Drumbeat Gets Louder to Play a Bit More Defense: Taking Stock

(Bloomberg) -- Stock futures are slightly lower on an eerily quiet start to the day, though we did have one promising economic datapoint out of the gate with small business optimism climbing above expectations (actual 108.8 versus estimate 108.0) to a record.

Europe stocks also traded down, despite the stronger-than-expected ZEW data from Germany, on weakness in the miners sector: ArcelorMittal and Fresnillo are both down more than 2.5%.

Not much movement so far in the pre-market, though the usuals are higher with AMD up another ~1% (while most of tech is down a smidge) after a monster >9% rally on Monday while pot stock Tilray is up another 4% in follow-through from yesterday’s pact.

Things to watch for include further volatility in the hurricane-related stocks like Generac and Home Depot, a harsh reaction to Sonos’ first report as a public company (shares plunged 14% pre-market), a deeper dive into NXP Semi’s long-term strategy (see our preview for perhaps the sorest of sore spots for the risk arb community in some time), margin commentary out of Dover (they just announced a rightsizing plan; see our preview for one of the most controversial names in industrials), the 3D printer stocks like 3D Systems and Stratasys ahead of HP Inc’s investor briefing (though maybe less so now that HPQ unveiled its new metal parts printer at a trade show yesterday), Zscaler into tomorrow’s IPO lockup expiration (shares nearly tripling since the March IPO), and the calm before the storm with several major sell-side conferences kicking off tomorrow that could impact TMT (Deutsche Bank and Goldman), industrials (Morgan Stanley Laguna), health care (again Morgan Stanley), and materials (Credit Suisse) in addition to Apple’s iPhone event.

Still Waiting...

It’s tough to glean much from yesterday’s session given the meager-than-usual volumes (lowest in ~2 weeks), which can be attributed partly to the Rosh Hashana holiday and partly to the watching wallpaper drying-like countdown to a China tariff decision.

Some expected a quickfire order at 12:01am Friday morning, or the second that the public comment period was over, but all we’ve gotten so far is a cloud of uncertainty related to timing and an even bigger threat to tax an additional $267 billion of imports. The market doesn’t appear to be taking that too seriously at the moment, as the S&Ps closed very near where they traded just prior to the warning.

But one area that shined on Monday is the transports, with the TRAN closing at a record (see chart below) as a bit of hurricane mania led to a flurry of bids in the truckers. Bloomberg Intelligence cited possible upward pressure in trucking prices from the impact of Hurricane Florence while also noting that earnings expectations for the truckload carriers don’t fully appreciate the longevity of the rate cycle.

Getting Defensive

Defensive sectors remain in vogue to start the month, with utilities and consumer staples taking the reigns versus a sputtering display for the tech space, which got whacked in the first four days of September.

Tech showcased a slight bit of relief yesterday, but the majority of the large-cap FAANG stocks ended in negative territory as did every member of the BAT complex. Alibaba got hit the most (-3.7%) followed not far behind by Tencent (-2.9%) as the news and initial swirling confusion over Jack Ma’s departure weighed on sentiment throughout the session (see more on this in Monday’s Taking Stock).

The most vocal pusher on the defensive rotation thesis is Morgan Stanley’s chief equity strategist Michael Wilson, who’ll grace the Bloomberg TV airwaves at 2pm today -- never mind the mea culpa he issued last week for being wrong about a 10% correction the SPX, as he tacked on "we might just be early" in the following sentence of that note.

In a piece from Monday, Wilson stayed the course given the reasserted relative strength seen in defensive and value stocks. He is now zoning in on potential weakness in the consumer discretionary space ("the clear and unrelenting leader this cycle, even more so than tech"), which follows his downgrade of the tech sector and small caps back in July. He cites the unhealthy breadth observed over the past week as well as discretionary stocks’ vulnerability to a slowdown later this year and next as tax cuts represented the last leg higher while prices will be rising on increased tariffs on consumer goods.

Notes From the Sell Side

Nomura Instinet’s Romit Shah, who says he’s been of the most bullish on Tesla since initiating coverage last year, now calls the stock "no longer investable" in a downgrade. Shah still thinks Tesla could be a lot bigger than it is today, but the issue is the erratic behavior of Musk: "During the second quarter, the switch seemingly flipped."

UBS downgrades CBS to a neutral given the uncertainty around the management transition, which could last for an extended period, and the fact that they don’t expect a strategic acquirer to surface.

UBS also boosts its price target on buy-rated Apple to $250 (versus a Street average of $224) in a deep dive that includes a new bottom-up services model, new data on iTunes spending, mobile payments, ecosystem retention, iPhone upgrade rate, new work on historical mega-cap stock performance, new stock ownership analysis, and a new valuation approach.

Wedbush upgrades Snap to an outperform as key hires and improved execution over the past six months suggest increased focus on shareholder value.

Keybanc pins a Street high price target of $81 on Roku after checks point to potential upside to the research firm’s 3Q estimates and continued adoption of ad-support streaming, including The Roku Channel.

Stifel’s Stephen Gengaro, formerly of Loop Capital, initiates on the oil service sector and calls for some "very compelling" risk/reward opportunities despite Permian takeaway constraint concerns. He expects strong growth in U.S. land to restart by mid-2019 and says international activity is in the early stages of a recovery; favorite stocks are Tenaris, Baker Hughes, Solaris, DMC Global, and Oil States.

Tick-by-Tick Guide to Today’s Actionable Events

• Today -- IPO lockup expiry: RCUS
• Today -- Bob Woodward’s book "Fear: Trump in the White House" is released
• 7:30am -- FRAN earnings
• 8:00am -- NXPI investor day
• 9:00am -- DOV analyst meeting
• 10:00am -- Wholesale Inventories & Trade Sales, JOLTs job openings
• 10:00am -- Bernanke gives welcome address at Brookings Institute event
• 12:00pm -- DoE short-term oil and natgas outlook
• 2:00pm -- HPQ 3D printing technology briefing
• 2:20pm -- Kashkari moderates panel at Brookings Institute event
• 3:30pm -- Yellen moderates panel at Brookings Institute event
• 4:30pm -- API oil inventories
• Tonight -- IPOs scheduled to price: Nio (NIO), 111 (YI)

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Steven Fromm

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