Market Review: September 16, 2019

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Closing Recap

Monday, September 16, 2019

Index

Up/Down

%

Last

DJ Industrials

-143.52

0.53%

27,076

S&P 500

-9.44

0.31%

2,997

Nasdaq

-23.17

0.28%

8,153

Russell 2000

6.37

0.40%

1,584


 

Equity Market Recap

·     Global stocks slid as energy stocks/oil prices rose along with a rally in havens following an attack on Saudi oil facilities this weekend that temporarily knocked 5.7 MMbpd of production offline as Saudi Aramco said the attack cut 50% of its oil production which represents 5% of global output. With today’s decline, the Dow Industrial Average fell for the first time in nine sessions, while the SmallCap Russell 2000 benefited from spikes in shares of SMID energy stocks. Oil prices jumped the most in over a decade on the lower output/market disruption and fears the U.S. government may respond against Iran. Outside of the oil news (which dominated headlines all weekend and Monday), Empire Manufacturing data missed estimates led by a decline in cap-ex plans, which saw its third largest monthly drop on record (since 2001) according to Bespoke. The oil news today has overshadowed the expected top story of the week, which is the FOMC interest rate meeting that takes place Wednesday, where a rate cut is likely currently baked into markets, especially after the recent moves by other central banks last week (ECB cut their deposit rate by 10 basis points to -0.50% while also saying QE will be restarted on Nov. 1 to the tune of €20B per month). Treasury yields slipped for the first day in nine as yields pull from 5-week highs, gold prices jumped nearly 1% and the dollar was broadly higher. Transportation stocks, specifically airlines and truckers (AAL, UAL, DAL) sunk on the spike in fuel costs.

·     Oil news: the Yemeni based Houthi rebels took responsibility for attacks on an oil processing facility servicing the Ghawar Field and others and also attacks on the Khurais oil field as well in Saudi Arabia with drones on Saturday, temporarily knocking 5.7 MMbpd of production offline. However, the U.S. says that evidence suggests that Iran is behind the attacks. Saudi Aramco’s CEO said that one-third of the oil output will be restored by the end of the day on Monday and other reports say full production restoration may take several weeks. U.S. President Donald Trump authorized the release of oil from the nation’s emergency reserves after a series of drone attacks in Saudi Arabia knocked out half its crude output, or about 5% of world supplies.

·     Also not helping markets, S&P Dow Jones Indices said that preliminary Q2 2019 S&P 500 stock buybacks, or share repurchases, were $164.5 billion. This was the second consecutive quarterly decline after four consecutive quarters of record buybacks. Q2 2019 buybacks were 20.1% lower than Q1 2019’s $205.6 billion, 13.7% lower year-over-year from Q2 2018’s $190.6 billion, and 26.2% lower than the Q4 2018 record expenditure of $223.0 billion.

 

Commodities

·     Oil prices posted its biggest one day gain since 2008, with WTI crude jumping $8.05 or about 15% to settle at $62.90 per barrel (off earlier highs of $63.38) as a fire at the Aramco facility in the eastern city of Abqaiq, Saudi Arabia Saturday, caused the worst disruption to world supplies on record (and cut 50% of the oil they produced). The attack on Saudi Arabia also shut 5% of global crude output as U.S. officials blamed Iran and President Donald Trump said Washington was "locked and loaded" to retaliate. Natural gas prices rose 2.5% to $2.68 mln btus.

·     December gold rose $12.00, or 0.8% to settle at $1,511.50 an ounce, its best settlement in about 10-days, rising on global macro fears and despite the broader jump in the dollar. Copper prices dropped the most in 6-weeks following weaker China industrial data overnight.

 

Currencies

·     The U.S. dollar was higher vs. most major and emerging market currencies, gaining strength ahead of the FOMC interest rate meeting later this week (9/18) as the euro fell to lows below the 1.10 level (down -0.65% and off overnight hi’s 1.1093) while the US dollar was only down slightly vs. the Canadian dollar (surprisingly) despite the surge in oil prices on the day; the dollar traded back above the 108 level vs. the yen, while the Pound fell over -0.6% to 1.2425 – the dollar perked up, largely on the back of safe-haven flows.

 

Bond Market

·     Treasury prices gained for the first time in nine-sessions for the 10-year, as the yield dropped 6 bps to 1.83% after touching 5-week highs on Friday around 1.90% (and well off the 1.427% lows just 2-weeks ago) and off earlier highs of above 1.87%. The increased geopolitical fears after Saudi oil fields were destroyed over the weekend raised caution for investors as well as positioning ahead of this Wednesday’s FOMC meeting where a rate cut is likely expected. The 2-year yield slipped 4 bps to 1.75% as the spread holds at about 8 bps with the 10-year.

