Market Review: December 02, 2019

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Closing Recap

Monday, December 02, 2019

Index

Up/Down

%

Last

DJ Industrials

-264.97

0.94%

27,786

S&P 500

-26.86

0.85%

3,114

Nasdaq

-97.48

1.12%

8,571

Russell 2000

-16.82

1.04%

1,607


 

Equity Market Recap

·     U.S. stocks fell for a second straight session, with markets lower in broad based selling (stocks, bonds, gold, the dollar) amid weaker economic data, and macro trade news. At this point, the U.S. is still on track to hit China with its next round of tariffs on December 15th, but according to recent reports/comments it appears they may be delayed as talks continue to progress, though China is insisting that U.S. tariffs be rolled back as part of any "phase one" trade deal, China’s state-run Global Times said Sunday. In other market news, the U.S. economy’s manufacturing sector (ISM data) contracted for a fourth straight month in November, as new order volumes slid back to around their lowest level since 2012. Also, President Donald Trump said he would restore tariffs on metal imports from Brazil and Argentina. European stocks ended the day 1.6% down for its worst single-day drop in two months following the news of the restored tariffs on some imports, while the volatility gauge for euro zone stocks jumped to six-week highs after the tariff threat. Gains were led by energy stocks amid the bounce in oil while financials held up fairly well (BAC, JPM, COF, SYF, and NTRS among those touching 52-week highs earlier) and tech fell sharply. U.S. benchmark oil futures settled higher on Monday for the first time in three sessions ahead of the OPEC meeting later this week. Retail stocks were in focus, with Cyber Monday sales expected to hit a record following $11.6 billion in online sales on Thanksgiving and Black Friday.

Economic Data

·     ISM Manufacturing for November falls to 48.1 from 48.3 prior and below the est. 49.2 as production rose to 49.1 vs 46.2 MoM and new orders fell to 47.2 from 49.1 prior; employment segment fell to 46.6 vs 47.7 prior and inventories fell to 45.5 (May 2016 low) vs 48.9, prices paid rose to 46.7 vs 45.5 and backlog of orders fell to 43.0 (January 2016 low) vs 44.1

·     Markit said Manufacturing PMI for November at 52.6 vs Flash Reading 52.2 and rises from 51.3 in Oct. (vs. year ago 55.3) at the highest reading since April 2019 as output rises to 53.7 vs 52.4 in Oct. (best since January ’19) and new orders rise vs prior month

·     Construction Spending for October fell (-0.8%), below the expected rise of 0.4% while Sept. was revised to -0.3% from 0.5% gain, and August revised to 1.1% gain from 0.3% decline. Private construction fell 1% in Oct., after 1.1% decline in Sept., and public construction fell 0.2% in Oct.

 

Commodities

·     Crude oil prices advanced amid talk of further OPEC supply curbs ahead of a meeting of the OPEC countries scheduled for Thursday, while a broader coalition of oil producers known as OPEC+ is due to meet on Friday. WTI crude prices rose 79c or 1.4% to settle at $55.96 per barrel (off earlier highs $56.67). Expectations are for OPEC to likely to go beyond its current agreement to cut production by 1.2 million barrels a day, according to reports and could reduce production by an additional 400,000 barrels, as per Reuters, running until June 2020. Overall prices rebounded after last week’s 1.6% loss. Prices also jumped overnight following better-than-expected China manufacturing data but pared those gains after the U.S. ISM manufacturing PMI for November came in below expectations. Gold prices slipped -$3.50 or 0.2% to settle at $1,469.20 an ounce, falling despite the pullback in the dollar and stocks.

 

Currencies & Treasuries

·     The U.S. dollar index (DXY) sank following weak economic data in the U.S., falling as much as 0.4% below the 98 level with the buck falling to four-session lows around 109 (off six-month highs 109.73). The soft U.S. manufacturing ISM print and decline in U.S. equities and yields have also weighed. The euro rises 0.6% on the day to a 10-day high of $1.109 after the weaker-than-expected U.S. manufacturing data (ISM said its manufacturing index fell to 48.1% in November from 48.3% in October with a level below 50 indicating a contraction in sector activity). Treasury prices rolled lower along with stocks on a day of broad based asset selling, with the 10-year yield rising about 5 bps to 1.83%, down along with weaker economic data.

