Friday, October 26, 2018
Equity Market Recap
· U.S. stocks close out another tough week with massive selling pressure late afternoon, capping what has been another week of extreme volatility. The Dow Industrials fell as much as -539 points at its low point, while the Nasdaq Comp underperformed, falling more than 3% at its worst. The S&P 500 index joined both the Nasdaq Composite and Russell 2000 in correction territory today, defined at down more than 10% from its record highs (S&P 500 record high 2,940.91 on 9/21, and Nasdaq record 8,133.29 on 8/30). Disappointing earnings and outlooks in the technology sector from AMZN, GOOGL, and WDC weighed heavily on sentiment, adding to already weaker outlooks from various industrial and materials this week. Energy stocks have underperformed as oil prices drop for a third straight week, while transports fell back below the 10,000 level (well off its 11,623 highs about 6-weeks ago). Defensive and safe-haven assets have rallied during this stretch, with gold prices rising a 4th straight week and bonds ending the week near their best levels, as yields fall to monthly lows. Markets got a midday bounce after reports that Federal authorities arrested a man in Florida in connection with the suspected explosive packages that have been sent to high-profile Democrats, alleviating market concerns for the time being, but that didn’t hold up. Macro factors remain such as slowing China growth, trade tariff impact and the problems in Europe with Italy and Brexit talks. Markets brace for the busiest week of earnings this quarter coming up, including tech bellwether Apple.
· The U.S. economy slowed a bit in Q3, as GDP posted a still solid 3.5% annual rate, down from the 4.2% rate in the prior three-month period, but came in above consensus views of 3.3%. Personal consumption rose 4.0% in 3Q after rising 3.8% prior quarter and topping views of up 3.3% (largest increase since 4Q 2014), while the GDP price index rose 1.7% in 3Q after rising 3.0% prior quarter (and was below the 2.1% est.). Core PCE q/q rose 1.6% in 3Q after rising 2.1% prior (es.t 1.8%)
· Michigan Sentiment for Oct-F fell to 98.6 from 100.1 last month and slightly below the 99 est.; the expectations index fell to 89.3 vs. 90.5 last month, while the current economic conditions index fell to 113.1 vs. 115.2 last month.
· Oil futures end higher; WTI crude with a nice reversal off earlier lows to settle at $67.59, up 26c on the day (off earlier lows of $66.20), thought still posted a weekly decline of 2.4%, its third straight week of declines. Global equities were under pressure fueled by concerns about the economy and energy demand as China reported slowing growth earlier in the week (GDP 6.5%). Meanwhile the market has been well-supplied due in large part to the surge in production from Saudi Arabia before the full effects of U.S. sanctions hit Iranian exports on Nov. 4th. Markets also witnessed a third straight week of rising U.S. supplies according to the EIA and API this week.
· Gold prices rose $3.40 or 0.3% to settle at $1,235.80 an ounce, ending the week higher by 0.6% (its fourth straight weekly rise), as investors rotated into defensive and safe haven assets throughout the week as stock collapsed. Gold prices getting a boost as market expectations are coming down that the FOMC may pull back the reigns on interest rate tightening given the latest stock market “tantrum” as well as several large cap industrials and materials citing rising tariffs for lowering outlooks, possibly crimping economic growth.
· The U.S. dollar fell broadly, dropping from near 52-week highs earlier (DXY touched 96.86) after mixed economic data (GDP for Q3 came in above expectations at 3.5%, but below the Q2 reading of 4.2%). Odds that the Fed raises rates in December still remains, but markets have pulled back expectations for early next year. The dollar fell below the 100-day MA against the yen for the first time since April (traded lows of 111.38 vs. 100-day 111.57) before moving back above the 112 level, while the euro and pound pared their weekly losses (still down-1% and -1.8% respectively), each falling on weaker EuroZone data and issues in Italy and with Brexit. The Chinese yuan has fallen against the dollar every day this week and keeps flirting with its lowest level in a decade.
· Treasury markets end the week near their best levels as yields fall from multi-week highs; the 10-year fell as low as 3.07% and 2-yr slips to 2.80% as stocks drop on the week (more than 3-week lows for bond yields as investors rotate into safe-haven assets and out of stocks). The yields are well off multi-year highs just a few weeks back of around 3.27% for the 10-year and above 2.90% for the 2-year. Mixed economic data today also not helping as GDP growth beat estimates, but fell from the prior quarter while sentiment for October also dropped.
