Market Review: May 20, 2019

Auto PostDaily Market Report

Closing Recap

Monday, May 20, 2019

Index

Up/Down

%

Last

DJ Industrials

-84.24

0.33%

25,679

S&P 500

-19.37

0.68%

2,840

Nasdaq

-113.91

1.46%

7,702

Russell 2000

-10.81

0.70%

1,524


 

Equity Market Recap

·     U.S. stocks dropped on Monday, as technology names underperformed and the Nasdaq Composite falling as much as 1.6% before paring losses. The Philadelphia Semiconductor Index (SOX) extended losses to more than -15% from its April record high, plunging further after the U.S. placed China based Huawei Technologies Co on a blacklist which bans it from acquiring components and technology from U.S. firms without prior approval. In interest rate news, Atlanta Fed President Bostic does not see a rate cut this year like the market is telegraphing while the Fed’s Clarida also dampened expectations of a rate cut after saying the U.S. economy is close to twin Fed goals. The dollar dipped, Treasury yields inched higher and oil rose following a meeting of OPEC ministers this weekend. In other market unfriendly headlines this weekend, President Trump warned Iran not to threaten the U.S. or face ruinous consequences.

·     Top stock stories were: in telecom as Sprint (S) shares surged after the FCC chairman said he would recommend the company’s $26.5 billion merger with TMUS (prices later declined after Bloomberg reported the DoJ is said to lean against approving the TMUS/S deal). Semi and optical stocks with exposure to recently blacklisted Huawei and effectively halted its ability to buy American-made parts and components extended last week’s losses (LITE cut its forecast while other suppliers such as QCOM, AVGO, and XLNX reportedly will stop selling to Huawei until further notice. U.S.). TSLA shares fell below $200 to its lowest level since late December on another cautious analyst comment. Along with tech weakness, the metals sector continues to flounder amid the U.S./China trade spat with CLF, AKS, X, CMC and FCX lower.

·     In an upbeat story this weekend (surrounded by lots of negative headlines this weekend), Equity Vista Partners’ Robert Smith made headlines with a pledge to pay off the student debts of Morehouse College’s Class of 2019 — an amount estimated at $40M. With 460 of S&P 500 companies having posted first-quarter results, 75.2% have topped analysts’ profit expectations. Analysts now expect first-quarter earnings growth of 1.4%, a significant turnaround from the 2% loss expected on April 1, according to Refinitiv data.

 

Commodities

·     Oil prices held steady, with WTI crude rising 34c to settle at $63.10 per barrel after a meeting of oil ministers this weekend (ahead of that now July OPEC meeting, pushed out about a week according to reports today) as OPEC signaled that it may keep oil supply limited through the end of the year, though it’s not clear how much coalition partner Russia shares that view. The United Arab Emirates’ energy minister said he does not think oil producing nations should relax the production cuts currently in place. June gold settles at $1,277.30 an ounce, up $1.60, or 0.1%, bouncing off 2-week lows last Friday as the dollar pares recent gains.

 

Currencies & Treasuries

·     Treasury prices erased morning gains, as yields traded higher mid-afternoon – the 10-year topped 2.41% and the 2-year yield moved above 2.21% (up 2 bps and 3 bps respectively from earlier in the day). There were no major U.S. economic data points to move markets, though a couple of Fed comments (Bostic and Clarida) threw cold water on hopes of Fed rate cuts later this year. The U.S. dollar index (DXY) was down slightly most of the day, paring some of its recent gains last week after good economic data. The Australian dollar gained as much as 1% against the greenback after the incumbent Liberal-National government retained power in a surprise election result, defeating the favored Labor party.

 

 

Macro

Up/Down

Last

WTI Crude

0.34

63.10

Brent

-0.24

71.97

Gold

1.60

1,277.30

EUR/USD

0.0009

1.1167

JPY/USD

-0.11

109.96

10-Year Note

0.019

2.412%

 

 

Sector News Breakdown

Consumer

·     Retailers; TGT was upgraded to Equal-weight at Morgan Stanley as see less near-term downside after the stock’s recent ~15% decline though still have concerns around TGT’s medium-term margins, but they seem to be reflected in the stock’s below-average valuation; MIK was downgraded to Equal-weight at Morgan Stanley with a $10 price target as see a low probability that MIK’s fundamental performance will positively inflect in the N-T; focus on retail this week ahead of earnings (HD, LOW, and TGT; OSTK said it recently launched the world’s largest omni-channel 3D and augmented reality experience in e-commerce, expanding its 3D models; In footwear, CNBC reported that more than 170 shoe retailers, including NKE and FL, are asking President Donald Trump not to raise tariffs on footwear; earnings tomorrow from AZO, HD, JCP, KSS, and TJX tomorrow

