Market Review: September 10, 2019

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Closing Recap

Tuesday, September 10, 2019

Index

Up/Down

%

Last

DJ Industrials

73.18

0.27%

26,908

S&P 500

0.85

0.03%

2,979

Nasdaq

-3.28

0.04%

8,084

Russell 2000

18.92

1.24%

1,543


 

Equity Market Recap

·     U.S. stocks were mixed to mostly lower, as small caps (Russell 2000 outperformed again) and transports were among the top gainers, as well as bounces for 2019 losers such as energy (as oil stabilizes) and financials (as Treasury yields rise to 4-week highs). At the same time, declines were led for a second day by momentum/2019 winners such as software, payments, exchanges and defense, with technology lower along with further selling in healthcare on House leader Pelosi drug pricing plan details. Restaurant stocks were under pressure following a profit warning from WEN last night and announced it would launch breakfast, while transports outperform broader markets again, rising over 1% to its best levels in about 5-weeks, and bringing its YTD performance this year to 16% from 12.3% two days ago (Dow Transports up four of the last 5-days including 2-days of gains of more than 2%). Stocks got a small bounce midday on a report in the South China Morning Post saying China is expected to agree to purchase more U.S. agricultural goods in hopes of reaching a more favorable trade agreement with Washington as the two sides prepare for a meeting between their top negotiators in October. Oil prices sunk from earlier highs after President Trump shook up his administration saying he asked NSA head John Bolton for his resignation, which was given this morning, raising expectations that the U.S. tensions with Iran might ease amid his departure. Economic data in the U.S. quiet again today but picks up tomorrow and Thursday with inflation reports from PPI and CPI respectively. Markets await central bank action later this week as the ECB convenes on Thursday (FOMC meeting next week). Lastly in tech, AAPL shares active as the company announced 3 new iPhones (the 11) with multiple cameras, issued an updated iPad, prices its TV+ Video Service at $4.99 a month, launch of gaming services among other items (see below).

 

Commodities

·     Commodity prices were mixed with gold prices falling for a 4th straight session, dropping -$11.90 or 0.8% to settle at $1,499.20 an ounce and pulling back further from its recent 6-year highs, and falling below the $1,500 level for the first time since August 6th. Oil prices were higher initially, touching highs of $58.76 earlier in the session ahead of weekly inventory data, but prices turned lower midday after President Donald Trump fired National Security Advisor John Bolton saying he disagreed strongly with many of his suggestions. WTI crude settled at $57.40, down 45c or 0.8% as the announcement partially eased concerns about the potential use of war as a means of diplomacy by the White House amid escalating geopolitical tensions in the Middle East and Asia.

 

Currencies & Treasuries

·     Treasury market’s dropped as yields jumped with the benchmark 10-year yield rising 3.5 bps to 1.69% (4-week highs) while the 2-year yield rose 5 bps to 1.64% as the spread widens further (after being inverted for several weeks, raising recession fears); The U.S. Treasury sold $38B in 3-year notes at a yield of 1.573% vs. 1.57% when-issued prior to auction, with the bid-to-cover (demand) at 2.42 vs. 2.41 prior auction and indirect bidders awarded 46.2% of auction and directs 16.6% (govt expected to sell 10 and 30 yr notes this week as well). The 2-year yield now more than 25 bps of last week 3-year lows of 1.427% and the 30-yr at 2.16% up 4 bps and nearly 30 bps off its all-time low yields of 1.9% last week). No major economic data to move markets as investors await PPI and CPI data the next two days and ECB rate decision Thursday.

·     There was less volatility in the currency market, as the U.S. dollar finished mixed, inching up against the euro ahead of the ECB central bank meeting this Thursday where easing measures are expected and holding recent gains vs. the yen at 107.45 (best levels since August 1st). The buck did slide against the Canadian dollar while trading little changed vs. the Pound at 1.235.

