Closing Recap

Wednesday, June 05, 2019

Equity Market Recap

·     U.S. stocks jumped for a second straight session as the same factors that lifted stocks for their biggest one-day tally since January yesterday, were the reasons markets bounced again today. A “softer” Fed has boosted sentiment for stocks, with recent Fed officials (Powell, Clarida, Bullard) noting they are ready to act to stave off an economic slowdown due to the potential impact of trade wars with China (and Mexico if tariffs are imposed this week). Their acknowledgment this week of risks posed by the deepening trade spats helped reassure investors who have aggressively boosting bets the central bank will ease this year. Data showing that private payrolls (ADP report) change was its lowest since March 2010 (added 27K jobs which was well below the 185K economist estimate) helped back market expectations that the Fed may get more aggressive and cut rates in the coming months.

·     The other factor helping markets was bets tariffs on Mexico will be avoided after White House trade advisor Peter Navarro said in an interview with CNN that Mexican officials still have time to prevent the U.S. tariffs from taking effect by agreeing to steps such as taking asylum seekers and increasing resources at the border. Senator Grassley also said today he was optimistic the U.S and Mexico could reach a deal to avert tariffs. Stocks did pare gains late afternoon after Mexico said it would make its own demands in talks with U.S. today on tariffs.

·     In stock news, software stocks were mixed after earnings results (CRM advanced on results, DB, DATA, TWLO rallied in sympathy, while PVTL, GWRE fell on lower outlooks); semiconductors fell after SWKS cut its outlook citing Huawei ban implications; banks fell early as Treasury yields remained near 2-year lows but bounced later in the session; defensive utilities a beneficiary of the low yields, moving back near all-time highs; energy stocks the biggest drag on markets as oil price touched the lowest levels since January on bearish inventory data (now down over 20% from April highs); food stocks got a boost from better CPB earnings; 52-week highs for staples HSY, MDLZ, PEP, KO, KMB as well as many in the REITs and utility sectors

Economic Data

·     Private payrolls slowing as ADP private payrolls rose 27K (9-year lows), well below the 185K est. while the prior month reading was revised down to 271K from 275K; Breakdown of private payroll data: Small businesses fell -52K, Medium business +11K, and Large Businesses +68K

·     Markit Services PMI at 50.9 in-line with est. 50.9 (but was at lowest since early 2016) while ISM Non-manufacturing index for May reported at 56.9 vs. est. 55.4 (prior 55.5); the new orders index at 58.6 vs. 58.1 prior month, prices paid 55.4 from 55.7 and employment index at 58.1 vs. 53.7 in April (highest since Oct 18)

·     The Fed Beige Book said “economic activity expanded at a modest pace overall from April through mid-May, a slight improvement over the previous period. Almost all Districts reported some growth, and a few saw moderate gains in activity. Manufacturing reports were generally positive, but some Districts noted signs of slowing activity and a more uncertain outlook among contacts. Residential construction and real estate both showed overall growth, but both sectors saw wide variation in sentiment across Districts. Reports on consumer spending were generally positive but tempered. The outlook for the coming months was solidly positive but modest, with little variation among reporting Districts.

Commodities

·     Oil prices end much lower as WTI crude falls $1.80 to settle at $51.68 per barrel, now down over 22% from its April peak putting it in "bear market" territory. Another round of bearish inventory data spooked oil investors, with WTI crude and Brent sinking to their lowest levels since January after the EIA said in its weekly report that total petroleum stockpiles grew by about 22M barrels last week, the biggest jump in data going back to 1990 while drillers also pumped out a record 12.4M barrels a day. The EIA inventory data showed an unexpected 6.77M barrel build in crude stocks, compared to an estimate for -2M barrel draw and followed a 3.5M barrel increase reported by API overnight. Meanwhile gasoline and distillate stockpiles built more than expected.

·     Gold prices settled higher, rising for a 6^th straight day to $1,333.60 an ounce, rising $4.90 for its highest settlement since late February on a weaker dollar and a more dovish Fed outlook on interest rates the last few days citing trade tariff implications to the economy.

Currencies & Treasuries

·     Treasury prices were steady, slipping after early morning gains as yields ticked higher on mixed economic data (better ISM services data and weaker ADP payrolls), a softer economic outlook from the Fed Beige Book, and as stocks rebounded late afternoon. Yields were modestly higher though Bespoke noted the 2-year treasury saw its largest 10-day downside move (-44 bps) in yield since October 2008. The U.S. dollar rebounded late day vs. euro and yen after sliding the last few sessions on rising expectations of the Fed cutting rates this year.

