Equity Market Recap
What is going to break this market out of its dull, listless trading range remains the question (good piece below from JPM on potential volatility coming)? It is a busy month of central bank meetings, starting with the ECB tomorrow (7:30 decision and 8:30 presser), followed by the FOMC and BoJ later this month. But so far, stocks continue to meander in a tight range, holding near all-time highs (NASDAQ made another new high), holding in the face of positive, negative or no news. Europe no different as the German DAX index closed at its best levels since December today despite German industrial production dropping (-1.5%) in July (est. -0.3%). The FTSE 100 posted small gains, as Bank of England's Carney said in testimony on economy he was “absolutely comfortable” with decision to expand stimulus and cuts rates if needed (comments hit the Pound). Oil bounced, gold slipped and bonds were steady.
Stocks were mixed as Transports outperformed major averages, led by gains in airlines and rails; Consumer Staples declined the most, led by weakness in grocers (SFM guidance), food (GIS comments). Tech was mixed, focused on the Apple product announcements made today (new iPhone 7, new watch, etc.). There was no major economic data today after three straight days of weaker than expected data points (manufacturing/jobs/services), which has reduced expectations of a Fed rate hike in two-weeks. Stocks were mixed following commentary out of various sell-side conferences today.
JPM Strategist Kolanovic said: while a driver of the recent market stability the "relatively stable macro data and a seasonal decline in trading activity" he explains that "a significant driver of the volatility collapse was derivatives hedging effects, also known as pinning", as well as the near all-time high leverage for Volatility Targeting and Risk Parity strategies. However, "this is all about to change as a number of important catalysts materialize this month (ECB, BOJ, Fed meetings), seasonal push market volatility higher, and leverage in systematic strategies and option positioning provide fuel for volatility http://goo.gl/5BPGlg
Commodities
Crude oil prices end higher; WTI crude closed higher by 67c to $45.50 per barrel, up around 1.4% in what was a quiet day of news for the energy complex. We get a little data tonight with the weekly API inventory report at 4:30 PM and the DOE 10:30 AM inventory report tomorrow (all pushed out a day due to Labor Day holiday)
Gold prices fell, snapping a three session winning streak, falling -$4.80, or 0.4% to settle at $1,349.20 an ounce (after a 2% surge yesterday), despite the mixed dollar amid profit taking (touched intraday high of $1357.60 and low $1346.90).
Currencies
The U.S. dollar was mixed on the day, sliding against the yen (though pared losses) following reports that officials at the Bank of Japan are divided over whether to further expand the central bank’s monetary easing efforts. Note, the dollar has swung lower in recent days following weaker economic data reports in the U.S. The British Pound fell to lows midday, dropping to lows of 1.319 (after highs of 1.344 overnight) after the BOE’s Carney said the Bank of England has room to cut bank rate further if needed. The dollar rebounded against the euro after sliding about 1% yesterday. Overall, the dollar index bounced back today.
Bond Market
Bond markets were quiet on Wednesday, with yields little to unchanged after yesterday’s volatility; the yield on the 10-yr held steady around 1.534% and the 2-yr at 0.734% (earlier touched low of 1.52% for 10-yr and above 1.54%). There were no major economic data points today and stocks once again traded in a very narrow range.
Economic Data
Fed’s Beige Book report (released at 2:00 PM ET today) showed: modest economic growth as inflation stays ‘slight’; contacts in several districts expect modest price gains; most Fed districts reported ‘modest’ or ‘moderate’ growth pace; says labor market conditions still tight in most districts; says moderate upward wage pressures increased further; says consumer spending little changed in most Fed districts; says credit demand appeared to expand at moderate pace; demand for energy-related products, services weakened
U.S. job openings (JOLTs) rose to 5.871M in July from 5.643M prior month. July job opening rate (job openings as a % of total employment plus openings) 3.9% vs 3.8% prior month; July pace of hiring 3.6% vs 3.6% prior month
Sector News Breakdown
Consumer
Retailers; OLLI 13.73M share Spot Secondary priced at $26.50; CASY with a Q1 EPS and revenue quarterly miss, both falling below consensus while reaffirming its FY17 views; retailers comment on delayed Hanjin shipments (KORS said sees pricing pressure from delay); FRAN rises on earnings; overall, department stores better (M, JCP, DDS, KSS)
Consumer Staples; grocers under pressure after SFM cut its year profit forecast to 83c-86c from prior view 92c-94c and lowered comp sales outlook to up 1.5%-2.5% from prior up 3.5%-4.5% citing significant ongoing deflation, stepped-up promotional environment (shares of WFM, KR were also active on guidance); MDLZ said it is expanding into the U.S. chocolate market and partnering the Oreo with Milka, a European chocolate brand; GIS said prelim Q1 organic net sales growth is expected to be below full-year forecast range of unchanged to down 2%
Restaurants; CMG shares rise after Bill Ackman’s Pershing Square reports 9.9% stake and seek talks (analysts still lukewarm amid slowing sales); PLAY Q2 EPS/revs top consensus but comps miss views (1% vs. 2.1% est.) and lowers year comp view; DIN upgraded to overweight at KeyBanc as view risk/reward as compelling at current levels given the stock’s upside potential
Casino & Leisure; GLPI was upgraded to overweight at Morgan Stanley; SGMS said it will consider a range of options to solidify its leadership in this fast growing segment, including potential new joint ventures, acquisitions, IPO, and other growth options; in boating, MBUU shares jumped as Q4 EPS and sales top consensus; in cruise lines, RCL downgraded to hold at Argus
Homebuilders; group was very strong today, with shares of KBH, BZH, MTH, but home improvement names HD, LOW falling; appliance maker WHR active after Longbow noted Core 6 wholesale shipments were up +10.3%, exceeded their forecast of +7-9%.
