Afternoon Debrief for the 2nd of July 2019

Closing Summary – Market rides countercyclical strength to another record close

The Dow (+0.3%), Nasdaq (+0.2%), and S&P 500 (+0.3%) ended Tuesday on a modestly higher note thanks to a late push that lifted the indices out of the red. Relative weakness among small-cap names sent the Russell 2000 lower by 0.6%, yet the S&P 500 logged another record close.

Equity indices started the day near their flat lines while a modest wave of buying interest lifted the averages to session highs one hour after the open. However, the opening push saw limited participation from cyclical sectors, leading to a midday pullback. That lack of participation was most visible in the technology sector (+0.3%) where the PHLX Semiconductor Index lost 1.4%, trimming this week’s gain to 1.2%. 22 out of 30 index members recorded losses of at least 1.0% while yesterday’s leader-Inphi (IPHI 52.20, -1.47, -2.7%)-was the second weakest performer, falling 2.7%.

The broader technology sector was able to eke out a slim gain and its late strength helped send the key indices to fresh highs ahead of the close while most of the remaining cyclical sectors settled in the red. Financials (-0.2%) were pressured by renewed strength in Treasuries of longer tenors while energy (-1.7%) retreated amid a 4.8% drop in the price of oil. WTI crude fell beneath the confluence of its 50-day (58.72) and 200-day (58.74) moving averages, ending the day at its lowest level in eight sessions.

Elsewhere, relative weakness in the Dow Jones Transportation Average (-0.8%) kept the industrials sector (-0.1%) in negative territory. Delta Airlines (DAL 58.54, +0.75, +1.3%) bucked the trend among DJTA members, after boosting its Q2 guidance.

Staying on the earnings front, Greenbrier (GBX 28.71, -2.14, -6.9%) briefly slid to a fresh 2019 low after missing Q3 estimates and guiding Q4 results below expectations. Conversely, Amarin (AMRN 22.37, +3.13, +16.3%) rallied after issuing above-consensus guidance for Q2 and FY19.

Countercyclical sectors recorded gains across the board, which helped the S&P 500 stage its late rally. Rate-sensitive real estate (+1.8%) and utilities (+1.2%) finished in the lead.

Longer-dated Treasuries settled near their session highs while the 3-month bill underperformed with no apparent catalyst. The 10-yr yield fell six basis points to 1.98% while the 3-month yield rose three basis points to 2.19%.

Curiously, gold futures rallied to recover their entire decline from yesterday. The yellow metal settled higher by 1.5% at $1408.55/ozt and continued its advance after the 13:30 ET close of the pit session. The rally in gold accelerated after NBC reported that Vice President Mike Pence was called back to Washington just before his plane was about to touch down in New Hampshire. The vice president’s spokeswoman later said that there is no cause for alarm while an unnamed White House official told Bloomberg that the reason for the return will be revealed “weeks from now.”

On the international front, EU officials have agreed on nominees to top EU jobs. All nominations were in-line with this morning’s report from Die Welt. Germany’s Defense Minister Ursula von der Leyen was nominated to replace EU Commission President Jean-Claude Juncker while IMF Managing Director Christine Lagarde was nominated to take over for Mario Draghi at the ECB. Belgian Prime Minister Charles Michel was proposed as the replacement for EU Council President Tusk while Josep Borrell Fontelles was nominated to replace Federica Mogherini as the High Representative for Foreign Affairs and Security Policy. The nominees still need to be approved by the EU Parliament.

Investors did not receive any economic data of note. Tomorrow, the weekly MBA Mortgage Index (prior 1.3%) will be reported at 7:00 ET, followed by the June ADP Employment Change report ( consensus 145,000; prior 27,000) at 8:15 ET. May trade balance ( consensus -$54.40 bln; prior -$50.80 bln) and weekly Initial Claims ( consensus 222,000; prior 227,000) will be reported at 8:30 ET while May Factory Orders ( consensus -0.5%; prior -0.8%) and the June ISM Non-Manufacturing Index ( consensus 55.8; prior 56.9) will be released at 10:00 ET.

