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FactSet StreetAccount Summary - US Weekly Recap: Dow (1.79%), S&P (1.25%), Nasdaq (1.65%), Russell 2000 (2.57%)

Aug 7, 2015
Overview:
  • US equities ended lower this week. There were both macro and micro forces at work in the price action. Monetary policy remained in focus with the continued volatility surrounding the liftoff timing debate and the uncertainty about how much it really means for equity sentiment. Key developments included mixed Fed commentary, largely in-line payroll growth, still lackluster wage trends, continued auto sector momentum, strong services sector data, easier lending standards and further selling pressure in some growth-sensitive commodities. One of the bigger stories this week revolved around a sharp selloff in media stocks on cord-cutting concerns. There was also a lot of attention on the continued weakness in Apple (AAPL), along with some outsized scrutiny on biotech, one of the bigger momentum spaces in the market. A number of the usual suspects were also in the headlines this week, including the M&A, shareholder activism and restructuring themes. Outside of the shifting consumption patterns impacting media, there seemed to be few high-profile takeaways from the latest flurry of earnings reports. However, results out of the energy sector did fit into ongoing supply concerns. Energy and consumer discretionary were the worst performers this week, while utilities was the only sector to finish in positive territory.
Fed’s Lockhart more hawkish than Powell:
  • The liftoff timing debate heated up well before Friday’s release of the July employment report. On Tuesday, Atlanta Fed President Lockhart, a current FOMC voter widely viewed as a centrist, told the WSJ that there is high bar right now for not raising rates at the September meeting. He noted that it would take a significant deterioration in the data to convince him not to move. Lockhart highlighted the traction in the labor market recovery, the rebound from Q1 weakness and increased confidence that inflation will pick up as slack diminishes. However, Fed Governor Powell sounded a bit more reserved the following day on CNBC. He noted that the time is coming to raise rates, possibly this year. He also stressed that nothing has been decided when it comes to the September meeting. While he had some positive comments on the labor market, he did point out there is much more slack than suggested by the unemployment rate. Despite all the scrutiny, neither Lockhart nor Powell had a sustained impact on stocks. This seemed to fit with the extent to which the Fed has stressed the importance of the pace of policy normalization over the timing of the first rate hike.
Employment report largely in line:
  • The July employment report was largely in line with expectations. Nonfarm payrolls increased 215K last month, below consensus expectations for a 225K gain. However, there was a net positive revision to the prior two months of 14K. Job gains were fairly widespread and manufacturing posted its biggest increase of the year. As expected, the unemployment rate remained unchanged at a seven-year low of 5.3%. After a disappointing flat reading in June, average hourly earnings rose 0.2% m/m, matching the consensus. However, the y/y rate of increase only pushed up to 2.1%. The average workweek ticked up to 34.6, marking the high level of the recovery. There was a bit of disappointment that the participation rate did not rebound after the 0.3 pp decline in June to the cyclical low of 62.6%. There were somewhat mixed takeaways from a labor market slack perspective. The number of people involuntarily working part-time due to economic reasons fell to a new cyclical low, but long-term unemployment rose for the first time since January.
Cord-cutting fears hit media stocks:
  • The media group came under outsized pressure this week. DIS (8.9%) was the tipping point after cutting its F13-16 operating income growth guidance for its cable networks division to mid-single digits from high-single digits. It cited lower subscribers (ESPN) and incremental FX headwinds. Worries about subscriber losses quickly shifted the traditional media narrative to heightened cord-cutting momentum. This was a big topic in the press, though there did not seem to be anything incremental in the discussion about shifting consumption patterns, particularly on the part of millennials, the early-stage push by some programmers to offer online versions of channels directly to consumers, and the benefits for NFLX +8.1%. Results out of some of the other leading players only seemed to weigh further on sentiment. FOXA (11%) was hit by its softer-than-expected F16 EBITDA growth guidance. VIAB (20.2%) was another notable decliner after it reported a worse-than-expected 9% decline in US advertising in the June quarter, with ratings a headwind. However, there were also thoughts that the selloff was overdone in comparison to the magnitude of this week’s disappointments.
