The General Market
Main U.S. Benchmarks Finish The Week On A High Note
Global stocks retreated on Friday that was triggered by the mounting currency crisis in Turkey. U.S. equities were poised for a sixth weekly gain but the momentum was halted. The dollar capped its best week since June as the lira sank to a record.
While Turkey’s brewing financial trouble shook world stock markets, the U.S. Dollar Index touches its strongest and firmest level in 14 months with the plunge of the ‘Lira’. European and emerging-market equities took the hit, posting losses of more than 1%.
The S&P 500 Index slumped in thin trading and lost 20.30 points (-0.71%) to register its third straight down session. It was also its worst one-session slump since June 27. According to Dow Jones Market Data, the broad-market index has been traversing a narrow range in the past several weeks. But the S&P 500 is actually within striking distance of an all-time high.
It was the third straight daily decline for the Dow Jones Industrial Average as it dropped 196.09 points (-0.77%). The blue-chip index moved to negative territory for the week, dropping -0.54% due to Friday’s biggest one-day percentage fall since July 11.
The Nasdaq Composite Index was aiming for a ninth straight day of gains but instead slid 52.67 points (-0.67%) to close the week. The tech-heavy index still managed a +0.4% weekly advance.
Trump compounds Turkey’s currency crisis
United States President Donald Trump decided to double the steel and aluminum tariffs on Turkey which is already reeling from a currency crisis. Turkey’s lira is sliding “rapidly downward against our very strong Dollar!” Trump’s ‘tweet’ on Friday read, “Turkey’s lira is sliding rapidly downward against our very strong Dollar!”
The plunge of Turkey’s lira has ignited fear in markets because of one primary factor – bank exposure. Based on data from the Bank for International Settlements, Turkish borrowers owe $18 billion to U.S. banks, $14 billion to banks in Japan, $19 billion to U.K. banks, $38 billion to banks in France, and $83 billion to banks in Spain.
U.S. and China Imposes $16 Billion Worth of New Tariffs
China swiftly announced late Wednesday that it would slap additional tariffs of 25% on $16 billion worth of U.S. imports. The move is in retaliation to the plan of the United States to collect 25% extra in tariffs on $16 billion of Chinese goods beginning on August 23. Trump made the order on Tuesday.
On Thursday, Chinese state media accused the United States of a “mobster mentality” when it decided to implement additional tariffs on Chinese goods. Beijing warned that they had all the necessary means to fight back. The latest action by the U.S. left them with no choice but to fight back.
WB to Issue World’s First Global Blockchain Bond
The World Bank (WB) plans to issue the world’s first global blockchain bond in order to raise funds. Should the plan by the international lender to use the emerging technology, it’s going to be a weighty mainstream endorsement.
The World Bank already hired Commonwealth Bank of Australia to manage the bond. The bond will have the name “Blockchain Offered New Debt Instrument,” or “bond-i,” which is a reference to the Bondi Beach in Sydney. WB hopes to raise about $73 million from the bond’s floatation.
U.S. Securities Market Regulators to Investigate Tesla
Elon Musk, CEO of Tesla Inc. (TSLA) sent an e-mail blast informing company employees about his intention to go private. Musk also “tweeted” that he secured a $72 financial deal. The board of Tesla wants the detailed financing plan and more information as to how its CEO will take the U.S. electric car maker private in the proposed deal.
However, lawyers think Musk could have broken the 14e-8 of the Securities Exchange Act of 1934 because of his “funding secured” tweet. The provision states that publicly traded companies are prohibited from announcing plans to buy or sell securities if executives don’t intend to complete, don’t have the means to complete, or are trying to manipulate the stock price. Thus, Tesla is likely to face an investigation.
Two investors filed lawsuits against Musk on Friday. They allege that Tesla fraudulently engineered a scheme to squeeze short-sellers, including through Musk’s proposal to take the electric car company private.
The Consumer Services Sector Highlights
Pizza Wars – The Demise of Papa John’s
Papa John’s International Inc. (PZZA) $40.26 (-28.25% YTD)
Papa John’s is losing customers because of the public feud between founder John Schnatter and the company’s board. Schnatter was prompted to resign as Chairman last month after a racial slur. He insists that stepping down was a mistake.
