Closing Recap

Tuesday, June 11, 2019

Equity Market Recap

·     U.S. stocks erased their earlier gains, sliding throughout the trading session as markets felt “heavy” and “tired” after rallying over 6% during the last week on rising expectations for lower interest rates and improved trade situations with Mexico (averting tariffs). Meanwhile, markets remain hopeful a trade deal can be reached during the G-20 meeting this month between the U.S. and Beijing…though Trump said he would impose more tariffs on Chinese imports if there was no progress in talks with Chinese President Xi Jinping at the G20 summit. Stocks leaked lower all day amid a slew of lackluster economic data, weaker trading revenue commentary from major banks (MS, C, and STT) at an investor conference, while industrials overall lagged led by declines in UTX and RTN after their mega-merger announcement yesterday was met with mixed signals by President Trump. Inflation data (PPI) was in-line with economist expectations ahead of tomorrow’s consumer prices report. Metals and Materials got a boost overnight after China said it would ease restrictions on the spending of proceeds from special bond sales and encourage banks to offer loans to projects funded by such debt. Right now, stocks remain boosted by lower rate hopes with markets betting on an interest rate cut in July and possibly two more this year.

Economic Data

·     PPI data for May mostly in-line across the board: Producer Price Index (PPI) Final MoM for May in-line at 0.1% vs. est. 0.1%; PPI Ex: Food & Energy (core) MoM for May at 0.2% (in-line) vs. est. 0.2%; PPI Ex: Food & Energy (core) YoY for May in-line at 2.3% vs. est. 2.3%; Producer Price Index (PPI) Final YoY for May at 1.8%, below the est. 2.0%

Commodities

·     Oil prices end the day flat ahead of weekly inventory data (API tonight and EIA tomorrow), with WTI crude settling at $53.27 per barrel (off highs $54.04 and vs. lows $52.96). Prices got a boost early after China’s latest stimulus measures were seen to allay growth fears, lifting commodity names. U.S. weekly crude stockpiles are expected to decline by -1.25M barrels in the latest week, which would be the biggest decline since early May if actual.

·     August gold erases earlier losses to settle higher at $1,331.20 an ounce, rising $1.90 on the day (off earlier lows of around $1,320 an ounce), getting a boost as stocks slipped midday (erasing early gains) with investors rotating back into defensive assets (Treasury prices, gold and the Japanese yen, all seen as safe-haven assets, rallied late day).

Currencies

·     The U.S. dollar slipped mid-afternoon to its worst levels intraday, but still overall just a modest decline, with the dollar index (DXY) down more than 150 bps from 2019 highs on 5/23 of 98.37. The dollar erased earlier gains vs. the yen to trade flattish around 108.50 (down from earlier highs of 108.80) – yen rallies as stocks slip this afternoon, rotation back into safe-havens. The euro holds gains after rising to its best level since late March yesterday on weaker economic data, while the pound was higher vs. the buck

Bond Market

·     Treasury market’s slipped initially after in-line producer price (PPI) monthly data, pushing the yield on the benchmark 10-year to highs of 2.175%, but pulled back below yesterday’s closing levels around 2.15% as stocks erased early gains; the yield on the 2-year was up above 1.924%; the U.S. Treasury sold $38B at a yield of 1.861% compared to the W/I yield 1.867% ahead of $38B auction, with the bid-to-cover at 2.62 vs. prior 2.48 and indirect bidders awarded 56.6% of the notes and 13.4% to directs.

Sector News Breakdown

Consumer

·     Retailers; CROX said it does not anticipate that the expanded U.S. tariffs on footwear imports from China, if enacted, will have a material adverse impact to be about $5M, assuming a 25% tariff takes effect on August 1/continues multi-year effort to reduce sourcing from China; ASNA posted a smaller than expected Q3 EPS loss, but revs misses ($1.27B vs. $1.43B est.) and guided Q4 sales below; DLTR was upgraded to overweight at JPMorgan saying top-line and margin builds across banners support an inflection to high-single net income growth and low-double-digit consolidated EPS growth beyond FY19; CHS Q1 comp-store sales slide below estimates, down (7%) vs. est. (6.6%) drop citing poor performance at its White House Black Market chain while revises FY19 total net sales view to down low-to mid-single digits; LULU earnings tomorrow

·     Auto’s; TSLA is set to hold its annual shareholder meeting on Tuesday starting at 5:30 PM EST; in ride hailing space, LYFT was upgraded to positive at Susquehanna citing the potential of the ridesharing industry and said the stock should benefit from easing competitive dynamics with UBER; TM and SoftBank push forward with autonomous JV as self-driving car startup Monet plans to begin operating in Southeast Asia next year

