Trade Rhetoric ‘Decepticon’ Unmasked as Barbie: Taking Stock

(Bloomberg) -- Positives are few and far between this morning, save a few earnings reports, like Barbie maker Mattel, which beat earnings estimates for the first time in three years, up nearly 18 percent in post-market trade ("outperformance in every segment," Goldman Sachs analysts wrote). This poses an interesting dynamic with competitor Hasbro (of Star Wars, Transformers product lines), which just reported disappointing results after winning the toy game for the better part of four years.

Trade Rhetoric ‘Decepticon’ Unmasked as Barbie: Taking Stock

But it appears trade war tea leaves will be the order of the day after yesterday’s disruption (mentioned below) and after Politico put some some flint to steel in the tinder box after reporting that Trump intends to sign an order to ban Chinese telecom equipment.

Leadership from both the U.S. and China have been vocal that the ZTE, Huawei and technology security issues are parallel to the ongoing trade discussions, but its sure not to help. Today’s TV punditry will deep-dive the true implications from delayed talks. Futures have been steady (though lower), and if this were truly a deep crisis, my feeling is we would have dipped much more, or at least more than the 0.9% we saw Thursday.

Worse Than Better Than Feared

We finally got that fear-inducing headline, courtesy of National Economic Council head Larry Kudlow, ruining the illusion of docile and upward trekking markets. Nothing has really changed, however, as the infinitesimally small odds the market was pricing in for a trade deal to be signed, sealed and delivered before March 1 had to be priced out. There was temporary worry, of course , when one of the biggest cheerleaders of trade deal prospects splashes cold water in the market’s face, but the move never really got that severe and Thursday ended up on an upswing.

It didn’t help that the news came in a sensitive moment on a technical basis (read: up against the 200-DMA) and during a period of consolidation, and while the spotlight was fully focused (the lion’s share of material earnings are behind us).

Chipotle, as stellar a report as it was, one of the biggest bank mergers in 10 years (though that sunk shares of the mega banks in prospective competition risks) and the relief rally in video game makers following their own disasters were no match for Twitter’s revenue miss (and its choice to remove an element from transparency from earnings, a la Apple) and a "worse-than-feared" forecast from NXP Semiconductors (bucking the "better than feared trend").

That "worse-than-feared" surprise on already lowered expectations in the semiconductor space looks to be continuing, after Power Integrations (+0.4%) and Apple suppliers Qorvo (-0.8%) and Synaptics (-2% and just got downgraded at JPMorgan) all provided views for the subsequent quarter below forecasts.

In Thursday’s Taking stock, growth concerns were cited as reasons to be wary of multinationals with heavy overseas exposure to growth (Fiat Chrysler’s results also posed worries and took down the sector), but its also worth being worried about those who fail to undertake adequate currency hedges. The dollar strength (up for the seventh- straight day, its longest streak in 2 years) could also start to pose a worry, as the gains put the greenback back above its recent moving averages and within striking distance (less than 2%) of its December highs. A break above would put the index at its highest since mid 2017.

Trade Rhetoric ‘Decepticon’ Unmasked as Barbie: Taking Stock

A nice fixed-income offset for equities is that macroeconomic picture is serving to cushion the blow from the 10-year yield, for all you Fed Model watchers out there. And this decline has served to provide a lift to rate-sensitive names. Interestingly, real estate, also referenced for its defensive qualities and rate sensitive nature, is actually one of the top performers in 2019 -- a year proclaimed thus far for its risk-on quality.

On Tap for Next Week

Earnings take a bit of a back seat next week as we make way for trade-related developments that may result from the Lighthizer/Mnuchin duo in China next week. A major breakthrough would be needed to change sentiment after Kudlow said a meeting between U.S. President Donald Trump and Chinese President Xi Jinping was unlikely to take place by March 1 -- the date Trump said tariffs on $200 billion worth of tariffs would rise. Reports recently indicate that no trade settlement could occur before Trump actually meets with Xi.

Its also 13F season -- everyone’s favorite time to speculate on hedge fund winners and losers from more than 45 days ago (see November’s Taking Stock: Which Hedge Funds Got ‘Whale Rocked’ in October?). Speculation will be rife given the volatility that ensued: who weathered the selloff and seized the opportunity to load up on beaten down stocks, versus those who liquidated positions (and likely took a loss (the extent of which won’t be known) given the rout began shortly after the quarter started? Did investors pick up shares of Facebook after dumping them during the scandal? And with Apple stock on sale, did value investors pile in right before its epic warning? Which funds capitalized on the defensive posturing late in the year, thirsting for healthcare and utilities? Did holders of PG&E get out ahead of the bankruptcy? Did anyone load up on Celgene, BB&T or Suntrust ahead of the mega mergers? The narratives are endless and we”ll be breaking it all down via TOPLive and through NI HEDGE.

On the earnings front, Nvidia will have an opportunity to tell us of things are looking up after last week’s debacle, while Applied Materials will provide additional information into the semiconductor situation, which seems to be getting more complex by the day (Intel’s cloud-related weakness (we saw different angles from MSFT, GOOGL and AMZN), poor forecasts, a bottom being in, enterprise storage products weakness). Peer Lam Research two weeks ago beat expectations. Industrial heartbeat Deere reports at the end the week, while video game maker Activision hopes to prove that not all game makers can suffer the same plight (following EA’s results earlier this week).

Sectors in Focus Today

  • Beauty companies as Coty results have shares soaring, validating Bill Miller’s comments last week and what we’ve seen from Sally Beauty, among others
  • Toy makers like TOY CN after Mattel notched its first EPS beat in three years and Hasbro just missed
  • Tire makers like CTB, after GT provides results despite the fact it pre-announced in January, as did many other companies at the Detroit auto show; the pre-announcements didn’t stop ADNT from widely missing and GM beating expectations earlier this week
  • Cyber security names after RPD, FSCT beat expectations, each up more than 9%
  • Mining stocks as CLF reports results; will be interesting to hear any color on how the Vale SA disaster is affecting supplies given Iron ore futures topped $90/ton
  • Gene editing stocks after Sangamo’s study took shares down in CRSP, EDIT and NTLA. Piper said there was no read-through to CRSP, while BTIG just initiated on the three with a buy
  • Online travel agencies (BKNG cut views Wednesday, TRIP, SABR) after Expedia guided above expectations for 2019 EBITDA growth on the conference call; the beat was almost entirely due to margins, according to Telsey Group

Notes From the Sell Side

XEC was upgraded at Susquehanna, which cited its capital efficiency as "set to improve" will spacing tests in the Permian will serve as a tailwind. Analyst Biju Perincheril sees an attractive risk/reward for shares with downside protection given the commodity price environment.

Vocera Communications is one of the biggest movers to the downside in the pre-market after results disappointed, down 24%. Citi analyst Stephanie Demko says the company "overshot" the negative catalyst expectations and shares could remain rangebound for much of 2019 in her downgrade. The voice communication solution provider is also "highly dependent" on its key selling season, she wrote, with the expectation that growth may lag until the next sales cycle.

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

  • 8:30am -- Dec. Chicago Fed
  • 8:30am -- HAS earnings call
  • 9:00am -- CLF earnings call

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