Closing Recap

Thursday, June 27, 2019

Equity Market Recap

·     U.S. stocks closed mixed, led by gains in Small Caps (Russell 2000 up over 1% ahead of annual Reconstitution tomorrow) and technology as the NASDAQ outperforms, with both stocks and Treasury prices advancing. The yield on the 10-year yield fell back to the 2% level, while oil and gold prices end little changed and the dollar was steady ahead of the G20 meeting starting this weekend where all eyes on Trump and Chinese leader Xi. The Dow Industrial Average underperformed amid weakness in Boeing (BA) after tests on its currently grounded 737 Max revealed a new safety risk and U.S. regulators are ordering the company to make additional design changes. Footwear/apparel giant and Dow component Nike (NKE) expected to report after the bell tonight. Energy and Consumer Staples were weaker on the day while tech gained and financials showed strength ahead of part two of the Fed’s annual bank stress tests, the crucial CCAR numbers. Note tomorrow is the annual Russell Reconstitution which should perk up volume into Friday afternoon. Economic data this morning was mixed as the third estimate of Q1 GDP data was in-line with the prior reading of 3.1%, with weaker personal consumption (+0.9%), but inflation data points a little “hotter” as Core PCE rose 1.2% vs. est. 1%.

·     Stocks tumbled off highs late morning after White House advisor Larry Kudlow said in a Fox interview that the US may move ahead on additional tariffs on Chinese products, noting nothing was agreed upon before Trump/Xi meeting at G20. A U.S. official was also quoted as saying that it is unlikely the U.S. would agree to lift restrictions on Huawei, which was a sticking point overnight by China after the WSJ reported China terms for a trade truce with Trump will include an insistence that the U.S. lift its ban on the sales of technology to Huawei.

·     In the first of two Democratic Presidential hopeful debates last night was a focus on income inequality, border reform, corporate power, healthcare and battling Republicans in Congress. Senator Elizabeth Warren stood center stage last night with good showings as well from Julián Castro, the former housing secretary, and Mayor Bill de Blasio of New York. Tonight’s debate will have Bernie Sanders and Joe Biden in addition to many others.

Economic Data

·     The third est. for Q1 GDP stood at 3.1%, below estimate of 3.2% but was unchanged compared to the second estimate (note GDP rose 2.2% in prior quarter). Personal consumption rose 0.9% in 1Q after rising 2.5% prior quarter and was below the +1.3% estimate. GDP price index rose 0.9% in 1Q after rising 1.7% prior quarter, but was below the 0.8% estimate. Core PCE q/q rose 1.2% in 1Q after rising 1.8% prior quarter and was above the 1% economist estimate

·     Weekly Jobless Claims rose 10K to 227K, above the 220K estimate while the 4-week moving avg. stood at 221.25k in the week ending June 22 (prior week claims revised up to 217K from 216K); continuing claims rose 22k to 1.688m in the latest week

·     Kansas City Fed Manufacturing reported at 0 vs. est. for reading of +1 (vs. prior month +4) as new orders for exports fell -4 vs. 6 prior and prices paid for materials falls to 9 from 13 prior

·     Pending home sales MoM for May rose 1.1% vs. est. up 1% (prior month was -1.5%)

Commodities

·     Commodity prices were little changed, as WTI crude rose a nickel to settle at $59.43 per barrel, now having risen $8 bucks over the last week on Iran tensions and bullish inventory data. August gold futures slipped -$3.40 or 0.3% to settle at $1,412.00 an ounce, falling for a 2^nd straight session after trading to 5-year highs on Tuesday. Price moved in a narrow range today after recent volatility saw both gold and oil prices rebound off recent lows to multi-week highs after a dollar decline as interest rate cuts appear in the near future. Regarding OPEC, Iraq’s oil minister said today that the organization is expected to roll over a deal on cutting supplies at a meeting next week and discuss deepening the curbs that have been in place since Jan. 1^st.

Currencies

·     The U.S. dollar index (DXY) traded in a very narrow range throughout the day, flat vs. the euro (1.1368) and yen (107.74), and Pound (1.2675) – ahead of G20 this weekend in Osaka Japan that markets are watching closely for any improvement between China and the U.S. on trade. However, while the dollar was little changed, Bitcoin prices plunged, nearly giving up all of its gains yesterday in very volatile trading. The price of bitcoin dropped more than $2,000 to move back below $11,000 (after highs above $13,700 yesterday), started late Wednesday afternoon after the website of cryptocurrency exchange Coinbase apparently crashed. The digital currency is still up roughly 60% this month, and more than 230% year to date.

Bond Market

·     Treasuries rise; U.S. Treasury sold $32B in 7-year notes at a yield of 1.889% vs. pre-sale when/issued yield at 1.891%, with a bid-to-cover at 2.44 vs. 2.30 prior auction and indirect bidders awarded 55.5% and directs awarded 24.2% (strong auction helped prices). The strong auction pushed Treasury yields lower, with the 10-year down at 2.01% (from 2.05% late yesterday) and the 2-year at 1.74% and 30-year 2.53%. Mixed GDP data points also provided strength for Treasury prices and boosts case for the Fed to get more aggressive on rate cuts.

