Equity Market Recap
- U.S stocks rose late Friday, erasing earlier losses as the Dow Industrials pushed into positive territory minutes before the close to extend its winnings streak to 7-days, while the Nasdaq Composite jumped and the S&P 500 index posted modest gains. All three averages posted gains of over 1% for the week. Optimism remains a key driver to market gains related to upcoming announcements on U.S. President Donald Trump’s tax and trade policies. Today however was dominated by M&A, with the food sector highlighted after a rebuffed $143B offer for Unilever by Kraft. However, there were other potential deal announcements throughout, including one in the Telco space according to a Reuters report (S/TMUS) late day. No economic data today after a week of strong reports, and rising inflation, which has boosted interest rate expectations Banks took a breather after surging early in the week after Fed Chief Janet Yellen testified to Congress on monetary policy. Reminder U.S. equity markets are closed on Monday for President’s Day.
- Story of the day in consumer staples space, as food and household products stocks volatile on reports Kraft announced that it made a $143B merger proposal to Unilever that was declined (details below). The news has picked up interest in other household product names, while food names decline (also hurt by lower earnings/outlooks from GIS, SJM, and CPB). According to Bloomberg, Kraft Heinz’s offer for Unilever has made M&A history, regardless of the outcome. Data compiled by Bloomberg shows the deal’s total value is the fourth-largest for any proposal ever. Only Allergan’s failed offer for Pfizer, Vodafone’s takeover of Mannesmann and AOL’s purchase of Time Warner had higher values at the outset
- Gold prices slipped $2.50, or 0.2% to settle at $1,239.10 an ounce, but still managed to end the week with a gain of about 0.3%, its third straight weekly advance (gold touched 3-month highs yesterday before slipping today)
- Oil prices ended the day little changed, rising 4c to $53.40 per barrel in a week pressured by oversupply concerns and a mixed dollar, while expectations that an oil output cut by producers might eventually balance the market helped to underpin prices. Also bearish for crude was data showing oil drillers added oil rigs for a 5th straight week…but oil remained steady. Natural gas prices slipped 2c to $2.834 mln btu (down 28% from winter peak and at 3-month low
- The U.S. dollar surged against most peers with the exception of the yen, leaving it little changed on the week following Yellen’s mildly hawkish view and surprisingly strong U.S. data on retail sales and consumer prices. The yen rose against major currencies. Concerns about the upcoming French elections and a lack of movement in fiscal changes in the United States stoked safe-haven demand for the Japanese currency. The dollar index (DXY) traded back near the 101 level, getting a lift on the bullish outlook for the U.S. economy given by Fed Chair Yellen (raising rate expectations) and as indicative by the stronger economic data this week.
- Bonds prices ended the week higher, with yields extending their month-to-date decline, as the 10-yr yield dipped over 3 bps to around 2.42% (earlier today a 1-week low of 2.40%). Bonds caught a bid late week as stocks finally stopped making record highs, though had a hiccup mid-week after rising inflation expectations on data this week (CPI/PPI). That data helped to give Treasury yields a fifth straight positive session, the longest streak of gains since mid-December, but yields have since pulled back.
Sector News Breakdown
- Consumer Staples; it was all about the food industry today, starting with a potential blockbuster deal, as KHC announced that it made a $143B merger proposal to Unilever (UL/UN) that was declined https://goo.gl/6wvdH8 ; Unilever said Friday it rejected the $50 a share proposal, comprising about two-thirds in cash and a third in new stock; shares of K, GIS, MDLZ among names that declined on news of the buyout offer
- In other Staples news; GIS falls on lower guidance as sees FY17 EPS up 5%-7% vs. prior view up 6%-8% and effective tax rate 29% vs previous 29.8%/also lowers FY17 organic net sales down ~4% from down 3%-4% prior; HAIN downgraded to hold at Argus following the February 10 announcement of an SEC investigation into the company’s accounting practices; in earnings, SJM Q3 EPS/sales missed consensus/guidance lower; CPB mixed Q2 as EPS beat/sales miss views; NUS falls as Q4 EPS/sales missed estimates and Q1 guidance below consensus; KMB, CLX, CHD all leading in the Household product space
- Retailers; VFC Q4 EPS in-line at 97c, while revs miss $3.32B vs. est. $3.42B) as North Face biz continues to weaken (COLM active in sympathy); JWN announced a $500M share buyback; KATE tgt raised by many analyst after announced yesterday it starts review of strategic options, but cut to underperform at CLSA Research; TPX upped at Raymond James saying bad news known; there are earnings reports on Tuesday from retailers WMT, HD and Macy’s
- Restaurants; DIN shares slip early after CEO resignation, Q4 earnings miss; BLMN Q4 EPS/sales both came in just short of consensus views and comps fell (-3.5%) vs. est. (-1.1%); RUTH mixed results as Q4 EPS beat/sales missed views; MCD positive mention by Cleveland Research
