Plus, oil prices are surging, airline stocks are falling, GM union workers are striking, and Apple’s newest iPhones are beating demand expectations.
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Stocks were lower to start Monday with the Dow falling by 106 points, or -0.4%, its first decline in 9 days. The S&P 500 traded down -0.3%, while the Nasdaq was down -0.2%.
Oil prices spiked after a coordinated attack hit the heart of Saudi Arabia’s oil industry on Saturday, knocking out about 5% of global supplies and raising the specter of more destabilization in the region. Brent crude futures are currently up nearly 11%, while U.S. West Texas Intermediate futures are up 10.5%. The estimated 5.7 million barrels a day of lost production from the attack is the single biggest disruption on record, surpassing both the 1979 Islamic Revolution and the 1990 Gulf War in terms of cut to supplies. While Saudi Arabia insiders say the country may be able to return some supply within days, the attacks highlight the vulnerability of the world’s most important exporter while also putting a spotlight on the political risks that can impact oil prices. “We have never seen a supply disruption and price response like this in the oil market,” said Saul Kavonic, an energy analyst at Credit Suisse. “Political-risk premiums are now back on the oil-market agenda.”
While Yemen’s Houthi rebels have claimed responsibility for the attack, a Saudi military official said Monday that preliminary findings show that the strikes did not originate from Yemen and the weapons used in the attack were Iranian. U.S. Secretary of State Mike Pompeo said Sunday that there was no evidence that the raids were carried out from Yemen and also blamed Iran. President Trump tweeted on Sunday that the U.S. is “locked and loaded” after the attack on Saudi Arabia’s oil supply, but said the administration is waiting on Riyadh for confirmation on who launched the strike before taking action. “There is reason to believe that we know the culprit, are locked and loaded depending on verification, but we are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!” Trump tweeted. Defense stocks are on the rise after Trump’s tweet with Raytheon shares up 2.75%, L3Harris Technologies and Lockheed Martin both up 1.6%, and Northrop Grumman up just over 1% as of this writing. “This is more a missile defense play,” said Jeffries analyst Sheila Kahyaoglu. “This highlights the continuous need for air defense missile systems and Lockheed and Raytheon are the biggest beneficiaries of that.”
Airline stocks are down this morning as crude oil and gasoline futures spiked following the weekend attacks. American Airlines has been hit the hardest with shares currently down more than -5%. United Airlines is down -2.75%, Delta is down -2.48%, Alaska Air is down -1.54%, and Southwest is down -0.23%. Evercore ISI’s Duane Pfennigwerth said in a note to clients Monday that the spike in oil prices could “require a reset of revenue expectations” for airlines. “Higher fuel serves as a healthy reminder of the volatility of the inputs and may prove timely as carriers contemplate ’20 growth plans and cadence of [Boeing 737] Max returns,” Pfennigwerth said. Cruise line stocks were also down this morning with Carnival slipping -2.59%, Norwegian Cruise Line down -2.19%, and Royal Caribbean down -1.38%.
OxyContin maker Purdue Pharmaceutical filed for chapter 11 bankruptcy on Sunday. The company has collapsed under the weight of thousands of lawsuits from states, local governments, and individuals seeking damages from the opioid crisis. The bankruptcy filing comes just days after Purdue reached a tentative deal to settle some 2,000 lawsuits. “This settlement framework avoids wasting hundreds of millions of dollars and years on protracted litigation,” said Purdue chairman Steve Miller, who said the deal “instead will provide billions of dollars and critical resources to communities across the country trying to cope with the opioid crisis.” According to a report from the New York Times, the bankruptcy has the apparent support of the governments whose lawsuits against the company are combined in the federal multi district proceeding in Ohio, but is opposed by the attorneys general of more than two dozen states who will likely work to oppose the deal which could disrupt the federal multi district litigation. Shares of Mallinckrodt, which is another defendant in the opioid litigation, are currently down -5.76%.
“No contract, no cars!” General Motors shares are down nearly -4% as the company is facing a loss of between $50 million and$90 million a day after 48,000 members of the United Auto Workers union went on strike early Monday as contract negotiations with the automaker broke down. Union members walked out of factories and set up picket lines at 33 plants across the nation as well as 22 parts warehouses. GM said it presented a “strong offer” to the union that included the addition or retention of thousands of jobs and more than $7 billion in new investments over the next four years. UAW Vice President Terry Dittes, who oversees the union’s GM unit, made the strike announcement during a press conference Sunday morning saying, “Today, we stand strong and say with one voice, we are standing up for our members and for the fundamental rights of working class people in this nation.” Dittes says the strike is the union’s last resort as both sides are far apart in bargaining over a new four-year contract, including on issues like health care and fair wages. Bargaining between GM and the UAW resumed this morning.
Apple shares are up slightly this morning after TF International Securities analyst Ming-Chi Kuo said demand for the newest iPhones is beating his expectations, especially from Chinese consumers. Kuo boosted his forecast for iPhone 11 series shipments from 65 to 70 million units in 2019 to 70 to 75 milling units, and said the supply chain will “grow steadily” in the fourth quarter. Uber and Lyft shares are up 3.31% and 5.1%, respectively, this morning after HSBC raised its rating on the ride-sharing companies from hold to Buy and said the two companies have at least 30% upside ahead. “We think regulatory concerns are priced in, whilst we continue to see a lot of optionality around product improvements for both Uber and Lyft,” said HSBC analyst Masha Kahn.
Stocks We’re Watching
Fibrocell Science (NASDAQ: FCSC): Shares of this cell and gene therapy company are up nearly 60% over the last week after Creek Castle Pharmaceutical Holdings announced it had reached an agreement to acquire Fibrocell for $3 per share. “Fibrocell’s unique and innovative gene therapy platform provides us with development opportunities that will strengthen the combined company as a leader for EB and other rare conditions where there are limited options for affected patients,” Castle Creek Chief Medical Officer and Senior Vice President of Research & Development Dr. Mary Spellman said in a statement. “We are truly excited about the future of the new company and the benefits we can bring to patients.”
Kemet Corp (NYSE: KEM): Shares of this electronic components specialist are up 10% in the last week after analysts at Stifel upgraded the stock from hold to buy late last week. While the entire industry is facing tough conditions as demand starts to fade, Stifel is optimistic that Kemet’s product line sets it apart from its rivals, putting it in a better position to get through the industry-wide rough patch. Stifel set a price target for KEM of $26, indicating possible upside of 33% over the next twelve months.