Sector News Breakdown

Consumer

·     Retailers; Dow component NKE expected to report earnings after the close; JWN and ROST were both downgraded to sell at Goldman Sachs as the firm takes a conservative stance on the retail sector saying 2Q headwinds have proven persistent, and they see risk that a 2H inflection in earnings growth may not materialize for many companies in our sector (reiterate buys on UAA, TPR); Cowen raised its tgt on VFC to $100 from $90, saying new five-year targets should be laid out at its upcoming 9/25/19 Investor Day – a positive catalyst; Cowen also upped SKX tgt to $32 from $30 given our increased confidence on SKX’s product cycle and raises both FY19E and FY20E EPS; furniture retailers a bounce, led by MLHR after earnings beat last night and reported sales increased ~9% to $671M, and on organic basis

·     Consumer Staples; food sector with a bout of recent earnings misses as CAG shares drop after Q4 sales and profit missed estimates, hurt by weak demand for groceries and snacks/its Grocery & Snacks segment sales decreased 7.1% in the qtr while the midpoint of 2020 adj EPS guidance range below Wall St. estimates; MKC however beat EPS for Q2 while raised year EPS ($5.20-$5.30 from $5.17-$5.27) and sales view (to 8%-10% from 7%-9%); group dropped yesterday after weaker GIS results and guidance (KHC, CPB, K, POST, SJM shares also active); FIZZ tgt and ests cut at Jefferies following Q4 EPS miss w/net sales modestly better, though GM % worse

·     Housing & Building Products; homebuilders rebound after KBH posted better than expected Q2 results as homes delivered increased 2% to 2,768 in the qtr, while net orders surged 15% to 4,064 and had a positive outlook for the 2H of the year (better commentary than LEN on Tuesday when the builder lowered its outlook for the year); home furnishing co PIR shares fell as reported 1Q below consensus, with weak sales and gross margins (KIRK, HOME, WSM, BBBY active)

·     Casino & Leisure movers; SKIS reported Q4 EPS of 83c, well above consensus and higher revs of $85.5M; SEAS cautious at Wedbush saying the opening of the new Star Wars attraction at Disney is likely to have a negative impact on SEAS, at least in the near-term; in lodging, Wells Fargo upgraded shares of DRH (to market perform) and SHO (to outperform)

·     Auto sector; Ford (F) with details of its reorganization announced months ago, saying it will shed 12,000 jobs in Europe, launch new models and add electric technology to its vehicles in an attempt to bring the lossmaking region back to profit; TSLA two cautious analyst comments as Cowen raised its delivery estimates 5K to 85K units (70K model 3, 15K S/X) but remain below the low end of guidance of 90-100K as expect the stock to fade following the delivery report heading into earnings (remain underperform on shares), while Credit Suisse initiated at underweight and $189 tgt saying it faces risks ahead – reflected in his below-consensus estimates. Credit Suisse started coverage of F, GM, APTV, AXL and BWA with outperforms

Energy

·     Energy stocks pared some of yesterday gains, pulling back as oil prices retreat from five-week high on profit taking ahead of the G20 meeting this weekend. U.S. President Donald Trump warned he might impose substantial additional tariffs on Chinese imports the last few days and White House Advisor Kudlow echoed those comments again today.

·     Equipment and E&P sector; WTTR and PTEN were both downgraded at Wells Fargo citing multiple emerging macro headwinds, as they cut EPS/EBITDA ests for NAM business lines across our OFS universe, OXY was active after Carl Icahn is seeking to replace four directors saying the company’s board mismanaged its $38 billion deal to buy APC

Financials

·     Insurance; Deutsche Bank with a few changes in the insurance sector, as they upgraded ACGL to buy and up tgt to $40 saying that increased 2020 EPS of $3.00 represents the high on the Street, while the firm downgraded both TRV and WRB to sell. For TRV, said the commercial Property & Casualty sector is "largely overvalued" due to an intra-sector exodus from more rate-sensitive financials into P&C insurance stock

·     Consumer finance and lending; MGI enters into both a first lien credit agreement and second lien credit agreement with Bank of America. The new agreements provide for a first lien secured three-year revolving credit facility of $35M, a first lien secured four-year term loan facility of $645M and a second lien secured five-year term loan facility of $245M

·     Services; FDS shares dropped after Goldman Sachs downgraded to sell from neutral and tgt to $246 from $253 citing rich valuation and diminished revenue outlook; HHC shares spiked after CNBC’s David Faber reported the company has hired bankers at Centerview Partners to explore strategic alternatives that include a sale of the company https://cnb.cx/2ITkSqA . HHC later confirmed those reports saying that its board is conducting a broad review of potential strategic alternatives to maximize shareholder value.

