Mid-Morning Look: December 4, 2018

Terrie AmengualDaily Market Insights

Mid-Morning Look

Tuesday, December 4, 2018

U.S. equities are taking a breather after rising over 5% the last week or so following the truce between the U.S. and China as it relates to trade/tariffs being delayed, as well as the dovish take on interest rates by Fed Chairman Powell last week at the central bank meeting. The White House confirmed today the China trade war will re-escalate if no deal is reached in the 90 day timeframe. Also weighing on stocks is the recent action in treasury markets, as the yield on 10-year Treasury note extended a fall toward three-month lows at 2.95%, which has narrowed a closely followed spread between the 2-year Treasury to the tightest level since 2007 (does it signal recession on the horizon?). Dow Transports slide over 2% or 230 points, back below its 50-day MA support 10,629, led by trucking weakness after UBS downgrades in space and Morgan tgt cuts on FDX/UPS. Housing stocks weak after a cautious outlook from homebuilder TOL this morning after earnings beat. Defensive sectors are strong early with several utilities making new 52-week highs as Treasury yields fall, while healthcare names also outperform, led by 52-week highs in Dow components PFE, MRK, UNH and WBA.

Treasuries, Currencies and Commodities

· In currency markets, the dollar slumps again, with the dollar index (DXY) falling to session lows of 96.37 before paring losses to 96.63 (still down -0.4%) on reduced tensions with China, falling yields, and a more dovish tone from the Fed related to interest rates. The Fed’s Williams said today he sees no signs of greater inflation pressures on the horizon. The Financial Times noted China’s currency has roared higher in its most dramatic two-day rise in more than a decade after the country reached an apparent ceasefire in its trade skirmish with America.

· Precious metals advance, with gold rising to near 5-week highs as the dollar sell-off continues after last week’s dovish commentary suggested slower rate hikes into 2019 by the Fed. An apparent cease-fire in the trade skirmish between the U.S. and China softened the greenback yesterday as well, with most rival currencies recovering

· Energy futures still trading higher, but have fallen from earlier highs (WTI crude 53.32, down from 54.55 earlier) as investors await the results of OPEC meeting in Vienna on Thursday. Earlier this morning, Saudi Arabian Oil Minister Khalid Al-Falih said it’s too early to say whether the OPEC+ group will cut oil production when it meets in Vienna later this week. Weekly API inventory data released tonight at 4:30 PM, but EIA data pushed out to Thursday.

· Treasury markets extend gains as Treasury yields fall further – 10-yr yield down at 2.944%, 2-yr holds around 2.82% though 30-yr down at 3.2%; 10-year Treasury note extended a fall toward three-month lows at 2.95%, which has narrowed a closely followed spread between the 2-year Treasury to the tightest level since 2007

Sector Movers Today

· Auto sector; auto retailers a bright spot, led by gains in AZO after Q1 EPS, margins and comp sales (2.7% vs. est. 1.7%) all topped consensus views (ORLY, AAP active); MEI was upgraded to outperform at Baird on valuation/recent underperformance; KMX launches a new “customer-driven buying experience” in Atlanta that it aims to scale nationally/says the omni-channel experience will allow customers to “customize” their car buying decisions from home or in stores (shares of CVNA, CARG, TRUE were weak on reports initially)

· Utilities & Solar; in solar, FSLR received its second analyst upgrade in as many days as Argus raised its rating to buy from hold (Goldman upgraded yesterday) as view FSLR as well positioned in the solar industry based on its positive cash flow, solid balance sheet, and focus on cadmium telluride technology; 52-week highs for several utilities today as yields fall (10-year under 3%) making dividend paying sectors more attractive: CMS, AEP, WEC, DUK, LNT, ETR, EXC, XEL, ES; ES was also upgraded to outperform at Credit Suisse today

