It's All About Social Media Contagion, Not FAANGs: Taking Stock

(Bloomberg) -- Stock futures are holding on to their slight gains thanks to Amazon decoupling from most of its FAANG peers, though momentum gets hit from another whiff from a social media bellwether as Twitter plunges ~16% on weak monthly active user numbers.

Trader eyeballs will divert from earnings statements and the pre-market chart of Amazon (up 4.5% and poised to open at a record) or Twitter (plunging 14%) for a second once 8:30 am rolls around, i.e. when second-quarter GDP gets released. Trump is on the record saying the number probably won’t be 5.3%, but will be "terrific," while Kudlow predicted the print will be "big" and didn’t disagree with a suggestion that it’d be in the 4.0%-4.5% range.

We’ve now received earnings from more than half of the companies in the S&P 500, and so far 88% beat on earnings while 74% had better-than-expected revenue. Tech continues to shine, with 35 of 36 companies beating on the bottom line, according to our data, but it’s the stocks in the industrial sector that are seeing the largest one-day bump on the results. They’re up ~2.2% versus all securities rising at an average pace of ~0.7%.

Meanwhile money continues to come into stocks with the latest leg up in the tape. EPFR Global data shows a $4.1 billion inflow into U.S. equities after more than $2 billion intake in the prior week. Lipper had a different read, noting that U.S.-based equity funds as a whole posted a net $620 million in withdrawals thanks to $1.1 billion in outflows from non-domestic equity funds versus $474 million inflows for domestic funds.

No FAANG Contagion

The heavy volume session on Thursday (highest in almost a month) was dominated by all-things Facebook, given the size and scope of its record plunge and the superlatives that showed up in the media as a result, e.g. the biggest one-day market cap rout by one stock ever, a market loss equal to about two-thirds the size of the 1929 "Black Tuesday" market crash, how many billions Zuckerberg lost, and yada yada -- meanwhile the stock closed up ~18% from its mid-March Cambridge Analytics lows.

But the dust has now settled on the FAANG front as Amazon avoided a similar fate, and so it’s safe to say that the contagion from Facebook hasn’t spread to the rest of the complex. Regardless, it’s worth paying attention to which funds felt the most pain and which got spared:

  • An analysis by Goldman strategists led by Arjun Menon and David Kostin shows that Facebook is the most popular stocks of hedge funds, and so naturally they suffered when the stock tanked
  • Goldman said 26% of 222 hedge funds that they monitored owned FB as of the most recent filing with an average weight of 4%, while 97 of these funds held FB as a top ten position in their portfolio
  • The strategists said that while hedge funds felt pain, mutual fund relative returns saw a boost as allocation to FB and FANG has declined over the past few years
  • "Due to their consistent FANG underweight over time, core funds have delivered the highest median relative returns during the 41 previous episodes (since 2014) when one or more of the FANG stocks fell by 5%+ in one day"

Sectors that may outperform today:

  • FAANGs: Not that the group saw much contagion from the Facebook fiasco, but a relief rally is in order thanks to the well-received report from Amazon
  • Semicap equipment: Watch Applied Materials and KLA-Tencor after Lam Research (+4.7%) reversed afterhours with management now calling a near-term bottom
  • Semis: While the semicaps should do well given Lam, it’s unclear what will happen to the rest of the SOX given the punishment that Intel (-6.5%) took on a delay for its 10-nanometer products, coupled with downgrades at Citi and BofAML -- both AMD and nVidia did climb post-market in reaction
  • Cloud software: Overall stronger than expected numbers from Atlassian (+15%) might lead to a positive read-through for related software peers like ServiceNow, Workday and Tableau Software
  • Online travel: Expect strength in TripAdvisor and Booking on the back of a big beat from Expedia (+9.1%)
  • Machinery stocks, with CAT set to report next week, as Japan’s Komatsu numbers topped estimates
  • Auto parts makers may catch a bid after good price reaction to results from Veoneer (+2.5%) and Autoliv (+1.5%)
  • Restaurants: Watch the casual and fast casual names after better results out of Chipotle (+6.5%) and BJ’s Restaurants (+13%)
  • Gaming: Casino stocks were weak Thursday after Las Vegas Sands numbers, though may catch a slight bounce after a beat from Boyd Gaming (+6.6%)

