Market Review: July 11, 2019

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Closing Recap

Thursday, July 11, 2019

Index

Up/Down

%

Last

DJ Industrials

227.74

0.85%

27,087

S&P 500

6.80

0.23%

2,999

Nasdaq

-6.49

0.08%

8,196

Russell 2000

-7.14

0.46%

1,557


 

Equity Market Recap

·     U.S. stocks finished mixed, with the Dow Industrial Average outperforming, rising above the 27,000 threshold for the first time ever amid gains in healthcare behind a White House move pulling the plug on a proposed drug-rebate overhaul (UNH), financials (GS) as Treasury yields spiked and industrials (MMM, BA), while pharma names (MRK, JNJ, PFE) plunged. The S&P 500 also touched a new intraday high, moving above, but failing to hold the 3,000 level for a second day. The Nasdaq Composite and SmallCap Russell 2000 underperformed with technology and biotech moving lower. Fed Chair Jerome Powell indicated in his second day of Congressional testimonies that the Fed has room to ease monetary policy as the link between inflation and unemployment weakens, but several other Fed speakers today (Bostic, Williams, Richmond appeared undecided on rate moves). The commentary followed a stronger-than-expected consumer price index (CPI) report that may have investors worried that the Fed won’t cut rates at the end of the month. The 10-year Treasury note retreated, pushing yield up 6 basis points to 2.126% and the 30-year jumping more, especially after a very weak 30-year Treasury auction midday that pushed yields higher. Gold prices ended lower and oil erased morning gains.

·     The Healthcare industry (managed care, PBMs, services) surged after reports the Trump administration is dropping a plan to curb billions of dollars in annual rebates that drugmakers give middlemen in Medicare, a proposal it had said would drive down the prices consumers pay for prescription drugs (CVS, UNH, CI, MCK) among those rising, but news sinking shares of pharma (LLY, PFE, MRK) and biotech (REGN, AMGN).

·     Fed Chairman Powell testified for a second day on monetary policy and the economy, speaking to the Senate Banking Committee currently, and once again fielding many questions about what Facebook’s Libra digital currency would look like without regulation, receiving massive attention from Senators and Congressman the last few days. Other Fed speakers though did comment on upcoming rates: Atlanta Federal Reserve Bank President Bostic said he’s skeptical about the need to reduce interest rates later this month because the job market is performing well and some measures of inflation are near the Fed’s 2% target. Fed’s Williams says U.S. economy is in a good place, but picture is complex. Richmond Federal Reserve Bank President Richmond said doesn’t see the current levels of inflation or inflation expectations as a trigger for additional accommodation.

Economic Data

·     Weekly Jobless Claims fell 13K to 209K vs. est. 221K (prior week revised to 222K from 221K), while continuing Claims at 1.723M vs. est. 1.683M; the 4-week moving average stood at 219.25K

·     Consumer Price Index (CPI) MoM for June rises 0.1% vs. est. 0.0% while CPI Ex: Food & Energy MoM for June rises 0.3% vs. est. 0.2%; on a YoY basis, CPI YoY for June in-line with estimates at up 1.6% and CPI Core Ex: Food & Energy YoY for June rises 2.1% above the est. 2.0%

 

Commodities

·     Oil prices backed off from earlier gains, with WTI crude slipping 23c to $60.20 per barrel (off earlier highs $60.94) while Brent dropped 49c or 0.7% to settle at $66.52 per barrel. The decline in WTI comes a day after hitting its best level in 7-weeks. Prices jumped early after reports the British government said three Iranian vessels tried to block the passage of a BP-operated tanker through the Strait of Hormuz but withdrew after warnings from a British warship. Oil prices started their decline after OPEC forecast world demand for its crude would decline next year – needing 29.27M barrels per day (bpd) of crude from its 14 members next year, down 1.34M bpd from 2019, pointing to return of surplus despite an OPEC-led pact to restrain supplies. Also in oil, the U.S. government said Gulf of Mexico production was cut by 53% or 1M barrels per day due to the storm in the area, and nearly 45% of natural-gas production were shut down as a precaution, but didn’t have an effect today on prices. Gold prices fell -$5.80 or 0.4% to settle at $1,406.70 an ounce – ending near the lows of the session as yields spiked following the awful 30-yr Treasury auction (earlier highs of $1,429.40 an ounce).

