Closing Market Summary: Holding SteadyThe S&P 500 held steady on Wednesday, finishing just a tick below its flat line, in what was a range-bound day of trading. Investors had several headlines to work through, including criminal convictions of two former advisers to President Trump and the resumption of trade talks between the U.S. and China.
As for the other major averages, the blue-chip Dow Jones Industrial Average slid 0.3%, and the tech-heavy Nasdaq Composite climbed 0.4%, notching its fifth straight advance. Meanwhile, the small-cap Russell 2000 ticked up 0.3%, closing at a new record high for the second day in a row.
Futures were lower ahead of Wednesday's open after President Trump's former campaign manager, Paul Manafort, was convicted of tax and bank fraud on Tuesday evening, and after the president's longtime lawyer, Michael Cohen, pleaded guilty to a range of charges, adding that Mr. Trump directed him to pay two women hush money.
However, the bearish bias soon faded after the opening bell, with energy shares getting a notable boost.
The energy sector was Wednesday's top-performing group with a gain of 1.2%, helped by a sharp rise in crude prices, with WTI crude futures rallying 3.1% to $67.87/bbl. The crude rally was strengthened by the weekly EIA inventory report, which showed that U.S. crude stockpiles declined by 5.8 million barrels last week.
Meanwhile, the top-weighted technology sector (+0.5%) rebounded after lagging for the past week, and the consumer discretionary sector (+0.1%) finished slightly higher, helped by Lowe's (LOW 105.52, +5.78) and Target (TGT 85.94, +2.67), which added 5.8% and 3.2%, respectively, after reporting above-consensus earnings.
On the downside, seven of eleven groups finished in the red, with the lightly-weighted telecom services space (-2.0%) at the back of the pack. The trade-sensitive industrial group (-0.9%) also struggled as the U.S. and China kicked off the latest round of trade talks in Washington.
As of Wednesday's close, there wasn't any new news regarding the discussions, which mark the first negotiations since a breakdown in the process nearly three months ago. The White House doesn't believe much will come out of the negotiations and still expects the next tranche of tariffs to go into effect at midnight.
On the Fed front, the U.S. central bank released the minutes from the July/August FOMC meeting on Wednesday afternoon, revealing little to no new information.
In short, the Fed appears to be on track to hike rates at its September meeting, with many participants saying it would likely "soon" be appropriate to raise rates. Also of note, officials pointed to ongoing global trade tensions as the biggest threat to an otherwise strong U.S. economy.
Reviewing Wednesday's economic data, which was limited to July Existing Home Sales and the weekly MBA Mortgage Applications Index:
- Existing home sales decreased 0.7% in July to an annualized rate of 5.34 million units (consensus 5.40 million). The June reading was left unrevised at 5.38 million.
- The key takeaway from the report is that supply constraints continue acting as a drag on overall sales. The lower inventory -- and high prices on available inventory -- is crimping affordability, especially for first-time buyers. All prospective buyers are facing affordability pressures resulting from home prices increasing at a faster pace than income.
- The weekly MBA Mortgage Applications Index increased 4.2% to follow last week's drop of 2.0%.
On Thursday, investors will receive weekly Initial Claims, the FHFA Housing Price Index for June, and July New Home Sales.
- Nasdaq Composite +14.3% YTD
- Russell 2000 +12.2% YTD
- S&P 500 +7.0% YTD
- Dow Jones Industrial Average +4.1% YTD
KKR In Talks to Acquire Fiat Chrysler’s Magneti Marelli Autoparts Unit
Magneti valued around $3.7 billion by analysts
U.S. buyout firm KKR KKR 1.33% & Co. is in talks to acquire Fiat Chrysler Automobiles N.V . FCAU 1.47% ’s global auto parts business Magneti Marelli, according to people familiar with the matter.
The potential sale price couldn’t immediately be learned. Magneti is valued around €3.23 billion ($3.7 billion) by some analysts, suggesting the sale price could exceed that level. Talks could still collapse before a final agreement is reached.
A possible deal comes at a time when FCA’s newly appointed Chief Executive Mike Manley is tasked with managing the auto maker’s lower margin businesses in Europe following the death last month of his predecessor Sergio Marchionne.
Under Mr. Marchionne, FCA was focused on spinning off Magenti to the auto maker’s shareholders and listing the stock by the end of this year or early next year on the Milan stock exchange. An outright sale suggests Mr. Manley expects to generate more value than it would from a spinoff, while freeing him to focus more of his attention on investing in FCA’s core portfolio of Jeep, Ram and other car brands.
Magneti employs over 40,000 people, making a range of auto components. It generated revenue of €7.9 billion in 2016 according to the company’s website. FCA’s latest annual report said 34% of Magneti’s revenue came from business within the group.
KKR is expected to acquire Magneti through Japan-based Calsonic Kansei Corp., according to people familiar with the matter, creating an auto parts giant that could cut costs by eliminating overlapping operations. The New York-based PE firm acquired Calsonic last year from Nissan and other shareholders for about $4.5 billion.