 

Economic Data

·     Empire Manufacturing for September rose a slightly smaller than expected 2.0, below the 4.0 estimate and prior month at 4.8; the new orders index was 3.5 vs. 6.7 in August, while prices paid index 29.4 in September vs 23.2 in august and employment index at 9.7 vs. -1.6 MoM; the six-month business conditions index 13.7 in September vs 25.7 in August

 

 

Macro

Up/Down

Last

WTI Crude

8.05

62.90

Brent

8.80

69.02

Gold

12.00

1,511.50

EUR/USD

-0.0064

1.1010

JPY/USD

-0.06

108.03

10-Year Note

-0.057

1.836%

 

 

Sector News Breakdown

Consumer

·     Consumer/Leisure/Retailers; DKS was downgraded to market perform at Wells Fargo with shares up +25% year-to-date and hitting firm price target; TPR received a positive mention in Barron’s this weekend saying the stock’s recent weakness however, opens an opportunity; along with the sharp decline in transport prices given the big jump in oil prices, cruise lines also felt the pinch of higher fuel costs (CCL, RCL, NCLH)

·     Autos; GM shares fell after labor union United Auto Workers (UAW) went on strike Sunday midnight as U.S. labor contract talks reached an impasse on Sunday as about 48,000 hourly workers at co’s facilities were headed for the picket lines, union officials said; HSBC upgraded shares of both UBER and LYFT to buy saying sentiment has turned more sour on the stocks following large reported losses, regulatory headlines out of California and concerns around slowing growth, but feels those concerns are priced in; CARS upgraded to buy at Craig Hallum with $15 tgt as thinks shares are mostly de-risked following the massive selloff after the conclusion of the company’s strategic review.

 

Energy

·     Energy stocks surge across the board after Saturday’s drone attacks on 2 Saudi Arabia refineries that resulted in half of its output being shut (and also is responsible for roughly 5% of global production); reports were for a third of that production going back online today. Shares of large and SMID related energy names all leading markets to the upside: WLL, APA, HES, CHK, MRO, XOM, APA, DVN, HAL, SLB, PTEN, RIG, PXD, EOG, etc. – oil prices jumped after a coordinated drone attack hit the heart of Saudi Arabia’s oil industry, forcing them to cut its oil output in half.

·     Refiners; industry was pressured (VLO, DK, MPC, PBF) as RBC Capital said thinks the disruption of 5+ million barrels per day of Saudi oil supply is a clear negative for the US refiners – said the medium and heavy grades that Saudi produces are already in short supply, and a likely increase in oil prices could have a negative impact on demand given an already tenuous economic backdrop. A sudden spike in prices could also hurt retail margins for DK, MPC, PARR and PSX.

·     In research; Barclays upgraded SLB to overweight in the service sector and upped tgt to $50 as believes the company is firmly on the path to recovery, while downgraded HAL to EW as thinks SLB and BHGE are better positioned to defend against a flat NAM market; SunTrust upgraded CDEV to buy from hold as now forecast close to FCF neutrality at some point next year as the latest geopolitical events could cause WTI oil to remain $60+/bbl for months to come; KeyBanc upgraded shares of SM, JAG and CDEV saying they have an outsized benefit from the move higher in oil prices saying one of the most heavily shorted E&Ps (SM), is one of the oiliest E&Ps with oil cuts of 76% and 75% in 2H19 and 2020 (JAG) and is one of the oilier E&Ps with an oil cut of 56% in 2H19 and is completely unhedged (CDEV) respectively

·     In stock news; XOM said it made an oil discovery on the Stabroek Block offshore Guyana at the Tripletail-1 well in the Turbot area. The discovery adds to the previously announced estimated recoverable resource of more than 6 billion oil-equivalent barrels on the Stabroek Block; VNOM agrees to acquire Permian Basin mineral and royalty interests from Santa Elena Minerals for ~5.2M common units valued at $150M; SEMG shares soared after ET agreed to buy the company for $1.35B in a cash and stock deal, with holders to receive $17 per share that includes $6.80 in cash and 0.7275 of ET shares (with debt deal about $5B) https://on.mktw.net/2kC39dX

 

Financials

·     In research, JPM was downgraded to neutral at Buckingham after rally in shares; Raymond James downgraded BANC to market perform following the company’s announcement of a $35 million provision for loan losses and a $1.1 million swap charge related to one loan relationship that has been impacted by an alleged fraudulent scheme perpetrated by certain third parties