- Baker Hughes (BHI) weekly rig count rose 10 in the latest week to 751 (was up 12 last week), with oil rigs up 6 to 597 (rose 8 last week) and gas rigs up 4 to 153 (was up last week as well); US drillers add oil rigs for a 5th straight week. Outside of the rig data, news flow was very quiet in the energy sector. According to Seaport Global, WTI has traded in a $1.27-a-barrel band this week, the smallest range since January 2004 as its vacillated between headlines of OPEC compliance and increasing U.S. production, capex and rig counts. In MLPs/Pipelines; ENB and SE both reported Q4 results that missed estimates as the Alerian MLP Index (AMZ) finished at the lows this week (high of 339.20 to lows of 332 today); GST transformative restructuring
- Large Cap/regional banks traded mixed on Friday after a week of strong gains that saw 52-week highs (multi-year highs) for Dow components AXP, V, JPM and GS, along with various other banks, on improving NIM hopes given expected rate hikes, improved tax laws and reduced regulation as has been promised by the new administration; COF upgraded was upgraded to buy by Goldman Sachs; XL announces $1B share buyback program, raises quarterly dividend; in REITs, AIV downgraded to underperform at BMO Capital; VTR in talks to acquire part or all of BKD after another big suitor cooled on its bid – WSJ https://goo.gl/zTtZd6 ; MCO, NAVG also move on earnings
- Large Cap Pharma; AZN Lynparza, part of a new breed of cancer treatments known as Parp inhibitors or DNA Damage Repair (DDR), improved survival rates in patients with a certain type of breast cancer compared with chemotherapy/AZN to submit drug for approval in 2H’17; ABBV announced a $5B stock buyback
- Managed care; UNH dropped early in response to a lawsuit filed in a Los Angeles district court by the Department of Justice accusing the company of overcharging Medicare, specifically Medicare Advantage, by “hundreds of millions and, likely, billions of dollars” over more than a decade (Leerink said to buy UNH, HUM, WCG on weakness related to DOJ suit); AET boosted its dividend to 50c from 25c and to buy back an added $4B in stock
- Services and suppliers; WBMD shares get lift after company said is exploring strategic alternatives/also issued weaker Q1 guidance (Mizuho noted the company did this before in 2011, and it amounted to nothing); DVA shares climb after mixed quarterly results (EPS beat/rev miss); in hospitals, LPNT moved on earnings, while CYH sold some hospitals
Industrials & Materials
- Machinery sector; machinery dominated by stronger DE results top expectations for Q1 (61c/$4.7B vs. est. 55c/$4.63B) and guides FY net to $1.5B vs. est. $1.41B as sees signs of a recovery; DE reversed course lower after moving to within pennies of 52-week highs (traded 112.16 vs. 112.17 52-week high); shares of AGCO, LNN, CNHI, CAT active as well as ag parts suppliers (TWI, TITN); CAT rolling 3-month retail machine sales fall (-8%) vs. Dec. (-12%) fall, and Nov down (-17%)/said North America machine sales down (-13%) after falling (-14%) in Dec
- Transports; Car rental stocks HTZ cut to underperform at Credit Suisse citing negative read-through from Avis 4Q results and 2017 view/sees HTZ struggling to generate profit growth reflected in consensus (cut tgt to $15); also cut CAR to neutral; after results; in airlines, GOL raises year operating Ebit margin to 6%-8% form 5%-7%, CPA upgraded to buy at Evercore/ISI
- Metals & Mining; FCX gets Indonesia ministry approval for concentrate export within days (will be allowed to export 1.1 million tonnes of copper concentrate over the next one year); industrial metals were mixed (some gains in steel sector), while gold miners slide
- Aerospace & Defense; President Trump at BA plant in South Carolina today to talk jobs; LMIA agrees to buyout by Belgian company for $14 per share cash https://goo.gl/IqL6Jc; Trump said LMT has to cut prices for the F-35
Technology, Media, & Telecom
- Internet; TRUE shares jump after cars sold came in 4% above one analyst est., revenue came in ~4% above consensus, and EBITDA nearly doubled the high end of guidance; JD shares volatile after Bloomberg reported Chinese regulators have begun an investigation into its online finance
- Semiconductors; CREE terminates sale of Wolfspeed operation to Infineon Technologies; COHU a big winner on earnings as shares jump; SWKS outperformed in the semi-space, among the top S&P 500 gainers on the day; VECO moved higher early on earnings
- Software & Hardware; WDAY upgraded to overweight at Piper as expects results to beat estimates given channel checks that were the strongest in recent memory; WATT slips after J.P. Morgan observes AVGO powering wireless iPhone charging; TYPE shares fall on weak Q1 view
- Comm equipment; ANET delivered a strong 4Q16, highlighted by gross margin at 64.4% (vs. the Street at 62.7%) and billings growing of +65% YoY; FNSR shares dropped after Craig Hallum said its LR4 modules have been disqualified due to failed interoperability at multiple OEM/cloud customers; CGNX rallied after earnings/guidance
- Media & Telecom; S & TMUS spiked late Friday after Reuters reported Japan’s SoftBank Group Corp is prepared to give up control of Sprint to Deutsche Telekom AG’s T-Mobile to clinch a merger of the two U.S. wireless carriers https://goo.gl/RVxiGO ; CHTR tgt raised to street high $400 at Deutsche Bank after earnings; TIME downgraded at Stephens as sees low revenue visibility, limiting a potential buyout premium; DGI jumped late day on WSJ report MacDonald Detwiler in talks to acquire DigitalGlobe https://goo.gl/ce8Qnj
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