Thursday, November 16, 17
Equity Market Recap
· It was a very strong day on Wall Street, with large caps and small caps rallying, led by big gains in tech and consumer discretionary after Dow components WMT (all-time highs) and CSCO (best levels since dot.com bubble) each reported better-than-expected quarterly earnings and upbeat guidance. It was a full reversal of fortune for major averages after yesterday’s declines as the NASDAQ traded fresh intraday record highs, topping 6,806, while the Dow Industrials traded up more than 200 points earlier (last close of over 200 points was on 9/11). Today also marked the first time in seven days that the S&P 500 index opened higher, reversing recent weakness (the Dow and S&P had fallen four of the last five trading days coming into today).
· Energy stocks lagged after Bloomberg reported Norway’s $1 trillion sovereign wealth fund proposed dumping about $35B in oil and gas stocks, to make the economy “less vulnerable” to a drop in oil. Defensive asset classes such as utilities also lagged. The SmallCap Russell benefitted from news the House passed its version of a tax overhaul. Commodity prices and the dollar were little changed (though oil slipped to 2-week low) despite a bountiful day of economic data (details below), as bonds slipped and yields climbed. Tonight also marks a busy night of new issues expected, with IPO pricings for BXG, SAIL, SBT, SCPH, and SFIX all anticipated.
· This afternoon, the House of Representatives passed its version of a tax overhaul, advancing a key Republican priority. The Tax Cuts and Jobs Act, would cut the corporate rate to 20%; set up four tax brackets; and switch the U.S. to a so-called territorial tax system. House passage is just one step, however as the Senate Finance Committee is working on a separate measure that differs in key respects, notably by repealing Obamacare’s individual insurance mandate. The House and Senate must agree on a single measure before sending it to President Donald Trump. The House bill passed 227 to 205.
· Weekly jobless claims climb 10,000 to 249,000 (6-week highs) following delayed effects from hurricane Maria on Puerto Rico, Virgin Islands and topping the 235,000 estimate; the prior week was unrevised at 239K; the 4-week moving average rose by 6,500 to 237,750, while the number of people already collecting unemployment benefits, fell by 44K to 1.86M
· Philadelphia Fed Index for Nov falls to 22.7 from 27.9 the prior month and was below the 24.6 estimate; prices paid rose to 39.0 from 38.1, new orders rose to 21.4 vs 19.6 and employment fell to 22.6 from 30.6; shipments fell to 21.7 vs 24.4 and inventories fell to -8.6 vs 6.0
· Import price index rose a mild 0.2% in October, below the 0.4% estimate, following large gains in the prior two months tied largely to the higher cost of oil. Excluding fuel, import prices also rose 0.2%, the government said, while export prices were flat. Over the past 12 months the increase in the import price index slowed to 2.5% in October from 2.7% in the prior month
· Industrial Production for October rose 0.9% MoM, topping the 0.5% estimate after rising 0.4% in September; last month, industrial production was revised up to 0.4% from 0.3% in Sept.; Capacity utilization rose to 77% from 76.4% in Sept., revised up from 76%
· In Housing, the NAHB Builders’ Confidence index in November rises to 70 vs. 68 last month and topping the 67 estimate; the present single family sales rise to 77 vs 75 last month and future single family sales falls to 77 vs 78 last month
· A fairly quiet session for commodity prices as December WTI crude slipped 19c, or 0.3%, to settle at $55.14 per barrel (high $55.62 and low $54.93) with attention now turning to the next OPEC meeting at the end of this month after inventory data was mostly bearish yesterday with surprise weekly inventory builds. OPEC said late Thursday that it will announce what they are going to do regarding production quotas on Nov. 30. Gold prices did a whole lot of nothing on Thursday, edging higher a mere 50c to settle at $1,278.20 an ounce in quiet action. A rally in stocks helped reign in gains for defensive assets.
· The U.S. dollar index (DXY) was mildly higher, up around the 93.90 level (up about 0.1%) in what could be described as a lackluster session. Mixed economic data and news the House of Representatives passed its version of a tax overhaul failed to muster any real movement in the currency markets. The dollar posted small gains against the euro and yen, while the Pound posted small gains after UK retail sales. Bitcoin surging again rising over 7% late day to above $7,813 (recent record high was $7,882 on 11/8) after falling as low as $5,605 on 11/13. Following the fifth round of renegotiations of the North American Free Trade Agreement (NAFTA) the Mexican peso and Canadian dollar both gained vs. the dollar.
