Friday, November 2, 2018
Equity Market Recap
· Trade hopes giveth…and trade hopes giveth away. Major U.S. stock markets were once again volatile on the final day of trading for the week, with major averages closing out the day lower, but posted gains for the week. The Dow Jones Industrial Average fell as much as 300 points in afternoon trade (after rising more than 350 points in overnight futures), while the S&P 500 fell (but held) as low as 2,700 and the Nasdaq Comp touched and held 7,300 (off earlier highs 7,466). Tech was among the worst decliners after Apple (AAPL) shares dropped 7% on a disappointing holiday sales outlook and lower iPhone subscribers for the current quarter. However, the broader market moved on trade talks and jobs data. The U.S. economy added 250,000 new jobs in October, topping the consensus forecast of 208,000, while the unemployment rate was unchanged at a 48-year low of 3.7%. Average hourly earnings saw 12-month growth accelerate to 3.1% from 2.8% in September. The data lifted the dollar and boosted Treasury yields, but it wasn’t enough to offset the trade talk impact with China today.
· Stocks were boosted overnight after reports President Donald Trump is interested in reaching an agreement on trade with Chinese President Xi Jinping at the Group of 20 nation’s summit in Argentina this month, and has asked key officials to begin drafting potential terms. However, stocks turned south early afternoon after Larry Kudlow, a top economic adviser for President Donald Trump, in a CNBC interview refuted that report from Bloomberg News that said the president requested the drafting of trade accord between the U.S. and China. Kudlow did confirm that a meeting between leaders of the economic superpowers would take place.
· Overall, it seemed like a bout of profit taking as U.S. stocks were coming off three consecutive days of gains following a brutal October that saw the NASDAQ lose as much as 12% of its value from a recent peak in late August. Trade clashes between Beijing and Washington remain one of the biggest drivers of stock-market moves over the past several months, with fears ahead of the upcoming mid-term elections next week also playing a role in market volatility. Energy prices ended the day and week (6.6% drop) lower, while gold pulled off multi month highs.
· The U.S. economy added 250,000 new jobs in October, topping the consensus forecast of 200,000, while the unemployment rate was unchanged at a 48-year low of 3.7%. Average hourly earnings saw 12-month growth accelerate to 3.1% from 2.8% in September, while MoM, wages for 0.2%, in-line with consensus views. The Participation rate rose to 62.9% from prior 62.7%. Nonfarm private payrolls rose 246K vs. prior 121K and above the est. 195K
· The U.S. trade deficit widened to (-$54B) in Sept. from (-$53.3B) the prior month and compared to the est. (-$53.6B); Imports rose 1.5% in Sept. to $266.58B from $262.75B in Aug. while exports rose 1.5% in Sept. to $212.57B from $209.45B in Aug. It’s the second biggest monthly trade deficit since Donald Trump became president in January 2017.
· Factory Goods Orders for Sept rise 0.7%, topping the 0.5% estimate while factory orders for Aug. revised up to 2.6%; new orders ex-trans. for Sept. rise 0.4%; new orders ex-defense unchanged for Sept. after rising 1.5% in Aug.; capital goods non-defense ex aircraft new orders for Sept. fall 0.1% after falling 0.2% in Aug. Durables orders for Sept. rise 0.7% after rising 4.7% in Aug.
· Gold futures end lower, slipping -$5.30 or 0.4% to settle at $1,233.40 an ounce, only a slight pullback after yesterday’s near 2% spike on the dollar decline. Gold prices actually held up well despite the spike in Treasury yields today given the better jobs growth data. Gold had closed at a three-month high on Thursday, and ended the week down -0.2%
· Oil prices end a terrible month of October (fell over 10%) with a lousy week (falling -6.6%), ending slightly above the $63 per barrel mark. WTI crude fell 55c, or 0.9% to settle at $63.14 per barrel, back near seven-month low as fears of a major economic slowdown in China, along with record U.S. production and increased output by Russia and Saudi have weighed on sentiment.