Sales at the $65 billion company increased at a blistering 68 percent, to 45 billion yuan ($6.6 billion) in the second quarter. Smartphones powered most of that growth: Xiaomi sold an impressive 32 million units in the three months through June, up from 22 million a year earlier. A push abroad, particularly in emerging markets such as India, is also yielding results. International sales more than doubled and now account for over a third of Xiaomi’s total.
That provides some redemption for boss Lei Jun. After valuation prospects kept tumbling ahead of its IPO, Xiaomi made a lacklustre Hong Kong market debut in July. Since then, its shares have fallen by almost a fifth from their peak after mainland regulators banned investors in Shanghai and Shenzhen from buying them. And at a punchy valuation of 29 times expected earnings over the next year, pressure built for Xiaomi to deliver strong growth.
Not everything made the grade, though. Gross profit margins for smartphones tumbled to 6.7 percent in the quarter, from 8.7 percent last year. Lavish employee awards, including 9.9 billion yuan worth of stock given to Lei, resulted in an operating loss of 7.6 billion yuan. And despite Lei’s promotion of his company being a “new species” that integrates hardware and software services, the latter’s share of total sales shrank in the second quarter, to below 9 percent.
Even so, after a string of disappointing results from tech peers including gaming titan Tencent and smartphone and beauty app maker Meitu, Xiaomi’s stand out. So long as the company can maintain its momentum selling affordable handsets, investors may give Lei more time to make his broader, bolder strategy work.
Gapping down
In reaction to disappointing earnings/guidance:
- SMCI -21% (offering prelim Q4 results and Q1 outlook; co also provided an update on its Nasdaq listing and SEC filings -- expects stock to be suspended and delisted from Nasdaq), GSM -6.3% (also authorized the repurchase of up to $20 million of ordinary shares in the period ending December 31, 2018), RRGB -3.7%, LOW -2.2%, SE -1.3%
Other news:
- HA -3.9% (Category 4 Hurricane Lane might have some impacts on Hawaii)
- MNK -2.3% (receives Complete Response Letter from the FDA related to its New Drug Application for stannsoporfin)
- AGN -1% (receives Complete Response Letter from the FDA for ulipristal acetate New Drug Application, citing safety concerns regarding ESMYA post-marketing reports outside the US)
Analyst comments:
- JILL -3.5% (downgraded to Market Perform at Cowen)
- FNSR -2.4% (downgraded to Mkt Perform from Outperform at Raymond James)
- CTL -1.6% (downgraded to Sell from Neutral at MoffettNathanson)
- ZTS -1.4% (downgraded to Hold from Buy at Stifel)
- SBUX -0.9% (downgraded to Neutral from Overweight at Piper Jaffray)
- T -0.6% (downgraded to Market Perform from Outperform at Wells Fargo)
![]()
Gapping up
In reaction to strong earnings/guidance:
- LZB +18.7%, KEYS +13.7%, PSTG +13.1% (also acquired StorReduce, a cloud-first software-defined storage solution for managing large scale unstructured data; financial terms of the acquisition are not being disclosed), BITA +11.3%, UXIN +9%, PPDF +8.9%, PLAB +7.8%, MOMO +7.3%, TGT +5.5%, URBN +5.4%, FRO +3.7%, SFL +1.7%, MYGN +1.5%, RY +0.9%
M&A news:
- NAVG +10.2% (to be acquired by Hartford (HIG) for $70/share in cash, or ~$2.1 bln)
Other news:
- EXAS +13.9% (Exact Sciences and Pfizer (PFE) announce agreement through 2021 to co-promote Cologuard)
- ZNGA +9.1% (Zynga confirms multi-year licensing agreement with Disney to develop and publish a new mobile game with the option for a second game)
- SRRA +8.2% (Sierra Oncology acquires drug candidate momelotinib from Gilead Sciences (GILD))
- STAR +4% (will replace A. Schulman [SHLM] in the S&P SmallCap 600)
- OCUL +2.9% (ticking higher after Pres/CEO disclosed the purchase of 20K shares worth ~$120K)
- ADI +1.8% (reinstates share repurchase program and authorizes repurchase of an additional $2 bln of its common stock; reports earnings tomorrow before the open)
Analyst comments:
- YRCW +2.9% (upgraded to Buy from Hold at Deutsche Bank)
- MELI +1.1% (upgraded to Buy from Hold at Stifel)
- ITRI +0.9% (upgraded to Buy from Hold at Argus)
- LSTR +0.7% (upgraded to Outperform from Market Perform at Wells Fargo)
![]()
Early premarket gappersGapping up:
- LZB +19.3%, KEYS +13.3%, PSTG +10.5%, BITA +10.4%, ZNGA +9.6%, UXIN +8.2%, MOMO +8.2%, PLAB +7.8%, URBN +5.9%, MYGN +4.9%, TGT +4.8%, STAR +4%, FRO +3.7%, OCUL +2.9%, ADI +0.7%
Gapping down:
- SMCI -22.3%, GSM -4.4%, RRGB -3.7%, JILL -3.5%, AGN -2.9%, LOW -2.4%, SE -1.3%
![]()