·     Consumer Staples; BYND was downgraded to neutral from overweight at JPMorgan after shares surge over 570% since IPO (while raises tgt to $120 from $97) though says their above-the-Street estimates remain unchanged; CL tgt was raised to a street high $82 at Argus and raising their financial strength rating on Colgate by one level to Medium-High on dividend strength; FIZZ shares fell as much as 10% after Business Insider reported the company is facing a new lawsuit that claims the president of its parent company, National Beverage, planned to falsely state in April that its sparkling water cans were free of the toxic chemical Bisphenol A (company responded to Bloomberg saying all LaCroix beverages now produced in cans without BPA liners

·     Restaurants; DENN was downgraded to hold at Maxim citing valuation; MCD tgt was raised to $203 from $185 at UBS citing further confidence in US comp sustainability; CMG tgt was raised to $650 from $635 at Maxim and raise ests as potential tariffs on key food ingredients from Mexico were averted

·     Housing & Building Products; HDS shares slipped as guides 2Q below/sees EBITDA $240-255M vs. est. $265M and sees 2Q EPS $1.04-1.12 below est. $1.18; LOVE fell on mixed Q1 results as posted a greater EPS loss of (67c), while revs of $41M was slightly above estimates and growth in marketing spend was +22.3% YoY/gross margins decreased 340 basis points to 51.3% in qtr, primarily driven by 10% tariffs by U.S. on Chinese goods; MLM, VMC and USCR shares were all down sharply on the day amid broad weakness in building material stocks – last week cautious comment by Cleveland Research calling qtrs ‘disappointing’ for both companies

·     Casino & Leisure movers; Morgan Stanley raised its tgt price on MGP, VICI and GLPI saying as the mkt looks for defensive ideas, they say gaming REITs look attractive; RRR was upgraded to buy at Goldman Sachs with 35% total return potential as they see potential for a successful Palms ramp and FCF inflection in 2020 to drive a sustained re-rating; BYD positive mention at JPMorgan saying they are reaffirming their Overweight rating and see the risk-reward as compelling at current levels; in cruise industry, JPMorgan lowered 2019/20 estimates for RCL and NCLH for the disruption and lost sales associated with the change to U.S. travel restrictions to Cuba

Financials

·     Banks got a bounce early after Treasury yields extended bounce off multi-year lows (10-year yield touched highs around 2.175% earlier, off last week lows around 2.06%); strength in regional banks early (RF, HBAN, CMA, KEY); trust banks came under pressure midday after STT said at Morgan Stanley conference that it sees fees revs down 1%-2% in Q2 (comments also hit BK and NTRS shares) and said sees Q2 NII to fall 8% QOQ due to turn in rates; MS CEO Gorman said at a conference today that he would be “very surprised” if this quarter’s trading revenue surpasses the first-quarter figure; Citi (C) CFO said slowdown in market activity has persisted through most of Q2 and expects trading revenue to be down mid-single digits – the weaker trading revenue and lower fee comments at the conference today pressured banks late

·     Financial Services; HRB agreed to buy financial solutions platform Wave Financial for $405M, boosted its quarterly dividend by 4% to 26c and reported better-than-expected Q4 results helped by increased U.S. DIY tax preparation fees; CBOE was downgraded at Raymond James citing valuation and that the recent boost to volumes from increased market volatility was short-lived; MFIN will be added to the Russell 3000 Index at the conclusion of the 2019 Russell indexes annual reconstitution, according to a preliminary list of additions

·     REITs; several sell-side analysts with rating changes in REITs today: KeyBanc upgraded the self-storage sector to sector weight from underweight, raising the rating on both LSI (to overweight) citing valuation/YTD underperformance and upped PSA to sector weight on expectation for growth to remain steadier than he previously expected; Citigroup downgraded AMH to neutral; Bank America with several changes as upgraded both KIM and VER to buy while downgraded BDN to underperform from neutral; Bank America also upgraded EPRT to buy from underperform as sees to have outsize earnings and dividend growth relative to peers while downgraded EPR to underperform from neutral with an unchanged PT of $20

·     Asset managers; BEN reports Assets Under Management (AUM) $695.0B as of May 31 vs. $720.5B last month; said the decrease in assets under management was attributable to market declines and modest net outflows; CNS reported preliminary assets under management of $62.9B as of May 31, 2019, a decrease of $171M from April 30, 2019