On Tuesday, Papa John’s International reported second-quarter 2018 results which showed revenues of $408 million. It was a 6.2% decline on a year-over-year basis. Sales in the domestic company-owned restaurant were dismal. North America commissary sales also declined on weak volumes.
The bottom line likewise fell 24.6% from the year-ago quarter figure due to weak operating results. For quite some time now, the challenging sales environment in the U.S. restaurants has been weighing on the company’s performance.
PZZA dropped -5.18% to $38.94 after the earnings release but managed to recover and close higher at $40.26 on Friday, In a year’s time, the stock experienced a sharp decline of 46.9% versus the industry’s 4.7% growth. PZZA is down -28.25% YTD.
The company confirmed that its North American comparable sales for July fell 10.5% after the departure of Schnatter. They also said sales would continue to fall in the coming months.
Papa John’s would lower royalties and cut food-service pricing and online fees through 2018. The company will also fund the rebranding of the chain. The demise of Papa John’s means more than $41 billion quick-service pizza category is ripe for the taking. And rivals in the pizza wars should seize the opportunity.
Domino’s Pizza Inc. (DPZ) $291.31 (+54.16 YTD)
Domino’s Pizza appears to be the principal benefactor in Papa John’s disaster. Baird analyst David Tarantino said, “In our opinion, this dynamic creates a visible opportunity for Domino’s and other leading brands in the industry to gain additional market share when looking on a short-term and longer-term basis.”
DPZ rose +3.41% to $286.92 on Wednesday after Papa John’s lowered its sales outlook. The stock ended the week higher at $291.31.
Domino’s became the dominant player after garnering the majority of the industry’s market share and surpassing Pizza Hut. Their advantage lies in innovative technology which the younger customers love. Their popular loyalty program and improvements to its pizza dough are the other plus factors.
Tim McIntyre, executive vice president of communication at Domino’s, told CNBC, “We have been focused on becoming No. 1 in the pizza industry for a decade.” He added, “We achieved No. 1 status in global retail sales late last year. Our focus now is on becoming the dominant player in pizza, through great food; innovative technology; exceptional service to our customers; and a focus on the profitability of our tremendous franchisees.”
Based on the report from Kalinowski Equity Research, In 2017, Domino’s controlled 14.2% of pizza sales in 2017. Pizza Hut followed with 13.2% percent of the market while Papa John’s held onto 7.2% for the third spot. The research firm sees Domino’s market share to rise past 15% by the end of 2018 while Papa John’s will slip below 7%. Pizza Hut’s market share would remain flat.
A key metric for restaurants in the U.S. is same-store sales and Domino’s has had a long streak of growing same-store sales. Domino’s boast of 29 straight quarters of positive results in the U.S. The last time the company posted negative same-store sales were way back in Q1 of 2011.
Yum! Brands Inc. (YUM) $82.94 as of 08/10/2018 (+1.63% YTD)
Everyone is expecting that Pizza Hut along with Domino’s Pizza will benefit from the chaos at Papa John’s. However, among YUM’s three fast food chains, Pizza Hut is a poor third behind KFC and Taco Bell. The two posted solid sales growth while Pizza Hut sales dwindled last quarter.
Yum CEO Greg Creed admitted that Pizza Hut for some time is suffering because of a perception of low-quality food, limited investment into technology and dominant rival Domino’s. They are trying hard to attract customers by speeding up delivery time and raising customer satisfaction. But a turnaround will be a slow build according to Creed.
Semiconductors Sector Highlights
Tariffs on Semiconductors and Impact of Bitcoin’s Burst
The semiconductor industry is facing two challenges at the present. First, the inclusion of semiconductor and basic chips in the latest tariff list by the U.S. Second is the Bitcoin burst or declining demand for crypto mining.
The United States will be collecting 25% tariffs on another $16 billion in Chinese goods beginning August 23. Unfortunately for the sector, semiconductors were included in the new tariff list of 279 product lines published by U.S. Trade Representative (USTR) office.
Even semiconductors and other basic chips originating from South Korea, Taiwan or the U.S. will be hit by the tariffs. The Semiconductor Industry Association (SIA) laments the USTR’s decision to keep the sector on the tariff list.