· The U.S. dollar climbed throughout the trading session, getting a lift vs. rival currencies after a stronger-than-expected jobs report Friday, where 250,000 new jobs were added in October, topping the 200,000 estimate while wage growth climbed to a nine-year high of 3.1% on an annualized basis in October. The euro erased earlier gains in part of the rising US Treasury yields off better economic data, but also on reports that the ECB may consider a fresh TLTRO in December (which may help Italian banks). The dollar also rallied vs. the Japanese yen to highs above the 113.20 level (off overnight lows 113.256). The buck rallied vs. the Canadian dollar as Canada’s number of jobs created came in below views. The Turkish Lira jumped to 3-month highs after the U.S. lifted sanctions on some Turkish officials.
· Treasury markets dropped as yields jump following the better monthly jobs reading of 250K added jobs (topping the 200K estimate) and unemployment held at 3.7% while average hourly earnings rose 0.2%, raising the yearly pace to a 9-year high of 3.1%. Bond yields extended gains in the afternoon with the 30-year yield touching a fresh 2018 high of 3.45%, while the benchmark 10-year yield rose above the 3.21% level and the 2-year back to around 2.90%. The better jobs report and rising expectations that the Fed will “stay the course” on rate hikes trumped the need for bonds as a safe haven asset late day despite stocks rolling to end the week.
Sector News Breakdown
· Retailers; KORS was upgraded at both Piper and UBS on a valuation call calling it underappreciated and undervalued by investors; Cleveland Research said KSS appears to have better than expected October, while JWN comps appear to have improved and raised M comp views on better Oct trends; in research, BURL was downgraded at Wedbush, while BKE was upgraded at Deutsche Bank; GPRO falls after a weaker holiday sales outlook overshadowed a Q3 beat on top/bottom line, though gross margins fell short of estimates in Q3
· Consumer Staples; KHC shares fall as missed 3Q EBITDA estimates by ~8% and withdrew its previous guidance for 2H18 EBITDA to be in line with 1H18 (downgraded at Susquehanna)/UBS said EBITDA miss overshadows sales acceleration; WTW shares slip on mixed results as its subscriber count at the end of Q3 was up 24.9%, driven by growth in all major geographic market but Q3 revs of $365.8M missed the $379.3M estimate/raised year EPS view; SAM slips after Macquarie highlighted IRI data that shows sales for the four weeks ending Oct. 21 grew 15.5% vs 12-week growth of 18.5%
· Restaurants; SBUX rises after delivered a strong F4Q18 print and solid ’19 guidance as the business in the two important segments (US and China) improved comps; JACK was upgraded to positive at OTR Global; SHAK tumbles to 6-month low after Q3 results saw a miss on comps, while the Q4 guidance implied continued pressure; LOCO to 52-week highs as Q3 EPS topped estimates on better-than-modeled comps momentum, and raised the midpoint of FY guidance; CHEF rises after in-line Q3 EPS and slightly better sales
· Auto movers; auto supplier AXL dropped sharply following its Q3 miss as it cut adjusted EBITDA margin guidance to a range of 16.25% to 16.50% while EBITDA fell to 15.1% of sales in Q3, compared to 17.3% a year ago; TSLA receives SEC subpoena related to Model 3 production
· Housing & Building Products; NWL issued strong full-year profit guidance, despite falling short of estimates with Q3 sales and EPS/raises full-year EPS of $2.55 to $$2.75 vs. $2.45 to $$2.65 prior; FND was upgraded to buy at Bank America after earnings; homebuilders dropped midday after the yield on the benchmark Treasury rose over 6 bps back above 3.2% (lifting mortgage rates
· Casino & Leisure movers; in gaming, CZR shares rise after Q3 earnings beat (though revs and Ebitda missed) and announced its CEO would resign; lodging stocks pullback after stellar gains yesterday post better earnings from WYND, HGV, and STAY; LHO better results overnight