 

Currencies

·     The U.S dollar was mixed, with the dollar index down only slightly around the 97 level (off lows around 96 late June and Monday highs of 97.58) reacting to a handful of economic data and Fed commentary the last few days that cloud the interest rate cut picture. After the strong jobs report on Friday, the dollar jumped on expectations it may put the brakes on aggressive rate cuts this month/year by the FOMC – but yesterday/today comments by Fed Chair Powell gives feeling that a rate cut this month is a certainty – but todays slightly higher inflation reading (CPI) again raises concerns the Fed may not need to cut too aggressively. The dollar rose against the yen, but slipped vs. most other currencies including emerging market and commodity based ones (CAD). Bitcoin tumbles a second day as the Fed’s Powell raises Libra concerns saying Facebook’s Libra offering should "not go forward" without addressing concerns. Those include privacy, money laundering, consumer protection and financial stability, the Fed Chair declared during his semi-annual testimony before the House Financial Services Committee.

 

Bond Market

·     Treasury yields spiked mid-afternoon as prices fell after a weak 30-year auction result with soft demand despite higher yields. The U.S. Treasury sold $16B at 2.644% vs. the pre-sale when issued at 2.618% prior; the bid-to-cover stood at 2.13 vs. 2.32 prior and indirect bidders awarded 50% of auction and 16.8% to direct bidders. Prior to the auction, Treasury yields were modestly higher, having edged up all morning amid a higher inflation reading (CPI). The yield on the 30-year jumped over 7 bps to 2.65%, while the 10-yr yield rose 5 bps to 2.12%, its best level in roughly a month and the 2-yr inched up a few bps to 1.855%.

 

 

Macro

Up/Down

Last

WTI Crude

-0.23

60.20

Brent

-0.49

66.52

Gold

-5.80

1,406.70

EUR/USD

0.0003

1.1254

JPY/USD

-0.03

108.44

10-Year Note

0.058

2.119%

 

 

Sector News Breakdown

Consumer

·     Retailers; retailers DDS and ANF were both upgraded to neutral at Wedbush saying promotional levels stabilize, according to Search Trends & our Promo Tracker, and valuation strikes us as reasonable; GME announces that it expects to accept 12M shares for payment at a purchase price of $5.20 in its modified Dutch auction; VOXX Q1 sales drop 7.3% to $93.5M due to falling automotive car sales and timing of various programs and loss widens to (5c); AEO announced a 30M share buyback plan and said to sell CBD-infused products in stores/online; COST new all-time highs as June US comp sales rose 5.4% vs. est. 5.3%; PSMT shares slumped after Q3 revenue miss; SKX was upgraded to positive at OTR Global; ZBRA shares fell after Northcoast said they think 2Q19 sales could be in-line to slightly lower than expectations as ZBRA’s run rate business appeared to soften during the quarter

·     Consumer Staples; WW was upgraded to neutral from underweight at JPMorgan and up tgt to $22 after seeing stabilizing subscriber trends at the company; BTI was downgraded to neutral at Piper saying growth outlook is tempered by softer US expectations and we see relatively little upside to current valuation

·     Housing & Building Products; in home furnishing, BBBY shares slipped after mixed Q1 results (EPS beat/sales miss) and weaker comp sales of (-6.6%) vs. est. (-5.6%) and guided FY net sales, EPS at low end of ranges; HD and LOW shares active as Jefferies said rainy weather in May and June likely contributed to the fact that May and June saw sequential traffic changes worse than those seen in 2018.

 

Energy

·     Energy stocks opened higher before paring gains; prices of oil rose earlier on reports the British government said three Iranian vessels tried to block the passage of a BP-operated tanker through the Strait of Hormuz but withdrew after warnings from a British warship. Prices later slipped after OPEC forecast world demand for its crude would decline next year – needing 29.27M barrels per day (bpd) of crude from its 14 members next year, down 1.34M bpd from 2019, pointing to return of surplus despite an OPEC-led pact to restrain supplies

·     Drilling, services, Piper trimmed 2019-21 EBITDA estimates by ~5% on avg. for drillers saying global deepwater and jackup fundamentals are methodically tightening (both recently eclipsing 80% utilization threshold), but company-specific backlog trends remain patchy. Remain Neutral; in other energy movers, XEC, PDCE and CLR were all downgraded at BMO Capital