Sectors that may underperform today:

  • Social media: Twitter’s miss will likely bleed through to Snap
  • Networking: Both Juniper Networks (-5.5%) and LogMeIn (-15%) got crushed on their respective prints, which might weigh on Cisco and Arista Networks, neither of which have reported results yet; LOGM has 4 downgrades so far today
  • Cybersecurity: A shellacking for Imperva (-17%) and Proofpoint (-5.8%) could hit peers like FireEye, Palo Alto Networks, Okta, and Fortinet
  • Video Games: Watch Activision, Take-Two, and their ilk after disappointing forecasts for EA (-4.9%)
  • Payments: NCR (-7.3) is getting beaten up after slashing its year EPS forecast; watch for read across in ATM peer Diebold
  • Beverages: Boston Beer (-16%) looks to have a huge pullback on its hand after a massive 63% rally year-to-date into the earnings
  • Solars: The group, and the TAN ETF, may be under pressure on a bevy of misses from First Solar (-7.2%)

On Tap Next Week

It’ll be a massive mix of both macro and micro catalysts, as a slew of central banks are set to make policy decisions, several key economic data points are on the schedule, while the earnings floodgates remain wide open.

Swirling speculation over whether the Bank of Japan will tweak its ultra-loose monetary policy made some seismic shifts in Japanese yields and the currency markets earlier this week; the Fed, Bank of England, Mexico, and Brazil will all set interest rates as well. The eco data dump includes PCE, ISM, multiple housing figures, and Friday’s jobs number.

Some of the more notable earnings for next week include Apple (the last FAANG to report), Caterpillar (they of the "high water mark" comment from last quarter that hammered the market), Tesla (will Musk play nice with the sell side this go around?), Square, Pandora Media, Wynn Resorts, Pfizer, Credit Suisse, Barclays, BP, and Yum China, which surged yesterday on report of a buyout from Hillhouse Capital.

Notes From the Sell Side

Amazon’s biggest cheerleaders after last night’s results are now Cowen’s John Blackledge and Goldman’s Heath Terry, who both lifted their targets to the highest on the Street at $2,300, which implies a rally of another 22% from where the shares are trading in the pre-market.

NXP Semi (+1.9% pre-market) is getting a bunch of upgrades after the Qualcomm deal break -- Suntrust during the trading session yesterday and Jefferies, Deutsche Bank, Bernstein, and Mizuho all this morning -- as many are seeing a unique valuation opportunity after the deal break, not to mention that some of the sell-side models were probably a bit stale given the two-year wait for any sort of outcome on the M&A front. Most of these new price targets are around the $110-$115 range, which is leagues above the ~$92 level that the stock hovered around yesterday.

Morgan Stanley boosted its steel price deck for the second half as they don’t see the U.S.-E.U. trade negotiations as a near term risk: "Any increase in import volumes would likely lag the signing of a deal by 2-3 months given the normal import lead time, pushing the risk out to 2019."

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

  • Today -- WTO General Council meeting on U.S. China trade conflict (day two)
  • Today -- Disney airs Grand Finals of the Overwatch League
  • 7:00am -- TWTR (roughly), OSK, MCO, WETF, LPNT, PSX earnings
  • 7:30am -- TEN (roughly) earnings
  • 7:45am -- GT, ABBV (roughly) earnings
  • 7:55am -- IMO earnings
  • 8:00am -- XOM earnings
  • 8:00am -- TWTR, MRK earnings calls
  • 8:30am -- GDP, PCE
  • 8:30am -- CVX, BEN earnings
  • 9:30am -- XOM earnings call
  • 10:00am -- University of Michigan Sentiment
  • 10:00am -- FOXA shareholder vote on DIS deal
  • 11:00am -- CL, CVX earnings calls
  • 11:40am -- INTC interim CEO Robert Swan on Bloomberg TV
  • 12:00pm -- NXPI CEO Rick Clemmer on Bloomberg TV

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