Market Review: September 12, 2019

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Closing Recap

Thursday, September 12, 2019

Index

Up/Down

%

Last

DJ Industrials

45.68

0.17%

27,185

S&P 500

8.70

0.29%

3,009

Nasdaq

24.79

0.30%

8,194

Russell 2000

-0.64

0.04%

1,575


 

Equity Market Recap

·     U.S. stocks were at it again, pushing ever closer to record highs for the Dow Jones Industrials and S&P 500 after topping key psychological levels yesterday (27,000 and 3,000), while the tech heavy Nasdaq Comp outperformed on more positive trade talk rhetoric and Small Caps (Russell 2000) underperformed large caps for the first day in four. Stocks got a boost overnight after President Donald Trump said as a gesture of goodwill, he would delay the next tariff increase on China from October 1st to October 15th, after Vice Premier of China (Liu He) noted that the People’s Republic of China will be celebrating their 70th Anniversary on October 1st. There were also additional stories midday as CNBC reported that a senior administration official told them that the White House is "absolutely not" considering an interim China deal. That headline contradicted a Bloomberg report earlier that Trump advisers have discussed offering a limited trade agreement to China that would delay and even roll back some U.S. tariffs for the first time in exchange for Chinese commitments on IP and ag purchases. It wasn’t all China news as several central banks were in action today (ECB), inflation data (CPI) was “hotter” than expected and markets also await the third Democratic debate taking place tonight.

·     In central bank news, the world is easing and pressure remains on the Fed when they meet next week. This morning, the ECB cut their deposit rate by 10 basis points to -0.50% while also saying QE will be restarted on Nov. 1 to the tune of €20B per month. Turkey central bank cuts interest rates by 325 bps to 16.5% and the Denmark Central Bank cut interest rates as well. President Trump tweeted after the ECB move this morning “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!

Economic Data

·     Weekly Jobless Claims fell 15K to 204K, well below the 215K estimate while prior week claims revised to 219K from 217K; 4-week moving avg. at 212.5k in the week ending Sept. 7 and Continuing claims fell 4k to 1.670m in the week ending Aug. 31

·     Consumer Price Index (CPI) MoM for August rose 0.1%, in-line with estimates while core CPI (ex food & energy) a tad higher at 0.3% vs. the 0.2% estimate; CPI Final Demand YoY for August was lower than anticipated at 1.7% vs. est. 1.8%, but core YoY up 2.4%, just above the 2.3% est.

 

Commodities

·     Oil futures settled lower for a third straight session, sliding 66c or 1.2% to settle at $55.09 per barrel (off earlier lows of $54) after a meeting of OPEC+ ended without deeper cuts in crude output and reiterated their commitment to current output cuts. An OPEC committee said it would take up the issue again in December. Also adding to market weakness the last two-session expectations the U.S. may ease oil sanctions on Iran after former NSA advisor was asked to resign. November Brent crude shed $0.48 or -0.8% to $60.33 per barrel (down about 24% last 12-months). Gold prices rose $4.30 or 0.3% to settle at $1,507.40 an ounce, easing off earlier highs of $1,532.20 an ounce, as defensive assets slipped when stocks soared while palladium prices surged $48 or over 3% to $1,604.80 an ounce, a new all-time highs.

 

Currencies & Treasuries

·     The U.S. dollar was mixed, lower vs. the British Pound and also posted a sharp reversal against the euro (euro initially fell after the ECB easing measures announced today – touching a low of 1.0927 – before jumping to highs of 1.1087) as expectations now grow for more aggressive easing by the Fed next week when they meet, including a rate cut. Turkey’s lira jumped against the U.S. dollar after the central bank cut its key repo rate, citing an improvement in the outlook for inflation. The greenback topped the 108 level against the Japanese yen late day, its best level in about 5-weeks as investors rotated out of safe-haven assets.

