Afternoon Debrief for 3rd of July 2019

Record closes for Dow, Nasdaq, and S&P 500

The stock market finished the abbreviated pre-holiday session on a firmly higher note. A daylong upward drift helped the Dow (+0.7%), S&P 500 (+0.8%), and Nasdaq (+0.8%) settle at fresh record highs.

Today’s session was not particularly active, but a heavy batch of mostly disappointing economic data provided fuel for a rally based on the assumption that a weakening economic picture will prompt the Federal Reserve to cut the fed funds rate. While the market has been emboldened by that view, it should be noted that, historically speaking, the first rate cut has not been a positive event for equities going forward. On a side note, President Trump nominated Christopher Waller and Judy Shelton to the Federal Reserve’s Board of Governors. Mr. Waller previously served as the Executive Vice President of the Federal Reserve Bank of St. Louis while Ms. Shelton is one of the president’s economic advisors.

All eleven sectors ended Wednesday in the green, but like yesterday, the advance was paced by countercyclical groups. Real estate (+1.5%), consumer staples (+1.4%), and utilities (+0.8%) jumped out to an early lead, maintaining their position until the close. Gains in these rate-sensitive sectors were supported by continued strength in Treasuries of longer tenors. The bond market will remain open until 14:00 ET, but the 10-yr yield (-3 bps to 1.95%) and the 30-yr yield (-4 bps to 2.47%) are almost certain to finish the day at fresh lows for the year.

High-beta groups had a mixed showing today. The Dow Jones Transportation Average climbed 1.0% with airlines pacing the advance after yesterday’s guidance boost at Delta Air Lines (DAL 59.15, +0.61, +1.0%). United Airlines (UAL 90.67, +1.80, +2.0%) was the group’s top performer.

Chipmakers underperformed once again. The PHLX Semiconductor Index lost 0.4%, trimming this week’s gain to 0.8%. Broadcom (AVGO 284.89, -10.44, -3.5%) was the weakest performer, falling 3.5% after Bloombergreported that the company is in advanced talks to acquire Symantec(SYMC 25.10, +3.00, +13.6%). The broader technology sector (+0.7%) settled just behind the broader market.

In other M&A news, Sprint (S 6.98, +0.10, +1.5%) rallied amid reports that the company’s merger with T-Mobile (TMUS 75.82, +0.34, +0.5%) is likely to be approved by the Department of Justice.

Shares of Tesla (TSLA 234.90, +10.35, +4.6%) settled higher after the company reported a larger than expected number of total deliveries in Q2.

Participants received a full slate of economic data today:

  • The ISM Non-Manufacturing Index dropped to 55.1% in June ( consensus 55.8%) from 56.9% in May. The dividing line between expansion and contraction is 50.0%.
    • The key takeaway from the report is that it points to a slowdown in growth in the non-manufacturing sector, which accounts for the vast majority of U.S. economic activity. The June reading marks the lowest level for the index since July 2017.
  • Factory orders declined 0.7% in May ( consensus -0.5%) after declining a downwardly revised 1.2% (from -0.8%) in April. This is the third decline in factory orders over the past four months.
    • The key takeaway from the report is that orders for nondefense capital goods orders, excluding aircraft — a proxy for business spending — increased 0.5% versus a 0.4% increase seen in the advance durable goods orders report.
  • The U.S. trade deficit widened to $55.5 billion in May ( consensus -$54.4B) from a downwardly revised $51.2 billion (from -$50.8 billion) in April. Exports were $4.2 billion more than April exports while imports were $8.5 billion more than April imports.
    • The key takeaway from the report is that the average real trade deficit in the second quarter is 2.3% greater than the first quarter average, which is a negative for the Q2 GDP growth outlook.
  • Initial claims for the week ending June 29 decreased by 8,000 to 221,000 ( consensus 222,000). Continuing claims for the week ending June 22 also decreased by 8,000 to 1.686 million.
    • The key takeaway from the report is that initial claims continue to run at relatively low levels, which suggests employers remain reluctant to reduce the size of their workforce.

Bond and equity markets will be closed for Independence Day tomorrow. On Friday, June Nonfarm Payrolls ( consensus 160,000; prior 75,000), Nonfarm Private Payrolls ( consensus 147,000; prior 90,000), Average Hourly Earnings ( consensus 0.3%; prior 0.2%), Unemployment Rate ( consensus 3.6%; prior 3.6%), and Average Workweek ( consensus 34.4; prior 34.4) will be reported at 8:30 ET

  • Nasdaq Composite +23.1% YTD
  • S&P 500 +19.5% YTD
  • Russell 2000 +16.6% YTD
  • Dow Jones Industrial Average +15.6% YTD


  • Europe: DAX +0.7%, FTSE +0.7%, CAC +0.8%
  • Asia: Nikkei -0.5%, Hang Seng -0.1%, Shanghai -0.9%


  • Crude Oil +0.78 @ 57.03
  • Nat Gas +0.04 @ 2.28
  • Gold +11.85 @ 1420.40
  • Silver +0.11 @ 15.34
  • Copper +0.01 @ 2.68

Spotlight Issue: Tesla delivers with second quarter deliveries

Tesla (TSLA) jumped 4.6% after the company reported better than expected second quarter deliveries. Importantly, the company also said that orders exceeded deliveries during the quarter, resulting in an increased backlog.

Demand concerns have dominated the narrative around the stock since the company reported weak first quarter results.

Chief Executive Elon Musk has insisted that the company has no demand problem, but he has lost at least some credibility over the years (or nearly all of it, if you ask the short sellers).

