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US Market Debrief Aug 14th 2019

Stock market sinks on economic growth worries

Each of the major U.S. indices lost around 3.0% on Wednesday, as weak global data and a recessionary signal in the U.S. Treasury market sent stocks reeling. Broad-based selling left both S&P 500 and Russell 2000 down 2.9%. The Dow Jones Industrial Average lost 3.1%, and the Nasdaq Composite lost 3.0%.

The stock market began the day sharply lower, giving back the bulk of yesterday’s advance, after data out of China and Germany continued to weaken. China reported its slowest industrial production growth since 2002, and Germany reported a 0.1% qtr/qtr decline in Q2 GDP. Understandably, investors rushed to safe-haven assets such as gold ($1527.80/oz, +$13.70, +0.9%) and U.S. Treasuries, while equities steadily declined throughout the day.

In turn, the yield on the 10-yr note fell below the yield on the 2-yr note for the first time since 2007, representing an inversion that has preceded each recession since 1980. The average length of time between the first inversion and the start of each recession since 1980 has averaged 18 months, with the range being as little as ten months to as many as two years.

Despite this historical time cushion, it was risk-off on Wall Street with all 11 S&P 500 sectors finishing lower. The energy (-4.1%) and financials (-3.6%) sectors led the broader retreat amid steep declines in oil prices ($55.01/bbl, -$2.03, -3.6%) and U.S. Treasury yields. The utilities sector (-0.9%) was the only sector that didn’t finish lower by at least 1.0%. 

The 2-yr yield fell nine basis points to 1.58%, and the 10-yr yield fell ten basis points to 1.58%. Interestingly, the 30-yr yield hit a record low at 2.02% before finishing the session down 11 basis points at 2.03%. The U.S. Dollar Index held firm, advancing 0.2% to 98.04. 

It should be noted that the 2s-10s yield spread did not remain inverted during the session. Still, the yield curve had been steadily flattening all year and investors weren’t given any reason today to expect a change of course. The yield-curve flattening undercut shares of Citigroup (61.41, -3.42, -5.3%), Bank of America (BAC 26.42, -1.30, -4.7%), and JPMorgan Chase (JPM 104.80, -4.54, -4.2%).

Separately, Macy’s (16.80, -2.56, -13.2%) provided disappointing earnings and guidance, which sent shares down 13.2% and put additional pressure on the SPDR S&P Retail ETF (XRT 38.42, -1.68, -4.2%). 

Reviewing Wednesday’s economic data, which included Import and Export Prices for July and the weekly MBA Mortgage Applications Index: 

  • Import prices rose 0.2% m/m in July, but declined 0.1% excluding fuel. On a yr/yr basis, all import prices were down 1.8%, versus up 4.8% for the 12 months ending in July 2018, while nonfuel import prices declined 1.3% versus a 1.4% increase for the 12 months ending in July 2018.
  • Export prices were up 0.2% m/m in July. Excluding agricultural exports, prices were also up 0.2%. On a yr/yr basis, all export prices were down 0.9%, versus up 4.3% for the 12 months ending in July 2018, while nonagricultural export prices were down 1.5%, versus up 5.0% for the 12 months ending in July 2018.
    • The key takeaway from the report is that it doesn’t show any inflation, which stands in contrast to the Consumer Price Index for July. Accordingly, it will only serve to confuse the market’s perspective on the Fed’s read of inflation trends.
  • The weekly MBA Mortgage Applications Index spiked 21.7% following a 5.3% increase in the prior week.

Investors will receive the following economic data on Thursday: Retail Sales for July, Industrial Production and Capacity Utilization for July, the Empire State Manufacturing Survey for August, the Philadelphia Fed Index for August, the weekly Initial and Continuing Claims report, the preliminary Productivity and Unit Labor Costs for the second quarter, Business Inventories for June, and Net Long-Term TIC Flows for June. 

  • Nasdaq Composite +17.2% YTD
  • S&P 500 +13.3% YTD
  • Dow Jones Industrial Average +9.6% YTD
  • Russell 2000 +8.8% YTD

Overseas: 

  • Europe: DAX -2.2%, FTSE -1.4%, CAC -2.1%
  • Asia: Nikkei +1.0%, Hang Seng +0.1%, Shanghai +0.4%

Commodities: 

  • Crude Oil -2.03 @ 55.01
  • Nat Gas -0.02 @ 2.13
  • Gold +17.50 @ 1520.50
  • Silver +0.01 @ 17.28
  • Copper -0.03 @ 2.59

Spotlight Issue: Macy’s slammed after disappointing earnings results/guidance

Macy’s (M -15%) is leading retail stocks lower after the nation’s largest department store missed second quarter earnings estimates and lowered EPS guidance for the year.

