Market Review: September 18, 2019

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Closing Recap

Wednesday, September 18, 2019

Index

Up/Down

%

Last

DJ Industrials

36.35

0.14%

27,147

S&P 500

1.01

0.03%

3,006

Nasdaq

-8.62

0.11%

8,177

Russell 2000

-9.92

0.62%

1,568


 

Equity Market Recap

·     U.S. stocks were jittery following results of the September FOMC meeting, where the Federal Reserve cut interest rates by 25 bps for the second straight meeting, but projections for the path of policy deviated. The Fed noted that trade policy and slowing global growth warranted the cut (another “insurance” cut) even as the U.S. economy remains strong. Officials were split on the need for further easing, with five seeing no change in rates by the end of the year, five wanting one more cut and seven expecting two cuts (much more below). Treasury yields actually rallied along with a bounce in the dollar as the U.S. economy still seen as the “best on the block”, while oil prices dropped and gold plunged. Banking stocks saw a steep spike in reaction the move in yields while transports were pressured all day, led lower by a FDX miss and lower guidance. Strong housing data today another indicator of the better U.S. economy as housing starts jumped over 12% for August, well above expectations with upwardly revised revisions for July as well. Stocks fought back late session, rallying in the final hour of trading (the Dow Industrial turned positive late day after having fallen over 200 during Powell press conference) as Fed Chairman Powell said during his press conference that he felt the US economy outlook remains bright.

·     Liquidity concerns stoking more Fed actions as the NY Fed conducted another overnight repo to address the squeeze in the funding markets, taking in $75B in the operation, which was oversubscribed as dealers submitted $80.1B. The Fed accepted $51.6B in Treasuries at a 2.10% rate, along with $22.8B in MBS, and $700M in agencies. The actions the last two days have helped ease market conditions with overnight general collateral having dipped to 2.80% this morning, from over 8% yesterday. Gold prices and the dollar narrow trading ahead of the FOMC, while Treasury prices slip and oil edges lower

FOMC

·     The Federal Reserve trimmed its benchmark interest rate 25 bps to 1.75%-2%, with a sizable minority projecting one more rate reduction in 2019. The vote was 7-3 as St. Louis Fed President James Bullard preferred a half-point cut, while Boston Fed President Eric Rosengren and Kansas City Fed President Esther George dissented for the second meeting in a row, preferring no rate cut. The central bank pushed IOER (interest on excess reserves) down 30bps, a greater margin than the fed-funds target range, to 1.8%. It also lowered the overnight repurchase rate relative to the fed-funds rate to 1.70%. The Fed now see a median fed-funds rate of 1.9% this year, from June’s 2.4% estimate. With Wednesday rate decrease, that suggests one more quarter-percentage point cut is likely this year. Fed officials also trimmed their expectation of the median fed-funds rate in 2020, and project it to stand at 1.9%, from the last estimate of 2.1%.

 

Commodities

·     Oil prices slipped, with WTI crude falling -$1.23 or 2.1% to settle at $58.11 following the bearish weekly US inventory data out of the EIA and API, as well as further follow through on reports that Saudi oil supply is fully back online and that they have contained the damage (that according to its oil minister late yesterday) after the drone attacks knocked out facilities this weekend; natural gas falls 1.2% to settle at $2.64 mln btu. Gold prices settled slightly higher (prior to the FOMC interest rate decision), rising $2.40 to $1,515.80 an ounce, its third straight advance

 

Currencies & Treasuries

·     The U.S. dollar was volatile following the expected 25 bps cut by the Fed, while short-term Treasury yields moved higher with the 2-yr yield paring losses, rising to above 1.73% (up from 1.67% prior) while the 10-year yield rose to 1.77%, slightly off lows after rate news. In regards to the tick up in yields despite the Fed cutting, yields have had a big bounce off recent multi-year lows 2-weeks ago; not to mention US economy still stronger than most of the world. The U.S. dollar also showed strength against most rival currencies.

