Market Review: December 04, 2019

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Closing Recap

Wednesday, December 04, 2019

Index

Up/Down

%

Last

DJ Industrials

148.86

0.54%

27,651

S&P 500

19.71

0.64%

3,112

Nasdaq

46.03

0.54%

8,566

Russell 2000

11.37

0.71%

1,614


 

Equity Market Recap

·     U.S. stocks with a strong boost overnight, managing to hold those gains throughout the trading session as major averages mostly erasing yesterday’s steep declines and snapping the recent three-day losing streak for stocks. Stocks rallied this morning given renewed trade optimism between the U.S.-China amid reports the two are moving closer to agreeing on the amount of tariffs that would be rolled back in a phase-one trade deal despite tensions over Hong Kong and Xinjiang (as per Bloomberg). The headlines helped boost trade sensitive sectors while interest rate stocks slipped on rising yields. Oil prices another big story, with WTI Crude rising 4% on the trade news, as well as bullish inventory data and positioning ahead of the OPEC+ meeting later this week. Economic data generally weak (softer ISM services and ADP data) but failed to dent sentiment (Bespoke noted in just 9 months, the Business Activity Index in the ISM Services index went from its highest level since 2005 to its lowest level since 2009) along with a sharply lower reading in private payrolls from ADP ahead of the nonfarm payroll report on Friday. Tech space with nice recovery overall though shares of WDAY, ZS, MRVL, and CRM slip after mixed results and/or guidance overnight. Volumes were modest with investors eagerly awaiting credible and substantial news related to the phase 1 trade deal, with tariff increases looming for 12/15. Financials rebounded given the bounce in Treasury yields while energy stocks led on oil gains.

Economic Data

·     ADP Employment showed 67K jobs were added for November, well below the 135K estimate while last month was slightly downwardly revised to 121K from 125K) – data ahead of nonfarm payroll report on Friday with an estimate of 190K

·     Markit US Services PMI, Nov-F reported at 51.6, in-line with estimates and Markit US Composite PMI, Nov-F reported at 52.0, slightly above prior 51.9 reading

·     ISM Non-Manufacturing for November missed at 53.9, below the est. 54.5 (and vs. prior reading of 54.7); Business activity fell to 51.6 vs 57.0 prior month (the lowest since Jan. 2010) while new orders rose to 57.1 vs 55.6 MoM and employment rose to 55.5 vs 53.7 prior

 

Commodities

·     Oil prices surge $2.33 or 4.2% to settle at $58.43 per barrel, rising on bullish weekly inventory data, improved trade talk news with China-U.S. and ahead of OPEC production talks. The EIA weekly energy inventory report showed crude inventories fell -4.86M barrels (bullish) more than the expected draw of -1.5M barrels. Prices had pushed higher overnight amid optimism that the OPEC+ group could approve deeper production cuts when they meet in Vienna this week, with further support from industry data showing a larger than forecast drop in U.S. crude stockpiles. Positive commentary related to the China-U.S. trade drama also boosted oil prices.

·     Gold prices fell -$4.20 or 0.3% to settle at $1,480.20 an ounce, (a day after rising $15.20 or 1% to settle at $1,484.40 an ounce, its highest settlement in nearly a month) as traders/investors rotated back into riskier assets and out of defensive ones.

·     Commodity prices mixed as defensive gold pares slides, paring recent gains as riskier assets rally today on renewed trade optimism with China while oil prices benefit most from trade headlines that the U.S. and China were moving closer to a trade deal and before OPEC+ decides on its output-cut policy later this week. Also weekly inventory data came in bullish from both EIA/API

 

Currencies & Treasuries

·     Treasury yields edged higher most of the day, erasing most of its Tuesday declines with the 10-year up over 6 bps to 1.78% at highs amid the rally in risk today. The long end was up around 7 bps higher with the 30-year at 2.233% and the 2-year up 4 bps at 1.58%. Weaker ISM services data along with manufacturing on Monday and private payrolls today all disappoint. The U.S. dollar was mostly lower though pared losses into the afternoon, as the euro slipped from one month highs of 1.1116 to lows of 1.107, while the British pound has risen to its highest level since May against both the dollar (above 1.31) and euro (52-week highs above 1.18). The dollar rebounds against the safe-haven yen, but mixed overall.