Another tough week for Apple:
  • One of the big stories this week, particularly early on, was the continued pullback in shares of AAPL (4.8%). Much of the blame went to the ongoing concerns that iPhone units will decline in F16. There were also worries about the company’s exposure to China, a broader smartphone market slowdown and lackluster Watch sales. Technicals were another factor after the stock fell below its 200-day moving average on Monday for the first time in two years. BofA Merrill Lynch also downgraded the name, citing a significant slowdown in revenue growth as the iPhone decelerates, China share gain difficulties, the stock’s correlation to gross profit dollar growth, higher risk of negative revisions, and the unlikelihood of a compelling upgrade cycle surrounding 6S/6S+ and incremental capital return announcements. However, a number of firms defended the stock, with both UBS and Morgan Stanley specifically highlighting expectations for growth in iPhone units in F16. FBR Capital also talked up the unrivaled strength in the iPhone 6 product cycle with less than 30% of customers having upgraded to date.
Biotech under pressure:
  • Biotech, the highest profile momentum pocket of the market, came under pressure this week with IBB (3.6%). The selloff lacked a specific catalyst, though risk-off trades ahead of the July employment report received some of the blame on Thursday. A deteriorating technical backdrop was another factor as IBB failed to hold its 50-day moving average. A lot of the blame went to what seemed to be only a very slight dent in the M&A theme that has provided broad-based support for the space. AGN (3.1%) noted that any transformative deals may not come until after the close (expected in 1H16) of its recently announced sale of its generic-drug business to TEVA +1.9%. While AGN’s CEO continued to talk up the potential for big M&A, the disappointing timeframe did follow recent comments from the CFO of GILD (2.9%) (another potential driver of a transformative deal) highlighting a lack of near-term urgency on the deal front. Positioning may have also played a role in this week’s selloff. According to the latest “Flow Show” report from BofA Merrill Lynch, healthcare/biotech funds saw a record tenth straight week of inflows.
High-profile activism:
  • It was another fairly eventful week in terms of the headlines surrounding shareholder activism. Bill Ackman’s Pershing Square acquired a $5.5B, or ~7.5% stake in food giant MDLZ +2.2%. The WSJ said the fund believes the company has to grow revenues faster and meaningfully cut costs, or sell itself to a rival. Both the WSJ and Reuters mentioned KHC (1.3%) as a potential acquirer. Dan Loeb’s Third Point disclosed an increased 9.6% stake in BAX +4.5%. The fund noted that it would like to secure two board seats, help the company choose a new CEO and provide some “thoughtful perspective” on capital allocation. On Friday, Bloomberg reported that ValueAct had amassed a ~$1B stake in AXP +4.8%. However, while it said that the fund has held preliminary talks with the payments network, the company is not yet a core active target. Funds controlled by Carl Icahn disclosed an 8%+ stake in LNG (0.8%). Icahn said the stock is undervalued and wants to have talks with management about operations, capex, financing and executive compensation. Starboard Value, which owns an 8.7% stake in MDAS (11.6%), called on the company to create shareholder value by cutting expenses, improving capital allocation and governance and exploring strategic alternatives.
Another big selloff in oil, energy stocks:
  • Oil fell sharply again this week with both WTI and Brent crude falling 6.9%. Supply concerns remained an overhang with rising production a big takeaway from this week’s batch of Q2 results. A WSJ article pointed out that companies continue finding ways to drill wells faster and cheaper, with some even guiding for drilling activity to move back to levels seen before the oil price slump by early next year. In addition, the US oil rig count rose for a third straight week and the fifth time in the last six weeks. There were also some press reports highlighting near-term seasonal headwinds on demand. Sell-side commentary remained fairly downbeat. Goldman Sachs said risks remain substantially skewed to the downside, citing higher financial and operational stress, declining commodity cost curves and a stronger dollar. Oil weakness helped push the energy sector down for a 14th straight week. It also continued to weigh on inflation expectations (10-year breakeven rate fell to the lowest level since March) and provide another complication for Fed policy normalization.
Sector Performance (vs S&P 500):
  • Outperformers: Utilities +0.89%, Financials (0.13%), Consumer Spls. (0.24%), Industrials (1.02%), Tech (1.15%)
  • Underperformers: Energy (3.48%), Consumer Disc. (2.41%), Healthcare (1.68%), Materials (1.64%), Telecom (1.26%)
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