· Transports; truckers HUBG, KNX and WERN were all downgraded to neutral from buy at UBS as firm reduces 2019E and 2020E EPS to reflect a more cautious view on TL & Intermodal pricing in the 2019 bid season, which would translate into muted margin performance; in airlines, DAL November traffic was 4.2% and said expects to generate EPS at the high-end of the $1.10 to $1.30 guidance range for 4Q; in package delivery, Morgan Stanley slashed price targets on FDX (to $230) and UPS (to $87z0 on the risk that Amazon Air poses to both companies’ growth, which they say is currently being missed by the market

· Defense sector (LMT, GD, NOC, LLL, HII, LMT) active after Barclay’s reduced its budget forecast, although they still forecast growth. Barclay’s thinks current stock levels largely reflect budget risk, but don’t anticipate a recovery in relative valuations. Defense continues to broadly underperform, and they estimate now trades at a 5-10% discount, which we think largely reflects expectations for a decelerating to lower budget

· Pharma movers; 52-week highs for four Dow components…all in the healthcare sector…MRK, PFE, UNH, WBA; KDMN rises following updated results from a Phase 2 clinical trial evaluating KD025 in patients with previously treated chronic graft-versus-host disease (GvHD) at ASH conference; in cannabis space, APHA shares fall a second day after a short-seller report yesterday (from Gabriel Grego, founder of Quintessential Capital Management) hurt shares; RVNC study showed its drug (RT002) was safe and effective in a nearly 2,700 patient study (drug a potential rival to AGN’s Botox); VNDA was upgraded to overweight and $43 tgt at Cantor

       Stock GAINERS

· AZO +5%; after Q1 EPS, margins and comp sales (2.7% vs. est. 1.7%) all topped consensus views (ORLY, AAP active in sympathy)

· CLVS +9%; says patent protection for Rubraca in Europe was confirmed until at least 2031 and commercial form of Rubraca is entitled to European regulatory exclusivity until at least 2028

· MOV +15%; 3Q revenue and profit beat Street’s estimates, sending shares higher

· RH +16%; reported adjusted Q3’18 EPS of $1.73, which exceeded guidance and consensus of $1.27 as revenue was slightly better than expected despite some head winds during the quarter with better-than-expected margin and a lower tax rate providing the upside

· RVNC +10%; study showed its drug (RT002) was safe and effective in a nearly 2,700 patient study (drug a potential rival to AGN’s Botox)

· WM +2%; Waste Sector was upgraded to attractive at Goldman Sachs as the firm upgraded WM from sell to buy as believe now is the right time to own Waste stocks

Stock LAGGARDS

· APHA -16%; shares fall a second day after a short-seller report yesterday (from Gabriel Grego, founder of Quintessential Capital Management) hurt shares

· BNED -31%; Q2 results disappoint with comp sales down (-5.6%)

· CMCM -6%; as its File Manager application has been temporarily suspended from the Google Play store, and the company has temporarily taken down two other apps to update Target APIs.

· COUP -4%; reported strong Q3 results as revenue growth accelerated to 42% topping views but free cash flow missed and Q4 guidance implies a deceleration in y/y revenue growth to 26-27%

· CRUS -4%; lowered Q3 revs to range of $300M-$340M compared to its previous forecast of $360M-$400M due to recent weaknesses in the smartphone market

· DG -5%; lowered its full-year outlook saying as hurricanes resulted in a bigger than expected hit to the company’s top and bottom lines/lowered year EPS to $5.85-$6.05 from $5.95-$6.15

· TOL -5%; posted Q4 EPS and revenues that topped consensus views, but the sector fell after saying the housing market slowed further in November, particularly in California

· TREE -5%; guides FY19 revenue $990M-$1.03B, below consensus $1.04B, representing growth of 29%-34% over the midpoint of full-year 2018 revenue guidance of $765M-$775M (down from $765M-$775M)

Syndicate

· Keane Group (FRAC) 5.25M share Spot Secondary priced at $10.77

· Kornit Digital (KRNT) 3.13M share Spot Secondary priced at $20.50

· UDR, Inc. (UDR) 7.15M share Spot Secondary priced at $42.20

 

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Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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