· Bonds slip; despite a very busy day of economic data and a bill passage in Washington, bond volatility was relatively benign, with prices slipping as investors rotated back into risker stocks, sending yields up off weekly lows yesterday. The 10-yr yield climbed about 2 bps to 2.35% while the 2-yr yields edged back near 1.71%
Sector News Breakdown
· Retailers; Dow component WMT shares give a big boost to retail early (especially after the softer guidance from TGT yesterday took some steam out of the sector), as Q3 top/bottom line results beat forecasts while comps of up 2.7% topped views and raised its year EPS view to $4.38-$4.46, from prior $4.30-$4.40 (est. $4.38); in electronics, BBYshares slide as Q3 revs just miss estimates while its year EPS view of $1.89-$1.99 missed the $2.03 Street estimate; LB in-line earnings on slightly better sales and mixed guidance
· Other retail; Reuters reported that MAT has rebuffed HAS’ latest takeover approach, casting uncertainty over the potential combination of the toy companieshttps://goo.gl/V4Zqbw ; DG was upgraded to buy at Deutsche Bank; DSW upgraded at Susquehanna; in upcoming earnings: GPS, ROST, SPWH, WSM report tonight and ANF, BKE, DXLG, FL, HIBB tomorrow; BKS jumped after the WSJ said Sandell Asset Management Corp is proposing to take the company private at more than $9 a share in a proposed a deal worth about $750 million https://goo.gl/1rRHzs
· Consumer Staples; PG shares active after a recount last night after the close showed Nelson Peltz was elected to the board by a small margin of victory/PG said will review/challenge the results in the interim; in household products, SPB posted mixed Q4 with a beat on sales/EPS miss; SBH was downgraded to neutral at DA Davidson; in food,SJM Q2 EPS and sales topped views on higher margins of 39.2% and mid-point of year guidance topped the $7.77 estimate; WMT’s earnings also lifted packaged food stocks (CPB, BGS, HAIN)
· Housing & Building Products; RH shares rise, helping lift home furnishing retailers (WSM, BBBY, PIR) after the company raised guidance for the 3Q and the 4Q and provided preliminary guidance for 2018, which includes a substantial y/y improvement in operating margin
· Casino, Lodging & Leisure; lodging REITs LHO, SHO, CHSP downgraded to Underweight at JP Morgan, maintain underweight on HST, Neutral on RHP, and OW on PK saying prices have experienced relative outperformance QTD, and think year-end short covering and tax reform benefits are already baked into the stock prices; Bernstein downgraded MAR to market perform citing lack of catalysts; in leisure, NCLH 10M share Spot Secondary priced at $54.35; in casinos, Nomura raised its 2018 GGR growth est. to 13% from 10% driven mainly by continued strength in VIP, but the discussion around concessions, which could begin in 2018, may increase the group’s volatility (says best 2018 risk/reward: MLCO andMGM)
· Autos; Nomura noted the TSLA event on Thursday, November 16, will be about unveiling an electric semi-truck that does more than just out torque Class 8 heavy diesel trucks. Demonstrating a substantially lower cost of operation, among other things, will also be important. Along those lines, we believe the company could reveal new Autopilot technology that may ease investor concerns that Tesla is lagging in self-driving
· Energy stocks were among the top losers today after Bloomberg reported Norway’s $1 trillion sovereign wealth fund proposed dumping about $35B in oil and gas stocks, to make the economy “less vulnerable” to a drop in oil (group broadly lower); HES announced a $500M share buyback plan in addition to $500M in debt reduction; WPX was upgraded to buy at Citi based on 2017 being in the rearview mirror at this point for leverage concerns, announced non-core asset sales and increased visibility on 2018; APC shut its Marlin crude and natural gas platform in the Gulf of Mexico to establish tie-ins with new wells owned by third-party companies
· Financials were mostly higher on tax reform hopes; ALL said it estimates catastrophe losses of $516 million for the month of October; in Finance and Lending; PYPL agreed to sellSYF nearly $6 billion in loans it made to online shoppers in a deal that will give the payments company significant cash/SYF will agree to fund future loans that PayPal makes to consumers who want to finance purchases of goods and services; PAY was downgraded to outperform at Raymond James