·     Treasury yields end near the highs of the day, with the 10-year back above the 1.79% level (well off morning lows of 1.66% after ECB easing commentary earlier; the spread between the 2/10 yr widens to 7 bps now while the 30-year yield extends its recent run to 2.27% (now nearly 40 bps off its record low on 8/2 of 1.9%) – Treasuries have been volatile, recovering from multi-year lows in some case ahead of the FOMC meeting next week, mixed economic data and improving trade tensions with China. Yields had slumped this morning, pressured by a 7 bps slide in the German bund yield to -0.63% after the ECB decision.

 

 

Macro

Up/Down

Last

WTI Crude

-0.66

55.09

Brent

-0.43

60.38

Gold

4.20

1,507.40

EUR/USD

0.0053

1.1064

JPY/USD

0.36

108.18

10-Year Note

0.052

1.79%

 

 

Sector News Breakdown

Consumer

·     Retailers; weakness in retailer earnings for today with OXM falling on Q2 EPS/sales miss and lowers year EPS $4.25-$4.45, down from prior view of $4.45-$4.65 while still sees year sales remain steady and guides Q3 EPS 1c-11c vs. est. 14c; TLRD plunges as Q2 retail comps fell -3.6% vs. 1.7% YoY, suspends quarterly dividend starting in Q4 and guides Q3 EPS 40c-45c below the est. 74c; DLTH Q2 EPS and sales miss and guides FY19 sales $610M-$620M on EPS 60c-66c, below the $648M/72c estimate as adjusted EBITDA came in at $9.6M vs. $13.1M a year ago and falling gross margins; TPR announces a strategic partnership with BABA’s Tmall to mark a step forward in the company’s ChinaNext digital innovation agenda; OSTK rises up a 7th straight day (follows a sharp slide late August after its CEO stepped down amid controversy)

·     Autos; auto suppliers LEA and ADNT both downgraded to neutral at UBS citing outperformance and no meaningful improvement until mid-2020, while cut VC to sell saying the stock is pricing in margin recovery and sales acceleration, both of which we expect will fall short of expectations; HTZ rises after activist investor Carl Icahn boosts stake to 30.1% as of Sept. 11 from previously disclosed 29.49% as of July 18, 2018; UBER said it will raise $750M of debt, just one day after California passed a bill threatening to upend its business model by making it difficult to call its drivers “independent contractors”; LKQ rises as activist investor ValueAct Capital has taken a 5.2% stake in the auto parts company, according to a SEC filing

·     Consumer Staples; in grocers, WMT is rolling out an unlimited grocery delivery subscription service this fall, as the service will charge an annual membership fee of $98 for subscribers to access unlimited same-day delivery, which will be offered in 1,400 stores in 200 markets; KR reported mixed Q2 results as EPS missed and sales beat while identical store sales rose 2.2% in Q2 to top the consensus mark of +1.8% – shares fell after the company said it won’t reconfirm at this time its three-year forecast to generate $400 million in incremental profit; HSY was downgraded to market-perform at Bernstein noting shares have outperformed the market by 42% over the past 12 months and is now trading at ~27x forward earnings (a 52% premium to the market) and 18.3x EV/EBITDA; PEP launched its first-ever cash-back loyalty program, PepCoin, a digital program that’s perfect for the on-the-go consumer, with PayPal and Venmo.

·     Casino & Leisure movers in gaming, SJMHY was upgraded to market perform at Bernstein saying as a sector, current valuation in the Macau gaming sector is attractive and the sell-off has been overdone; WYNN disclosed in filing that it expects Q3 Macau operations’ casino revenue and adjusted property EBITDA to be negatively impacted by "significantly lower VIP gaming turnover/sees July-August total operating revenue of $1.01B to $1.12B vs. $1.15B a year ago and adjusted property EBITDA for the July-August of $225M to $248M vs. $339M a year ago; in leisure, MCFT shares dropped after Q4 sales of $122.8M missed the $126.2M estimate and said it sees sales down by a low-single digit percentage for the full year

 