 

 

Macro

Up/Down

Last

WTI Crude

-0.45

57.40

Brent

-0.21

62.38

Gold

-11.90

1,499.20

EUR/USD

-0.0007

1.1041

JPY/USD

0.24

107.49

10-Year Note

0.053

1.697%

 

 

Sector News Breakdown

Consumer

·     Retailers; VSTO updated guidance ahead of an investor day event saying it now expects FY20 revenue of $1.75B-$1.85B, down from prior view $1.79B-$1.89B (est. $1.83B) while execs plan to outline an accelerated transformation plan and updates on the operating model at the event; DG was downgraded to market perform at Bernstein as believes its future story is well understood, and the upside is probably priced into the stock already; FIVE was initiated buy and $168 tgt at Craig Hallum; FRAN shares soared after reports higher Q2 net income and smaller quarterly decline in comparable sales, helped by cost-cut measures and higher sales in newer products

·     Consumer Staples; in tobacco, MO was downgraded to neutral at Piper and tgt cut to $49 from $64 saying do not know terms of a potential PM deal, but interest in a deal without a premium suggests more stress on underlying fundamentals; food stocks were pressured with weakness in staples; DF shares rise, rising since Friday announcement that the company concluded a strategic review, opting to go it alone under the direction of new CEO

·     Restaurants; WEN shares fell after co sees 2019 adjusted EPS down (3.5%-6.5%) vs. prior view up 3.5%-7% while shares were downgraded by two analysts (BTIG, Guggenheim) following the company’s announcement of a system-wide breakfast launch planned for 2020 given uncertainty about its success and economic impact (shares of MCD, DNKN, SBUX among decliners on the guidance from WEN and the breakfast announcement); SBUX also disclosed that it agreed to provide additional information to the SEC on how it recognizes revenue.

·     Housing & Building Products; BZH said to offer $350M of senior notes due 2029; HDS shares fell after lowering outlook for FY19 adjusted EPS view to 3.45-$3.60 from $3.52-$3.70 (est. $3.58) while also lowers FY19 revenue view to $6.1B-$6.2B from $6.25B-$6.35B (est. $6.26B); WLH was upgraded to outperform at JMP Securities saying strategy to focus on entry-level, low-priced homes will boost WLH’s inventory turnover

·     Auto’s; FCAU shares slipped after Renault CEO said the company is no longer in talks with FCAU, merger deal no longer on the table, it’s in the past; Moody’s Investors Service downgraded the senior unsecured debt rating of Ford Motor Company (F) to Ba1 from Baa3; VNE and its software joint venture Zenuity nominated to supply global automaker to supply its next generation Mono Vision System for vehicles in Europe; RACE unveiled new models yesterday just ahead of the Frankfurt Motor Show where it launched the F8 spider and 812 GTS in Maranello, Italy.

 

Energy

·     Energy stocks were strong for a second day, though futures and stocks pared gains midday after President Trump said he asked National Security Advisor John Bolton for his resignation, which was given this morning (the news sunk oil prices as market raised prospect it could possibly increases chances of Iran deal); in stock movers; SU shares rose after announcing earlier to invest C$1.4 bln and install two cogeneration units at its oil sands plant reducing greenhouse gas emissions by 25%

·     E&P sector; Bank America downgraded WLL and JAG to neutral while upgraded PDCE to buy saying a deteriorating global oil demand outlook, along with several high-profile operating hiccups have not helped industry sentiment/sees anemic free cash flow from both WLL and JAG, but upgraded PDCE on improved FCF profile, following its recent acquisition of SRCI; OBE said it has initiated a formal process to explore strategic alternatives, including a potential sale of the company; SLCA was downgraded to hold from buy at Lafferty based on anticipated weaker North American well completion activity during the second half of 2019 from lower oil prices and producers cutting cost to preserve cash flow; CHK entered into a privately negotiated securities exchange agreement under which it has agreed to issue 250.7M common shares (~15% of total current shares outstanding) in exchange for ~$588M of Senior Notes and Preferred Stock, including ~$40.0M aggregate principal amount of its 5.75% Convertible Preferred Stock

·     Utilities; PCG on Monday unveiled a plan to settle billions of dollars in wildfire-related claims and exit bankruptcy next year as it seeks to prevent creditors from taking over the embattled company (PCG plan offers nearly $18 Billion to Wildfire victims and Public Entities); OGS was upgraded to neutral at UBS saying in the low interest rate environment, they see more balanced upside & downside skew and we are upgrading OGS

·     Oil Equipment and services; SLB was upgraded at Morgan Stanley with $51 tgt saying that while the stock struggled over the past several years, its relative outlook is improving/thinks risk-reward for co is the most compelling it has been in years; Weatherford International has signed $87M contract for fishing and intervention services with Petrolio Brasileiro S.A.; the four-year agreement represents the largest fishing contract ever signed by Weatherford

 