 

Economic Data

·     Housing Starts for August jumped 12.3% to 1.364M vs. est. down -1.3% to 1.25M (and revised up to 1.215M from 1.191M); Building Permits MoM for August rose 7.7% vs. est. down -1.3% to 1.3M (prior month revised to 1.317M from 1.336M)

 

 

Macro

Up/Down

Last

WTI Crude

-1.23

58.11

Brent

-0.95

63.60

Gold

2.40

1,515.80

EUR/USD

-0.005

1.1023

JPY/USD

0.27

108.41

10-Year Note

-0.06

1.794%

 

 

Sector News Breakdown

Consumer

·     Retailers; ULTA shares pressured early after Cleveland Research said Ulta Beauty Q3-To-Date sales off the cliff and that 2019 EPS guidance appears at risk, per checks; CPRI positive mention at Jefferies saying believe the Street is overlooking the L-T oppty in Asia and that Jimmy Choo and Versace op margins are depressed as mgmt invests in the businesses; BBBY shares slipped on cautious call from Edgewater Research citing risks to comps

·     Consumer Staples; GIS slightly missed analysts’ estimates while its adjusted earnings topped expectations/reports organic net sales declined 1% in Q1, reflecting lower organic volume and North America Retail sales flat at $2.38B and operating profit rose 2% to $560M; MO shares traded to 52-week lows today, remains pressured by vaping bans; BYND shares rolled on reports Tim Hortons says it plans to scale back its Beyond Meat offerings/breakfast sandwich and burgers to be available nationally until supplies last and then only in Ontario and British Columbia

·     Housing & Building Products; monthly housing starts and building permits data came in well above the economic estimate, a positive for homebuilders showing strength in space (LEN, TOL, KBH, PHM); MAS was downgraded at Buckingham to neutral as believe accurately reflects the possible benefits from tariff resolutions and/or a slightly higher realized price for the for-sale businesses; LEN was downgraded at KeyBanc as sees upside/downside catalysts balanced, following a 36% return YTD; KeyBanc also downgraded WHR citing limited valuation upside as earnings momentum weakens saying they are concerned that slowing GDP in Europe, China, and now India while also cut SWK on limited valuation upside as well

 

Energy

·     Weekly inventory data was bearish from both EIA and API reports: EIA weekly energy inventory data showed crude stockpiles rose an unexpected 1.06M barrels vs. est. for draw of -2.25M barrels, while gasoline inventories …rose 781K barrels vs. est. for draw of -750K barrels and distillate inventories rose 437K barrels vs. est. for weekly build of 500K barrels – recap of data as crude and gasoline with unexpected builds – bearish. Overnight, the API said U.S. crude supplies rose by 592K barrels for the week ended Sept. 13, showed a stockpile increase of 1.6M barrels for gasoline, while distillate inventories rose by 2M barrels.

·     Energy stock movers; E&P and drillers came under sharp pressure for a second day, erasing most of Monday’s large gains; fairly quiet in individual stocks news though E&C company MDR shares plunged after reports the company hires adviser AlixPartners in effort to stem losses after recently lowered guidance, Dow Jones reported

·     Coal, Utilities & Solar; shares of coal stocks HCC, ARCH, BTU were all under significant pressure today; utility stocks rose early as Treasury yields pulled back ahead of the FOMC meeting, with interest rate sensitive/dividend paying sectors rising (52-week highs today for D, ES, FE)

 

Financials

·     Insurance; AMBC shares higher as Appellate court upheld the Supreme Court decision preserves Ambac’s breach of contract and fraudulent inducement claims against Countrywide and eliminates a jury trial in favor of a bench trial for the BAC claims and severs the primary-liability claims against Countrywide from the contingent secondary-liability claims against BAC

·     Consumer finance and lending; SQ was upgraded to hold from sell at Craig Hallum with increased tgt of $63 saying the stock’s recent sell-off adequately reflects key headwind; WU shares rose as AMZN PayCode launches in the U.S. and allows customers to choose Amazon PayCode at checkout and then pay for their purchase in cash at one of 15,000 WU locations; PYPL Credit is extending its online promotional financing offering to purchases starting at $30/retailers will be able to offer 3 month Easy Payments at 0% APR on purchases of $30 and above with no down payment and gets paid upfront

 

Healthcare

·     Pharma movers; ZYNE shares dropped after mid-stage study data on open-label Phase 2 clinical trial, BELIEVE 1, evaluating topical gel Zygel (ZYN002) in epileptic children, as safety concerns weigh (said was well tolerated but noted two serious adverse events (lower respiratory tract infection and status epilepticus); IRWD amended its collaboration agreement with AZN for the development and commercialization of LINZESS in China/Ironwood will receive up to a total of $125M, including non-contingent payments of $35M and up to $90M in commercial milestone payments; VTVT presents additional positive data from its mid-stage type 1 diabetes treatment trial at the 55th Annual Meeting of the European Association for the Study of Diabetes; ENDP, AMRX tgts lowered at RBC as opioid liability estimate for ENDP more than doubles from $2.1B to $4.4B (assume is paid out over 10 years) and for AMRX, liability estimate actually decreases marginally from ~$500M to ~$400M, while raises liability estimate for TEVA from $3.8B to $4.5B