Sector News Breakdown
· Retailers; AMZN dropped as much as 10% before paring losses after mixed results as EPS for Q3 beat, but revenue missed and provided lower than-expected forecasts for revenue and operating income in Q4; DECK upgraded at Susquehanna following earnings as posts Q3 beat and upbeat guidance; TSCOupgraded at Wedbush, Bank America and RBC Capital after earnings citing two straight quarters of comp and tick growth helping margins; BOOT shares kicked lower after miss; PSMT drops as CEO steps down and reports 6c EPS miss
· Autos were mixed with another round of negative guidance in the supplier space (follows weak guidance from VC, LEA and VNE yesterday; GT and ALV both reported Q3 results below analysts’ estimates and blamed the slowdown in China and Europe markets for the performance/ALV cut its guidance for 2018 revenue growth, citing impact from a new auto regulation in Europe
· Consumer Staples; in staples, CL shares fell after reporting its first drop in organic sales in more than a decade (in-line earnings), dealing with market volatility in Brazil and inventory reductions in China to currency swings and rising logistics costs
· Restaurants; CMG mixed Q3 as posted 3Q18 EPS of $2.16 topping the $2.02 consensus, though the +4.4% comp was below the +5.0% mean/posted stronger-than-expected restaurant level margin of 18.7%; JACK was downgraded to neutral at Wedbush and cut tgt to $80 from $115 as sees another lackluster quarterly comp on tap
· Housing & Building Products; flooring company MHK falls to 52-week lows as Q3 results and commentary on the next two quarters were extremely disappointing citing disappointing volume trends in multiple markets around the world; homebuilders holding up well after getting crushed last few months (better PHM results this week); LEG falls as lowers year forecast; FBHS declined on earnings results while FIX advanced
· Casino & Leisure movers; casinos extend losses with markets sliding; WYNN, LVS, BYD new 52-week lows; BYD fell after quarterly results missed estimates; in leisure, PII was upgraded to strong buy at Raymond James; in lodging, HLT upgraded at Evercore;
· Energy stocks have had a rough week on declining oil prices, rising inventory crude builds, slowing China demand concerns and weaker production outlooks from several E&P companies; this afternoon the Baker Hughes (BHGE) weekly rig count showed the total U.S. rig count rose 1 rigs to 1,068, with oil rigs up 2 to 875 and gas rigs down -1 to 193
· E&P sector; CFWFF upgraded at BMO Capital after delivered its third consecutive solid quarter in Q3/18, with EBITDA well above expectations; COG raises dividend and boosts debt, but Q3 EPS and revenue missed estimates; SWN posted Q3 EPS beat
· Equipment and services; BOOM reported Q3 sales growth of 68.5% Y/Y to $87.88M exceeding management’s forecast, driven by strong demand; NOV reported EPS of 0c, significantly below consensus of 12c of $240M below the $251M est. as Wellbore Technologies and Completion & Production Solutions (CPS) lagged our forecast
· Coal & Solar; in coal, CLD reported weak results for a second straight quarter due to operating issues that should be transitional, tied to the heavy rains in 2Q18 said BMO; in solar, FSLR cut its annual shipment forecast for the second straight quarter as it struggles to ramp up production of its flagship panel (lowers FY18 GAAP EPS view to $1.40-$1.60 below consensus $1.65)
· Utility stocks pullback from recent 52-week highs, benefitting from a pullback in Treasury yields from multi-year highs (positive for dividend paying sectors, as well as the drop in broader stocks (also rotating into defensive names); today Wolfe Research downgraded AEE, CMS, DTE and WEC as doesn’t see upside from current levels; D filed an alternative plan with South Carolina regulators to change customer benefits from its proposed $7.9B takeover of SCG
· Bank movers; SIVB shares drop on weaker net interest income for quarter; in brokers, RJF was cut to neutral from buy and the price target was slashed to a Street low $85 from $101 by Citi to reflect a lower earnings outlook, lack of catalysts; there were several insurers out with earnings overnight (HIG, PFG, CINF, RGA)
· Consumer finance and lending; ELLI drops after being downgraded by four analysts saying the magnitude of the cut in the company’s guidance was much steeper than expected/Q4 guidance that calls for revenue growth to slow to 0%-3% vs. the 13% average organic growth over the last seven quarters; DFSforecast full-year NIM modestly below its prior guidance of 10.3%-10.4%, and a ~60bps sequential increase in the personal loan charge-off rate in 4Q
· Pharma movers; SNDX falls following its announcement of failed results from an NCI-sponsored study, E2112, evaluating entinostat plus PFE’s AROMASIN (exemestane) in patients with HR+/HER2- breast cancer; SGYP plunges as BTIG downgraded to neutral citing revenue shortfall for Trulance and noted SGYP announced that no interested parties are willing to make a fair offer for the Co; in MedTech, shares of SYK, ZBH, RMD, MMSI active after earnings
