Market Review: September 11, 2019

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Closing Recap

Wednesday, September 11, 2019

Index

Up/Down

%

Last

DJ Industrials

227.07

0.84%

27,136

S&P 500

21.46

0.72%

3,000

Nasdaq

85.52

1.06%

8,169

Russell 2000

32.70

2.12%

1,575


 

Equity Market Recap

·     U.S. stocks quietly pushed higher all afternoon, with major averages taking out psychological levels (Dow moved above the 27,000 and S&P to 3,000) and Small Caps outperformed large caps for a third straight session as the S&P 500 index continues to push back toward its record highs ahead of the FOMC meeting next week and on hopes of renewed trade optimism between China and the U.S. Major averages tracked gains in Europe and Asia, helped by reports that China plans to exempt 16 products from the first round of extra tariffs on U.S. imports, which will take effect September 17, helping trade sensitive metals, industrials and technology sectors. Dow Jones also reported this morning that President Trump is again mulling capital gains tax cut with advisers set to meet Wednesday to discuss indexing capital gains taxes to inflation (helping sentiment). Apple (AAPL) helped boost the Dow, S&P and Nasdaq Comp as investors and analysts cheered the results of its product announcements yesterday (phones, updated watch, video game and streaming). Economic data showed a rise in inflation as the July PPI topped estimates ahead of tomorrow’s monthly CPI report. Gold edged higher, Treasuries were little changed and the dollar gained ahead of tomorrow’s ECB rate policy meeting. Oil prices turned lower midday on reports Trump was looking to ease sanctions with Iran. One thing today that eased was the mass selling pressure in momentum/2019 YTD winners such as payments, defense, software names which had crushed certain stocks over the last 2-days.

Economic Data

·     PPI inflation data hotter than expected across the board – Producer Price Index (PPI) MoM for August rises 0.1% vs. est. 0.0% while PPI Ex: Food & Energy (core) MoM for August rises 0.3% vs. est. 0.2%; the PPI Final Demand YoY for August higher at 1.8% vs. est. 1.7% and PPI (core) Ex: Food & Energy YoY for August 2.3% vs. est. 2.2% – recap – Treasury yields move higher on data

·     July Wholesale Inventories MoM reported at 0.2%, in-line w ests and Wholesale sales reported at 0.3% after falling -0.3% last month)

 

Commodities

·     Oil prices reversed lower midday, erasing earlier gains on reports that President Trump weighed easing Iran sanctions, prompting former NSA advisor Bolton to pushback and subsequent resignation at request of the President. The news shook oil sentiment which fell -$1.65 or 2.9% to settle at $55.75 per barrel, off earlier highs of $58.30 per barrel. Prices were initially higher on bullish US inventory. Gold prices rose $4.00 to settle at $1,503.20 an ounce in what was quiet session ahead of the ECB rate meeting tomorrow.

 

Currencies & Treasuries

·     The U.S. dollar bounced against the euro ahead of tomorrow’s European Central Bank (ECB) meeting where additional easing measures are expected, falling back below the 1.10 level this morning, while the buck rises to 107.75 against the Japanese yen, its best levels since early August as safe haven assets pullback over the last few days with stocks rising. The dollar was generally higher vs. most currencies following the hawkish PPI data (CPI data tomorrow). The dollar rises to highs vs the Canadian dollar given the roll in oil prices, up around the 1.32 level. Treasury yields bounced around but ended little changed with the 10-year around 1.73%. The U.S. Treasury sold $24B in 10-year notes at a yield of 1.739% vs. 1.736% when-issued prior, with a bid to cover (demand) at 2.46 (highest since June) vs. 2.20 prior auction and indirect bidders awarded 62.6% and directs 12.7%.

 

 

Macro

Up/Down

Last

WTI Crude

-1.65

55.75

Brent

-1.57

60.81

Gold

4.00

1,503.20

EUR/USD

-0.0033

1.101

JPY/USD

0.25

107.79

10-Year Note

0.006

1.738%

 

 

Sector News Breakdown

Consumer

·     Retailers; COST was downgraded at Oppenheimer with upside potential seen as limited following the 45% YTD run; GME shares dropped after the company posted a wider than expected Q2 EPS loss and gave an outlook that was well below what had been expected (guides year EPS $1.15-$1.30 below the $1.57 estimate); TPX rises after Piper said industry trends normalizing and the competitive backdrop easing, the outlook over the next 1-2 years is perhaps as strong as they can recall; beaten up names such as M, KSS, JCP, UA, FL advanced again on value buying.