Energy
E&P and services sector; APA rises after it found a “significant” resource play in Southern Delaware Basin and boosted capex by $200M (could become one of the biggest energy finds of the past decade); CPE 26M share Spot Secondary priced at $14.60; SLB said it doesn’t see a V-shaped recovery in oil prices; BHI said sees taking Q3 restructuring charge (several comments coming from Barclays Energy conference today)
Oil drillers; NE said sees industry cutting another 60 floating rigs by end of 2017; RDC cut its 2016 drilling expense view to $775M-$785M from $795M-$805M and also cut 2016 capex view to $140M-$150M from $145M-$155M due to “capital discipline, widespread cost control measures”
MLPs; short term, SEP may face headwinds as it becomes “best financing vehicle” within the ENB portfolio said Piper Jaffray; EEP benefits from strengthened parent company; SE, SEP downgraded to neutral vs overweight; EEP upgraded to overweight vs neutral at piper; SMLP 5.5M share Spot Secondary priced at $23.20
Other movers on news; COP was upgraded to hold on valuation considerations at Jefferies; SYRG said late yesterday it expects '17 production of 17.5-20.0 MBOED and 11.1 MBOED estimated for '16); SLCA was added to U.S. focus list at Credit Suisse
Financials
Consumer Finance; Barclay’s said with limited upside, they are downgrading industry view to Neutral from Positive and also cut DFS and FSIC to Equal Weight from Overweight; despite what should be stable earnings power for our stocks amid some steeply discounted valuations, we believe investors will have a hard time getting the conviction needed to be more constructive on multiples, and will be more focused on earnings risk from a turn in the cycle
REITs; Morgan Stanley said they see several levers supporting continued outperformance of Triple Nets including highly accretive external growth and the 10yr falling to 1%...offer value (STOR, GLPI & SRC) and yield (CSAL) names as Overweights (upgraded GLPI and SRC)
Other movers; in exchanges, NDAQ shares fall after every product line underperformed Sandler O’Neill estimates in August, driven by U.S. equities, European options; ACGL was upgraded to buy at Goldman Sachs on confidence that mgmt is “willing to ramp up” sub-scale mortgage ops more quickly than expected; Fitch revised sector outlook on insurance to negative
Healthcare
Pharma & Managed care; VRX advanced as announced with PGNX the U.S. commercial launch of FDA-approved Relistor® tablets; LGND was upgraded to buy at Deutsche Bank; HQY raised its year EPS outlook after earnings; hospitals posting strong gains today, with shares of LPNT, HCA, CYH, THC all moving higher
Biotech movers; RTRX shares jump after positive results in a Phase 2 clinical trial, DUET, evaluating Sparsentan (RE-021) for the treatment of focal segmental glomerulosclerosis; AGIO rises as collaboration partner CELG to file NDA for AG-221 in AML by year end
Medical equipment/Suppliers/Services; CTLT 19M share Spot Secondary priced at $23.85; STJ filed a lawsuit against Muddy Waters and MedSec alleging dissemination of false, misleading information; HCSG shares fell after William Blair downgraded saying valuation near all-time highs; potential risks seen, related to recent Department of Labor rules
Industrials & Materials
Industrials & Machinery sector; Deutsche Bank initiated machinery with a cautious view as thinks natural resource markets have bottomed, but only expect low-single digit industry organic growth through 2020e…the firm top pick is CAT (buy rated) and also buy rated on OSK and WAB, but says see 24% downside to forecasts for CNHI & persistent market share losses at CMI (both sell rated); ACM guided FY16 EPS to low end of $3.00-$3.40 vs. est. $3.25
Ag space; Cowen said the fundamental outlook for ag equities remains bearish over the next 12-months with no catalysts to reverse the trend, save weather (but says sees trading opportunities in the sector)