The company delivered comparable store sales growth for the seventh consecutive quarter, but the 0.2% growth narrowly missed the 0.3% expectation. While Macy’s strategic initiatives (Growth 150 and Backstage stores, digital and mobile initiatives, etc.) continue to show progress, the company was forced to clear inventory for the second straight quarter after facing challenges, including “a fashion miss in our key women’s sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism.”

As a result, adjusted EPS of $0.28 missed the $0.45 consensus by a wide margin. Gross margins fell 160 bps yr/yr mostly from increased markdowns to clean the inventory position as well as higher delivery expense.

Macy’s lowered EPS guidance to $2.85-3.05 from $3.05-3.25 and reaffirmed its outlook for comp sales (+0-1%) and gross margin (down slightly yr/yr in the second half of the year). Management said the latest proposed 10% tariff on Chinese imports represents no more than a $0.05/share additional headwind to the EPS outlook.

Management noted that consumer spending remains healthy, but there is “significant noise in the macro economy.” Consumers had very little appetite for selective price increases in luggage, housewares, and furniture in response to the third tranche of tariffs that increased to 25%.

Analysts remain skeptical that the company can generate long-term profit growth. Seven consecutive quarters of positive comps is encouraging but comp growth came in at less than 1% for the last three quarters while consumer spending has remained strong. What will happen when the US economy turns down?

As we have learned in recent years, it is the department stores and mall-based retailers that are facing the strongest secular headwinds from eCommerce in the form of reduced foot traffic. Incremental benefits from digital initiatives haven’t been enough to stem the tide in the competitive retail market. 

Macy’s has a healthy balance sheet, but the now 9% dividend yield hasn’t provided much support for a stock that is down 45% year-to-date.

News Summary:

  • Earnings/Guidance:
    • Applied Industrial (AIT) misses by $0.15, misses on revs; guides FY20 EPS below consensus, revs below consensus
    • Canada Goose (GOOS) beats by CAD 0.03, beats on revs; reaffirms FY20 EPS guidance, revs guidance
    • Contura Energy (CTRA) misses by $0.33, beats on revs; lowers FY19 coal shipment guidance
    • Embraer SA (ERJ) misses by $0.06, beats on revs
    • Grocery Outlet (GO) beats by $0.07, beats on revs; initiates FY19 guidance with upside EPS, revs in-line
    • Luckin Coffee (LK) misses by $0.03, misses on revs
    • Macy’s (M) misses by $0.17, reports revs in-line; lowers FY20 EPS below consensus (does not include latest tariff tranche), reaffirms FY20 comps
    • Myriad Genetics (MYGN) misses by $0.07, misses on revs; guides Q1 EPS and revenue below consensus; guides FY20 EPS and rev below consensus
    • Performance Food Group (PFGC) beats by $0.05, beats on revs; guides FY20 EPS in-line
    • The RealReal (REAL) beats by $0.03, beats on revs
    • Tilray (TLRY) misses by $0.05, beats on revs
    • YY (YY) misses by $0.32, beats on revs; sees Q3 revs growth of 60.2-65.1%; authorizes share repurchase plan
  • General News:
    • President Trump tweets view that “we are winning” vs. China, and renews criticism of “clueless” Fed Chair Powell
    • Commerce Secretary Wilbur Ross said in CNBC interview that there is no truth to speculation that President Trump deferred tariff action on some products until Dec. 15 to have a “put” under the stock market
    • Senior White House official tells CNBC that tariff delay on some products is “not at all an indication of thaw in US/China relations”
    • China will still hold trade talks with US in September despite new tariffs, but China is not optimistic about progress, according to Bloomberg
    • 10-yr Treasury note yield briefly falls below 2-yr note yield for first time since 2007
    • July China industrial output increased 4.8% yr/yr which was lowest since 2002
    • Germany’s Q2 GDP fell 0.1%
    • EIA reports crude oil inventories had a build of 1.6 mln for week ending August 9
    • FTC Chairman is prepared to break up large technology companies if necessary by reversing prior mergers, according to Bloomberg
    • Carl Icahn increases active stake in Cloudera (CLDR) to 19.98% (from 18.36%)
    • PG&E (PCG) wants to be in charge of its own bankruptcy despite push back from creditors, according to The Wall Street Journal
    • Qualcomm (QCOM) appoints Mark McLaughlin as Chairman of the Board, effective August 13
    • SunTrust Banks (STI) increases quarterly cash dividend to $0.56/share from $0.50/share
    • FCC Chairman Ajit Pai recommends approval of T Mobile (TMUS) / Sprint (S) M&A deal
    • The We Company (WeWork) (WE) officially files for $1 bln IPO