Financials

·     Bank movers; WFC downgraded to hold at UBS from buy citing reduced estimates for earnings and lower net interest income along with the continued uncertainty and low visibility around the progress in the management’s efficiency improvements; CMA tgt and ests cut at SunTrust saying the new deposit cost guidance from its management disclosed on Friday lowers the company’s net interest income and margin expectations; ETFC said Preliminary August Daily Average Revenue Trades 285,000, Up 12% From July; exchanges CME, NDAQ, CBOE shares were all under pressure as Dow Jones reported the SEC is stepping up pressure on exchanges to finish a huge, long-delayed database designed to help detect market manipulation and investigate episodes of anomalous trading; a few headlines/details from Barclay’s conference today; STT shares popped after saying it sees Q3 NII to be flat, slightly better than guidance; RF guided net-interest margin (NIM) to be about 3.4% in Q4 and low to mid 3.4% range in Q1 and NII up modestly for 2019. Also in strategy Wells Fargo raised its Banks rating to Overweight from Neutral

·     Consumer finance and lending; payments MA, SQ, V, PYPL down sharply for a second straight session (momentum names); SunTrust said the three leading developed economy Networks, (V, MA, PYPL) are vying for durable share of Electronic Payments and eCommerce volume against a backdrop of rising emerging market competition, a large quickly developing B2B oppty and an evolving fast payments and cx-border ecosystem – views MA as strategically best positioned; CNBC reported that JPM is taking on Stripe and SQ with faster payments for merchants; GPN tgt was raised to $210 at SunTrust as they prefer it for growth investors, among the three consolidated Merchant/FI Processors; FNF announces mutual termination agreement with STC after not obtaining the necessary approval by the U.S. Federal Trade Commission

·     REITs; BXP was upgraded to equal-weight at Morgan Stanley saying NYC office REITs have underperformed YTD as several concerns have become consensus and they see a low probability for fundamentals to turn positive, but as valuations are more reasonable today; 52-week highs for KIM in the S&P 500

 

Healthcare

·     Pharma movers; large cap Pharma (MRK, LLY, PFE, JNJ) fall following comments from Evercore/ISI citing House leader Pelosi drug pricing plan, which the firm says is on the more aggressive side; BMY’s Opdivo shows sustained survival benefit in NSCLC as pooled data from the late-stage CheckMate-017 and -057 studies evaluating Opdivo (nivolumab) in patients with previously treated advanced non-small cell lung cancer (NSCLC) showed a sustained survival benefit; MNK announced a deal to sell its contract development and manufacturing subsidiary BioVectra for $250Mto an affiliate of private equity firm H.I.G. Capital; RCKT presented data from the first four patients in the Phase 1/2 trial of its RP-L102 gene therapy for Fanconi Anemia

·     Biotech movers; MESO rose in reaction to its partnership with Grünenthal to develop and commercialize allogeneic cell therapy candidate MPC-06-ID/Mesoblast will receive $15M upfront, up to $135M in prelaunch milestones, up to ~$1B in cumulative milestones plus tiered double-digit royalties on net sales; IONS was upgraded to outperform with $80 tgt at Bernstein saying Spinraza expectations have fallen significantly and further downside is likely limited and that value-creating catalysts for the Huntington’s program may not be so far away; AVEO announces encouraging survival results for late-stage kidney cancer drug trial saying 20 patients remain progression free on co’s drug tivozanib/plans to discuss updated results with FDA; NKTR shares rallied after filing showed Vice President Doberstein bought 15,000 shares; OMER announced a new approach to cancer immunotherapy that targets inhibition of GPR174

·     Medical equipment and devices; XERS received FDA regulatory approval for GVOKE™ (glucagon) injection, its ready-to-use, room-temperature stable liquid glucagon for the treatment of severe hypoglycemia in pediatric and adult patients with diabetes ages 2 years and above; MMSI shares dropped to record-lows after Raymond James downgraded to market perform on concerns that the acquisitions over the last few years have increased the complexity of the business which will continue to weigh on margins/says recent CEO stock sales tough to ignore as well; BAX agreed to acquire Cheetah Medical, a provider of non-invasive hemodynamic monitoring technologies, for an upfront cash consideration of $190M, with the potential for an additional $40M based on clinical and commercial milestones

·     Healthcare services and providers; Dow Jones reported Health insurers are expected to pay out a record $743 million to consumers this month under an Affordable Care Act rule that requires refunds if the companies don’t spend a big enough share of premium dollars on health care. The sum, which will go to about 2.7 million consumers who bought individual health policies from insurers, will be more than four times the amount paid out last year. The payout also dwarfs the next-highest total, $399 million in 2012, the first year of the refunds, according to a new analysis.