·     Auto sector; in auto retail, KMX shares fell after William Blair cut numbers this morning to below street from above street prior; auto suppliers fall after DAN provided an update ahead of a presentation at the RBC Capital conference/said weaker off-highway end market demand during July and August means Q3 sales are likely to fall $100M below expectations; in ride-hailing space, LYFT and UBER slipped late day as the California State Senate voted to pass a bill that would make it much more difficult for gig economy companies like the two to classify workers as independent contractors rather than employees.

·     Consumer Staples; LK tgt raised to $24 at KeyBanc as came away from mgmt meetings incrementally positive that Luckin is on track to deliver against previously communicated targets; PM raises quarterly dividend to $1.17 per share from $1.14 per share; CAG announced that it has entered into a definitive agreement to sell its Direct Store Delivery snacks business to Utz Quality Foods; FARM shares fall as Q4 results disappoint with larger EPS loss (52c) on weaker sales ($142M) as FBR lowers tgt to $10.50 from $21; MO shares were volatile after President Trump announced a proposal to ban all non-tobacco flavored vaping products from the market

·     Restaurants; PLAY shares fall sharply, downgraded by a couple of analysts (Loop and Raymond James) after the company lowers FY comps to -2% to -3.5%, from prior view -1.5% to +0.5% and lowers FY net income to $91M-$100M from $103M-$113M prior citing competitive environment; SBUX said there was no SEC inquiry of the company

·     Housing & Building Products; RH posted quarterly results that tops mgmt better-than-expected pre-announcement and raised the year forecasts (sees FY adj operating margin 13.6-13.8% up from 12.9%-13.4% on higher EPS/revs) but shares fell after the recent run higher in shares (stock had hit 52-week highs yesterday); in homebuilders, JPMorgan downgraded shares of NVR and LGIH while upgraded PHM, CCS and MTH as believe the homebuilding stocks still contain some modest remaining upside potential as we anticipate further improvement across most industry and company data points; LOVE shares jump after Q2 results top consensus (posts narrower quarterly loss) and reiterates its year view for revenue growth of 40%-50%

·     Casino & Leisure movers; ELY was upgraded to outperform at Raymond James saying the company’s stake in entertainment venue TopGolf is not being fully reflected in the shares (made an initial $10 mln investment in its parent company while recent funding round completed in 2017 valued TopGolf at $2.07B and ELY’s stake at $290M); Peloton (PTON) said it plans to charge $26-$29 for shares in its IPO, which would raise up to $1.16B at a valuation of up to $8 billion

 

Energy

·     Energy stocks were leaders early, though pared gains as oil prices slipped on reports of easing Iran sanction talk by President Trump. OPEC lowered its forecast of world oil demand in 2019 to growth of 1.02 million barrels a day in its monthly report, citing weaker-than-expected data in the first half from various global demand centers and slower economic growth projections for the remainder of the year. It also lowered its 2020 world oil demand view.

·     Inventory data bullish for crude as the EIA said weekly crude stockpiles fell -6.91M barrels more than the est. for draw of -2.9M barrels while gasoline inventories fell -682K barrels vs. est. for draw of -1.0M barrels and distillate inventories unexpectedly rose 2.70M barrels vs. est. draw of -900K barrels. Last night, API reported U.S. crude supplies fell by -7.2M barrels for the week, a stockpile decline of -4.5M barrels in gasoline, while distillate supplies rose by 618,000 barrels

·     Services and E&P sector; RRC announced maintenance downtime at the Mariner East 1 pipeline during September/co expects lower ethane production in 3Q19 as a result, which is partly offset by modestly higher gas production and improved NGL and gas differentials; sector was among standouts, especially in SMID space, among the top gainers in the S&P early; BHGE shares sunk after GE said it plans to sell millions of shares in spinoff Baker Hughes and will no longer control the majority of shares in the company.

·     Utilities among top gainers today, with the UTY rising back above the 800 level (up 0.8%) – all-time highs last Wed at 813.36 – nearly all 20 components higher, led by a 3% gain in CNP

 

Financials

·     Bank movers; at the Barclay’s conference, PNC said it sees 3Q net interest income down a percent from 2Q (below its prior view of flat) and sees intense deposit competition from small banks; BANC was downgraded to hold at Sandler O’Neill after an 8-K disclosed expectations that it will record a $35 million loan loss provision and related charge-off on a commercial line of credit extended to a company engaged in the financing of California liquor licenses

·     Consumer finance and lending; MA said it will partner with R3 to develop a new blockchain-powered cross-border payments solution to support banks; ADP was downgraded to neutral citing valuation saying the positive fundamental aspects of the story largely priced in

·     Asset managers; BEN reported preliminary month-end assets under management of $690.6B at August 31, 2019, compared to $709.5B at July 31, 2019 attributing the decline to net market declines and moderate net outflows; CNS reports preliminary AUM $69.6B as of August 31; an increase of $2B from assets under management at July 31

