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When the Going Gets Rough, Well, It's Just Rough: Taking Stock

When the Going Gets Rough, Well, It's Just Rough: Taking Stock

(Bloomberg) -- There was nowhere to hide Tuesday coming off the holiday-extended weekend in the U.S., despite what looked to be a relatively benign open. It looks like more of the same today.

I’ll spare you the trade talk, because frankly there were no tangible developments on that front to suggest why the S&P tanked in the last two hours of trading. But treasuries did continue to attract buyers as the session wore on -- perhaps to the delight of recession prognosticators that point to the deepening inversion in some parts of the yield curve as indicative of future recessions. News is bountiful on that front, with a cornucopia of superlatives on offer as a series of industrialized nations saw their respective benchmark yields hit levels not seen in years.

When the Going Gets Rough, Well, It's Just Rough: Taking Stock

The U.S. three-month/10-year spread hit levels not seen since March when some of the first inversion alarm bells started to ring out through the marketplace. Morgan Stanley equity strategists led by Michael Wilson went so far as to adjust that same curve for QE and QT and found that the inversion has been with us for even longer than it appears -- going back to 2018. Those strategists, instead of opting to predict recession, instead chose to highlight impending volatility given the relationship the VIX has shown to the curve -- concluding that volatility should rise significantly over the next six months.

When the Going Gets Rough, Well, It's Just Rough: Taking Stock

That may be music to traders’ ears. Amid the sell-off mid-afternoon, the VIX index spiked in a sign that some are looking for protection. For most of Tuesday, it was the best performing momentum stocks of last week -- including some that are considered “overbought” on the relative strength index -- that again led. That’s curious given 86% of the SPX was for sale in a risk-off style environment. Coming into the session, MKM strategists stressed that the market weakness seen recently was “for the most part” due to a “lack of buying pressure” as the earnings season is largely behind us and investors have a dearth of reasons to get excited.

Retail Struggles

The retail story continues today, and if it’s like anything we saw last week, there may not be too much to get excited about. S5RETL was down more than 2% for that week after Kohl’s, Foot Locker and Lowe’s earnings failed to inspire -- and that was even with a strong showing from Target (+15% over the span) and L Brands. Cowen now calls the Foot Locker risk/reward “fair” after its 22% decline last week, though is still is on the sidelines.

Other key retail names this morning include Abercrombie and Dick’s Sporting Goods shortly, while Canada Goose and Capri Holdings just reported. Ahead of the results, Barclays wrote of Canada Goose that it had “struggled” to make up ground in 2019 when compared to its peers, partially due to the issues with China -- though there is limited exposure to the Asian nation. Analysts expected valuation upside for the name and an outlook on three year growth guidance and its retail footprint (expecting midpoint of 15-20 stores by end of FY20). Credit Suisse was also generally sanguine, expecting a solid outlook for FY20, paired with its all-time low which should lead the stock to outperform with a big beat for the fourth quarter.

Capri and Canada Goose in the early going are not being as well received as the optimism assumed. Capri lowered its sales outlook for 2020, with its 1Q forecast light (comp sales for Michael Kors were weak, together with gross margin). Canada Goose is lower by more than 15% after missing on 4Q sales, though it beat on EPS and showed gross margin improvement through strong direct-to-consumer sales. The 2020 outlook did not blow it out of the water, though it appeared they left themselves some room to operate.

Sectors in Focus

  • Rare earths (including lithium miners LTHM, SQM, ALB and others like FCX, TECK, TRQ CN, TKO CN, NDM CN, GMO) after China implied it could use the metals to retaliate in the trade war
  • Asia-exposed stocks (AAPL, AMD, AVGO, BA, CAT, DE, KLAC, LVS, NKE, NVDA, WYNN) amid continued trade tensions which ratcheted up overnight as China alludes to possible responses
  • Steel names after ArcelorMittal lowered it European steel production levels, citing “weak” market demand (U.S. names include AKS, X, NUE)
  • E&Ps as WTI crude continues to slip, wiping out week’s gains as the trade angst builds, lowering growth prospects for the global economy
  • Recent volatile IPO names (UBER, LYFT, SWAV, TW, AVTR) after Beyond Meat soared yesterday (among the few names that rose) after its quiet period expired and it attracted a few bullish price targets

Notes From the Sell Side

Roku shares have more than tripled since December, and while that rally pushed Stephens to the sidelines on Tuesday, Needham continues to see upside potential from the company’s position in the video-streaming market. The firm raised its price target to a Street-high view of $120 -- 35% above the stock’s Tuesday close -- and reiterated that it was its “top pick” for the year. Roku has "unique advantages" in streaming video because it is an "aggregation platform rather than a single streaming service," analyst Laura Martin wrote to clients. Its scale for digital TV advertising is "unduplicated and unduplicatable," and while it has a big enough user base “to be a gatekeeper for 100% of new streaming services” -- giving it pricing power -- the company is still small enough to be an acquisition target.

Goldman Sachs issued a positive call on insurance companies, upgrading both Allstate and Hartford Financial Services to buy, citing an expected improvement in their margins. ALL’s "personal auto margins will hold better than consensus estimates predict," while "homeowners’ margins will improve starting in 2H19," analyst Yaron Kinar wrote to clients. The homeowners expectations is "predicated on top-line growth and the earn-through from industry pricing action." For Hartford, Goldman expects property and casualty margins “to hold on both an accident year basis and calendar year basis,” while the company’s acquisition of Navigators provides a “modest earnings lift” in both 2020 and 2021.

Rockwell Automation was lifted to buy from hold at Gabelli & Co., which wrote that while those with structural concerns about the company weren’t “mistaken,” it saw a “compelling” valuation and expects the company will “continue to take sufficient steps to adapt.” Given Rockwell’s technology orientation, it added, “we are hard pressed to see ROK under growing the automation space over the cycle.”

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

  • Deutsche Bank Global Financial Services Conference in NYC (day 2 of 2) (WFC)
  • Bernstein Strategic Decisions conference starts: (ALB, MCD, BA, BAC, C, EL, V)
  • Cowen annual TMT conference (ACIA, CSCO, JNPR)
  • 7:30am -- DKS earnings
  • 8:00am -- BMO CN earnings call
  • 8:30am -- PBI investor day; CPRI earnings call
  • 9:00am -- GOOS CN earnings call
  • 10:00am -- May Richmond Fed. Mfg Index
  • 10:00am -- PYPL at MoffettNathanson’s Inaugural Payments, Processors, and IT Services Summit
  • 10:00am -- DKS earnings call
  • 4:15pm -- PANW, PVH earnings
  • 4:30pm -- PANW earnings call

--With assistance from Ryan Vlastelica.

To contact the reporter on this story: Brad Olesen in New York at bolesen3@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Catherine Larkin

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