Healthcare

·     Pharma movers; MRK said the FDA has approved two new indications for Keytruda for head and neck cancer; RHHBY said U.S. regulators approved its antibody drug conjugate Polivy, mixed with other medicines including Rituxan, for relapsed diffuse large B-cell lymphoma; ZYNE said the USPTO has issued it Patent No. 10,314,792, titled “Treatment of Autism Spectrum Disorder with Cannabidiol” which includes claims directed to methods of treating autism spectrum disorder; VVUS launched an e-medicine platform that will enable patients with a prescription for Qsymia capsules CIV to purchase the medication online; JNJ said diabetes drug Invokana significantly reduced the risk of major cardiovascular events and kidney failure in patients with type 2 diabetes and chronic kidney disease, in a late-stage study

·     Biotech movers; CBAY shares dropped more than 50% after reporting early data from ongoing mid-stage study testing three doses of its experimental drug Seladelpar for fatty liver disease nonalcoholic steatohepatitis (all three doses -10 mg, 20 mg and 50 mg -of seladelpar failed to outperform placebo in terms of the relative or absolute change in liver fat content (LFC) from baseline) – shares of other NASH drug developers include VKTX, MDGL, GNFT, ICPT; QURE shares dropped over 10% midday, falling from recent 52-week highs on no specific news

·     Services, medical equipment and devices; a federal judge appears to be nearing a surprise move to block CVS $69 billion acquisition of Aetna, according to sources close to the health-industry giants, the NY Post reported. US District Richard Leon, who warned lawyers at a little-noticed hearing last week that they may want to cancel their summer vacation plans — looks like he is setting the stage to reject the mega-merger on concerns that it could raise prices https://nyp.st/2WB56c3 ; MOTS rises after saying it received 510(k) clearance for its second-generation system Pure-Vu GEN2 system; ZBH was upgraded to outperform at Bernstein saying the risk/reward is balanced at current share levels

Industrials & Materials

·     Industrial & Machinery; lighting stocks AYI, HUBB, VECO among names active after comp CREE lowered its Q4 revenue outlooks following the U.S. ban on Huawei and softer-than-expected demand for LED products; UTX was the worst performer in the Dow Industrials, a day after agreeing to merge with RTN in big M&A deal

·     Transports; JBLU was upgraded to buy at Citigroup and move tgt to $26 from $19.50 saying short-term, with fuel prices down sharply and unit revenue (RASM) looking healthy, near term EPS estimates are likely headed higher. The Dow Transport index rose more than 90 points to 10,339 highs (100-day MA higher at 10,400 and 200-day at 10,432), before fading late morning

·     Metals & Materials; metals sector outperforms after China’s latest stimulus measures helps allay fears over the growth environment; FCX gets a boost as mgmt purchased shares, as the CFO purchased 50,000 shares of 6/7, which followed a recent purchase of 172,000 shares by the CEO Adkerson the day prior; in chemicals, POL rises after it boosted its Q2 EPS outlook to 72c-74c from prior view (and est.) of 68c with positive commentary around Europe and China; in its monthly WASDE report, the USDA predicted the lowest domestic corn crop in four years in its first estimates to account for relentless rains that delayed planting across the Midwest

Technology, Media & Telecom

·     Semiconductors; CREE cut its forecast for Q4 following the U.S. ban on Huawei and softer-than-expected demand for LED products (sees Q4 revs $245M-$252M down from prior view $263M-$271M and sees LED Products revenue is expected to be between $113M-$117M – sees EPS 8c-12c, down from prior view 12c-16c); ACLS cut its Q2 revenue outlook to $75M from $80M prior (below est. $80.1M) saying a shipment to a Chinese customer was pushed out; AVGO landed a two-year deal with AAPL to supply radio-frequency components for smartphones, tablets and smartwatches

·     Internet; GRUB shares rallied after GeekWire reported on Tuesday that Amazon plans to close down its Amazon Restaurants food delivery service in the U.S. later this month (which was first launched in Seattle back in 2015 as a food-home delivery service for Amazon Prime members; FB was upgraded to buy from neutral with a $210 price target at MoffettNathanson citing improving underlying fundamentals and new growth opportunities, which can offset regulatory risks; The Justice Department’s antitrust chief argued big tech (AMZN, GOOGL) are "digital gatekeepers" that may struggle to defend themselves by arguing their products are free

·     Software movers; SYMC was downgraded to underweight at Morgan Stanley and cut its target from $23 to $14 saying increased competition and management turnover represent risks to Symantec’s turnaround/also said survey shows Symantec losing share in endpoint security/web security markets; overall software group surged yesterday in reaction to the over $15B deal as CRM acquired DATA

·     Media & Telecom movers; TGNA entered into a definitive agreement with the Dispatch Broadcast Group to acquire, for $535 million in cash, leading television stations WTHR, the NBC affiliate; MSGN shares were under pressure – possibly related to the injury from NBA superstar Kevin Durant last night – (hopes the free agent would come to the Knicks next year)