Friday, November 16, 2018
Equity Market Recap
· U.S. stocks end the week on a positive note, rising near the best levels of the session late day, but it wasn’t enough to erase the damage done earlier this week, as all major indexes close in negative territory over the last 5-days. U.S. stocks spiked mid-afternoon following comments from President Trump regarding trade with China, saying the U.S. may not have to impose further tariffs on China and noted China sent a list of things to do on trade. After the move to intraday day highs following Trump comments, CNBC reported, citing White House officials that people should not read too much into those claims, because there is no sign of a deal coming soon. The headline took a little “wind out of the sails” for equities before pushing to fresh highs late day. The dollar fell sharply and Treasuries rallied after remarks from the Fed’s Clarida that markets interpreted as dovish saying policy is getting close to neutral and there is some evidence of global slowing. Tech lagged most of the day after softer guidance from semi names (AMAT, NVDA), while consumer discretionary fell following disappointing results in retail (JWN, WSM).
· Still, there are many market moving catalysts weighing on investor sentiment into the holiday season including funding of the government, whether China and the U.S. will ratchet down their trade dispute at an upcoming G-20 meeting (where Trump and Xi are expected to talk), the pace of interest rate hikes after Fed officials appeared more “dovish” this week, the impact the recent energy decline has on the sector, the UK/Brexit outcome among others.
· Markets have also gotten a lift from Fed officials, which conveniently have eased up the recent hawkish tone – moving more dovish over the last few days. This morning, Vice Chairman Richard Clarida said “as you move in the range of policy that by some estimates is close to neutral, then with the economy doing well it’s appropriate to sort of shift the emphasis toward being more data dependent.” Yesterday, Atlanta Fed president Raphael Bostic said “I don’t think we are too far from a neutral policy, and neutral is where we want to be.” These are different calls from the October comment b Fed Chairman Powell who said that Fed policy needs to “go past neutral”, and “we’re a long way from neutral at this point, probably.” Recall stock markets quickly turned cautious in October, in part by view that the Fed wasn’t going to ease up on rate hikes. The Fed’s Evans said today, who will vote on policy in 2019, thinks neutral is about 2.75% and he could comfortably see rates going to 3.25% assuming his outlook for continued GDP growth continues.
· Industrial production for Oct rose 0.1% MoM missing the 0.2% estimate and down from last month’s 0.2% rise; industrial production was revised down to 0.2% gain from 0.3% in Sept. Capacity utilization fell to 78.4% from 78.5% in Sept., revised up from 78.1%. Hurricanes reduced the level of industrial output in both September and October the Fed noted
· Federal Reserve Vice Chairman Richard Clarida said he sees ‘signs of slowing growth’ and that sluggish expansion in the globe will be factored in the central bank’s calculus as it attempts to normalize interest-rate policy. Clarida said during an interview on CNBC that “we have to factor in to the global economy and there is some evidence of global slowing.” The comments are being construed as a potentially less aggressive Fed going into 2019.
· Gold prices climb by $8.00 on the day, or 0.7% to settle at $1,223.00 an ounce, its 3rd straight day of gains, pushing its weekly advance to 1.2% and bouncing off 1-month lows earlier in the week. A late week pullback in the dollar helped boost prices. A “softer” Fed outlook following Clarida comments earlier sunk the US dollar which tends to help dollar denominated commodities. December palladium settled at another record, up 1.5% at $1,154.60 an ounce
· Oil prices end the day unchanged, sliding off earlier highs of $57.96 per barrel to close at $56.46 per barrel, but posted its 6th straight weekly decline falling 6.2%. It has been a volatile stretch for energy prices to say the least, snapping its record 12-day losing streak mid-week in a rout that saw prices drop more than 25% from 4 ½ year highs just a month ago, as rising production, increasing inventories, a surging dollar, slowing demand fears from China and a recent somber demand outlook from OPEC and the IEA have taken its toll on oil. Talk of production cuts among major oil producers helped provide a lift to prices briefly before erasing gains.
· Dollar ends lower on the day; the euro jumped back above the 1.14 level today, up 0.7% and ending the week higher. The story of the week was the British Pound trading higher today, but down over 1% for the week vs. the dollar amid several UK parliament resignations in response to UK Prime Minister Brexit plan. The US dollar fell to a weekly low below 113 vs. the Japanese yen, with the buck falling broadly on the day following the more “dovish” commentary from Fed official Clarida today. Bitcoin prices rise more than 1% on the day to around $5,535, but ended the week down -12.5% to its lowest levels since November of last year.