SIA President John Neuffer said in a statement, “We have made the case to the administration, in the strongest possible terms, that tariffs imposed on semiconductors imported from China will hurt America’s chipmakers, not China’s, and will do nothing to stop China’s problematic and discriminatory trade practices.”
The Bitcoin burst
The semiconductors industry was one of the top-performing industries in 2017. There was a surge in the prices of memory chips and graphics processing units (GPUs) because demand was flying through the roof.
It resulted in extremely high valuations across the industry and irrational growth expectations. The iShares PHLX Semiconductor ETF (SOXX) gained over 42% in 2017 but have struggled since. SOXX is just up +8.33% YTD.
But it’s becoming apparent that there is a very high correlation between Bitcoin prices and GPU prices. Therefore, it would be safe to assume that the value of any GPU is tied to the value of any other product a chip-maker can produce. Therefore, last year’s surge in revenue for chip makers was largely due to crypto mining demand.
Analysts see processor prices returning to normal levels and that revenue in upcoming earnings results would miss estimates. The market has set irrational growth expectations for semiconductor stocks based on their valuation and growth data.
Healthcare Sector Highlights
Stocks Poised for Healthy Gains
Sarepta Therapeutics Inc. (SRPT) $129.53 (+132.80% YTD)
Sarepta Therapeutics recently, the company entered into a strategic investment with Lacerta Therapeutics. The deal will expand the scope of its gene therapy targets with the addition of 11 gene therapy products to its pipeline. At least 3 of the new gene therapy products are for the treating the central nervous system.
According to analysts, SRPT can reach $270.00 or a +108.5% increase but the median target of $196.00 or +51.4% is already a healthy gain should investors ride on Sarepta’s momentum.
SAGE Therapeutics Inc. (SAGE) $148.36 (-9.93% YTD)
A practice-changing depression treatment is forthcoming as Sage’s depression and insomnia drug Sage-217 is likely to pass the scrutiny of the U.S. Food and Drug Administration (USFDA) and obtain approval.
Thus SAGE is poised for a rebound and outperforms the market once the solution to depression is at hand. Currently, SAGE is down -9.93% but is well-positioned to hit the $200.00 threshold with plenty of room to increase by +76.0% to $261.00 at best.
Abiomed Inc. (ABMD) $377.83 (+101.61 YTD)
Abiomed is a provider of percutaneous coronary intervention (PCI) devices and is a sound stock investment because of the biotech’s expanding addressable market, fantastic execution, and excellent operating leverage.
Abiomed is the manufacturer of Impella which is the world’s smallest Heart Pump. Impella protects the patient during a high-risk procedure by providing temporary ventricular support so the surgeon can perform the procedures while Impella helps in pumping blood that otherwise, a weak heart cannot do.
Abiomed started with one device and have now expanded to 6 devices. Each device focuses on a niche area of the heart. This biotech has quietly expanded with newer product lines and geographical coverage. The company is already operating in the US, Europe, Japan, Hong Kong, Australia, Singapore, Israel, and now in India.
Abiomed’s growth rate of 35% is unprecedented. For the last couple of years, Impella devices help in performing surgeries which otherwise would never be possible because of failing but potentially recoverable hearts that cannot survive a procedure. ABMD can potentially reach $500 or even increase +36.3% to $515.00 from its current price of $377.83.
The WEEK AHEAD
At one point during the week, the main U.S. benchmarks had climbed to within half a percent of its all-time high registered in late January. U.S. stocks withstood a sharp -10.2% correction to rebound near their high-water marks. Also, this week marked their first weekly decline since the end of June.
Political turmoil, global trade disputes and worries over rising interest rates have triggered sell-offs. But stocks remain buoyant due to healthy economic data and strong corporate earnings. The U.S. stock market has nearly recovered all of its correction losses and has shown resiliency.
Market analysts believe the posturing between the U.S. and China on trade will be resolved over time without a significant slowdown in global growth. While higher tariffs are painful, companies, as well as consumers, will likely adjust to the new environment.
The second-quarter earnings season is coming to a close next week with less than 3% of the S&P 500 companies reporting results. Important economic data are on tap to include Retail Sales on Wednesday, Housing on Thursday, and the Leading Economic Index on Friday.