Airlines; DAL said computer outages cut Q3 pre-tax income by $150M and 1.5 pts from operating margin but sees 2H capacity up 2.5% in U.S.; LUV reaffirms 3Q RASM to Fall 3.5%-4.5% YoY and said Aug traffic was up 3.6%; all-in-all, strong performance for airlines (UAL, AAL, JBLU)
Aerospace & Defense; Deutsche Bank reiterated buy ratings on aircraft lessors AER, AL, & FLY saying while they find many risks concerning aircraft lessors to be valid, most are the same concerns shared by investors for over a year and are priced in by the market
Railroad stocks with negative headlines today; CSX said it now sees 3Q volume decline in high single digits (around 8%) as “macro-economic headwinds continue to impact volume” (had previously seen 3Q volume down by mid-to-high single digits) – sees 3Q EPS “slightly down” sequentially; CP said operating ratio could drop to mid-fifties – but group was strong
Shipping sector; judge has ruled that Hanjin Shipping ships, now stranded at sea, will soon be able to dock at US ports and unload merchandise (but Hanjin still needs to pay dock workers to physically move merchandise) – WSJ reported
Chemicals; EMN and CE were downgraded to neutral at Citigroup as sees earnings growth risks from a secular decline in the once dependable filter tow business, which is used in cigarette filters; in paints, VAL posted mixed Q3 results as EPS beat, but sales fell short of consensus; OLN was downgraded to underperform at Longbow
Distributors; HDS shares fall after Q2 EPS/sales both short of consensus and guides Q3 77c-82c vs. est. 91c; FAST said Aug net sales were up 9.9% to $364.9M, while daily sales up 0.3% to $15.9M; WCC was downgraded at Oppenheimer on valuation coupled with a stagnant macro
Technology, Media & Telecom
Apple Inc. (AAPL) with its annual product announcement today: introduced a new version of the Apple Watch (swim proof) series 1 $269 and series 2 $369 (with GPS); introduced a water resistant iPhone 7 with a faster and new camera (iPhone 7 to have telephoto lens, wide-angle lens, zoom up to 10x); announced collaboration with Nintendo on app store; said Pokémon Go coming to Apple Watch; now has 17M Apple Music subs (up from 11M last Feb); said more than 100 home kit products coming to market this year
Internet; a day after touching an all-time high, FB tgt was raised to $160 at Morgan Stanley and are now 10% and 13% above Street adj. EPS estimates in 2017 and 2018, respectively; CTRP 28.5M share Secondary priced at $45.96; AMZN just off all-time highs, while TWTR active ahead of board meeting tomorrow
Semiconductors; MCHP narrowed its Q2 EPS/rev guidance but left the midpoint unchanged as the company continues to make progress toward integrating the acquired Atmel and Micrel businesses; MXIM downgraded at RBC Capital reflecting: 1) recent share appreciation and 2) much of the “self-help” levers have been executed upon; AMD raising ~$1B in capital in the form of equity ($600M) and convertible debt ($450M), with net proceeds to pay down existing debt; SIGM Q2 top/bottom line better, but Q3 EPS view falls below consensus; ISIL downgraded at Stifel; CREE rises after China Business News report that govt may ban incandescent bulbs of 15 watts or above from Oct 1
Software, Hardware & Storage; Dell and EMC merger was completed last night; in software, FEYE founder Ashar Aziz resigns from board; NTDOY shares spiked midday during AAPL presentation, after Apple IPhone App partnership (Super Mario Run to be released ’16 holiday); BOX said it to develop integrations with Google Docs
Comm equipment/Optical; AAOI raised Q1 rev guidance by $6.0-7.0M to $63.0-$65.0M and EPS guidance by 10c citing higher-than-anticipated demand for data-center products; shares of FNSR was upgraded to buy at Stifel yesterday; shares of OCLR, LITE and EMKR all active in the sector
Hard-disk drive makers rise; WDC raised its Q1 EPS view to $1.00-$1.05, from 85c-90c and revs to $4.45B-$4.55B from $4.4B-$4.5B citing better-than-expected product mix following acquisition of SanDisk and progress in integrating WD and HGST subsidiaries (shares of STX also moved) |
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