· Treasury market’s end higher as yields finish the week near the lows; the 10-year yield fell over 4 bps to lows around 3.07% after Federal Reserve official Clarida voiced concerns over softer global growth, potentially opening the door to less rate hikes than expected next year. Meanwhile, Industrial production rose 0.1% in October, missing estimates, also weighing on yields. Treasury prices have rallied this week as investors sold off broader global stocks amid concerns over Brexit in the UK, softer earnings this week, and trade fears with China growing. The yield on the shorter-term 2-year fell to 2.80%, down from October highs around 2.95% as Fed officials more dovish.
Sector News Breakdown
· Retailers; sector has been under pressure all week, same for today as JWN shares fall on mixed Q3 results as EPS beat, while sales and comps just below estimates as a higher mix of off-price sales appears to have hit Nordstrom’s margins as the gross margin rate fell; KORS was downgraded at Oppenheimer citing concern that ongoing challenges with and softness within fashion watches will weigh on top-line trends and potentially margins; SCVL rises as Q3 beat across all lines and again raising the FY18 guide, posted better than planned results from higher margin boots, which comped up over +20% in women’s; DSW was upgraded to neutral from negative at Susquehanna; JCP was downgraded to sell at Argus; SONO posted stronger better than expected results and offered guidance above views
· Consumer Staples and Restaurants; 52-week highs for Dow component PG; POST reported Q4 results that fell short of consensus views, while the company also said it plans to go ahead with an initial public offering of its active nutrition business; NGVC shares jumped after quarterly results and as year mid-point guidance topped estimates
· Auto sector; weakness in major OEMs (F, GM, FCAU) and suppliers early after U.S. Commerce Secretary Wilbur Ross damped hopes of resolving the trade dispute with China any time soon; CRMT shares rise after the company cruises past Q3 consensus estimates with comp sales up 11.% during the quarter on a 5.9% lift in the average retail sales price
· Housing & Building Products; HD was downgraded to neutral at Bank America as believe that 2018 was the peak in earnings growth and 2017 was likely the peak in comps; ENR was downgraded to underperform at Bank America as now see risk-reward less compelling with the deal for SPB battery now ex: Varta Europe and ENR planning to acquire SPB Global Auto Care; in home furnishing, WSM falls as reported 3Q results that fell a bit short of consensus expectations on comps and operating margins, but slightly beat consensus on EPS due to a lower tax rate
· Casino & Leisure movers; SGMS downgraded to hold at Jefferies noting company changed CEOs, lost a lawsuit which it expects to appeal, lost a significant systems contract and the HY market has widened; overall a good week for casino stocks
· Energy stocks among the top sector performers early, helped by continued rebound in oil prices after touching 52-week lows earlier this week; positive update from APC overnight, stronger earnings from land driller HP and positive analyst research helping the group today. The Baker Hughes (BHGE) weekly rig count showed total rigs rose 1 to 1,082, with oil rigs up 2 to 888 and gas rigs down -1 to 194
· E&P and equipment sector; EOG was upgraded to outperform at Credit Suisse arguing one of the best run E&P companies for a valuation near peers despite having underperformed large-cap E&Ps by ~3% QTD; APC issued initial FY:19 production and capex guidance as capex of $4.3-4.7b compares well to consensus’ ~$4.8B while production of 712-740 mboe/d was modestly lower than consensus’ 738 mboe/d consensus and also announced a $1B share buyback; HP shares rally early as adjusted EPS in line with consensus, and $187MM EBITDA, above consensus of $175MM, but it reported significantly higher capex guidance for next year
· Utilities & Solar; PCG shares rose over 40% last night after a California Public Utilities Commission official told investors on a conference call that the agency doesn’t want PG&E to go into bankruptcy, Bloomberg reported overnight ; EIX shares also jumped in sympathy; 52-week highs for utilities AEE, XEL, ES, NEE, DTE, AWK
· Bank movers; it has been a rough week for banks as yields have declined, Fed officials have gotten more dovish, and Representative Maxine Waters (D-CA), who’s poised to become chair of the House Financial Services Committee in January, says easing banking regulations will stop when she heads the committee; banks were overall mixed today, getting a boost on news that Warren Buffet’s Berkshire has taken several added or new stakes in many banks this week, according to the latest 13F filings
· Insurance; KBW said primary insurers rather than reinsurers are expected to bear most of the losses from the Camp Fire in Northern California and the Woolsey Fire in Southern California (notes shares of KMPR, MCY, AIG, CB shares have fallen); EMCI rises as Employers Mutual Casualty Company proposed to acquire the rest of shares it does not already own for $30 per share in cash