· Biotech movers; RARE falls after discontinues development of UX007 in Glut1 DS indication as announces Phase 3 study of UX007 did not achieve primary endpoint; GILD posted Q3 beat and raised its outlook, but shares in check on CEO departure and risks to new drugs in development; SGEN plunges as reported Adcetris sales of $127MM, below consensus of $135MM and company guidance of $130-135M/sees Q4 Adcetris revs $128M-$133M vs. est. $145M
· Healthcare services and providers; CERN slides as missed revenue/reported in-line EPS/bookings grew 43% to $1.6B. Lower license software and tech resale revenue pressured the top line; ATHN rises as CNBC reported Athenahealth confident about reaching deal within two weeks (has been exploring options) ; Craig Hallum downgrade both AMED and LHCG to hold from buy and lowered tgts on belief Medicare’s proposed PDGM, which currently has a 6.42% behavioral assumption rate cut in 2020, creates uncertainty and will be an overhang; EHTH outperforms following a strong Q3 performance driven by increased sponsorship revenues as well as higher Medicare commissions; UHS reported earnings in hospital space
Industrials & Materials
· Industrial & Machinery; GE falls to new 52-week lows today after negative Gordon Haskett comments earlier as warns may owe billions more on insurance reserves; BGG shares fall as reported Q1 sales decrease of 15.2% Y/Y to $279M, saying lower sales resulted from fewer storm-driven power outages, warm and dry conditions
· Metals & Materials; AKS weak after the steelmaker posted a shipments miss in Q3 on weaker Ebitda of $160.8M, and said anticipates lower Q4:18 earnings relative to Q3:18, with lower pricing and flat sales/sequential EBITDA margin is expected to be tighter as well; in gold miners, GG upgraded at BMO after falling to decade lows on weak results/lower outlook; GLNCY cut its full-year oil production guidance by 6% to 4.6M barrels in the wake of unplanned outages at its Mangara field in Chad; CENX Q3 adjusted net income $2.3M, down 93% Q/Q, impacted by lower of cost inventory adjustments
· Chemical sector; EMN said it sees EPS growth will likely be towards the bottom of 10% to 14% range, and prices still catching up with rising raw-material and energy costs; KRA was downgraded to hold at SunTrust as Management lowered ‘18 EBITDA guidance from $400MM to $380MM citing weakening demand, tariff impacts, escalating logistics costs; HUN slides after its polyurethane peer BASF said on that Performance Materials sales volumes declined slightly in 3Q
Technology, Media & Telecom
· Internet; GOOGL slides as Q3 sales missed analysts’ expectations and revenue growth from its main Google sites, including Search and YouTube, came in at 22%, slower than the prior period; SNAP trades to record lows all-time lows as revenue and EBITDA beat estimates and guidance, but DAUs declined for the second straight quarter, and are expected to decline again in Q4; TWTR was upgraded to outperform at Oppenheimer after Q3 earnings and revenue that topped estimates/noted mgmt signaled that daily active users should continue to grow; several analysts upgrade and defend GRUB after pullback in shares yesterday post earnings; EXPE Q3 EPS beat estimates, boosted by growth in short-term rental unit HomeAway ; saw its gross bookings rise 11%, led by a 24% increase at HomeAway
· Semiconductors; INTC posted strong results and guidance, both well above consensus as execution and product traction remain impressive/66% GM included ~2 points of reserve inventory shipments and a one government incentive; MLNX rises after CNBC reported overnight the has hired a financial adviser to help it seek a sale after drawing acquisition interest from at least two companies ; CY moved on earnings and announced plans to: significantly reduce opex and divest its NAND business into a JV with Hynix; POWI falls on earnings as Loop downgrade noted similar to TXN, the small order push-outs of 2Q turned into a broad slowdown in orders and turns business in 3Q; LSCC in-line 3Q results, but guided 4Q well below consensus ($93M-$97M vs. est. $105.59M)
· Memory, flash pricing/HDD; WDC plunges as posted a Q1 rev miss and significant December quarter guide down, becoming a real drag on flash/memory space; WDC said Q1 results reflected strength in capacity enterprise, surveillance hard drives and embedded flash solutions, with each growing revenue over 30% from the year-ago quarter…but strength in these end markets was offset by ongoing declines in flash pricing (weighing on shares of MU as well as rival HDD co STX); WDC was downgraded by at least three analysts on the news
· Software mover; in the security space, PFPT reported slight F3Q18 upside, and guided F4Q18 EPS approximately in line with consensus, but guided FY19 significantly lower flagging disappointing hiring trends and announcing executive departures (FEYE, PANW, QLYS, SYMC weak); shares of CBLK and ARLOboth dropped after earnings results; PRO, SPSC, LOGM advanced on results
· Tech services/equipment; FLEX shares plunge on a spate of bad news including breaking off its relationship with NKE after concluding it can’t ramp profitably; CEO Mike McNamara announced his “retirement,” with no successor lined up and lowered year guidance; NATI upgraded to buy at Deutsche Bank saying better-than-expected 3Q results suggest directionally improving fundamentals