The GENERAL MARKET
U.S. Stocks Slump as Bond Yields Rise
U.S. stocks went on a slump beginning on Thursday when the rate of the U.S. 10-year rose to 3.196%. Then all three main benchmarks fell on Friday as the bond yield climbed again and hit 3.22%.
After hitting a record high and a 5-day win streak on Wednesday, the Dow Jones Industrial Average fell triple digits on Thursday (200.91 points) and Friday (180.43 points). The blue-chip index finished the week at points 26,447.05. Two of its 30 components, Caterpillar Inc. (CAT) and Intel Corp. (INTC) notched their second straight weekly decline.
The Nasdaq Composite Index lost 91.06 points (-1.16%) to close the week at 7,788.45 while the broader S&P 500 index shed16.04 points (-0.55%) to settle at 2,885.57. Also on Friday, the Dow dropped as much as 325.67 points and for the first time since July 5, the S&P 500 broke below its 50-day moving average before snapping back above the closely monitored technical level.
Thursday was actually the worst day this week. The blue-chip Dow Jones registered its biggest one-day percentage drop since August. Both the tech-heavy Nasdaq and the S&P 500 posted its biggest daily drop since late June. For the week, the tech-heavy index declined 3.2% while the S&P 500 slid 1% for its second straight weekly decline. The Dow Jones remained mostly flat.
September Jobs Report
The much-awaited September jobs report was released by the U.S. Labor Department on Friday. The report showed that 134,000 new jobs were added last month. The figure was below the projected 168,000 jobs. However, recent storms were seen as having a possible influence on job creation.
The unemployment rate dropped to 3.7% while the average hourly wage paid to American workers rose 0.3% per hour. The 12-month rate of hourly wage gains stood at 2.8%.
Healthy business and consumer spending has been boosting economic growth and prompting employers to hire more employees. The September jobs report extends the 8 ½-year streak of monthly job growth.
GE Makes Surprise CEO Appointment
General Electric Co. (GE) made a surprise leadership change on Monday. The U.S. conglomerate ousted CEO John Flannery and appointed an outsider to take the helm. Board member Larry Culp was named as the replacement.
GE shares jumped +7.09% as investors see Culp as the person who could re-energize the GE brand and quickly transform its portfolio.
Instagram’s New Chief is a Facebook Veteran
Facebook Inc. (FB)–owned Instagram announced on Monday that effective immediately, Adam Mosseri will head the company. The new appointee joined Facebook in 2008 and held various positions. He was News Feed and Design Director for Facebook’s mobile apps. Only recently, Mosseri was Instagram’s VP of product.
Google Partners with Ubisoft
The shares Ubisoft sizzled in Paris on Tuesday to outperform weaker European markets. The announcement that Alphabet Inc.’s (GOOGL) Google will partner with the French video games maker to test its video game streaming service lifted the stock.
Google confirmed late on Monday that it would team up with Ubisoft to test its video game streaming service. They will be offering the latest installment of the Assassin’s Creed series. Ubisoft shares are up by around 50% so far in 2018. The stock hit a record high of 107.90 euros in July versus its current trading price of 98.48 euros.
Honda Eyes 5.7% Stake in GM’s Cruise Unit
Honda Motor Co Ltd. firms up its partnership with General Motors Co. (GM) after announcing on Wednesday it will be investing $2.75 billion to acquire a 5.7% stake in GM’s Cruise self-driving vehicle unit. The two carmakers will jointly develop autonomous vehicles for deployment in ride services fleets around the world.
Japan’s SoftBank Group made its own multibillion-dollar commitment to General Motors’ said unit. Cruise has now matched Alphabet Inc.’s (GOOGL) Waymo unit in terms of resources and aggressive plans to launch commercial services.
INDUSTRIALS SECTOR HIGHLIGHTS
Caterpillar Inc. (CAT) – One of Seven Stocks to Push DOW to 27,000
CAT $153.31 as of 10/05/2018 (-2.71% YTD)
The stock of the mining and construction giant notched its second weekly decline on Friday. CAT was on an upswing to start the week and even registered an all-time high of $158.22 on mid-week before the powerful climb of the bond yields on Thursday surprised Wall Street. CAT slid -0.92% to $156.75 then fell -2.19% to $153.31to close the week.
The Dow Jones Industrial Average hit a record high on Wednesday prior to the rise in government bond yields which sent the Dow Jones components tumbling. The blue-chip index was coming from a 5-day winning streak and making a strong push towards the elusive 27,000 mark.
Analysts have identified seven Dow Jones stocks that will help the index reach that threshold. Given that the economic activity in the non-manufacturing sector grew in September for the 104th consecutive month, it is obvious that Caterpillar is among the 7 Dow components.
Based on the latest Non-Manufacturing ISM® Report On Business, the Non-Manufacturing Business Activity Index increased by 4.5% to 65.2% in September versus the 60.7% reading in August. ALL of the 17 non-manufacturing industries reported growth in September including mining and construction to where Caterpillar belongs.
The six other Dow Jones stocks that were identified are Apple Inc. (AAPL), Boeing Co. (BA), International Business Machines (IBM), Merck (MRK), Pfizer Inc. (PFE), and Walt Disney Co. (DIS).