 

Industrials & Materials

·     Industrial & Machinery; PWR announced that its subsidiary, Valard Construction, was selected for the Wataynikaneyap Transmission Project to provide EPC services in Northwestern Ontario, Canada/the contract award is one of the largest projects ever awarded to PWR

·     Transports; in trucking, KeyBanc upgraded HTLD and MRTN to Overweight and reiterate OW ratings on KNX and WERN reflecting increased conviction in stabilizing truckload dynamics on more seasonal trends and reduced incremental supply (lower truck orders, fleet failures. Said checks indicate lower demand and available capacity 3Q19 to-date largely in line with expectations; however, pricing outlooks have stabilized.

·     Chemicals; MOS said it would initiate $250M in stock buybacks under its repurchase existing authorization, and announcing plans to idle ~500K metric tons of phosphates production; DD agreed to sell its Compound Semiconductor Solutions business to South Korean silicon wafer supplier SK Siltron for $450M (also initiated buy and $85 tgt at Jefferies)

·     Containers & Packaging; OI lowers Q3 EPS guidance to 52c-55c from 60c-65c prior; paper stocks remain strong (IP, GPK), led by WRK after yesterday announcing yesterday that it is reconfiguring its North Charleston, SC, paper mill to improve the mill’s operating efficiency and long-term competitiveness/shut down of one paper machine will reduce linerboard capacity by approximately 288,000 tons

 

Technology, Media & Telecom

·     Apple (AAPL) product announcement: announces the iPhone 11 which includes additional cameras with the iPhone 11 Pro at $999, the Max at $1,099 and regular model at $699 (iPhone XR to cost $599 and the iPhone 8 at $449); introduced Apple Watch Series 5, with Always On Display (in stores Sept 20th) pried at $399 and dropped Apple Watch series 3 price to $199; Apple’s TV+ will cost $4.99 a month starting on Nov. 1st for a family subscription; said a new 7th gen #iPad is coming with a 10.2-inch display starting at $329 (in stores Sept 30th); said Arcade Gaming service to launch 9/19 and cost $4.99 per month (100 games to start) – shares of ROKU, DIS, NFLX all moved in reaction to announcements on streaming

·     Internet; CTRP Q2 revenue came in at CNY8.7B, up 19%y-y as revenue generated from the international business made up over 35% of total revenue in 2Q19 – but did lower year outlook as expects 2019 net rev to grow by 10%-15% yoy vs previous forecast of 16%-21% growth (analysts were expecting a grow of ~18%); SNAP will create a dedicated news channel for the 2020 U.S. presidential debates, according to Axios sources; MELI was upgraded to buy from neutral with $720 tgt at BTIG noting shares have pulled back 19% following Aug 12’s surprise primary election results in Argentina, creating a buying oppty – but shares of MELI fell early on reports AMZN bringing “Prime” to Brazil (increased competition); SHOP announced that it has reached an agreement to acquire 6 River Systems, Inc., a provider of collaborative warehouse fulfillment solutions for $450M

·     Semiconductors; MU tgt was raised to $58 from $48 at KeyBanc on signs of recovery in memory demand saying barring a recession, memory tends to improve through 2020 and Micron is well positioned to benefit from long-term drivers related to compute and storage/notes DRAM, which accounts for roughly 70% of MU’s revenue, has a likely healthier market than NAND; TSM reports August revenue of NT$106.12B (+25.2% M/M) (+16.5% Y/Y)

·     Media & Telecom movers; VZ was added to Citigroup catalyst watch list, expecting the company to beat Q3 estimates and benefit from the low rate environment citing recent checks suggesting "increased promotional discounts tied to auto-pay are not having a disruptive impact on gross add share within the category, so far; MTCH positive mention at Guggenheim saying doesn’t see Facebook Dating as much of a threat noting that Dating has already been live in other countries and hasn’t impacted Tinder DAUs or downloads; ESPN’s contract with AT for the ABC, ESPN, Disney, and Freeform networks is due to expire soon, according to emailed statement from the network; tower stocks AMT, SBAC each fall sharply from recent 52-week highs of $242 on 9/4 for AMT and $270.42 for SBAC on 9/5

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Content is provided by Hammerstone Inc., which has no affiliation with Regal Securities, Inc. (“Regal”) This commentary is provided for information purposes only, and is not a recommendation, offer or solicitation by Regal to buy or sell securities or to adopt any investment strategy. Regal has not participated in the creation of the Hammerstone content and does not directly or indirectly endorse the content. Any reliance on this material is at the sole discretion of the reader.

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