 

 

Macro

Up/Down

Last

WTI Crude

0.79

55.96

Brent

0.43

60.92

Gold

-3.50

1,469.20

EUR/USD

0.006

1.1078

JPY/USD

-0.52

108.98

10-Year Note

0.053

1.829%

 

 

Sector News Breakdown

Consumer

·     Retailers; Adobe reported a 17.2% growth on Thanksgiving and Black Friday (vs. 25.3% in 2018) and Salesforce Commerce Cloud reports 14% y/y growth on Black Friday (vs. 13% last year). Adobe said online sales rose more than 19.6% to $7.4B on Black Friday, marking the day’s largest revenue grab ever, while for Thanksgiving, it estimated web sales grew 14.5% to $4.2Bl for ULTA JPMorgan said given ULTA’s growth and superior competitive positioning, they believe it is only a matter of time for ULTA to re-rate back to the high end of the "retail winner" bucket; OLLI announces the unexpected death of Chairman/CEO Mark Butler over the Thanksgiving weekend

·     Consumer Staples; Citigroup downgraded PM in tobacco space to neutral and upgraded MO to buy saying it is becoming hard to argue that "tobacco is being disrupted" as they believe investors will start to care less about "reduced risk products;" TWNK said it’s going to buy wafer-maker Voortman Cookies from Swander Pace Capital for $320M (C$425M) in cash https://on.mktw.net/33BgmDX ; THS was upgraded to outperform at William Blair citing the potential of the company’s private brand business, as well as its product portfolio.

·     Restaurants; DPZ positive mention by Oppenheimer as remains one of their top picks into 2020 despite stock’s outperformance thus far in 4Q (+22% vs -5% peers’) as highlights drivers for accelerating SSS, best-in-class EBITDA growth and improving investor sentiment in 2020; DENN announces new $250M share buyback

·     Casino & Leisure movers; Macau casino revenue tumbles 8.5% amid the ongoing China-U.S. trade war and protests in neighboring Hong Kong, gambling revenue for the Chinese territory in November slid 8.5% Y/Y to 22.9B patacas ($2.8B). However, the figure was better than analyst expectations of a drop between 10%-13% (WYNN, LVS, MGM, MLCO); FCAU clinched a new tentative labor contract with the United Auto Workers by agreeing to double up on a major investment in U.S. production announced earlier this year

 

Energy

·     Energy stocks were among the few standouts to the upside today given the rally in oil prices following the better China manufacturing data overnight; in negative news, shares of APA slumped following a disappointing operational update on its Maka Central-1 well offshore Suriname with no reported hydrocarbon finds or initial well tests; Husky Energy (HUSKF) said it is cutting planned capital spending for 2020-21 by C$500M from earlier guidance due to changing market conditions (trims C$100M from its capex guidance for 2020 to C$3.2B-C$3.4B). Next upcoming catalyst a meeting of the OPEC countries is scheduled for Thursday, while a broader coalition of oil producers known as OPEC+ is due to meet on Friday.

 

Financials

·     Bank movers; financials JPM, COF, NTRS, CFG, BAC, AMP, SYF among financials touching 52-week highs today; WFC was downgraded to underperform at Raymond James citing expectations of weak earnings and a fourth-straight year of revenue declines next year and expects revenue to fall 6.8% in 2020, the steepest decline among Wells’ peers, and projects loan growth of a peer-worst 0.5%; SCHW was upgraded to neutral from sell at UBS noting given the combined company’s large market share in narrowly defined discount brokerage, as well as RIA custodian, the deal may draw regulatory scrutiny; in insurance, AFL shares slip as sees 2020 eps flat to 2019 reported excluding currency and up 1% when normalizing 2019 (guided 2020 EPS $4.30-$4.50 vs. est. 44.48 – in 8K earlier). In services; ADT was downgraded to neutral at Bank America following a big YTD run (+54% vs. S&P 500 +25%), saying while sentiment remains subdued and they see valuation as far from demanding, they also see few catalysts for continued outperformance.

 

Healthcare

·     Pharma movers; BAX agreed to acquire SNY’s Seprafilm Adhesion Barrier device and related assets for $350M in cash as transaction should close no later than next quarter; EYEG reports additional positive data from study testing its lead product Ocular Bandage Gel eye drop in patients who underwent a type of surgery to treat vision problems called photorefractive keratectomy; AMRN said the European Medicines Agency (EMA) has accepted to review its fish oil-derived treatment, Vascepa; LGND said it signed a worldwide license agreement for its OmniAb antibody discovery platform with SNY; KOD shares surged after agreeing to sell a capped royalty right on sales of its eye drug KSI-301 to privately held Baker Bros. for $225 million

·     Biotech; LXRX shares drop after saying the FDA reiterated its prior position and denied Lexicon’s appeal of the Complete Response Letter in relation to the New Drug Application for sotagliflozin (Zynquista) in type 1 diabetes; BIIB downgraded to neutral at Baird saying upcoming Clinical Trials on Alzheimer’s Disease annual congress could serve as a negative catalyst for shares; ASLN shares jump after reporting positive preliminary data from a multiple ascending-dose study evaluating ASLAN004 for the treatment of moderate-to-severe atopic dermatitis (AD).