· REITs; SNH downgraded at Jefferies see potential for material earnings declines in 2019 following the announcement that SNH’s largest tenant (FVE) announced that it is experiencing operational challenges; Bank America upgraded OHI to neutral as it moves to finalize its Orianna exit in the coming months and begins to reinvest proceeds while downgraded SBRA to underperform as headwinds like senior care dilution, increased Ridea volatility remain; AMH was downgraded at Morgan Stanley as margin expansion stalls while reiterate OW on INVH given stronger rev growth
· Pharma movers; AZN shares slip as its Mystic experiment that combined two of its drugs in lung cancer treatment (Imfinzi and Tremelimumab) failed to meet its main goal as results didn’t meet statistical significance, and the data support further analysis; shares of MRK and BMY have been competing for the lung cancer space; BMY announced that the EMEA had decided to recommend Opdivo + Yervoy combo for 1Lintermediate and poor risk renal cancer; WSJ reported late after that PFE plans to raise prices for 41 drugs, or 10% of its portfolio, in January
· Biotech movers; MDGL was upgraded at Evercore but to no avail as shares fell for a 4th time (6 of last 7 trading days), with firm saying concerns stemming from Association for the Study of Liver Diseases (AASLD) data are overblown; Cowen said sees a favorable risk/reward in SGEN shares ahead of what he expects to be a positive Echelon-2 update; TSRO shares jumped after Bloomberg reported the company is working with advisors to explore a possible sale after receiving takeover interest (stock rose more than 30% late day)
· Medical equipment and devices and services; BSX approved a new global restructuring program, and sees limited headcount reductions to result from these activities; CAH was downgraded at Leerink as firm survey showed a significant portion of Cardinal Health clients don’t view the company as being the most competitively priced with a quality score lagging peers (MCK, ABC); UBS initiated services today, with sell ratings on DVA, MD, and CYH along with buys on UHS, EHC, LHCG, and HCA; ACHC shares dropped more than 18% after CNBC’s David Faber said the sales process appears to have stalled
Industrials & Materials
· Industrial & Machinery; Most industrial stocks were lower after U.S. Commerce Secretary Wilbur Ross damped hopes of resolving the trade dispute with China any time soon; WAIR falls as reported Q4 EPS miss though sales beat while sees 2019 net sales to increase at a mid-single-digit percentage rate compared to fiscal 2018; rough week for Dow component BA, lower by more than 9% after reports that the company didn’t disclose possible fault in 737 flight safety feature, while also showed deliveries start the quarter slow as expected
· Transports; after briefly turning into positive territory midday on some trade talk from Trump on China, the index edged back into negative territory, led by a decline in airlines; CPA downgraded at Evercore/ISI following weaker than expected Q3 earnings and FY outlook; rails have had a good week led by gains in CSX (up 2.5%), UNP and NSC (around 1%)
Technology, Media & Telecom
· Internet; FB shares trade to 52-week lows below $139 (record high was $218.62 on 7/25) – follows recent NYT article that Facebook COO Sandberg hid info about Russian interference/ faces renewed criticism from Washington; overall, social media names (SNAP) and Internet in general were broadly lower as stocks continue to come for sale (AMZN, NFLX, GOOGL); ETSY shares down another 5%, stock now down about 15% off 52-week high just a week ago and trading around support – 50-day 46.13 and 100-day little lower at 45.40
· Semiconductors; Semiconductor stocks fell after worse-than-expected sales forecasts from chip maker NVDA and equipment maker AMAT, renewing concerns about waning demand; on a positive note, INTC announced a $15B stock repurchase program (AMD shares active on the NVDA guidance and KLAC, LRCX on the AMAT warning); QCOM was upgraded at Morgan Stanley as see a balanced risk/reward as the market now has more realistic assumptions around Apple, chip margin improvements and handset demand; NVDA missing Oct-Q sales by 2% and guiding Jan-Q sales 21% below Street expectations. Slower than expected inventory in the channel and company not shipping mid-range Pascal desktop GPUs drove 30% Q/Q gaming correction; AMAT posted in-line F4Q results but offered soft F1Q guidance
· Hardware, Media & Telecom movers; VIAB better earnings, as revenue beat amid a strong box-office slate and a growing streaming-only production business/its cable networks including Comedy Central, MTV, and Nickelodeon though continued to face a decline in viewership and advertising dollars; AAPL with early outperformance as shares moves back above its 200-day moving average of $193.74 after falling to recent lows around $186 this week