· Energy stocks mixed as Dow components in the energy complex out with earnings as XOM solid beats for Q3 earnings and revenues, and $11.1B in cash flow from operating activities was the company’s highest total since Q3 2014/said Q3 production fell 2% Y/Y but rose 4% Q/Q to 3.78M boe/day; CVX Q3 earnings beat estimates and revenues rose 12% Y/Y to $44B, although analysts had forecast $47B/says worldwide net oil equivalent production rose 9% Y/Y to a quarterly record 2.96M boe/day from 2.72M YoY. Baker Hughes (BHGE) weekly rig count fell -1 rig to 1,067, with oil rigs down -1 to 874 and gas rigs unchanged at 193
· E&P sector; EOG Q3 results topped views while raised 2018 Capex guidance range to $5.8-$6.0B; LLEX reports Q3 in-line with preannounced Q3 production and provided incremental well results; PE Q3 EPS topped estimates on higher than expected production as Q3 net oil production increased 9% quarter-over-quarter and 56% year-over-year to 73.5 MBoe per day; GPOR reports in-line with prior 5% production beat (1.43 Bcfepd) and realized pricing for the quarter; BPL reported a Q3 GAAP loss of $4.86 per share and a slight Y/Y drop in revenues to $909M while took a $537M non-cash goodwill impairment charge and cut its quarterly cash distribution
· Utilities & Solar; in solar, SEDG shares fell as posted in-line revenue with GM below expectations and EPS above on better than expected operating leverage; utility prices dropped as Treasury yields jumped across the board today on better economic data, making high dividend paying sectors less attractive
· Sand frac sector remains weak; Cowen lowered estimates and tgts in group (SLCA: $20 from $31; CVIA $8 from $14; HCLP $5.5 from $9; EMES $3 from $8) to reflect a lower long term margin assumption of $10/ton (vs prior $15/ton); HCLP was downgraded to underweight at Barclay’s and cut tgt to $5, taking issue with the payout amount, which is difficult to defend (says company could cut its distribution again)
· Bank movers; it has been an up and down week for banks, with regionals surging on less strict testing measures by the Fed mid-week; several research related news today as HBAN was downgraded at Wedbush to neutral on valuation, while Citigroup upgraded WFC to buy and CMA to neutral on reasonable valuations while downgraded USB to neutral; in Europe, the European Banking Authority said 48 banks in 15 European countries would see capital depleted by 226B euros ($257B) & capital ratios decline by 395 basis points in the adverse scenario in its stress test.
· Insurance; LNC Q3 EPS beat as results were driven by better results in the Annuities and Group Protection segments, partly offset by higher expenses in other areas; MET Q3 EPS beat though included several items and charges; PGR beats on top and bottom line for Q3
· Consumer finance and lending; SYF slides as WMT files a lawsuit stemming from a dispute over the value of the store’s credit-card portfolio that Synchrony had been servicing; ALLY to provide up to $2.3 billion in financing commitments over the next 12 months to support retail contracts from and inventory needs of CVNA
· REITs; RBC Capital upgraded HCP to outperform from sector perform saying the firm is now poised to drive improved long-term earnings growth while they downgraded VTR to sector perform from outperform saying 2019 will be a “transition year” as senior-housing operators work through elevated deliveries. BMO Capital upgraded AVB and FSP in the REIT space while downgraded ESS as downgraded to underweight at Barclay’s and cut tgt to $5, taking issue with the payout amount, which is difficult to defend (says company could cut its distribution again); EQIX slightly better Q3 Ebitda as revs of $1.28B were in-line
· Pharma movers; ALKS fell after an FDA advisory committee voted 20 to 3 that its ALKS 5461 didn’t show substantial evidence of effectiveness as a proposed adjunctive treatment for major depression; ABBV posted stronger-than-expected Q3 earnings and boosted its year EPS view as the company continues to ride Humira, its best-selling drug with revs up $5.12B; SAGE got a positive vote as an FDA advisory board voted 18-to-0 to back its claim that its infusion therapy, Zulresso (brexanolone), effective for the treatment of postpartum depression.