CAT has benefited from the melting of trade tensions after the Trump Administration signed a new and reworked NAFTA with Canada and Mexico. This might lead to a possible relaxation, if not the elimination of tariffs on steel and aluminum which are key input costs for CAT.
Price forecast for CAT
The schedule of Caterpillar Inc. to present its earnings report is on October 23 and analysts see an upside. Their 12-month price forecasts for CAT have a median target of $175.00 (+14.2%) with a high estimate of $210.00 (+37.0%) from its current price of $153.31.
BIOTECHNOLOGY SECTOR HIGHLIGHTS
Amarin Corporation PLC (AMRN) – A Biotech Rising from Obscurity
AMRN $19.80 as of 10/05/2018 (+393.77% YTD)
Traditionally, the month of October is a weak month for stocks. However, biotech stocks have been resilient so far in 2018. The iShares Nasdaq Biotechnology ETF (IBB) is up +9.14% year-to-date. On the other hand, the broader Health Care Select Sector SPDR ETF (XLV) has risen +14.04% YTD. But one biotech stock that has risen from obscurity is AMRN.
The shares of the biopharmaceutical company Amarin Corp. is up +393.77% year-to-date and investors are taking notice. As of Friday, September 21, 2018, the price of AMRN was $2.99. But on Monday, September 24, the price soared +314.71% to $12.40 and has never looked back.
YTD Comparison chart
What triggered the phenomenal rise were the breakthrough results in the clinical trial of its drug from purified fish oil. The drug Vascepa not only able to reduce the risk of heart attack, stroke, and other catastrophic cardiovascular events by 25% in high-risk patients but it did so without side effects. In addition, it is also relatively cheaper to produce.
The sales estimates for Vascepa are $2.7 billion. Amarin has also become a strong acquisition candidate for a company with a cardiology and primary care sales force.
Popular Stock of the Millennials
An interesting sidelight about the stock is the report AMRN is one of the popular stocks among millennials. Business Insider regularly tracks the buying and selling of stocks through the free-trading app Robinhood where users are mostly millennials. They found something out of the ordinary.
The younger investors are hoping that although the value of AMRN has quadrupled in recent weeks, more gains are forthcoming. Amarin first appeared on the Top-100 list of Robinhood the previous week with 11,000 of its users holding shares. This week, there are more than 17,000 users currently holding AMRN which is now the 75th most popular stock in the said app.
PROCESS INDUSTRIES (Cannabis) Sector Highlights
Canopy Growth Corp. (CGC) – Weed Stock Outpacing Market Gains
CGC $47.49 as of 10/05/2018 (+100.75% YTD)
If there is one weed stock investors should be buying before October 17, 2018, when legal recreational marijuana goes on sale in Canada, it is CGC no less. Canopy Growth Corp. has more advantages than any other in the marijuana industry.
Even large cannabis firms such as Aphria Inc. (APHQF), Aurora Cannabis Inc. (ACBFF), Cronos Group Inc. (CRON), and Tilray Inc. (TLRY) would be hard pressed to dislodge Canopy Growth at the top of the heap. Tilray had a remarkable performance in September as it skyrocketed 120% based on data from the S&P Global Market Intelligence. TLRY closed at $146.91 on October 5 and that is a whopping 764% gain from its IPO price of $17 last July.
But being cash-rich is the ‘real’ strength of Canopy Growth. Because the weed company is awash with cash, it can capture growth opportunities as well as withstand the ups and downs of the industry. Further, cash-rich companies attract investors. An excellent example of a cash-rich company that investors like is Apple Inc. (AAPL). Canopy Growth is the tech giant’s counterpart in the marijuana space.
The prospects for CGC are mind-blowing. The stock has been outpacing the gains of the U.S. stock market in general. CGC is up +100.75% year-to-date. Analysts are bullish and see the stock to rise even further by as much as 63.0% to $77.34.
Canopy Growth appears well-positioned not only in Canada and the U.S. but in the big international market for marijuana. Investor appetite for CGC will build up some more once the company, along with major shareholder and the maker of Corona Beer Constellation Brands (STZ), begins developing marijuana beverages which are the new thing people will be sipping very soon.
The WEEK AHEAD
U.S. stocks retreated this week due to the rise of the 10-year Treasury yield to 3.2%, which is the first time in 7 years. Even the rates on investment-grade corporate and municipal bonds rose to their highest levels. Notably, interest rates are rising for the right reason – solid economic growth.
The week also ended with the September jobs report showing a winning streak in the labor market during the third quarter. For as long as inflation remains at or near 2%, the Feds can slowly hike short-term rates without dampening the solid economic growth which is the primary support for the current bull market in stocks.
On the average, dips in the stock market (a decline of 5% or more) occur more than three times in a year. In reality, price movements (up or down) are consistent with a return to normal market volatility.
Volatility will eventually set in on the bond market particularly on bonds with longer maturities. Thus, investors can expect the stock market to continue performing well when rates are rising and the economy is strong.
Next week, the important economic data to be released are as follows: the Producer Price Index (PPI) on Wednesday, Inflation readings on Thursday, and Consumer Sentiment on Friday.