You Know Something Else That May Be Transitory?: Taking Stock

(Bloomberg) -- Highs in the equity markets.

That’s one way to follow a risk-on day. Friday was all green, as payrolls buoyed equity sentiment previously soured by the purported inflation risks relayed during the FOMC decision mid-week (the fateful “transitory” comment). But what a difference a couple days makes.

If you hadn’t received the countless notifications pushed to your smartphone this weekend (or relatives calling you in disbelief), you’d be surprised to see a sea of red on the screen, as new threats from President Trump to raise tariffs on Chinese goods and China’s threat to delay talks just days before they were set to resume sent futures plunging more than 2% overnight.

You Know Something Else That May Be Transitory?: Taking Stock

Obviously one can’t help but wonder if the new heights in the S&P contributed to the magnitude of the decline, but given the fact that the market had been broadly pricing in a trade deal, the depth of the reaction was to be expected. One also can’t help but wonder if those same highs and the strength of the economy emboldened the commander-in-chief in this new negotiating tactic. It may not be a coincidence that when the market was selling off at pace in the fourth quarter and the FOMC was pondering a pivot, the President showed remarkable (relative) restraint in discussing the trade subject matter. But now, after he expressed frustration with the Fed last week, calling for more cuts despite the economy and markets on firmer footing, its a safer space to dig in.

You Know Something Else That May Be Transitory?: Taking Stock

But for equities, and those especially exposed to foreign risks, it’s not great timing. We are still grinding through earnings season, and as Credit Suisse pointed out last week, companies in the S&P 500 with higher foreign sales were already “delivering weaker” results than those with more domestic exposure. Revenue beats lagged their more domestically-focused peers by 80 basis points, while earnings beats lagged by 300 bps. Despite the fact that futures have pared some of the most extreme losses this morning, one can’t ignore the fact that the Hang Seng and Shanghai composites ended lower by nearly 3% and 5.6%, respectively.

And, as a result, some Asian region-exposed names are some of the biggest losers early, with high beta names showing some of the worst losses, like CSIQ (55% of rev. from Asia), SWKS (~45% of rev. from Asia), SINA, MRVL(~60%), NVDA(50%), AMD (~70%), MU (~80%); while your usual trade proxy names like Boeing and Caterpillar, are also lower. Financials are also weaker this morning as treasuries surge (yields decline) in the flight to safety and amid growth risks.

Your 63-Hour ICYMI

The second longest shot to ever win the Kentucky Derby was crowned after one of the favorites, Maximum Security, was disqualified after a steward review (maybe the horse can be renamed “Maximum Scrutiny,” after President Trump weighed in on the annual horse race result) of a foul for impeding other horses, the first time the winner has been disqualified during the Derby; Avengers is now the second-highest grossing film of all time, sitting behind Avatar after eclipsing another James Cameron film, Titanic; violence between Israel and Gaza escalated after a series of rocket attacks; Buffett admitted Wells Fargo had made some mistakes, though stopped short of assigning blame for the bank’s scandals while answering questions at the Berkshire annual meeting; EU is opening a probe into Apple after Spotify’s complaint over fees, the FT reports; Occidental has boosted the cash portion of its offer for Anadarko as the battle with Chevron heats up; Sinclair is set to buy 21 Fox regional sports networks from Disney for nearly $10 billion; Barron’s was positive on Burlington given its room to grow, and also mentioned LOVE, ZUO, FTCH and millenial-exposed names COST, FB, GOOGL, SBUX, and DIS positively, among others; the Cincinnati Reds hit home runs on three straight pitches in a game against the San Franciso Giants they ultimately lost

Sectors in Focus Today

  • Recent IPOs remain in focus (LYFT, ZM, PINS, SILK, SWAV, BYND) as the macro picture worsens ahead of the Uber IPO later this week. ZM and BYND are already outpacing the greater market to the downside here in the pre-market
  • Oil names and E&Ps as OXY boosts the cash portion of its offer for APC
  • Disney and other media names (NXST, SSP, GTN, TRCO, MDP) after the Sinclair’s deal for Fox’s regional sports networks; Disney reports results later this week and has already been on the receiving end of two price target boosts, including a new Street-high from Rosenblatt
  • Apple supply chain on newfound China risks given its heavy reliance on Asia (SWKS, AVGO, CRUS, QRVO, QCOM, MXIM, NXPI)
  • Hotels and loding (CLDT, RLJ< DRH, SHO, RHP) as PK entered an agreement to acquire CHSP at an approximate 8% premium to Friday’s close
  • Theater names (IMAX, CGX CN, AMC) after Disney’s Avengers continued to set records at the Box Office
  • Holdings from participants at the Sohn conference: Glenview’s Larry Robbins (largest holdings include IQV, FMC, FDA, HCA, DXC), Doubleline’s Gundlach and Greenlight’s Einhorn (largest holdings include GM, GRBK, AER, BHF, CCR).
  • Meat suppliers (PPC, SAFM, BYND) as Tyson is due to report shortly. Analysts will surely be interested to hear the justification for exiting the BYND investment and the traditional protein maker’s plans to compete in the world of meat substitutes

Notes From the Sell Side

EOG Resources was upgraded to positive from neutral at Susquehanna Financial Group, which wrote that the company was “truly in a class by itself,” following a review of the company’s well performance. The firm had been skeptical on “how long the company can maintain its capital efficiency and production growth,” but recent performance “suggests our doubts were misplaced.” Price target raised to $115 from $107; analyst Biju Perincheril wrote that while the stock’s valuation was “still on the high side,” it had “improved over the past year on a relative basis.” The upgrade comes after results last week, when EOG boosted its dividend and said it was able to consistently make cash.

BofAML made a dramatic about-face on Inphi Corp. The firm double upgraded the company, to buy from underperform, and it went from having the Street-low price target ($32) to the Street-high target, raising it by nearly 90% to $60. Analyst Vivek Arya wrote that he had "previously underappreciated IPHI’s ability to extend its leadership position in high-speed optical components and the larger-than-expected benefits from the 5G and data center (100G/200G/400G) product cycles.” Even with the stock up more than 70% from a January low, "we see opportunity, as the stock is only back to its 2017 peak, while new product cycles are just starting and can continue for the next 2-3 years." The comments come after IPHI’s results last week, which BofAML wrote had addressed its growth concerns.

Tick-By-Tick to Today’s Actionable Events

  • PD and TUFN quiet periods expire
  • Sohn Conference
  • MSFT developer conference (day 1 of 2)
  • NOW analyst day
  • ALDR migraine studies and AGN long-term safety for ubrogepant are presented at American Academy of Neurology meeting; see preview
  • 7:30am -- TSN earnings
  • 8:00am -- BHC CN, AIG earnings call
  • 9:00am -- TSN earnings call
  • 9:30am -- Fed’s Harker speaks on the economy
  • 12:05pm -- Greenlight’s David Einhorn at Sohn conference
  • 1:00pm -- BPFH investor day
  • 1:05pm - Glenview’s Larry Robbins at Sohn conference
  • 3:00pm -- JKHY investor day
  • 4:15pm -- AIG earnings
  • 4:30pm -- HTZ earnings
  • 5:20pm - Doubleline’s Jeff Gundlach at Sohn conference

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