· Pharma space; not a lot of news; MRTX 2.016M share Spot Secondary priced at $13.00; ACOR downgraded by two analysts after dropping yesterday after reports five deaths in Parkinson’s trial; ACHN 18.367M share Secondary priced at $2.75; PTCT was upgraded to neutral at JP Morgan after sell-off in shares
· Biotech movers; Citigroup noted the recent weakness in biotech (IBB down from 52-week highs 342.49 on 10.6 to 306.25 close yesterday) noting first, there haven’t been any upside clinical trial surprises for some time & there have been failures/data pushouts (such as CELG’s GED-301 & Ozanimod in UC, respectively) – also said there are a lack of major catalysts and noted M&A has stalled – while companies have talked about buying for years – also notes competition/pricing pressures/biosimilars continue to worry investors for all large caps
· Healthcare suppliers and services; DPLO agreed to acquire LDI Integrated Pharmacy Services, a full-service PBM for $515M in cash and $80M in stock (DPLO cut at Baird saying sees many risks in the deal to buy LDI); Cleveland Research said ESRX is off to a surprisingly strong start; AFAM spikes after merging with LHCG https://goo.gl/LwkXLw; UHSauthorized $400M share buyback; in research, PDCO was upped at Stifel to hold, while SYK was upgraded to outperform at Baird
Industrials & Materials
· AG & Machinery; ROK shares rise as EMR again boosted its takeover offer by $1.4B to $225 per share ($135 cash and $90 in stock), up from its initial bid of $200 in Augusthttps://goo.gl/1g28Fw ; Moody’s downgrades GE’s senior unsecured rating to A2, affirms short-term rating at P-1; outlook stable
· Transports; Transports near the highs with the DJ Tran index up 1.4% at 9,575, well off yesterday’s low of 9,420 with all 20 components in the index higher; ALK was moved to top pick at Morgan Stanley saying they more bullish on shares given they trade at below-average valuation multiples despite above-average margins and growth prospects
· Metals & Mining; CSTM was upgraded to overweight at Morgan Stanley with $13 tgt (raised KALU tgt to $101) saying Management’s targets look conservative and think the rerating has more to go given the organic growth profile
Technology, Media & Telecom
· Internet; strong sector returns with broader tech move higher, led by gains in NFLX up over 2%; Pandora (P) was upgraded to outperform at BMO Capital which likes secular trends and also examines scenarios including a takeout by SIRI; NTES a mover after earnings
· Semiconductors; index traded near intraday highs late day, with the Philly SOX index up over 1.7% at 1,315 (recent 17-year highs were 1,321.89 on 11/8), given the surge in tech; all 30-semi components of index are higher with shares of SLAB, AMAT (ahead of earnings tonight), ENTG, LRCX all leading; SGH raises Q1 EPS and revenue forecasts above prior outlook
· Software movers; TLND 2.75M share Spot Secondary priced at $40.25; APPN 3.8M share Secondary priced at $20.25; 52-week highs for VRSN, APH, TEL, RHT, LRCX, ACN, NTAP, SNPS, CSCO, CDNS, CRM in the tech sector
· Networking, Hardware and components; Dow component CSCO reported overall a better-than-feared quarter result and guide, with Jan revenue outlook of up 1-3% was about flat for the street; NTAP quarter and guide were strong across all metrics driven by strength in sales of all flash arrays/product revenue grew for the fourth consecutive quarter
· Media movers; TIME is said to be in talks to sell itself to the MDP, in a deal backed by Charles G. and David H. Koch, the billionaire brothers, NYT Deal book reportshttps://goo.gl/U3ocaa ; VIAB shares declined after forecasting domestic affiliate revenue to be down in mid-single-digits in FY18 before returning to growth in FY19
· Telco movers; Reuters reported TMUS will propose a “significant” share buyback that could start in December, citing finance chief Braxton Carter comments on Thursday,https://goo.gl/uBHaQS ; Reuters reported the FCC Chairman Pai is expected to unveil plans next week for a final vote at the FCC’s Dec. 14 meeting to reverse 2015 net neutrality rules banning the blocking or slowing of web content