 

 

Macro

Up/Down

Last

WTI Crude

2.33

58.43

Brent

2.18

63.00

Gold

-4.20

1,480.20

EUR/USD

-0.0004

1.1079

JPY/USD

0.25

108.89

10-Year Note

0.064

1.78%

 

 

Sector News Breakdown

Consumer

·     Retailers; GIII shares declined as apparel sales fall short as tariffs weigh/said revenue increased 5.2% to $1.13B in FQ3 as the wholesale business performed well but missed the $1.7B estimate while cuts FY20 EPS view to $3.06-$3.16 from $3.15-$3.25 and lowers FY20 revenue guidance to $3.2B from $3.3B; shares of gun makers/sporting goods (AOBC, RGR, DKS, VSTO) stores active after monthly NICS FBI firearm background checks for November at 2,574,752, up from prior month 2,393,609, but slightly lower than the 2,543,752 figure YoY; GPRO announced a "strong" Black Friday and Cyber Monday shopping period as reported YoY sell-through growth of 30% based on available data from its larger U.S. retail partners; BNED shares plunge following a sharp miss in Q2 earnings and revenue while announced the Board approved the engagement of a financial advisor to assist with the evaluation of a range of potential strategic opportunities

·     Consumer Staples and restaurants; in food, CPB shares slipped early after reporting organic sales fell 1% in FQ1 amid a decline in the meals & beverages segment while cut its sales forecast (to -1% up 1% from prior view of 1%-3% gain) due to the divestiture of its European chips business earlier this year; DENN upgraded to buy from hold at Maxim and raise our price target to $26, from $23, following the announcement earlier this week that the company expanded its share buyback program; CMG CEO said chain recently raised menu prices by about 2% and said half of 2020 new stores will have a drive thru-lane

 

Energy

·     Energy stocks oil prices jumped across the board given the strong action in oil prices which finished markedly higher on bullish crude inventory data from the EIA and API, as well as positive trade commentary about a Phase 1 deal. Few headlines out from OPEC members ahead of official meeting results the next two days with Saudi Arabia threatening to increase oil production unilaterally if some OPEC nations continue to defy existing output cuts, WSJ reported.

·     Inventory data bullish for crude: The American Petroleum Institute reported that U.S. crude supplies fell by -3.7M barrels for the week ended Nov. 29, while showed stockpile gains of 2.9M barrels for gasoline and 794,000 barrels for distillates. The EIA said crude inventories fell -4.86M barrels (bullish) vs. est. for draw of -1.5M barrels; Gasoline inventories rose a greater 3.38M barrels vs. est. for build of 1.75M barrels; Distillate inventories rose a greater 3.06M barrels

·     E&P sector; CHK shares gained on news it secured a $1.5B term loan facility – a lifeline for the company that issued a going concern warning a month ago. In utilities, PCG rose after a Bloomberg report that the company is near finalizing terms for a $13.5B payout to victims of wildfires caused by its power lines, a major step toward resolving the largest utility bankruptcy in American history

 

Financials

·     Bank movers; a bounce back for banks and brokers given the rebound in Treasury prices after sinking as much as 11 bps yesterday to trade under 1.7% for the 10-year (back above 1.77% today); news flow remains quiet as do trading volumes; MA announced a stock buyback of up to $8B of its common stock and boosted its quarterly dividend 21% to 40c from 33c

 

Healthcare

·     Pharma movers; LCI said its first human study of insulin glargine met all primary endpoints and expects to meet with FDA in the coming months to plan next steps for clinical advancement, including design of biosimilar product development plan; the FDA designates BMY’s Orencia a Breakthrough Therapy for the prevention of moderate to severe acute graft-versus-host disease in hematopoietic stem cell transplants from unrelated donors; RVNC 6.5M share Spot Secondary priced at $17.00; ARWR 4M share Secondary priced at $58.00; KOD 6M share Secondary priced at $46.00; RLMD 3.333M share Spot Secondary priced at $30.00

·     Biotech movers; RAPT announced a license and collaboration agreement with Hanmi Pharmaceutical for FLX475 in Asia where RAPT will receive $10 million in an upfront payment and near-term milestone payment; MDRX announces private offering of $200M of convertible senior notes; PTGX erasing all of its 47% decline yesterday after analysts BTIG said think the sell-off in PTGX shares may be overdone following the release of preliminary data on its injectable hepcidin mimetic (PTG-300) for the treatment of beta-thalassemia (also insider purchases by CEO Patel of 30K shares, VP Gupta of 30K shares and 8K shares from Dir Giraudo yesterday as per filings); ALLK shares rose on Bloomberg report said to weigh options/including sale

·     Medical equipment and devices; ZBH was upgraded to strong buy at Raymond James and raise tgt to $170 saying opportunities to reduce obsolete inventory charges and inventory over the next several years increase conviction in further shareholder value creation; VRAY 41.55M share Secondary priced at $3.13

·     Healthcare services and providers; HQY shares rose on beat and raise quarter as Q3 results were well-above expectations (contained a two-month contribution from the recent WageWorks acquisition) – Wells Fargo noted HSA administration platform HQY reported an October quarter beat with revenue of $157.1 million (up 123% yr/yr and 21% organic)

 