·     Refiners; Piper noted the coasts of Louisiana and Texas threatened by the storm system are home to a large portion of U.S. refining capacity totaling around 5Mbbl/d. This is ~27% of the total 18.8MBbl/d U.S. capacity. Names in coverage group that are particularly exposed to the area are VLO, MPC, and PSX

 

Financials

·     Bank movers; banks getting a bounce with the move up in yields and ahead of earnings next week with C reporting on Monday, JPM, WFC on Tuesday – though many analysts weighing in on sector, lowering estimates ahead of earnings the next 2-3 weeks in banks; Bank America downgraded regional banks CMA, CFR to underperform and RF, HWC was cut to neutral citing the cloudier visibility on forward EPS given the more challenging backdrop as the Fed’s poised to cut rates three times through March 2020; online brokers cautious at Morgan Stanley as they downgraded AMTD to equal-weight as lowers tgts for group (AMTD, SCHW, ETFC) ahead of Q2 results as sees a more challenging path to revenue growth given the less favorable interest rate and client cash environment; in insurance; ALL was downgraded to underperform at Credit Suisse

·     Services, consumer finance and lending; ADS card services unit wins a new long-term agreement to provide co-brand and private label credit services for outdoor specialty retailer SPWH; ZG shares fall after news RDFN teaming with Open Door so that home sellers in Atlanta and Phoenix can request an Opendoor offer through RDFN’s site and app

·     Asset managers out with monthly AUM data: 1) LM prelim assets under management (AUM) of $780B as of June 30, 2019 included long-term net inflows of $0.5B; 2) WDR preliminary AUM of $71.9B at June 30, 2019 rose 4.7% from $68.6B at May 31, 2019/market gains of $3.8B more than offset net outflows of $612M; 3) LAZ prelim AUM as of June 30, 2019 totaled approximately $237.5B, included market appreciation of $9.0B; 4) APAM AUM as of June 30, 2019 totaled $113.8B; 5); TROW AUM for June was $1.13 trillion, up 8.7% YoY; 6) IVZ AUM of $1,197.8B was an increase of 3.3%; driven by favorable market returns, foreign exchange, non-management fee earning AUM inflows, and reinvested distributions

 

Healthcare

·     Managed care, distributor stocks getting a big boost (CI, HUM, UNH, CVS, ANTM, ABC), while large cap pharma slides (LLY, MRK, PFE) after reports the Trump Administration is dropping a plan to curb billions of dollars in annual rebates that drugmakers give middlemen in Medicare, a proposal it had said would drive down the prices consumers pay for prescription drugs. The plan had been to curtail the rebates worked out between drugmakers and third parties that manage benefits for Medicare as well as Medicaid managed care, where states contract with insurers to deliver benefits https://bit.ly/32nE7jt – Axios had reported overnight

·     Pharma movers; outside of weakness in large cap names (PFE, MRK, BMY, JNJ) on the White House news, Reckitt Benckiser Group Plc agreed to pay as much as $1.4B to settle an investigation into the sales and marketing of a treatment for opioid addiction by former unit Indivior Plc; LLY says Emgality reduced the frequency of weekly cluster headache attacks across Weeks 1 to 3 compared to placebo in a Phase 3 study published in New England Journal of Medicine; generic names ENDP and AMRX both downgraded to sector perform at RBC Capital as think opioid uncertainty and excessive leverage will weigh on the turnaround; MNK tgt cut to $10 at Jefferies saying Symphony Health prescription data show Acthar declines accelerating

·     Medical equipment and devices; CODX launches its Vector Smart NAM test to identify the presence of West Nile virus, St. Louis encephalitis, and western equine encephalitis in mosquitoes; Agilent (A) agreed to acquire privately held BioTek Instruments for $1.165 billion. Including expected tax benefits, the company expects to pay about $1.05 billion

 