Notable Ratings Changes:

  • Upgrades:
    • Bristol-Myers (BMY) upgraded to Overweight from Neutral at Atlantic Equities; tgt $63
    • Care.com (CRCM) upgraded to Buy from Neutral at BTIG Research; tgt $13
    • CBS (CBS) upgraded to Buy from Neutral at BofA/Merrill Lynch; tgt raised to $63
    • Ferrari (RACE) upgraded to Buy from Neutral at Goldman Sachs
    • PagerDuty (PD) upgraded to Outperform from Sector Perform at RBC Capital Mkts; tgt $49
    • Viacom (VIAB) upgraded to Buy from Neutral at Guggenheim; tgt raised to $35
  • Downgrades:
    • Advance Auto (AAP) downgraded to Neutral from Buy at Guggenheim
    • CBS (CBS) downgraded to Underperform from Market Perform at Bernstein
    • Granite Point Mortgage (GPMT) downgraded to Outperform from Strong Buy at Raymond James; tgt lowered to $20.50
    • Macy’s (M) downgraded to Underweight from Neutral at JP Morgan
    • Myriad Genetics (MYGN) downgraded to Neutral from Overweight at Piper Jaffray; tgt lowered to $40
  • Others:
    • Fastly (FSLY) initiated with an Overweight at Piper Jaffray; tgt $21
    • Tenet Healthcare (THC) resumed with a Neutral at Goldman Sachs; tgt $28
    • World Wrestling (WWE) initiated with Buy and $85 tgt at Rosenblatt

Upcoming Events:

  • Econ Data (Thursday):
    • 08:30 ET: Initial Claims for week ending Aug. 10 (Briefing.com consensus 215K; Prior 209K)
    • 08:30 ET: Continuing Claims for week ending Aug. 3 (Prior 1684K)
    • 08:30 ET: Retail Sales for July (Briefing.com consensus 0.3%; Prior 0.4%)
    • 08:30 ET: Retail Sales, ex-Auto, for July (Briefing.com consensus 0.3%; Prior 0.4%)
    • 08:30 ET: Empire State Manufacturing for August (Briefing.com consensus 1.1; Prior 4.3)
    • 08:30 ET: Philadelphia Fed Index for August (Briefing.com consensus 10.0; Prior 21.8)
    • 08:30 ET: Q2 Productivity – Prelim (Briefing.com consensus 1.3%; Prior 3.4%)
    • 08:30 ET: Q2 Unit Labor Costs – Prelim (Briefing.com consensus 1.6%; Prior -1.6%)
    • 09:15 ET: Industrial Production for July (Briefing.com consensus 0.1%; Prior 0.0%)
    • 09:15 ET: Capacity Utilization for July (Briefing.com consensus 77.8%; Prior 77.9%)
    • 10:00 ET: Business Inventories for June (Briefing.com consensus 0.1%; Prior 0.3%)
    • 10:30 ET: EIA Natural Gas Inventories for week ending Aug. 10 (Prior +55 bcf)
    • 16:00 ET: Net Long-Term TIC Flows for June (Prior $3.5B)
  • Earnings:
    • Monday (Aug 12)
      • Pre-Market: GOLD MDP SYY TSG
      • After-Hours: BE TME VFF
    • Tuesday (Aug 13)
      • Pre-Market: AAP AVYA BEST EAT CVET ELAN GDS IIVI JD PSN RUBY
      • After-Hours: ADPT BILI CDK GO HUYA MYGN PSNL TLRY YY
    • Wednesday (Aug 14)
      • Pre-Market: AMCR AIT CAE GOOS CTST CTRA ERJ IHRT LK M PFGC
      • After-Hours: WUBA A CACI CGC CSCO HOLI NTAP PRSP SPTN VIPS
    • Thursday (Aug 15)
      • Pre-Market: BABA BGG CSIQ JCP MSG MSGN NIO TPR WMT
      • After-Hours: CRMT AMAT DDS GLOB NVDA PAGS VIAV ZTO
    • Friday (Aug 16)
      • Pre-Market: DE QD
      • After-Hours: None
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