  • Nasdaq Composite +22.2% YTD
  • S&P 500 +18.6% YTD
  • Russell 2000 +15.6% YTD
  • Dow Jones Industrial Average +14.8% YTD


  • Europe: DAX +0.04%, FTSE +0.8%, CAC +0.2%
  • Asia: Nikkei +0.02%, Hang Seng +1.2%, Shanghai -0.03%


  • Crude Oil -2.84 @ 56.35
  • Nat Gas -0.03 @ 2.24
  • Gold +20.20 @ 1408.55
  • Silver +0.04 @ 15.23
  • Copper -0.02 @ 2.67

Spotlight Issue: Delta raises second quarter guidance

Shares of Delta Air Lines (DAL) +1.3%got a lift after the company pre-announced strong second quarter results this morning.

Delta raised guidance for its second quarter EPS and pre-tax margin as “demand for Delta’s product and service remains strong.” Adjusted total revenue per available seat mile (TRASM, or unit revenue) grew 3.5%, at the high end of its 1.5-3.5% outlook as given in April.

Delta has consistently outperformed its peers in terms of unit revenue growth. Last quarter, Delta said that it expects to maintain a healthy unit revenue premium to the industry. Delta may be benefitting to some degree as peers face capacity challenges due to the grounding of Boeing’s 737 Max aircraft. Delta does not have the 737 Max in its fleet.

Still, the strong guidance indicates that demand for air travel, both in the corporate sector and in the leisure segment, remains quite favorable.

Delta set off a major round of airline consolidation when it acquired Northwest Airlines in 2008. Fast forward to today, and we have a big three [including American (AAL) and United (UAL)], or a big four if you want to give a nod to Southwest (LUV), leading the airline industry.

The industry was once notorious for its poor investment profile, but consolidation and subsequent pricing power has improved the sector’s outlook.

Delta shares rose over 300% from 2013 to 2014. The stock has traded in a slightly upward trending channel since then. The stock currently sits just a few percent from its all-time highs. Of course, airlines are still transportation stocks beholden to macroeconomic trends.

The stock has a 2.5% dividend yield and trades at ~9x EPS and 6x EV/EBITDA estimates, in-line with peers.

Airlines still trade at a discount to the rails and other industrial industries. Airline executives have yet to really make progress on closing that valuation discount.

Delta will provide more details regarding its second quarter performance on Thursday, July 11, when guidance for the third quarter and 2019 will be in focus.

News Summary:

  • Earnings/Guidance:
    • Acuity Brands (AYI) beats by $0.02, misses on revs
    • Alliance Data (ADS) reaffirms FY19 outlook after completing sale of Epsilon to Publicis
    • Amarin (AMRN) sees Q2 revs above consensus; sees FY19 revs above consensus
    • Ceragon(CRNT) sees Q2 revs below consensus following a further delay in receiving certain large orders from India
    • CyberOptics (CYBE) lowers Q2 revenue guidance as orders for SMT and semiconductor products started to weaken during Q2
    • Greenbrier (GBX) misses by $0.06, reports revs in-line; guides Q4 EPS below consensus, revs below consensus
    • Simply Good Foods (SMPL) beats by $0.02, beats on revs
  • General News:
    • President Trump says China trade talks have already resumed and that he believes the U.S. cannot accept a 50-50 deal with China
    • USTR adds $4 bln in EU tariffs to existing review related to Airbus (EADSY) subsidies; tariffs that total $21 bln could be initiated as early as August 13 pending outcome of WTO dispute
    • White House Director of Trade Policy Peter Navarro said in CNBC interview that U.S.-China trade dealings are complicated; US policy toward 5G and Huawei status on the entity list remains unchanged; says Chinese President Xi requested relief on Huawei
    • Russia and Non-OPEC allies agree to extend production reductions until March of 2020, according to CNBC
    • China has conducted anti ship ballistic missile testing in the South China Sea, according to CNBC
    • Reserve Bank of Australia cuts cash rate 25 bps, as expected, to all-time low 1.00%; says it stands ready to cut again if necessary
    • EU Council nominates IMF Director Christine Lagarde to be president of the ECB
    • Cleveland Fed President Mester (not an FOMC voter in 2019, but a voter in 2020) says she is not ready to cut rates yet, as she is waiting to see more data
    • 20 drug makers have increased prices on over 40 prescription drugs, according to The Wall Street Journal
    • Nike (NKE) has stopped sales of certain shoe after criticism from Colin Kaepernick, according to The Wall Street Journal

Notable Ratings Changes:

