jefferies saying outlook includes backlog-based growth potential and less margin risk, even with macro uncertainty; HP cut its capital expenditure forecast for the full year to $485M-$495M from $500M-$530M and sees 2020 capital expenditure about $300M/expects to exit quarter at low end of its previously guided range of 193-203 rigs

·     Coal, Utilities & Solar; in coal, BTU reaffirms FY guidance targets while sees cap-ex at the lower end of range and said sees Q3 results materially lower than Q2 hurt by falling demand for two different types of coal/also announces refinancing activities (ARCH, CEIX, HCC move in sympathy)

 

Financials

·     Bank movers; banks outperformed on the day, led by large cap (JPM, WFC, BAC, C) and regionals as Treasury yields spiked off recent multi-year lows and as global stock markets rebounded; in insurance; PRU to pay $2.35 billion for an online startup Assurance IQ, confirming prior reports by the WSJ while the company also announces a $500M buyback plan

·     Consumer finance and lending; GDOT was downgraded to hold from buy at Jefferies and cut tgt to $32 from $62 saying although the P/E multiple has traded to a level below the LT average, organic revenue growth has been slowing and it is trying to establish share in a new customer target market with well-resourced competitors; FISV and FIS both upgraded to overweight at KeyBanc as believes eCom and B2B initiatives could upscale growth and drive a positive re-rating

·     REITs; Deutsche Bank upgraded FRT to buy from hold and boosts price target to $141 from $134 while downgraded BRX to hold from buy and trims price target to $19 from $20 in large REIT call saying they overall remain well positioned with stable to improving operating metrics supported by a favorable, albeit increasingly fragile, macro backdrop.

 

Healthcare

·     Pharma movers; MNK shares plunge on reports they hired a consultant and law firm to help explore options to absorb potential costs from lawsuits tied to the sales of opioids (shares of specialty pharma names (TEVA, ENDP, MYL) and drug distributors (ABC, CAH, MCK) moved in reaction as well; BMY said a phase III CheckMate-548 trial evaluating the addition of Opdivo to temozolomide and radiation therapy did not meet one of its primary endpoints, progression-free survival in patients with newly diagnosed glioblastoma multiforme; in cannabis space, CRON was upgraded to market perform at BMO Capital following recent stock decline as it is now trading largely in line with valuations of other large, publicly-traded cannabis producers; ACRS said it will restructure its operations, including a reduction in headcount of 86 positions

·     Biotech movers; GBT shares rose after the FDA accepted its marketing application seeking approval of voxelotor for the treatment of sickle cell disease (SCD)/agency’s action date under Priority Review status is February 26, 2020; LVGO shares drop in first earnings report as public company despite reporting a narrower-than-expected quarterly loss

·     Medical equipment and devices; ATRC shares slipped on a negative short call from Culper Research that as open-heart procedures are being replaced by less-invasive procedures, ATRC’s Open segment is under structural pressure

·     Healthcare services and providers; ANTM shares pressured after presentation this morning at Wells conference, as the managed care provider reiterated the company’s outlook for its medical cost ratio of 86.2 – 86.5%, up from 84.2% in 2018 and in line with 2017’s 86.4%

 

Industrials & Materials

·     Industrial & Machinery; CMI, PCAR, NAV shares active after Class 8 truck orders were modestly above last month but remained the weakest segment. August Class 8 orders of 10,900 plunged 79% yr/yr, increased 6% from July’s subdued 10,299 orders while total Class 5-7 orders were 18,800 units and decreased by 22% y/y; REVG shares dropped after Q3 results missed, margins declined -175 bps to 11.6% and op margins fell over 200 bps while cutting its outlook

·     Aerospace & Defense; AVAV shares rise as reported Q1 revs $86.9M above consensus as double-digit topline performance was lifted almost exclusively by robust small UAS sales, which more than offset a sharp decline in TMS performance

·     Metals & Materials; precious metal prices plunge as gold dropped over 2%, off 6-year highs for gold and taking miners lower amid rotation out of defensive assets (AEM, AUY, NEM, GOLD among those getting hit the hardest early); copper prices rise amid renewed optimism for trade progress between the U.S. and China, bringing the metal’s two-day gain above 4% and extending its rebound from yesterday after hitting a new multi-year low earlier in the week (FCX, SCCO);

 

Technology, Media & Telecom

·     Semiconductors jumped as much as 4% for the Philly semi index (SOX) as the political protests in Hong Kong were tempered and the US/China announce an October meeting to work on trade again – the SOX traded as high as 1,5683 – not far from its all-time highs of 1,625 late July (bottomed just above 1,400 early August) – group was broadly higher

·     Software movers; CLDR shares jump following an ~8% beat on revenue ($196.7M vs. $182.3M cons.), primarily attributed to improved sales execution and renewals and ARR of $682M, up 16% YoY, down from 21% last quarter, but well ahead of guidance of 10-12%; WORK shares plunge in its 1st report as a public company as expects slowing revenue growth in the second half, but posted a $3.7M revenue beat, as revenue increased to $145M on growth of 58% y/y – but was partially tempered by $8M in one-time customer credits due to the SLA slipping below 99.99% during outages witnessed in June and July according to KeyBanc; SMAR posted solid 2Q results, despite services deceleration contributing to a smaller beat and guidance raise than usual, while subscription rev growth was roughly consistent with 1Q, while service revs decelerated substantially; PANW reported Q4 earnings results that topped views and hosted an analyst day/shares fell initially on weaker Q1 guidance (EPS of $1.02-$1.04 vs. est. $1.33) but also provided three-year guidance that suggested long-term growth will be ahead of consensus; TNAV shares dropped after GM announced that it will introduce new in-vehicle technology, with Google’s voice assistant, navigation and app ecosystem

·     In software research, HUBS was upgraded to outperform from sector perform at RBC and raised its tgt to $230 from $187; VMW was upgraded to neutral from sell at Goldman Sachs with $152 tgt saying the recent pullback in shares back in the share price has reset investor expectations around the company’s growth trajectory; ATVI was upgraded to overweight at Stephens with a new tgt of $65 citing the improving outlook with recent content updates and the fall catalysts right around the corner (BMO upgraded yesterday); CLDR upgraded at JMP Securities after the company reported F2Q20 results that were much improved compared to F1Q20; DT shares dropped after its results while MDB also dropped despite strong quarterly results

·     Media & Telecom movers; CMCSA was upgraded to Outperform from Perform at Oppenheimer with a $54 price target saying the company’s fundamentals are healthy in the near-term, and 2020 is setting up to be a strong year; MTCH was upgraded to buy from hold at SunTrust with a $106 tgt, while shares got sidetracked early on reports FB launches Facebook Dating in the US (which also pressured IAC shares); MDP shares plunged after quarterly results as revs fell YoY, though topped consensus while guidance for the year fell well short of consensus views

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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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