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One Fire-Breathing Dragon Exchanged for Another: Taking Stock

Brad Olesen
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One Fire-Breathing Dragon Exchanged for Another: Taking Stock

(Bloomberg) -- The Game of Thrones era has come to an end, but that doesn’t mean the threat of retribution doesn’t loom large from a different type of dragon.

Huawei-related issues have wrested control of the trade war debate, after the networking giant’s placement on a blacklist by the U.S. Government escalated what was already a tense situation for worldwide indexes -- and tech/chip equipment-makers specifically. With S&P futures getting steadily worse following a broadly negative session in Europe, it’s names like NVDA, AMD, INTC, AMAT, AAPL, LSCC, XLNX, MU, QCOM and ADI leading to the downside.

Intel Corp., Qualcomm Inc., Xilinx Inc. and Broadcom Inc. and just within the last few hours NXP Semiconductors and Alphabet have all announced they are complying with the Huawei ban, noting they will not be supplying the Chinese firm with hardware or software. And even if there is no direct link to Huawei, many U.S. names could be exposed further down the supply chain. Bloomberg Intelligence analysts Woo Jin Ho and John Butler wrote last week that Ericsson, Nokia and Cisco may aim to fill the $5 billion sales opportunity that would be left with Huawei’s absence in some markets. And separately, the U.S. tech sector receives billions in orders from Huawei, which may come to an end.

The moves prompted Morgan Stanley in a note to indicate that the 2H rebound many chipmakers were banking on may not materialize. This, even before we know what, if any countermeasures may be coming down the pike. China’s Foreign Ministry spokesman Lu Kang said earlier that one should “wait and see” what measures will be taken in response.

Timing Is Everything

As briefly indicated last week, timing can make all the difference in the world. Corporate entities wait three months to tell their story and then “something” hits the fan. Life is what happens when you’re busy making plans I suppose. Tell that to investors in the S5SSEQX, or in NYFANG (which bore the brunt of poor BIDU, BABA results last week) whose investments are taking a hit on a one-two punch of rare disappointments and a ratcheting up of tensions between the U.S. and China.

Just take a look at Alibaba. Goldman Sachs wrote after the results last week that the results were a "solid beat" and were enough to keep the outlook unchanged, though shares still dropped more than 3%. Baidu had its worst day in four years after reporting a rare loss, but its conceivable its decline (17%) was hurt by tensions. Two more Chinese ADRs report today, in Pinduoduo Inc. and Qutoutiao Inc. PDD’s revenue more than tripled over the year-ago period, but its losses rose by a factor of nearly 7. Shares had initially risen 4%, but have now pared some of the gains to go negative as futures dipped through the morning. Other Chinese ADRs like IQ, and HUYA are also weaker.

Your 63-Hour ICYMI

Someone drop-kicked Arnold Schwarzenegger from behind at one of Arnold’s events -- with the perpetrator appearing to actually injure himself doing so; Brooks Koepka made it interesting at the PGA Championship, carding a +4 round and opening the door for a challenger that never came, allowing him to clinch yet another major -- tournaments he has said are easier for him than others; Equity Vista Partners’ Robert Smith made headlines with a pledge to pay off the student debts of Morehouse College’s Class of 2019 -- an amount estimated at $40 million; Austria’s Vice Chancellor stepped down amid a video that surfaced appearing to show hims engaging in corruption; Deutsche Bank employees flagged suspicious behavior by Kushner and Trump, according to the New York Times -- shares hit a record low this morning; a rocket struck the Green Zone in Baghdad, just days after the evacuation of many U.S. personnel; John Wick 3 topped the box office, toppling Avengers and marking the first time a Keanu Reeves film has done so in 11 years, the NYT reported; AMAT, BWA, SCHW, REGN and TPR were mentioned positively in Barron’s as possible stocks to hide from trade war impacts given valuations, while AAPL, CSCO, QCOM, HON and ETN may be at risk -- JWN was also mentioned positively in the magazine; Wynn discussed a possible sale of its New Massachusetts Casino to MGM; Exxon has drawn interest for some of its oil fields in the Gulf of Mexico.

Sectors in Focus Today

Semiconductor manufacturing names and semis broadly after Friday’s struggles in the sector that’s considered heavily geared towards Asia during the trade negotiationsHuawei suppliers (IPHI, NPTN, LITE, MU) after the U.S. imposed restrictions related to purchases of Huawei products, while also discussing national security concerns Chinese ADRs (HUYA, BABA, SINA, IQ, BIDU) as trade war tensions show no signs of abatingE&P names as crude rises amid OPEC signaling of its intent to limit supply for the rest of 2019Theaters (CNK, AMC, IMAX, RDI) after John Wick 3 filled seats as Avengers began to slow its pace

Notes From the Sell Side

American Airlines and Delta were downgraded while United Continental was raised at Morgan Stanley, following earnings and updates on the Boeing 737 Max. AAL has “considerable” downside to EPS next year, analysts led by Rajeev Lalwani wrote, citing the likely reset in labor costs. DAL was mentioned as the “highest quality” legacy airline, though was downgraded on valuation, while UAL was raised after “executing on its natural share strategy” which provides possible upside to its guidance.

CarGurus and Carvana were both given new ratings at Cowen, which cited “strong usage and utility for customers” for CARG in its car-buyer survey, while the survey indicated CVNA was gaining share with “high customer satisfaction.” Customers voiced repeat purchase intent with CVNA, the analysts wrote in assigning a market outperform rating for the “car-vending machine” company. CARG, however was rated at the equivalent of a hold as its “multiple is elevated,” which could show limited upside for the shares.

Tick-By-Tick to Today’s Actionable Events

TC, TLSA, TLC lockups expiringElectrical Products Group Conference (HON, MMM, JCI, IR, SWK)UBS Global Healthcare conference (XLRN, UHS, INCY, TNDM)Canada Markets closed for Victoria DayLSCC investor dayPresentations at International Conference of American Thoracic SocietyInsmed’s Arikayce late-breaking data for global Phase 3 ‘Convert’Athersys’ MultiStem late-breaking 28-day data of Phase II trial in acute respiratory distress syndrome (ARDS)7:30am -- PDD earnings call8:30am -- April Chicago Fed Nat Activity Index9:00am -- ESI investor day9:30am -- Fed’s Harker discusses management science in Boston1:00pm -- Fed’s Clarida, Williams at ‘Fed Listens’ event in New York4:00pm -- INNT investor day7:00pm -- Fed’s Powell speaks at Atlanta Fed financial markets conference

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, Steven Fromm

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