  • Upgrades:
    • Bio-Techne (TECH) upgraded to Buy from Neutral at Janney; tgt raised to $270
    • (CARS) upgraded to Buy from Neutral at Citigroup; tgt $24
    • Dova Pharmaceuticals (DOVA) upgraded to Outperform from In-line at Evercore ISI
    • Genesee & Wyoming (GWR) was upgraded to Neutral at Credit Suisse
    • Landstar System (LSTR) upgraded to Mkt Perform from Underperform at Raymond James
    • Medical Properties Trust (MPW) upgraded to Buy from Hold at SunTrust; tgt raised to $20
    • Meridian Bancorp (EBSB) upgraded to Overweight from Neutral at Piper Jaffray; tgt raised to $20
  • Downgrades:
    • Arrow Elec (ARW) downgraded to Outperform from Strong Buy at Raymond James; tgt lowered to $80
    • BlackLine (BL) downgraded to Sell from Buy at Goldman Sachs; tgt lowered to $41
    • Comerica (CMA) downgraded to Sell from Neutral at Goldman Sachs; tgt $70
    • Coty (COTY) downgraded to Sell from Neutral at Citigroup; tgt lowered to $10
    • Cummins (CMI) downgraded to Sell from Hold at Loop Capital; tgt lowered to $145
    • Dave & Busters (PLAY) downgraded to Hold from Buy at Jefferies; tgt lowered to $40
    • Fortune Brands Home & Security (FBHS) downgraded to Sell from Hold at Loop Capital; tgt $50
    • GTT Communications (GTT) downgraded to Sector Weight from Overweight at KeyBanc Capital Markets
    • Ingersoll-Rand (IR) downgraded to Hold from Buy at Jefferies; tgt $140
    • KAR Auction Services (KAR) downgraded to Sell from Neutral at Guggenheim; tgt $20
    • LendingTree (TREE) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt $415
    • Nordstrom (JWN) downgraded to Neutral from Buy at UBS; tgt lowered to $33
    • PACCAR (PCAR) downgraded to Sell from Hold at Loop Capital; tgt lowered to $62
    • Roku (ROKU) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt $90
    • Ryder System (R) downgraded to Hold from Buy at Loop Capital; tgt lowered to $62
    • Spirit Aerosystems (SPR) downgraded to Hold from Buy at Jefferies; tgt lowered to $85
    • Stryker (SYK) downgraded to In-line from Outperform at Evercore ISI
    • The Trade Desk (TTD) downgraded to Sector Perform from Outperform at RBC Capital Mkts; tgt $220
    • Watts Water Tech. (WTS) downgraded to Neutral from Buy at Janney; tgt $93
    • Western Digital (WDC) downgraded to Sell from Hold at The Benchmark Company; tgt $40
    • Westlake Chemical (WLK) downgraded to Equal Weight from Overweight at Barclays; tgt lowered to $71
  • Others:
    • CenterPoint (CNP) added to Conviction Buy List at Goldman Sachs
    • Churchill Downs (CHDN) added to Franchise Pick List at Jefferies
    • Corteva (CTVA) initiated with Hold at Loop Capital
    • Revolve Group (RVLV):
      • initiated with a Buy at Guggenheim; tgt $50
      • initiated with an Outperform at Cowen; tgt $42
      • initiated with an Equal Weight at Barclays; tgt $32
      • initiated with an Outperform at Credit Suisse; tgt $40
      • initiated with a Neutral at BofA/Merrill Lynch
      • initiated with an Overweight at Morgan Stanley; tgt $39
      • initiated with a Buy at Jefferies; tgt $60
      • initiated with an Outperform at Raymond James; tgt $40
    • Uber (UBER) initiated with a Hold at Stifel; tgt $50
    • Wyndham Hotels & Resorts (WH) initiated with an Overweight at Barclays; tgt $72

Upcoming Events:

  • Econ Data (Wednesday):
    • 07:00 ET: MBA Mortgage Applications Index for week ending June 29 (prior +1.3%)
    • 08:15 ET: ADP Employment Change for June ( consensus 145K; prior 27K)
    • 08:30 ET: Trade Balance for May ( consensus -$54.4B; prior -$50.8B)
    • 08:30 ET: Initial Claims for week ending June 29 ( consensus 222K; prior 227K)
    • 08:30 ET: Continuing Claims for week ending June 22 (prior 1688K)
    • 10:00 ET: ISM Non-Manufacturing Index for June ( consensus 55.8; prior 56.9)
    • 10:00 ET: Factory Orders ( consensus -0.5%; prior -0.8%)
    • 10:30 ET: EIA Crude Oil Inventories for week ending June 29 (prior -12.8M)
  • 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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