·     Consumer Staples; KO said it had dropped plans to refranchise its Africa bottling business, Coca-Cola Beverages Africa (CCBA), and would instead keep its majority stake in the unit for the time being; SPTN posted mixed Q1 results as sales grew 6.6% to $2.54B after the acquisition of Martin’s (beating views) while generated $54.7M of EBITDA during the quarter down from $67.2M a year ago/reaffirms prior guidance for mid-single-digit sales growth

·     Restaurants; CMG tgt was raised to $783 at Piper and reiterate Chipotle as their top investment recommendation, as believe incremental momentum and growth is on the horizon; JACK was upgraded to buy at Stifel and raised tgt to $95, taking advantage of what they say is a valuation dislocation; DFRG shares jumped over 30% on reports from TheDeal.com of possible interest – recall in December the company said it is exploring options, including a possible sale amid pressure from activist investor Engaged Capital

·     Auto’s; TSLA shares fall to lowest levels since December 2016, now down 38% YTD, with Wedbush the latest to sound cautious cutting tgt to $230 to reflect reduced confidence in the company’s ability to hit its 2019 unit demand guidance; Ford (F) to eliminate about 7,000 salaried positions as part of restructuring according to reports from Bloomberg and CNBC

 

Energy

·     Energy stocks got a lift early after the OPEC minister meeting this weekend only to end mixed across sub-sectors; stock movers; XEL announced plans to retire its last two coal plants in the Upper Midwest, noting that this was a decade earlier than scheduled; NRG agreed to acquire Stream Energy’s retail electricity and natural gas business for $300M plus working capital in an all-cash transaction; XEC was upgraded to buy at SunTrust calling it 1 of only 2 Permian E&Ps to trade at ˜4x with other having Colorado exposure- Currently FCF + unlike most other Permian (and other basins) companies while returning shareholder value- Stable operations. Defensive utilities again outperform – 52-week highs for FE, AWK, NEE, WEC, AEP, XEL, ED, CMS, DTE, LNTand ETR today

 

Financials

·     Bank movers; DB traded to all-time lows after the NY Times reported that anti-money laundering specialists at the firm flagged activity in Trump and Kushner accounts/UBS cuts Deutsche’s future EPS estimate for 2020 by 25%, 2021 by 18%, and 2022 by 12% due to lower revenue assumptions; in advisers, EV was downgraded to underperform at Bank America citing weaker flow trends, a tougher product mix shift vs the past, and some margin pressures ahead; regional banks a little bounce after falling the last few weeks on plunging rates (comments by the Fed’s Bostic saying does not see a rate cut this year like the market is telegraphing also helping the group) with shares of PNC, STI, KEY, RF moving earlier

 

Healthcare

·     Pharma movers; BMY was downgraded at Argus to hold saying they have serious concerns about BMY’s growth prospects following its planned acquisition of Celgene; MRK shares were active after the U.S. Supreme Court told a lower court to consider throwing out hundreds of patient claims that Merck & Co. was too slow to warn about the risk of thigh-bone fractures from its Fosamax osteoporosis drug; AZN new data from Novel Start trial shows Symbicort reduces attacks in mild asthma when used as an anti-inflammatory reliever

·     Biotech movers; MDCO shares rose early after presented data Saturday for inclisiran, its cholesterol-lowering medication as interim results from an ongoing study showed LDL, the "bad" cholesterol, was lowered by more than 50% out to three years, when receiving twice-a-year dosing of inclisiran

·     Medical equipment and devices; Mizuho raised its tgts on DGX (to $110 from $106) and LH (to $174 from $150) as they feel they will continue to re-rate higher as investors anticipate the long-term upside potential from UNH lab initiatives. In short, we think UNH’s initiatives to form a preferred lab network (PLN) and focus on out-of-network lab spend will bring greater pricing transparency to the clinical lab industry. Managed care stocks were among the better gainers; UNH a top leader in the Dow Industrial Average

 

Industrials & Materials

·     Transports; Morgan Stanley with rating changes in airline sector as UAL upgraded to overweight from equal-weight and up tgt to $110 from $101, DAL downgraded to equal-weight from overweight and AAL downgraded to underweight from equal-weight and cut tgt to $26 from $40; the U.S. Supreme Court turned away a UPS appeal that aimed to force the U.S. Postal Service to raise its prices for delivering packages; RYAAY saw its net income fall to 885 million euros ($987 million) for the 12 months through March (below profit of 1.45 billion euros in the previous year) and said it expected full-year profit for 2020 to stay flat