·     REITs; Guggenheim downgraded DLR to neutral from buy on valuation while rolling tgts to YE20 from YE19 – given the estimated total return of 6.8% (capital appreciation and dividend yield); tgt changes for CONE to $81 from $70, COR to $119 from $110, DLR to $132 from 127, EQIX to $585 from $550, GDS to $57 from $49, INXN to $90 from $85 and QTS to $54 from $52

 

Healthcare

·     Pharma movers; large cap names little bounce after recent selling pressure after House leader Pelosi drug pricing plan weighed on sentiment; AIMT rises ahead of the FDA Allergenic Products Advisory Committee meeting on Friday, September 13, to review and discuss the marketing application for AR101, branded as Palforzia, to reduce the incidence/severity of peanut allergies

·     Biotech movers; LXRX rises as regained all rights to diabetes med Zynquista (sotagliflozin) after its collaboration agreement with SNY expired yesterday/SNY agreed to pay Lexicon $260M, $208M upfront and the remaining $52M within 12 months; PBYI said the FDA accepts for review its supplemental marketing application seeking approval for Nerlynx (neratinib)

·     Medical equipment and devices; DVA was downgraded to market perform at William Blair saying slowing patient growth and ongoing policy and regulatory overhangs make this a less attractive growth story than in years past; TTOO shares jumped after entering into a deal with Biomedical Advanced Research and Development Authority (BARDA) of the U.S. Department of Health and Human Services/deal may provide up to $69M

·     Healthcare services and providers; in dental space, shares of ALGN, PDCO, HSIC and XRAY were active ahead of the SDC IPO which is expected to price tonight (58M share deal with pricing range of $19-$22), expected to raise as much as $1.3B; CNBC reported that it just got very hard for AMZN’s online pharmacy to access patient medication as Surescripts said it is terminating its relationship with ReMy Health, a third party that supplied PillPack with information about patient prescriptions

 

Industrials & Materials

·     Industrial & Machinery; JPMorgan upgraded OSK and AGCO in machinery sector saying both stocks appear undervalued (even following the strong run so far this month) with relatively limited downside risk to earnings while downgrading ATU to Underweight as the risks appear weighted to the downside at current valuation (remain Overweight on ETN, CAT and TEX and underweight DE and ALSN)

·     Metals & Materials; AA was upgraded to outperform at Credit Suisse as they expect alumina prices to recover on significant capacity cuts in China, an end to inventory destocking, and the Al part shutdown; steel stocks extended recent gains, with shares of CMC, X, STLD, NUE, AKS posting big gains, while gold miners were generally higher (NEM, GOLD)

·     Paper sector (WRK, PKG, IP); The Pulp and Paper Products Council (PPPC) released preliminary N.A. uncoated freesheet statistics for August. Shipments fell a substantial 16% in August (14% when adjusting for one fewer shipping day), tied for the largest monthly decline this year and much more severe than the YTD decline of 11% (as per KeyBanc)

 

Technology, Media & Telecom

·     Internet; AMZN shares active as Bloomberg reported the FTC has sent a team of investigators to question small businesses that sell products on Amazon to figure out if the company is abusing its market power by diminishing competition; online travel names were strong, led by BKNG which touched a 52-week high today

·     Semiconductors; MU positive analyst mentions as Longbow upgraded to buy saying its checks highlight upside in shipments and improving DRAM and NAND pricing fundamentals (also upped WDC tgt to $76 on same reasoning), while Wells Fargo raised its tgt to $60 from $50 and increase estimates (DRAM-driven); KLAC tgt raised to $165 from $150 at UBS as still see excitement around the upcoming Analyst Day on 9/17 in NYC/earnings per share of more than $16 is possible for 2022; KeyBanc said believe AVGO and SWKS are well-positioned to benefit from content gains in the new phones given increasing LTE and pre-5G bands, WiFi 6, and enhanced cellular capabilities in the new AAPL iPhone 11/believe CY is another beneficiary of the upcoming cycle

·     Hardware and Software movers; ZS shares dropped to 6-month lows after its FY profit target fell short of expectations as it guided FY EPS 12c-15c below the est. 18c (though better revs) and forecasts FY20 calculated billings of $490M-$500M vs. est. $500.7M; AAPL shares rise nearly 3% as investors cheer news at its product event yesterday (note all-time highs a bit higher at $233.47 in Oct ’18); Cloudflare (NET lifts its IPO range to $12-$14 from the prior $10-12 range as the 35M shares in the offering means the company now expects to raise up to $490M; LTRX slips as reported mixed results w/rev light but EPS in-line/FY20 rev and EPS guidance was in-line.

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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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