Sector News Breakdown

Consumer

·     Retailers; GME shares to new 52-week lows hours following a miss on its Q1 revenues (fell 13% to $1.55B vs. $1.64B est.), despite an unexpected profit in GAAP terms, while comp sales dropped (-10.3%) and the company decided to eliminate its dividend to preserve cash; AEO positive Q1 results as EPS of 24c beat by 3c while Q1 comp sales up 6%, topping the 3.1% est though guided Q2 EPS 30c-32c vs. est. 35c; VRA posted Q1 rev beat of $91M and better year revs at $425M-$440M vs. est. $426.33M on strong comp sales of 5.2% (topping views); GIII shares slide on Q1 sales miss ($634M vs. est. $650.45M) and softer guidance

·     Autos; sector was active after Peter Navarro said tariffs may not have to go into effect, speaking on CNN; GM was denied an exemption to the 25% U.S. tariff on its Chinese-made Buick Envision sport utility vehicle; TSLA traded as high as $201.27 before fading, after touching 52-week lows of $176.99 on Monday; SAH was upgraded to overweight at Stephens; recent hail riding IPO UBER traded back above its price of $45 for the first time since May 9th

·     Consumer Staples; in the food space, CPB Q3 earnings and revenue topped expectations, boosted by higher demand for its snack brands, while guided FY19 adjusted EPS to $2.50-$2.55, above consensus of $2.47/said meals and beverages segment showed signs of stabilization; BF posted mixed Q3 results (EPS beat/sales miss) saying sees 2020 underlying net sales growth of 5%-7%, though says higher tariffs and input costs will hurt gross margins this year; ELF was upgraded to equal-weight at Morgan Stanley as views valuation more reasonable following the 53% drop in the stock over the year

·     Casino & Leisure movers; cruise lines fell after Trump bans travel to Cuba; CCL confirmed that it will no longer be permitted to sail to Cuba effective immediately, due to changes in U.S. policy; NCLH was downgraded to neutral at Buckingham; CCL and its subsidiary Princess Cruise Lines has been ordered to pay $20 million for environmental violations just two years after it paid $40 million for dumping oil-contaminated waste into the ocean; CHDN was upgraded to outperform at Telsey Advisory; JPMorgan turned positive on Macau Gaming, upgrading shares of Wynn Macau, MGM China, MLCO, and Galaxy Entertainment all to overweight (cut SJM Holdings)

Energy

·     Energy stocks sunk in a big way on Wednesday, weighed down by another bearish inventory report which sunk WTI crude and Brent to their lowest levels since January. The EIA said in its weekly report that total petroleum stockpiles grew by about 22M barrels last week, the biggest jump in data going back to 1990 while drillers also pumped out a record 12.4M barrels a day. The EIA inventory data showed an unexpected 6.77M barrel build in crude stocks, compared to an estimate for -2M barrel draw and followed a 3.5M barrel increase reported by API overnight. Given the pressure on energy prices in E&P (PXD, CXO, XEC, FANG), names leveraged to natural gas (SWN, CRK, GPOR, RRC), service names (HAL, SLB) and drillers were absolutely clobbered. After lagging yesterday in the broad market rally, the defensive utility sector leading higher today, with the UTY up nearly 2% nearing its all-time highs (769.63 on 5/24), with shares of ETR, AEP, ED, ES, SO, AWK at 52-week highs today.

Financials

·     Bank movers; as go Treasury yields, so goes the banking sector – at least for the last few weeks – as banks have dropped sharply given the recent decline in Treasury yields as it narrows lending margins. With the stance on the Fed turning overly dovish with fed fund futures forecasting rate cuts this year, pressure related to the move in yields has pushed stocks lower. In insurance, AIG was downgraded to hold at Deutsche Bank noting the spike in shares (valuation call); trust bank targets (BK, STT, NTRS) were cut at Morgan Stanley citing curve pressure

·     Consumer finance and lending; few stories today as Visa (V) announced a new strategic agreement with WU that will implement Visa Direct, Visa’s real-time1 push payments platform in an effort to bring speed and transparency to the process of sending money around the world; Goldman Sachs upgraded both FLT ($305 tgt) and WEX ($225 tgt) to buy from neutral and upped tgts saying each have substantially improved their execution over the past year and are on track to deliver consistent, mid-to-high teens earnings growth over the next two years; FISV was upgraded to buy at SunTrust