Energy

·     Energy stocks gave back a nice portion of its prior three –day rally, especially in the Small/MidCap (SMID) related sectors as oil prices were volatile again. U.S. expansion, plus big gains from Norway and Brazil, is set to boost non-OPEC supply growth in 2020 to 2.3 million barrels a day from 1.9 million barrels a day this year, the International Energy Agency (IEA) said in its monthly outlook. The non-OPEC surge will cut the need for OPEC crude to 28.3 million barrels a day, which is 1.4 million barrels a day below its August output

·     Oil equipment & services; Wells Fargo lowered 2020 Lower 48 D&C spending forecast to -5% (vs +0%) to reflect a more cautious stance on oil supply/ demand and E&P capital discipline saying baking in weaker activity and pricing in 2H19, they cut 2020 EBITDA ests across NAM business lines 10-20%, and downgrade the land drilling sub-sector downgraded to underweight, while also cutting ratings on HP, NBR and PTEN to underperform citing falling leading-edge dayrates, limited contract coverage, and expectations for a weaker contracting environment in 2020-2021 ( also downgrades NINE and OIS to market perform; upgrades CJ to outperform); Cowen also downgraded a handful of equipment/pump names (MRC, PUMP, FTSI)

 

Financials

·     Bank movers; industry pressured after several days of strength, falling along with Treasury yields down sharp, with 10-yr yield down 6.5 bps to 1.67% after the ECB moves this morning – raises prospect of Fed getting more aggressive cutting rates – note the banks are down sharply; USB revises its long-term EPS growth view to 7%-10%, down from prior view of 8%-10% and sees long-term revenue growth 5%-7%, down from 6%-8% prior

·     Consumer finance and lending; PYPL assumed buy at Canaccord as view PayPal as a payments juggernaut with growth in payment volumes at this scale is impressive and active user count also continues torrid growth; MA in slides for its investor day reiterated 2019 through 2021 performance goals and its 2019 financial outlook.

·     Asset managers (monthly AUM data out); LAZ reported preliminary assets under management or AUM as of August 31 totaled approximately $228.8B; AB says preliminary AUM $587B as of August 31, up from $585B at the end of July; APAM AUM as of August 31 totaled $111.5B; IVZ prelim month-end assets under management, or AUM, of $1,175.1B, a decrease of 2.0%; LM prelim AUM of $776.8 billion as of Aug. 31, 2019; in research, JPMorgan upgraded BEN while downgraded IVZ and VCTR removed from Focus List as they see the traditional asset managers as having grown particularly inexpensive/valuations have contracted from ~18x prior to the Crisis to ~11x today/says based on a DCF, feel investors have priced in many risks; Wells Fargo raised tgts on HLNE, APO, ARES and KKR driven by higher applied multiples on fee related earnings

 

Healthcare

·     Pharma movers; ABBV was upgraded to buy with $79 tgt at UBS because its acquisition of AGN leads to a NEWCO generating $20B+ of annual free cash flow growing to a highly compelling, 9% FCF yield in ’23E; in cannabis sector; ACB shares fall after the pot company missed revenue expectations even after dropping its forecast/reported 4Q total net sales of C$98.9M below Stifel est. (C$103.5M) and the co’s preliminary guidance range offered last month driven by lower sales on non-cannabis businesses; SGEN was upgraded to outperform ($82 PT) at Oppenheimer based on review of two pipeline assets (Enfortumab Vedotin and tucatinib) that focus on less competitive later lines of treatment with strong data

·     Biotech movers; TXG 10M shares IPO priced at $39, above the $36-$38 range (shares opened at $54); ADVM announced positive 24-week clinical data from the first cohort of patients (n=6) treated with a one-time intravitreal (IVT) dose of ADVM-022 in the OPTIC phase 1 clinical trial in wet age-related macular degeneration (wet AMD); TOCA plunges after saying its experimental treatment did not prove effective in helping patients with a type of brain cancer to live longer, in a late-stage study; RGNX shares rose in response to ADVM competitor data (see above) in AMD failed to impress Wall Street as those shares fell over 20%

