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“The Doom And Gloom In The Manufacturing Sector” Is Beginning To Infect The Broader Economy

Summary

Stocks traded mixed this morning, with the Dow trading down 39 points, or nearly -0.2%. The S&P 500 and Nasdaq traded flat at the open.

Shares of Virnetx were up as much as 23% yesterday after the company won a legal round in a decade-long fight against Apple over a $439 million patent infringement judgment.

Shares of Stars Group surged 35% yesterday after the announcement of a merger with Flutter Entertainment.

Plus, the market is pricing in an 80% chance of another interest rate cut this month, the U.S. is imposing tariffs on Europe, and Tesla missed its Q3 delivery figures.

Stocks traded mixed this morning, with the Dow trading down 39 points, or nearly -0.2%. The S&P 500 and Nasdaq traded flat at the open.

The parade of disappointing economic numbers continued this morning with the ISM Non-Manufacturing Index report. The report showed that while the services sector continued to expand in September, the pace slowed considerably. The reading came in at 52.6, its weakest since August 2016, and well below economists’ estimate of 55.3. ISM officials said that the weakness has come over concerns over tariffs, labor resources, and the general direction of the economy. “Net, net, look out below is what purchasing managers from services industries are shouting at the markets as the fears of recession continue to mount,” said Chris Rupkey, chief financial economist at MUFG. “Stock investors don’t like that the doom and gloom in the manufacturing sector is starting to infect the bigger part of the economy that employs millions of workers in services industries including health care, retailing, business administration, accounting, computer services on and on.” All eyes will now be on tomorrow’s jobs report, which currently has the weakest projection in seven years at a gain of just 130,000.

But while the dismal results this week have raised hopes that the Fed will reduce its benchmark rate again at its next meeting, with Fed fund futures now pricing in a more-than 80% chance of a rate cut this month, some policy makers don’t sound so convinced. Chicago Federal Reserve chief Charles Evans said this morning that the recent weakness in manufacturing hasn’t yet convinced him that it’s necessary to cut interest rates again given that many of the economy’s fundamentals remain solid. “I’m open minded about the decision,” Evans told Bloomberg. “Whether one more rate cut at this point is the right decision or not, I think we’re just going to have to go into the meeting and see. The question is how accommodating we need to be. At the moment it’s still risk management.”

It’s Tariff Time: Europe Edition. As if bad economic data isn’t enough to make investors cautious, the U.S. announced late yesterday new tariffs $7.5 billion worth of European exports including planes, French wine, Scotch whisky, and cheese, among others. The move comes after the World Trade Organization ruled in the U.S.’ favor in a 15-year-old dispute over government subsidies received by plane manufacturer, Airbus. Airlines balked after the U.S. said it would implement 10% tariffs on Airbus planes beginning on October 18 as it will drive up costs for everyone. Airlines for America, a trade group representing airlines including American Airlines and JetBlue, called the tariffs “unprecedented” and said they “would negatively impact the U.S. commercial aviation industry as well as the overall economy.” JetBlue said: “We are concerned about the detrimental impact aircraft tariffs will have on the ability for low-cost carriers like JetBlue to grow and compete, which will harm customers who rely on us to offer competitive, low fares.”

Tesla shares are down nearly -6% this morning after the electric auto maker disappointed on its third quarter delivery figures. Deliveries came in at a record 97,000, but that figure was below the 100,000 mark Tesla CEO Elon Musk had hyped last week. “When Elon Musk says they are aiming for 100,000 deliveries, you are hoping for 102,000. Not 97,000,” Loup Ventures Gene Munster told Bloomberg. “This is a credibility hit. This is a textbook example of Elon not being disciplined and having difficulty managing expectations.” JMP Securities analyst Joseph Osha raised another concern in Tesla’s deliveries miss. “The delivery data show low single-digit sequential unit growth, and we know of no operational issues that could have prevented TSLA from delivering more vehicles if demand were available,” Osha wrote in a note. “To put it another way, yesterday’s announcement was the first time since covering the stock that we found ourselves wondering whether demand growth for TSLA’s cars might be leveling off.”

Shares of GoPro are down more than -18% after the company cut its revenue and profit forecasts for the rest of the year, citing a late-stage production delay for its Hero8 Black cameras. GoPro trimmed its 2019 revenue forecast to between $1.22 billion and $1.25 billion, down from a prior forecast of $1.25 billion to $1.28 billion. Shares of Delta are down nearly -3% this morning after the airline lowered its earnings guidance for the third quarter. Buckingham downgraded the stock to Neutral from Buy, saying “With or without a recession, shares are likely to re-rate lower for longer on 4Q cost pressures annualizing into 2020 that imply a consensus outlook that is too aggressive. Lumpy supply tied to the return of the [Boeing] Max and increasing global economic uncertainty—which is starting to impact business travel volumes—suggest pricing next use is going to be challenged.”

Stocks We’re Watching

VirnetX Holding Corp (OTC: VHC): Shares of Virnetx were up as much as 23% yesterday after the company won a legal round in a decade-long fight against Apple over a $439 million patent infringement judgment. In 2016, Virnetx won the $439 million judgment against Apple in a case alleging the iPhone maker infringed on patents related to technology for on-demand VPN services and FaceTime. On Tuesday, the U.S. Court of Appeals denied motions by Apple to vacate an earlier ruling denying a rehearing of the case and to ask the court to wait to impose judgment while it considered the first motion.

The Stars Group (NASDAQ: TSG): Shares of Stars Group surged 35% yesterday after the announcement of a merger with Flutter Entertainment. The companies represent two of the biggest brands in online betting, and together will be the world’s largest online betting and gaming company. The combined company’s core markets would be the U.K., Ireland, and Australia, but Flutter CEO Peter Jackson said the new company is “ideally positioned to pursue the growing opportunities in the U.S. “The opening up of the U.S. sports betting market is perhaps the most exciting development in the industry since the advent of online betting,” Jackson said on a conference call with analysts. “Flutter and TSG are confidence that there remains a long runway of growth left for online and mobile gambling.”

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