Mid-Morning Look

Tuesday, June 04, 2019

U.S. equities are getting a boost amid several market developments, but the fact the Fed appears to be getting more dovish on rates, raising expectations for one maybe two cuts by the end of 2019, has stocks bouncing off recent lows (while Treasury yields sink and the dollar falls further from last week’s 2019 highs). Also helping is a rebound in large cap tech stocks after the “FAANG” index plunged yesterday following a federal government crackdown targeting them (GOOGL, FB, AMZN, AAPL). Three factors helping bounce global stocks: 1) Mexican President Andres Manuel Lopez Obrador said “I think that tomorrow’s meeting will be very important and an agreement will be reached before June 10, before tariffs go into effect,” 2) China Commerce Ministry said this morning that the differences and frictions between China and the U.S. should be resolved through dialogue and negotiations, and 3) the Fed’s more dovish as: Evans echoed comments from the Fed’s Bullard yesterday (suggesting rate cuts) saying “markets seem to be seeing something that we’re not seeing as quickly,” in a CNBC interview. “We need to pay attention to that,” he adds. Fed Chairman Powell provided the latest boost to stocks after saying in his speech at the Fed conference (that mostly focused on long-term policy issues), that the Fed is closely monitoring the impact of trade developments and will act appropriately to sustain expansion. For the time being, an oversold bounce taking shape after several weeks of stock market declines (Dow with 6-week losing streak into today/S&P and NASDAQ 4-week losing streaks).

Treasuries, Currencies and Commodities

·     In currency markets, the dollar sinking from last week’s 2019 highs, moving lower as recent Fed officials (Bullard yesterday, with Evans and Powell today) becoming more dovish and hinting that Fed rate cuts could be possible, as the Fed monitors the ongoing trade development impact. The Pound rises above the 1.27 level vs. the dollar while the euro holds yesterday gains. Gold prices pulling back only slightly given the move into riskier stocks (though the weak dollar provides some support), while oil sliding into inventory data tonight/tomorrow. Treasury market’s down for the first time in a week as yields bounce off nearly 2-year lows.

Economic Data

·     Fairly quiet with Factory Orders for April falling (-0.8%) vs. est. down (-1%) while March revised to down (-1.3%). Durable Goods orders for April-F was down (-2.1%) and Durable Good ex: transportation was unchanged

Sector Movers Today

·     Industrial & Machinery; CIR shares active after CR said it remains firmly committed to pursuing its proposal to acquire CIRCOR after its initial bid was rejected; NAV shares rallied early as quarterly sales beat, and raises 2019 sales and EBITDA projections/adjusted net income for the second quarter grew 57% to $105M vs. $67M in the same period one year ago; CAT tgt was cut to $115 from $125 at UBS saying their sell thesis is predicated on expectation that a 2020 EPS decline (now -15%, was -8% vs. consensus +6%), is not priced in; MMM was removed from short-term sell idea list at Deutsche Bank after the 23% drop from late March on lower guidance

·     Transports; DAL reported May traffic rose 7% and capacity was up 5.3%, helping boost the beaten up airline sector (AAL, HA, UAL); Dow Transports outperform moving closer to the 10K level (recent low was 9,715.20 just yesterday)

·     Software movers; CRM expected to report earnings tonight after the close; TTWO was upgraded to market perform at BMO Capital saying with the threat of an economic downturn they believe video game stocks will be increasingly seen as safe havens for investors; COUP posted a $7.5M revenue beat and $17M FY20 revenue raise driven by broad-based strength that contributed to accelerating billings growth at 44% TTM vs. 41% TTM last quarter

·     Retailers; TIF posted a mixed Q1 as EPS beat on slight revs miss ($1.03/$1B vs. est. $1.02/$1.02B) while comp sales miss as Q1 comps sales ex-FX fell (-2%) vs. est. (-1.2%) and cut its FY outlook to up low-to-single-digit percent, down from prior view of up mid-single-digit percent citing lower spending by tourists worldwide for missing estimates for quarterly same-store sales; LE reported a narrower Q1 EPS loss of (21c) vs. est. (30c) on higher revs of $262.4M though Q2 guidance fell short of consensus; KSS was downgraded to neutral at Atlantic Securities

·     Restaurants; CBRL Q3 earnings topped consensus by 2c on better revs while reaffirming its year outlook and announced a $50M share buyback plan; WING was upgraded to buy at Stifel and raised tgt to $92 from $80 based on view system sales growth will remain in the mid- to high-teens for the foreseeable future

Stock GAINERS

·     CIR +2% after CR said it remains firmly committed to pursuing its proposal to acquire CIRCOR after its initial bid was rejected

·     CLR +11%; reiterated 2019 guidance for volumes, capex, and costs, and introducing a 20c dividend and $1B share buyback program, while reiterating its year-end net debt target of $5B

·     COUP +1%; posted a $7.5M revenue beat and $17M FY20 revenue raise driven by broad-based strength that contributed to accelerating billings growth at 44% TTM vs. 41% TTM last quarter

·     CVS +3%; said it would offer expanded health services such as nutrition counseling and blood pressure screenings in 1,500 stores by the end of 2021, while forecast adj EPS of over $7 in 2020, and reiterated 2019 profit and sales forecast

·     HAS +5%; as toy makers among the top gainers in the S&P 500 today (MAT shares also higher)

·     LYB +4%; as ended its pursuit of Braskem SA after failing to agree to terms with the Brazilian chemical maker’s controlling shareholder (Braskem shares plunged)

·     MRTX +6%; upgraded to buy at Citigroup with $132 tgt while SunTrust raised tgt to $120 from $85 saying the side effect profile and response to the treatment’s lowest dose in AMGN’s AMG 510 are positive for Mirati’s MRTX849

·     NAV +7%; as quarterly sales beat, and raises 2019 sales and EBITDA projections

Stock LAGGARDS

·     BOX -9%; as Q1 revenue and EPS came in ahead of estimates, but billings, expansion rate, and retention rate all materially decelerated while cuts FY20 revenue view to $688M-$692M from $700M-$704M (est. $701.9M) while raising year EPS (downgraded at Canaccord)

·     CMS -1%; defensive utilities pare recent record highs as investors rotate back into riskier names

·     CRM -1%; underperform in software space ahead of earnings tonight (down 4 of last 5 days) – recall yesterday JPM removed from its focus list to reflect 15-year high valuations

·     FB -1%; extends yesterday losses, falling down to its 200-day moving average level of $161.30 a day after reports the FTC is said to open competition probe of Facebook practices

·     TIF %; reversed earlier losses of more than 3% to trade higher despite comp sales miss as Q1 comps sales ex-FX fell (-2%) vs. est. (-1.2%) and cut its FY outlook to up low-to-single-digit percent, down from prior view of up mid-single-digit percent

·     VTR -2%; as 11M share Spot Secondary priced at $62.75, while defensive REITs generally lower after recent advance amid plunge in rates (WELL, HCP, EQIX, DLR also lower)