·     Paper stocks weak (PKG, IP, WRK) as pricing reported by PPW on late Friday showed a $10/ton m/m decline for all domestic containerboard grades (linerboard and medium) and continued export pricing declines in May, according to analysts (KeyBanc). The containerboard and pulp updates were negative, with prices down in both markets on weak demand and oversupply

·     Industrial, Defense; AZZ posted Q4 results miss/reaffirms FY20 guidance though gross margins and operating margins improved; GD was upgraded to buy at Goldman Sachs saying valuation relative to its defense peers has moved to the low-end of historical range

 

Technology, Media & Telecom

·     Tech a drag on markets; Last week, the White House executed an executive order that imposed a ban on all communications equipment that could pose "an unacceptable risk to the national security of the United States." This ban has aimed more specifically at communications equipment sourced from Chinese vendors, such as Huawei and ZTE. Companies with significant exposure to China’s communications industry have been punished over the last week (revenue hit) including LITE, NPTN, FNSR, AAOI, ACIA as well as several semi-chip companies including XLNX, AVGO, QRVO and others. This weekend, reports indicated that INTC, QCOM, XLNX and AVGO decided to cut their ties with Huawei until further notice.

·     Internet; Reuters reported that GOOGL has suspended business with Huawei Technologies Co. that requires the transfer of hardware and software products except those covered by open source licenses; BIDU falls to fresh 2-year lows on China/US trade concerns; company plunged last week after sharply lower guidance for upcoming quarter revenues; Chinese ADRs (HUYA, BABA, SINA, IQ, BIDU) remain weak as trade war tensions show no signs of abating

·     Semiconductors; The Philly semiconductor index (SOX) has dropped about 15% from its April all-time highs (1,604.56 on 4/24) as a bad month is getting worse for U.S. and European names amid the escalation of trade tensions between the U.S. and China. The story today was some Huawei Technologies Co. suppliers were said to have halted shipments to the Chinese company (XLNX, INTC, QCOM, AVGO, and Infineon). The move comes after the White House blacklisted Huawei and threatened to cut it off from buying U.S. products last week.

·     Optical stocks were slammed last week following the blacklist add of China tech company Huawei to US suppliers (some names get good revenue from Huawei), as LITE cut its Q4 forecast from $405M to $425M in revenue to $375M to $390M with EPS dropping to 65c-77c form 85c-$1.00 and non-GAAP operating margin is trimmed from 18% to 20% to a range of 15.5% to 17% on the news (note last week, LITE shares were down over 21% last week on the Huawei blacklist ban, NPTN was down -36% last week, AAOI -14% last week and ACIA -11% last week – so lots of bad news "baked in" coming into today)

·     Media & Telecom movers; telco sector active, led by gains in Sprint (S) after FCC Chairman Ajit Pai said, "In light of the significant commitments made by T-Mobile and Sprint as well as the facts in the record to date, I believe that this transaction is in the public interest and intend to recommend to my colleagues that the FCC approve it.” https://on.mktw.net/2YAvn6Y; SATS rises and DISH falls after the company executed an agreement to buy EchoStar’s (SATS) Broadcast Satellite Service business in an all-stock deal valued at about $800M; AT said the final episode of Game of Thrones was watched by a 19.3M viewers across HBO’s linear HBO GO and HBO NOW platforms, exceeding the previous series high of 18.4M viewers

·     Hardware & Component news; AAPL shares fell with China concerns as one analyst warned that higher prices for its products following the increases in China tariffs could have "dire consequences" on demand also pressured the iPhone maker’s stock; KEYS falls after being downgraded to neutral at Baird saying trade restrictions add more uncertainty for KEYS’ communications business/estimates China accounts for about 17%-18% of KEYS total revenue but "most overt risk falls on 5G related growth opportunities in China; AAPL, DELL, Kingston Technology and STX are set to sell their preferred shares in Toshiba Memory Holdings for about $4.5b, WSJ reported

·     Software stocks were mixed; video gamer names dropped led by ATVI following an article by Kotaku that said the development of next year’s "Call of Duty" will no longer be led by development studios Raven and Sledgehammer; GME shares weak as Credit Suisse cut its tgt to $7 saying they believe that GME’s key loyalty drivers (and sticky gross profit pools), Pre-owned and Power Up, are under pressure, and that its cost initiatives alone won’t be enough to offset

_________________________________________________________________

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.

Live Trading

Open an Account

Paper Trading

Register