Industrials & Materials

·     Industrial & Machinery; FAST shares fell after Q2 results miss estimates as Q2 EPS/revs just fall short of consensus while said saw slowing in Q2 relative to activity levels in Q1 (follows weaker results from MSM the day prior – shares of GWW, WSO, WCC also active); PH was downgraded to market perform at Wells Fargo and cut tgt to $175 as future potential appears to be increasingly complicated; CIR’s board unanimously decided to reject the latest buyout bid by CR saying it "substantially undervalues the company” (had recently upped price to $48 from $45)

·     Airlines; DAL the first with earnings in the sector as Q2 results in-line while boosted its dividend and guided Q3 above views ($2.10-$2.40 vs. est. $2.18) – follows good CASM/PRASM data from AAL yesterday that lifted stocks; air fares fell 0.9% in June MoM, according to data compiled by the Bureau of Transportation Statistics and have been lower three of the last four months following the Boeing 737 Max grounding; JBLU said June traffic increased 4.7% YoY on a capacity increase of 4.8% and load factor was 86.9%

·     Truckers; group active following ratings changes at Credit Suisse, as the firm downgraded JBHT (ahead of earnings on Monday), ODFL and SNDR to neutral and WERN to underperform saying with a weakening demand backdrop, contract TL rates that are turning negative, and anecdotal evidence that suggests capacity remains relatively loose, they see fairly meaningful risk to 2H19 and 2020 EPS for the asset based truckers and cut estimates

·     Metals & Materials; Deutsche Bank said copper and gold are preferred commodities in the short-term and iron ore is expected to stay higher-for-longer as they upgraded FCX to buy from hold (up tgt to $13.50) as 2Q preliminary production numbers clear out any short-term negatives, while the firm downgraded AA to hold (and tgt cut to $23) on a more moderate outlook for aluminum and as a dovish Fed makes it more difficult for Alcoa to reduce its pension obligations (also downgraded CMC in steel space citing valuation); BHP exploring options including disposal of thermal coal business – Financial Times reports; in grains, prices of cotton fall along with corn and soybeans after the WASDE report was bearish

·     Aerospace & Defense; RYAAY CEO Michael O’Leary said the negative impact of the Boeing (BA) 737 MAX grounding on the airline’s growth plans may start to spill over to next summer if the airplane isn’t flying again by this fall; HEI was downgraded to underperform at Bank America citing valuation but also says with the below average YTD air traffic growth there may be more risk to the commercial aerospace cycle

 

Technology, Media & Telecom

·     Internet; SNAP tgt raised by another analyst as Bank America ups to $17 as remain constructive on Snap’s LT opportunity to monetize users that are spending 30+ minutes on the site, though we remain Neutral given our view that expectations are high for 2Q; GRUB shares fell as NY Post reports the NY State Liquor Authority is developing new rules that will significantly curb the stiff fees that can be charged by food-ordering companies like Grubhub, Uber Eats, DoorDash and Postmates, https://nyp.st/2G7ZLil ; ECB’s Villeroy says FB’s Libra project is raising increasingly serious questions for regulators; TWTR said was having issues late day for some users

·     Software movers; TTWO was downgraded to hold from buy at Jefferies and tgt cut to $115 from $135 saying TTWO is in a soft spot regarding its game release schedule, and that lack of near-term catalyst makes it harder to push the multiple much higher at these levels; MSFT was initiated outperform with PT $150 at Cowen saying its position in key secular markets could help add an incremental $100B in revenue by FY25; SMAR tgt raised to Street high $60 at Needham citing increased confidence that SMAR can grow revenue at 40%+ for at least two years; OMCL shares fell after GlassHouse Research publishes report with $35.50 tgt (59% downside target)

·     Media & Telecom movers; SBGI said Q2 media revenue of $721M vs. est. $712.9M and also entered into an agreement with CHTR for the continued carriage of its TV stations and the Tennis Channel, and for the carriage of its Marquee Sports Network

·     Hardware & Component news; VSH shares fell after cuts Q2 revenue view to $682M-$688M from $700M-$740M (below est. $715.2M) and cuts Q2 gross margin view to 25.2%-25.8% from 26%-27% citing the result of weaker than expected demand mainly from distribution (shares of AVT, APH moved in sympathy); Loop Capital the latest cautious on AAPL saying street expectations for Apple’s iPhone in H2 could prove overly optimistic, as the firm expects 182M iPhone unit sales in 2019 with an ASP of $733 (vs. consensus estimates have 185M and $754, respectively)

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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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