·     Biotech movers; ACAD 6.25M share Spot Secondary priced at $40.00; BIIB said it will launch a new study to evaluate whether a higher dose of Spinraza can provide greater efficacy in the treatment of the neuromuscular disease spinal muscular atrophy; PTCT 2.48M share Spot Secondary priced at $40.40; TBIO 9M share Spot Secondary priced at $10.00; IGMS 10.937M share IPO priced at $16.00; NLNK reacts to the FDA’s acceptance of licensee Merck’s marketing application for Ebola vaccine V920/the agency’s action date is March 14, 2020

·     Medical equipment and devices; ZBH was upgraded to buy at Canaccord as believe the company is approaching the apex of its turnaround and is now on the cusp of a multi-year cycle of accelerating top-line growth that should translate to incremental leverage opportunities in 2020 and beyond; NVST 26.77M share IPO priced at $22.00

 

Industrials & Materials

·     Transports; sector was pressured as FDX shares dropped following a 9c EPS miss and revs just missing estimates citing weakening global economic conditions, increased costs with worse-than-expected margins at Ground, while also lowered its FY20 adj EPS to $11-13 vs est. $14.73 (prompted several analyst downgrades); in airlines, LUV cuts Q3 CASM view to up 8%-10% vs. previous 9%-11% view and guides Q3 capacity down approximately 3% vs. previous down 2%-3% view; in rails, Cowen said 3Q rail volumes have come in light thus far – likely driven by remnants of the pre-tariff pull-forward, ongoing trade concerns, or a global economic slowdown – and as a result we’re lowering estimates on the group, and cutting price targets for NSC and UNP

·     Metals & Materials; STLD the latest steel producer to issue lower guidance (NUE last week) as sees Q3 EPS 66c-70c, slightly below the consensus 71c saying reduced earnings are primarily related to lower profitability from the company’s sheet steel operations, as shipments and average steel pricing declined in the quarter; weakness in metals broadly today

 

Technology, Media & Telecom

·     Internet; FB unveiled new models of its Portal video chatting devices, making the company’s first foray into TV streaming hardware but offering a limited selection of subscription services (shares of ROKU slipped on headlines); AMZN PayCode, already available in 19 countries around the world, launches today in the U.S. and allows customers to choose Amazon PayCode at checkout and then pay for their purchase in cash at one of 15,000 WU locations; online retailer CHWY beat on quarterly sales but said its net loss widened from a year earlier on an unadjusted basis.

·     Software movers; ADBE quarterly sales grew more than consensus expectations, though projections for the current period were weaker than consensus targets/sees Q4 EPS $2.25 on revs about $2.97B below est. $2.30/$3.03B (sent shares lower)

·     Media & Telecom movers; ROKU shares pressured after CMCSA announced that Xfinity Flex is now included with an Xfinity Internet-only subscription, providing millions of new and existing customers with the ability to easily access their favorite streaming services and manage their connected home devices right on the TV (Guggenheim raised its tgt on ROKU earlier to $170 citing international growth potential of the platform for streaming video)

·     Hardware & Component news; Dow Jones reported Huawei Technologies Co. has been suspended from membership in a global trade group of companies, governments and experts set up to tackle computer security breaches and share information about vulnerabilities; STX guided Q1 non-GAAP diluted EPS forecast from within 5% of $0.90 to within 5% of $0.99 (better guidance) but said “solely reflects the impact of a change in the estimated useful lives of Seagate’s capital equipment, primarily associated with the manufacturing of the Company’s products, from a range of three to five years to a range of three to seven years”; PSTG active as analysts weigh in from Pure’s Accelerate conference – Two key products announced at Pure’s user conference, Accelerate 2019, included: 1) DirectMemory, a new higher performance tier; and 2) FlashArray//C, a new capacity optimized array that can support Tier 2/3 workloads – BTIG reit buy and $20 tgt, Opco reit OP and up tgt to $20

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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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