·     Medical equipment and devices; DXCM fell as Reuters notes the Company said on its website Sunday that some users of its continuous glucose monitoring systems were not receiving data or alerts as intended. In an update Monday on its Facebook page DXCM says still investigating root cause; CRY announced it has received CE Mark for the E-nya thoracic stent graft system for the minimally invasive repair of lesions of the descending thoracic aorta, including thoracic aortic aneurysms and dissections

·     Healthcare services and providers; In connection with its merger with WCG, CNC has agreed to divest its Medicaid and Medicare Advantage businesses in the state of Illinois to CVS for an undisclosed sum; EVFM rises after the company said its lead drug gel Amphora for the prevention of urogenital chlamydia and gonorrhea in women met the main and secondary goals of a mid-stage trial compared to a placebo; TDOC was downgraded at SunTrust noting that the stock is up 69% year-to-date and its enterprise value to sales multiple has reached a 9-turn premium to its 5-year historical average

 

Industrials & Materials

·     Industrial & Machinery; DE downgraded to underperform at Bank America post a disappointing earnings outlook that they view as more realistic than conservative/says the set-up on agriculture into next year is very challenging, and there is no guarantee that FY20 is necessarily the bottom if US farmers respond with higher corn and soybean plantings; AQMS shares fell after announced that on Friday evening a fire occurred in the Aqua Refining area of the plant that heavily damaged its lead-recycling facility in McCarran, Nevada

·     Metals & Materials; steel stocks in the U.S. (X, AKS, STLD, NUE) active after the restoration of steel and aluminum tariffs on Argentina and Brazil announced Monday by the Trump Administration which was a factor pulling industrial base metal prices down across the board. President Trump said this morning, "Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries." RBC Capital upgraded RIO to Sector Perform (and GLNCY upped as well), PT 3,900p while strongly caution that beyond H1, the outlook for Chinese steel demand looks increasingly challenging; NEM announces to repurchase up to $1B in stock; Canadian miner Continental Gold agrees to be acquired by China’s Zijin Mining for ~C$1.4B (~US$1B) in cash; VALE to suspend temporarily the disposals of its mine Brucutu into the Laranjeiras dam while the company considers its conditions,

·     Chemicals; Morgan Stanley resumed LYB at overweight and a $110 price target and downgraded DOW to Equal-weight, but maintain our $58 price target as Dow thesis that dividend yield would ultimately predominate over EV/EBITDA has now played out

 

Technology, Media & Telecom

·     Internet; NFLX cautious mention by KeyBanc saying while Netflix should remain the dominant global SVOD provider, its 2019 results so far suggest increasing elasticity and/or a rising cost of customer acquisition, and the entrance of Disney as a direct competitor seems more likely than not to augment these trends; EBAY tgt raised to $45 at Wells Fargo citing recent agreement to sell its StubHub business for $4.05 billion; CNBC reported EU starts new preliminary probe into Google and Facebook’s use of data

·     Software movers; SPLK was upgraded to buy at Goldman Sachs and raise tgt to $180 from $147 based on updated pricing model and "de-risking" of free cash flow guidance through FY23/says valuation of shares is "undemanding"; Stephens positive on video games saying retail checks around Black Friday indicated strong demand for EA’s sports titles and Jedi Fallen Order as well as ATVI’s Call of Duty Modern Warfare. We expect Jedi Fallen Order to continue selling well through the holiday; WORK shares plunge early ahead of earnings this Wednesday; COUP earnings expected tonight after the close

·     Hardware & Component news; AAPL positive mention at JPMorgan as raise tgt to 296 from $290 and up estimates after checks while Wedbush said based on Apple store checks, inventory levels/shortages at a number of retailers, and reduced prices for AirPods 2, they believe Cupertino could potentially sell 3 million+ of these units over Black Friday/Cyber Monday; ROKU was downgraded to underweight at Morgan Stanley saying it will be increasingly difficult to sustain the current premium in Roku’s valuation levels as gross margins fall and gross profit growth moderates; BRKS said unable to file its annual report on form 10-k for its fiscal year ended sept. 30 within prescribed time period

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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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