Logistical bottlenecks were the primary excuse for the weak first quarter results, so a big rebound in second quarter deliveries was expected, but an increase in the backlog would indicate that demand for the mass-market Model 3 is quite strong.

The company delivered a record 95,200 EVs during the quarter, in-line with the company’s 90-100K guidance.

Model 3 deliveries grew 320% yr/yr and 52% sequentially to 77,550 versus estimates near ~74K.

Model S/X deliveries fell 21% yr/yr but grew 46% sequentially to 17,650. Model S/X deliveries fell 44% back in the first quarter, which caused market participants to believe that demand fell off a cliff due to the Federal tax credit getting cut in half and perhaps to some cannibalization from the Model 3.

Tesla did make a concerted effort to move its older EV models via price cuts and incentives. What’s more, the Federal tax credit got cut in half again yesterday, to $1,875, so demand may have been pulled forward into the second quarter.

This afternoon, the company also said it made significant progress streamlining global logistics and delivery operations at higher volumes, enabling cost efficiencies and improvements to its working capital position.

Good news is putting pressure on the short sellers, which represent some 30% of the float.

Now focus will turn to the company’s financials. In April, Tesla guided for a smaller net loss sequentially and a return to profitability in the third quarter.

Tesla will report second quarter financial results in the last week of July or early August.

News Summary:

  • Earnings/Guidance:
    • Int’l Speedway (ISCA) misses by $0.03, misses on revs; reaffirms FY19 EPS guidance, revs guidance
    • Jefferies (JEF) beats by $0.04, beats on revs
    • Tesla (TSLA) reports record Q2 deliveries, above estimates; orders exceeded deliveries
    • USANA (USNA) issues downside Q2 guidance and cuts FY19 outlook
  • General News:
    • President Trump nominates Christopher Waller and Judy Shelton to Fed Board of Governors, according to Bloomberg
    • President Trump says in tweet that  US should “match” the “currency manipulation game” that he believes China and Europe are playing
    • Iran has warned it will increase enrichment of uranium on Sunday, according to Washington Post
    • The Commerce Department staff was told that Huawei should still be considered blacklisted, according to Reuters
    • China could soon purchase some soybeans, corn, and pork from U.S., according to Bloomberg
    • Japanese Prime Minister Shinzo Abe believes a 10% sales tax is high enough, according to Bloomberg
    • EIA reports crude inventories for the week ending June 28 had a draw of 1.1 mln barrels; gasoline inventories had a draw of 1.6 mln barrels
    • Amazon (AMZN) to create over 2,000 permanent jobs in the UK in 2019, taking total permanent workforce to more than 29,500; Amazon aims to build 43 story tower in Bellevue, WA, according to Seattle Times
    • Boeing (BA) pledges $100 mln in funds to ‘address family and community needs of those affected by the tragic accidents of Lion Air Flight 610 and Ethiopian Airlines Flight 302’
    • Canopy Growth (CGC) Co-CEO and Board member Bruce Linton to step down
    • HP (HP), Microsoft (MSFT), and Dell (DELL) aim to move production out of China, according to Nikkei
    • Vale (VALE) is being investigated over dam collapse with a focus on knowledge of executives, according to The Wall Street Journal

  • Upgrades:
    • Cinemark (CNK) upgraded to Buy from Hold at Loop Capital
  • Downgrades:
    • Kirkland Lake Gold (KL) downgraded to Sector Perform from Outperform at Scotia Howard Weil
    • Domtar (UFS) downgraded to Underperform from Market Perform at BMO Capital Markets
    • Inogen (INGN) downgraded to Underweight from Neutral at JP Morgan
    • Royal Dutch Shell (RDS.A) downgraded to Neutral at Exane BNP Paribas
    • Tractor Supply (TSCO) downgraded to Neutral from Buy at Northcoast
    • USANA (USNA) downgraded to Neutral from Buy at Sidoti
  • Others:
    • Marker International (MRKR) initiated with an Outperform at Oppenheimer
    • Bandwidth (BAND) initiated with an Overweight at JP Morgan
    • Benefitfocus (BNFT) initiated with a Neutral at JP Morgan
    • Delta Air Lines (DAL) assumed with an Overweight at Stephens
    • First Horizon (FHN) assumed with an Overweight at Piper Jaffray
    • L3Harris (LHX) initiated with a Buy at Vertical Research
    • Brookfield Business Partners (BBU) resumed with an Outperform at Credit Suisse
    • CannTrust (CTST) initiated with a Buy at Citigroup
    • Digital Realty Trust (DLR) initiated with a Buy at Argus

Upcoming Events:

  • Econ Data (Friday):
    • 08:30 ET: Nonfarm payrolls for June ( consensus 160K; Prior 75K)
    • 08:30 ET: Nonfarm Private Payrolls for June ( consensus 147K; Prior 90K)
    • 08:30 ET: Avg. Hourly Earnings for June ( consensus 0.3%; Prior 0.2%)
    • 08:30 ET: Unemployment Rate for June ( consensus 3.6%; Prior 3.6%)
    • 08:30 ET: Avg. Workweek for June ( consensus 34.4; Prior 34.4)
  • Earnings:
    • Monday (July 1)
      • Pre-Market: None of note
      • After-Hours: None of note
    • Tuesday (July 2)
      • Pre-Market: AYI GBX OMN SMPL
      • After-Hours:  None of note
    • Wednesday (July 3)
      • Pre-Market:  ISCA
      • After-Hours: None of note
    • Thursday (July 4)
      • Market closed for Independence Day
    • Friday (July 5)
      • Pre-Market:  None of note
      • After-hours:  None of note
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