Mid-Morning Look: December 02, 2019

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Mid-Morning Look

Monday, December 02, 2019

Index

Up/Down

%

Last

 

DJ Industrials

-154.54

0.55%

27,896

S&P 500

-22.16

0.71%

3,118

Nasdaq

-105.34

1.22%

8,560

Russell 2000

-9.24

0.57%

1,615

 

 

U.S. equities slide to start the day, week and new month, as President Trump’s decision to restore tariffs on steel and aluminum imports from Brazil and Argentina dims investor optimism while erasing positive early sentiment following a better than expected reading on China’s manufacturing activity in November and by Black Friday sales data in the U.S. Monday’s moves were a step back for stocks after they closed out their best month since June (for November, the S&P rose 3.4%, the Dow gained 3.7%, and the NASDAQ climbed 4.5%). The market has climbed to fresh highs in recent weeks, buoyed by data showing the U.S. service sector on solid footing and as the Fed remains accommodative and the U.S.-China taking more steps top near a phase 1 part of trade deal. Energy stocks pacing the gains early amid a bounce in oil with tech falling the most and metals mixed on tariff news. Treasury prices fall along with gold prices.

 

Treasuries, Currencies and Commodities

·     In currency markets, the dollar was weak, only to slide further following a softer round of U.S. economic data this morning (ISM manufacturing and construction spending), this after the euro slipped to 7-week lows late last week. Commodity prices mixed as oil prices jumped early following the better China Manufacturing data over the weekend, but prices pared gains following a weaker ISM manufacturing print in the U.S. this morning. Treasury market’s fall as yields jump given the weaker US data while gold prices also slide early.

 

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.

 

 

Macro

Up/Down

Last

 

WTI Crude

1.00

56.17

Brent

0.88

61.38

Gold

-5.50

1,467.20

EUR/USD

0.0047

1.1065

JPY/USD

-0.14

109.35

10-Year Note

0.063

1.839%

 

 

Sector Movers Today

·     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 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.

·     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

·     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

·     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

 

Stock GAINERS

·     AKS +3%; among US steel makers rising early after the restoration of steel and aluminum tariffs on Argentina and Brazil announced Monday by the Trump Administration

·     SPLK +1%; 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

·     THS +4%; upgraded to outperform at William Blair citing the potential of the company’s private brand business, as well as its product portfolio

·     XEC +2%; gaining along with other energy stocks (MRO, EOG, HFC, NOV) given the rebound in oil prices following better China manufacturing data

 

Stock LAGGARDS

·     AFL -2%; 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)

·     APA -11%; following a disappointing operational update on its Maka Central-1 well offshore Suriname with no reported hydrocarbon finds or initial well tests

·     BRKS -5%; said was unable to file its annual report on form 10-k for its fiscal year ended sept. 30 within prescribed time period

·     DXCM -3%; 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

·     LXRX -14%; after saying the FDA’s Office of New Drugs reiterated the FDA’s prior position and denied Lexicon’s appeal of the Complete Response Letter for sotagliflozin in type 1 diabetes

·     OLLI -8%; after the company announces the unexpected death of Chairman/CEO Mark Butler over the Thanksgiving weekend.

·     ROKU -16%; 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

·     TDOC -6%; 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

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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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