·     Healthcare services and providers; in dental space, SDC 58.54M share IPO priced at $23.00 (above expected range $19-$22) but shares plunged; WBA said customers who use Apple Inc.’s (AAPL) Apple Card with Apple Pay on eligible purchases will receive 3% cash back. Apple’s stock rose 0.6% in premarket trading and Walgreens shares were still inactive. The eligible purchases will include prescription bought in Walgreens and Duane Reade stores and those made on the Walgreens app and its website; in medical equipment, VAR was upgraded to in-line at Evercore/ISI after Varian received an exemption from China relative to the tariffs on imports from the U.S.

 

Industrials & Materials

·     Industrial & Machinery; DE downgraded to market perform at Wells Fargo and cut tgts citing the likely decline in demand during 2020 for U.S. construction equipment, shift to equipment rental from purchase/says earnings for both to face downward pressure due to demand drop; EMR said trailing three-month orders rose 2%; underlying orders rose 3%, excluding a 1% unfavorable currency impact

·     Transports; trucking stocks slip early after LSTR issues warning saying it won’t meet the bottom end of its EPS forecast range (on July 24th had guided Q3 EPS $1.48-$1.54 vs. est. $1.55) – shares of truckers move on guidance (JBHT, FWRD, CHRW); in airlines, JBLU traffic in August increased 3.9% YoY on a capacity increase of 6.1% while load factor was 86.9%, down 1.8% YoY

·     Chemicals; NTR announced a shutdown of their Allan, Lanigan, and Vanscoy mines in 4Q19 that could reduce potash production by 900kt and 2019 EBITDA by $100-$150mln as per Bernstein

 

Technology, Media & Telecom

·     Internet; YELP shares active after a report that GRPN could attempt to acquire the company. The Wall Street Journal reported that Groupon is seeking a large acquisition amid unrest from some prominent investors. Two anonymous sources told the Journal that Yelp could be the target, even though Yelp is worth substantially more than Groupon. https://on.mktw.net/2lSs0dp; Yahoo Japan Corp. intends to buy a majority stake in Japanese online fashion retailer Zozo Inc. for about $3.7B, according to multiple reports https://on.mktw.net/2md3VOS ; IQ was upgraded to market perform at Bernstein as expects near-term headwinds associated with content restrictions to be gradually removed after mid-October; GOOGL agrees to pay EU500M to settle French tax probe

·     Semiconductors; ADI upgraded to Overweight at Barclay’s saying they believe ADI is the clearest winner in Massive MIMO and will look cheap as CY21 (and even CY22) estimates come into focus; OLED was downgraded to negative from neutral at Susquehanna and cut tgt to $80 from $130 saying bill of materials cost increase, especially for 5G phones, plus a material cost variance between LCD and OLED displays will slow the penetration of OLED displays into smartphones; INFN defended at Stifel after hosting investor meetings, saying they are increasingly confident in the company’s ability to achieve its 2019 targets given the solid demand environment in the company’s core markets

·     Software movers; ORCL earnings results disappoint, as revenue miss was driven by a lower than expected Cloud and on-premise license revenue (- 6.1%), Hardware (-3.2%) and services (-4.4%) in large part offset by a beat in Cloud and on-premise support (0.9%)/FX was a ~1% headwind to reported revenue and costs/also said CEO Hurd takes leave citing personal reasons; ATVI rises as adds another analyst upgrade (Nomura) saying last month’s launch of World of Warcraft Classic has driven strong, above-expectations engagement in the franchise

·     Hardware & Component news; DXC share fell after CEO Mike Lawrie announced his retirement, prompting Susquehanna to downgrade the stock; AVYA shares fall after saying its review of strategic alternatives is "ongoing" and remains in advanced discussions. The company had previously said it expected its review of strategic alternatives would be concluded in mid-September. The stock had rallied in mid-August after Bloomberg reported Avaya was considering a buyout bid from Canada-based rival Mitel Networks. https://on.mktw.net/2kucV1D

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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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