·     Monthly credit card data: COF reports August net charge-offs 4.18% vs. 4.25% last month and said August delinquencies 3.50% vs. 3.49% last month; JPM reports August net charge-offs 2.45% vs. 2.21% last month and August delinquencies 1.14% vs. 1.15% last month; SYF reported charge-offs for August of 3.90% and monthly delinquencies of 2.58%; ADS reported delinquencies for August of 5.6% and August charge-offs 5.7%; Citi (C) August NCO 2.62% vs. 2.91% last month and 30-plus day delinquencies 1.53% vs. 1.53% last month

·     REITs; Blackstone (BX) to acquire Dream Global REIT (DUNDF) in an-all cash transaction for C$16.79/unit, valuing transaction at C$6.2B (18.5% premium to the closing price of C$14.17 on Sept. 13, 2019); Morgan Stanley upgrades PSA to Equal Weight from Underweight after the company screened better than its closest peer in his deep dive analysis while downgraded EXR to underweight from Equal Weight

·     Brokers; ETFC said August 2019 darts 284,828 vs 254,021 in August 2018 while net new accounts for the month were 27,358 vs 46,636 same period last year; SCHW August core net new assets of $19.9B up 3% M/M from $19.3B in July and down 4% Y/Y from $20.8B/total client assets were a record $3.72T at the end of August, down 1% M/M and up 5% Y/Y/new brokerage accounts of 126K, down 2% M/M and 5% Y/Y

 

Healthcare

·     Pharma movers; AIMT won FDA Panel approval late Friday, as advisers to the FDA said there is adequate data showing that its Palforzia drug for peanut allergy works in children, voting in favor while 2 voted against the efficacy and also voted 8-1 in favor of safety approval (the FDA is expected to decide by late January whether to approve the therapy); the FDA designates AZN’s Farxiga (dapagliflozin) for Fast Track review for reducing the risk of cardiovascular (CV) death; ACB was downgraded to sell at Stifel saying the near-term outlook suggests downside to FY estimates for sales and core earnings; Purdue Pharma, the company that made billions selling the prescription painkiller OxyContin, filed for bankruptcy this morning

·     Biotech movers; ALDR spikes as Lundbeck bids for the company at $1.95B net of cash, with holders to receive $18 per share in cash plus one non-tradeable Contingent Value Right (CVR) for an additional $2 per share if migraine med eptinezumab is approved by the EMA https://bit.ly/2lRewie ; SGEN received FDA priority review for its antibody-drug conjugate enfortumab vedotin for urothelial cancer

·     Medical equipment and devices; ZBH announced 510(k) clearance from the FDA for the JuggerStitch meniscal repair device, which will now be available to the U.S. market

 

Industrials & Materials

·     Aerospace & Defense IRDM was awarded a seven-year $738.5M contract from the Defense Dept.; RTN was upgraded to overweight at JPMorgan as view RTN outperformance thus far in Sept as a sign of increasing investor confidence in the outlook for Raytheon and for the RTX combination, along with some mean reversion; NY Times reported this weekend BA’s full board of directors is expected to hear a report this week detailing structural corporate changes that can be made to improve the safety of its planes following two fatal crashes of its 737 Max planes; defense NOC, LMT up on the day as well on geopolitical uncertainty

·     Transports; airlines were the biggest drag in the index (which had been rallying over the last 2-weeks), pressured by the spike in oil prices/supply concerns (AAL, JBLU, UAL, LUV); in rails, KeyBanc upgraded both GBX, WAB to overweight from sector weight saying that the rail companies had a positive set-up given recent share-price declines; early strength in KEX, R, CAR and rails (NSC, CSX) helped offset the weakness in airlines and truckers on fuel cost fears

·     Materials; in steel, NUE guided Q3 EPS 75c-80c, below the estimate of $1.26 and well below last year comp of $2.13 saying expects Q3 performance in its steel mills segment to decrease compared to Q2 due primarily to lower prices for sheet and plate steel; WY agreed to sell its 555,000 acres of Michigan timberlands to Lyme Great Lakes Holding LLC, an affiliate of The Lyme Timber Company LP, for $300 million in cash; AXTA to acquire Capital Paints LLC, a UAE-based thermosetting powder coatings manufacturer specializing in architectural powder coatings (no terms disclosed)

 

Technology, Media & Telecom

·     Software movers; NEWR shares a drag on software after mgmt changes and updates guidance to the downside as affirms Q2 revenue outlook between $143M-$145M but lowers FY2020 revenue to be between $586M-$593M (+22% to +24% Y/Y), down from $600M-$607M; NET extends gains after rising 20% in its market debut on Friday

·     Hardware & Component news; HPQ was downgraded to neutral from buy at UBS saying it does not see printer supplies growing for the next 18 months/PC margin would likely decline greater than consensus as it would pass through the component price declines and move away from commercial

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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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