Healthcare

·     Retail pharmacy movers; earnings in the group as Dow component WBA reported better-than-expected quarterly results, and also reaffirmed its outlook (it had said it April that earnings would be flat for the rest of its fiscal year, which goes through August); comparable retail-pharmacy sales in the U.S. were up 6% year-over-year; RAD shares fell -9% as Q1 adjusted EPS loss (14c)/$5.37B was below the est. loss (7c)/$5.38B driven by reimbursement pressure in the Retail Pharmacy segment and margin compression in the Pharmacy Services segment; ADPT 15M share IPO priced at $20.00 (opened at $39.01); BBIO 20.5M share IPO priced at $17.00 (opened at $30.61), CHNG IPO opened at $14 after pricing at $13

·     Pharma movers; DOVA rises as the FDA approves Dova its supplemental marketing application for DOPTELET (avatrombopag) to include treatment of thrombocytopenia (low blood platelets) in adult patients with chronic immune thrombocytopenia who have did not respond to previous therapy; ARWR said the FDA granted Fast Track designation to ARO-AAT, the company’s second generation subcutaneously administered RNA interference (RNAi) therapeutic as a treatment for a rare genetic liver disease associated with alpha-1 antitrypsin deficiency; ACRS shares slide after results from a Phase 2 clinical trial of ATI-502, an investigational topical Janus Kinase, or JAK, 1/3 inhibitor, in patients with alopecia areata did not achieve statistical superiority at the primary or secondary endpoints; ZGNX rises after saying it expects to resubmit its U.S. marketing application next month for FINTEPLA (fenfluramine) for the treatment of seizures associated with a severe type of epilepsy called Dravet syndrome; VRCA announced positive topline results from its COVE-1 Phase 2 open label clinical study of VP-102 for the treatment of verruca vulgaris, or common warts/in both cohorts, VP-102 achieved positive results on both the primary endpoint

·     Medical equipment and devices; MYGN soared late yesterday to close higher by about 17%/this morning Myriad announced publication of results from a large study that demonstrated the Prolaris test can accurately predict the 10-year risk of metastases in men newly diagnosed with localized prostate cancer; MDT slipped late day after the FDA warns on cyber security to its MiniMed insulin pumps

·     Healthcare services and providers; WAGE is being acquired by HQY for $51.35 per share in deal valued at about $2B, giving HealthEquity access to a bigger share of the HSA market, expanding its direct distribution to employers and benefits advisers https://on.mktw.net/2Xy4bJ5 ; PDCO shares were weak early on mixed Q4 results as EPS missed on a light revenue beat and issued lower guidance for FY20 (EPS $1.33-$1.43, consensus $1.51)

Industrials & Materials

·     Aerospace & Defense; Dow component BA shares slipped after U.S. FAA identifies a new risk the plane maker must address before the grounded 737 MAX jets can return to service. The risk was discovered last week and it is not yet clear if the issue can be addressed with a software upgrade or will it require a more complex hardware fix; component, and part supplier makers to BA such as SPR, ATI and HXL were active on the news as well

·     Transports; LUV said it continues to await guidance from Boeing as it will remove the Boeing Max plane from schedule through October 1^st; in rails, Cowen said they remain constructive on the group but are lowering rail estimates (ex-Canada) to reflect softer traffic as tariff pull-forward, macro concerns, and poor weather have negatively impacted the Class I volumes qtd

·     Metals & Materials; GLNCY shares slide (and copper prices rose) after CNBC reported that at least 9 killed in collapse of copper and cobalt mine owned by Glencore in southeastern democratic republic of Congo – citing a union representative (Glencore later confirmed at least 19 fatalities); shares of copper producers FCX, SCCO moved in reaction; CETX rises after saying it received new orders worth $6 million in its electronics manufacturing services unit over the last few months

Technology, Media & Telecom

·     Internet; FB tgt was raised to $230 from $220 at Deutsche Bank saying channel checks show that ad units and pricing for "stories" content are improving; TRIP upgraded to buy at DA Davidson with $55 tgt citing proprietary data indicating improving TRIP fundamentals; TWTR shares slipped midday after announcing they will put warning labels on tweets from world leaders that break the rules

·     Semiconductors; Wedbush initiated coverage on a few names, positive on AMD and NVDA with an outperform rating, but underperforms on INTC ($37.50 tgt) and WDC ($32.50 tgt); MRVL tgt raised to $28 from $26 at Cowen citing the company’s potential from 5G technology; group taking a breather after surging yesterday post MU earnings

·     Software movers; IBM won unconditional EU approval for its RHT takeover; COUP tgt raised by three analysts (Goldman, KeyBanc, Needham) following the annual Coupa Inspire user event this week which gave them confidence in the sustainability of key growth drivers this year

·     Media & Telecom movers; in telecom, CTL shares bounced after being upgraded to outperform at Wells Fargo and raise tgt to $14 as view the move to "fiber roots" positively and believe it is underappreciated by the Street

·     Hardware & Component news; in optical sector, AAOI was upgraded at Rosenblatt from Sell to Neutral with a $10 price target saying the company could benefit from the proposed $300B tariff because it has a factory in Taiwan, unlike many major Chinese competitors; ZM shares rise as teams with VZ to offer ZM’s video-first unified communications platform to VZ’s business customers as a cloud service