· Biotech movers; PBYI shares plunge over 50%, downgraded by several analysts which slashed their price targets after Q3 sales of its lone drug (Neratinib) showed sequential growth of just 3.5%, with many analysts saying they believe there may be a sequential decline in Nerlynx sales in Q4; ADVM shares fall as reported it will discontinue the development of AAVrh10-based GT, ADMV-043, in A1AT deficiency due to a lack of efficacy and therapeutic protein expression in a phase I/II trial
· Medical equipment and devices; PACB to be acquired by ILMN at a price of $8.00 per share in cash with a total enterprise value of approximately $1.2B on a fully diluted basis ; NVCR downgraded to market perform at Wells Fargo citing a lack of meaningful catalysts in 2019 after another quarter of flattish US prescription trend; KTWO fell after Biedermann Technologies filed a lawsuit claiming rival K2M “knew or was willfully blind to” Biedermann’s patents for devices used to treat complex and degenerative spine disorders
· Healthcare services and providers; TDOC reported a beat on revs and earnings on strong PEPM and utilization, and raised its revenue guidance for 2018; MDRX falls after Q3 EPS and revenues both missed consensus/revenue was up 16% to $522.3M but almost 5% below consensus of $548.7M
Industrials & Materials
· Industrial & Machinery; TEX shares fell double digit percent after Q3 miss, lower FY guidance and gross margin declined by 76 bps to 18.9% and operating margin was flat at 5.9%; in engineering, FLR advanced on earnings, while in infrastructure names, PWR and MTZ both active on earnings; GE shares tumble for an 8th straight session after Credit downgrade by Fitch (decade lows)
· Transports; UPS was downgraded to neutral at Citigroup while reduced estimates across his Transportation coverage in order to re-set 2019 expectations for the potential of a broader volume slowdown; airlines held up better than most in transport index but did slip as stocks leaked lower into the afternoon; GWRwas downgraded to underperform at Credit Suisse
· Metals & Materials; metals gaining, led by nickel and copper on possible U.S.-China trade deal, while safe-haven gold fell on positive U.S. jobs data; steel stocks active after X reported better EPS and stock buyback, offsetting lower outlooks; GFI said the NUM union at its South Deep mine will go on strike today over the company’s plan to cut ~1,100 jobs, nearly a third of the workforce at the mine/says it could temporarily halt production at the mine
· Chemicals; CC was downgraded to neutral at Citigroup after Q3 adjusted Ebitda missed estimates and cut its FY18 adj. Ebitda guidance; group was stronger yesterday after Dow component DWDP advanced on better earnings results and didn’t see impact from global macro issues; CF was upgraded to buy at Citigroup following pullback in shares and signs pointing to a strong spring for US urea fundamentals
Technology, Media & Telecom
· Dow component and tech giant AAPL reported Sept. quarter revenue and EPS ahead of the Street (2% and 5%, respectively); IPhone units slightly missed, but iPhone ASP was materially above Street estimates; holiday revenue guidance for the Dec. quarter was below consensus; tech supply chain for Apple, including several semi chip makers, were weaker (among supply chain includes AVGO, SWKS, CRUS, QRVO)
· Internet; BABA Q2 results beat on EPS but missed on revenue by about 1% even with 54% Y/Y revenue growth/cuts its FY19 rev guidance below consensus citing pressure trade wars; VRSN was upgraded by JPM and Baird after the company came to terms with the U.S. Department of Commerce on a new cooperative agreement
· Semiconductors; pullback in semis after over 4% spike yesterday led the Nasdaq higher; OLED plunges after cutting its full-year forecast to $240M-$250M from $280M-$310M (below est. $298.78M) and reported a wide Q3 revenue miss
· Software mover; security software maker SYMC rises as reported F2Q19 results that exceeded almost every consensus metric (revenue, op margin, EPS, cash flow, billings), while rival FTNT shares dropped on results/outlook; BL reported 3Q revenue and profitability results ahead of consensus and raised guidance; CARB falls after a disappointing revenue forecast prompted a downgrade from Oppenheimer; PCTY Q1 revenue and EBITDA results were above consensus, though the implied EBITDA outlook for the rest of the year is lowered slightly
· Media & Telecom movers; in media, CBS reported better-than-expected earnings after political advertising helped fuel results; LYV Q3 revenue and operating income both topped consensus lifting shares
· Hardware & Component news; HDD maker STX reported Q1 results that beat EPS and revenue estimates with a 14% Y/Y revenue growth as HDD revs were $2.8B/reports $2.3B share buyback;, but shares reversed lower after early gains; ANET reported strong quarterly results, topping revenue and EPS estimates, and provided a strong outlook for 4Q; TRMB posted in-line revenue with EPS above consensus on mix shifting toward Software/Services revenue and improving operating leverage.
· Other gainers on earnings: ACIA, ANET, CRUS, MSI, RP, SYMC
· Other decliners on earnings: BCOV, FTNT, MANT, WIFI