Industrials & Materials

·     Industrial & Machinery; monthly truck orders weak as ACT Research said combined NA Classes 5-8 intake fell 15% M/M and 38% Y/Y during the month on a nominal basis/preliminary North America Class 8 net orders were down 20% M/M to 17,500 units (shares of PCAR, CMI, NAV are leveraged to the data); ETN downgraded to hold from buy at Deutsche Bank citing outperformance over the last 6-month and 3-month period vs. coverage universe

·     Transports; Dow Transports rise as high as 10,692 before paring gains and moving back above the 50-day MA of 10,604 today (fell to lows around the 200-day MA yesterday of 10,459); in rails, UNP guides 4Q volume down a little more than 10% versus prior-year Q4 and sees 4Q revenue down similar percent as volumes, although not quite to magnitude after pricing actions; RYAAY said it expects traffic growth for FY21 to be 156M guests, down from a prior expectation for 157M guests; said it had to revise its 2020 schedule based on receiving just 10 Boeing MAX aircraft, instead of the 20 planes it expected. Ryanair is also closing two bases

·     Metals & Materials; RIO said it will curtail operations at its Richards Bay Minerals unit in South Africa due to increased violence in communities near its operations that has targeted its employees and now expects titanium dioxide slag production for 2019 to come in at the lower end of guidance of 1.2M-1.4M metric tons (shares of other TiO2 names VNTR, TROX, KRO, CC were all active on the news)

·     Aerospace & Defense; WWD upgraded to buy at Jefferies and up tgt to $135 from $108 as think Aerospace profitability (~75% of earnings) could surprise to the upside as margins climb and we estimate potential FCF of $1.8b (20% of market cap) that could be deployed from FY20-23; UAL one of BA’s biggest customers, placed an order for 50 Airbus A321 extra-long jets that will replace the airline’s fleet of Boeing 757 mid-sized jets

 

Technology, Media & Telecom

·     Internet; in online travel, EXPE CEO and CFO to resign effective immediately in mgmt shake-up, while announces a 20M share buyback program as Barry Diller, Chairman of the Board, and Vice Chairman Peter Kern, Director of Expedia, will oversee the company’s executive leadership team; NTES upgraded to buy from neutral at Goldman Sachs w/$368 tgt citing improving fundamentals reflected in the recent Q3 earnings report, which beat on profit but missed on revenue; BIDU announced that their Facemoji Keyboard and Simeji apps have reached the milestone of 40 million users and 100 million downloads.

·     Semiconductors; Philly semi index (SOX) surges nearly 2% early, rebounding post yesterday decline; MRVL reported Q3 revenues/EPS of $662M/$1.07, respectively, and in line with estimates while Q4 guidance was above estimates as it includes revenues from Avera and Aquantia, which were not in estimates/ex the revenues from Avera/Acquantia, Marvell revenues would have come in below consensus estimates; MCHP narrowed both its EPS and sales view for Q3 and increasing the midpoint driven by order strength extending into November

·     Software movers; INST announced to be acquired in cash deal of $47.60 by Thoma Bravo, valued at about $2B, but was below last night closing price of $52.96 – though statement notes price per share represents an 18% premium to the Company’s 3-month volume-weighted average price as of October 27, 2019 – the day prior to Q3 earnings call when it announced a strategic review for its Bridge business; earnings tonight from WORK, SEAC, SMAR; DT shares fell on 27.5M share offering – to trade December 6th

·     Software earnings; CRM delivered big beats on revenue, EPS, CRPO and calculated billings as upside balanced across all four clouds and included the first quarter of Tableau that contributed to 33% y/y reported growth (21%organic growth) – subscription revenue grew 34% y/y to $4.239B and Professional services revenue grew 22% y/y to $274M while below-consensus guidance for 4Q EPS and current RPO kept lid on shares; WDAY beat on most key metrics, but billings growth decelerated and came in below Street estimates/raised guidance for FY20 (above) and provided guidance for Q4 and Q1FY20 revenue and operating margins (below consensus); in security software, ZS shares slipped after reported Q1 results that beat expectations and raised its full-year adjusted profit view, although the midpoint of the higher forecast was below expectations/Q1 billings growth strong at +37%, 5% above Cowen and 9% above Street views

·     Media & Telecom movers; FTR rises after its change of the CEO guard, with recent Frontier financial adviser Bernie Han taking over for Daniel McCarthy; Capgemini (CGEMY) was selected by Bayer as a core strategic partner to transform its IT landscape/Capgemini strengthens and expands existing client partnership with new 6-year landmark deal worth over a billion Euros; NTDOY said over Thanksgiving week (Nov. 24 to Nov. 30), the Nintendo Switch and Nintendo Switch Lite systems sold a combined total of more than 830,000 units in the U.S.

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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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