Healthcare

·     Pharma movers; IFRX shares plunge as much as 85% after its drug for an inflammatory skin disorder called Hidradenitis Suppurativa failed to show a statistically significant response in patients receiving the treatment compared with those on placebo (CCXI shares fell in reaction as has competing drug); LLY said its Emgality injection was approved by the U.S. FDA for the treatment of episodic cluster headache in adults. Lilly said Emgality is the first and only treatment that reduces the frequency of attacks; in the cannabis sector, CRON was double upgraded to buy from underperform at Bank America amid improved confidence that Cronos is near announcing a launch in the U.S and raised its tgt to $27 from $17 (ACB, CGC, TLRY higher in reaction)/BoFa said it sees the CBD market at $2 bln now and will grow to $11.5 bln in 2032

·     Biotech movers; SRRA rises after its bone marrow disorder treatment Momelotinib wins FDA ‘fast track’ status and plans to launch the late-stage trial in Q4 2019; AIMT said it has received additional patent protection for its HepTcell and ALT-702 programs in the United States

·     Medical equipment and devices; RWLK shares surge after the company said the FDA cleared the company’s ReStore soft exo-suit system for sale to rehabilitation centers across the United States; MDT was upgraded to outperform with $110 tgt at Wells Fargo saying the company’s late stage pipeline will accelerate its growth into fiscal 2021; SIEN priced a 17.4M share secondary at $5.75 per share, while Wells Fargo raised its rating to outperform with a $10 tgt

·     Healthcare services and providers; CVS mentioned positively by several analysts after its investor day, with Leerink raising tgt to Street high $100; LH disclosed a data breach affecting 7.7M customers that occurred between Aug 1 2018 and March 30 2019/company also announced mgmt changes; HQY reported Q1 results well ahead of expectations at 41c/$87.1M vs. 34c/$84.1M and increased guidance for the full year based on the performance in the quarter and increased expectations for the remainder of the year

Industrials & Materials

·     Transports; ODFL said revenue per day increased 4.2% Y/Y to due to an increase in LTL revenue per hundredweight that was partially offset by a 5.8% decrease in LTL tons per day; in rails, UNP said at UBS conference that Q2 volumes running down about 3% affected by weather, intermodal and high inventories; KSU at Deutsche Bank conference estimated impact to Q2 2019 operating ratio due to the loss of the Mexican fuel excise tax credit; AAWW announced a new CMI agreement to operate two of DHL’s recent 14 plane order from Boeing for the 777 aircraft.

Technology, Media & Telecom

·     Semiconductors; SWKS lowered its Q3 outlook based on the impact of the BIS ban on Huawei, saying revenue/EPS guidance for the JunQ goes from $825M/$1.50 to $765M/$1.34, implying an annualized EPS impact of ~10%; AMBA shares rally after posting a Q1 EPS beat on in-line revs while Q2 revenue guidance of $51M-$53M was above est. $48.81M and announced a $50M share buyback plan

·     Software movers; CRM Q1 results beat across major metrics including billings, revenue, and OCF, while current RPO growth came in slightly below guidance due FX headwinds, according to Piper; PVTL the latest software maker to disappoint on its outlook, having cut its FY 2020 subscription revenue outlook to a range of $530M-$538M from prior $542M-$547M view and overall revs cut to $756M-$767M from prior view of $798M-$806M and forecast a wider adjusted loss – that despite beating on the top/bottom line for Q1; GWRE cut its full-year rev outlook despite Q3 results that beat (guides Q4 EPS 47c-53c on revs $199M-$207M well below est of 61c/$226.41M)

·     Hardware & Component news; ROKU shares traded to a record high after being upgraded to buy from neutral at Guggenheim and its tgt raised to $119 from $75 to reflect strong secular tailwinds for streaming video consumption; TIVO received a favorable determination by and Administrative Law Judge of the International Trade Commission, ITC, that CMCSA’s X1 platform infringes Rovi’s patents

·     Internet movers; GRUB shares lagged other Internet names after Needham said it is incrementally cautious due to Uber Eats, citing tough choices" with increasing competition in key markets. GRUB might have to choose the lesser of two evils into next year: investing in growth and dinging EBITDA or staying "rational" and continuing to lose market share; AMZN launched an AI-powered shopping feature, StyleSnap, that helps shoppers with fashion recommendations

·     Media & Telecom movers; Intelsat (I) shares were weak for a second days as Bloomberg noted with chatter swirling about whether a plan to monetize mid-band satellite spectrum has stalled out, the Technology Policy Institute has gathered industry members for a panel in Washington today. That will provide a chance to hear from key members of the C-Band Alliance (the consortium led by Intelsat, SES (SGBAF) and Intel (INTC)) including member Peter Pitsch’s defense of the monetization proposal, Height Capital said