Monday, November 20, 17
Equity Market Recap
· Stocks closed Monday on a positive note, as gains in the Dow Industrials paced gains, led by shares of technology and discretionary shares, offsetting losses from the energy and health-care sectors. It was a quiet day of news overall as investors continue to watch the progress on tax legislation, though hopes of a deal coming to pass before this week’s Thanksgiving Day holiday is unlikely. There were no major economic data points this morning, with earnings out of retailers (LOW, URBN, BURL, DLTR), technology (ADI, PANW, INTU, CRM, HPQ, GME) and healthcare (MDT, A) expected the next two days before the Thanksgiving Day holiday. Commodity prices slumped with sharp declines in crude and gold as the dollar rebounds. The VIX Index’s high print so far this year of 17.3 is the lowest annual high going back for 22 years, to 1995 when in the midst of an epic bull market it peaked at 17 that year, according to Oppenheimer (down around 10.50 today). The Russell 2000 rose for a third day as the House’s passage of a tax plan provided a boost. Investors shrugging off political troubles in Germany, despite a steep drop in the euro.
· Oil prices declined, extending last week’s losses ahead of the highly anticipated official OPEC meeting taking place later this month (Nov 30th) that’s widely expected to result in an extension of a pact limiting crude-oil production beyond its March timeframe. However, oil prices have slowly been slipping since touching more than 2-year highs of $57.35 on 11/6, falling 46c to settle at $56.09 per barrel today on expiration (Jan futures fell 29c to $56.42). OPEC members pledged in November of last year to reduce their crude output by 1.2M barrels a day from October 2016 levels to 32.5M barrels a day in an effort to drawdown a global stock overhang and rebalance supply and demand. Several non-OPEC countries, including Russia, joined the pact, pledging an additional cut of nearly 600K barrels a day.
· Precious metal prices dropped sharply on Monday, erasing Friday’s gains with gold falling over 1% and silver falling as much as 3% as the euro weakened and the dollar gained amid German political turmoil that left Chancellor Angela Merkel’s prospects of serving a fourth term in doubt. December gold dropped more than $20 midday back under $1,280 an ounce, settling at $1,275.30 an ounce, down over 1.6%. The sharp decline comes after prices surged on Friday by $18.30 or 1.4% to settle at $1,296.50 an ounce and posting a gain of nearly 1.8% for the week.
Currencies & Bonds
· The U.S. dollar ended strong, picking up steam against the euro after coalition talks in Germany collapsed Sunday night, leaving the political future of Chancellor Angela Merkel unclear. The euro posted its largest intraday drop since October 26 (down -0.5% vs. the USD), while the dollar also rallied against the safe-haven yen. Bitcoin topped $8,000 for the first time as investors looked past technology concerns that saw it suffer a 29% plunge earlier this month. The Canadian dollar likely active this week with ongoing Nafta talks. Bonds slipped as yields gained, especially across the shorter end of the curve again, with 2-yr yields up at 1.75%, while the 10-yr traded 2.36%.
Sector News Breakdown
· Retailers; BABA paid $2.88 billion for a 36% stake in China’s second-largest big-box retailer, Sun Art Retail Group Ltd. https://goo.gl/RHTGQJ ; OSTK shares rise to its highest level since 2005 as CEO, Patrick Byrne said in an interview with Fox Business that Bitcoin is “more powerful than physical money” (OSTK was one of the first major online retailers to use bitcoin); HIBB extended Friday’s 15% gains after earnings; home improvement retailer LOW reports tomorrow
· Autos; Uber agreed to buy 24,000 sport utility vehicles from Sweden’s Volvo Cars to form a fleet of driverless autos; VLKAY raised its profit and revenue targets for 2020 as expects revs to rise more than 25% through 2020 and operating profit would increase 25% or more; GM was upgraded to buy at Guggenheim ahead of the company’s highly-anticipated event focused on its vision for an autonomous future; in auto suppliers, DLPH upgraded at Bank America saying the breakup of the company into two publicly traded entities increases the likelihood of a takeout
· Leisure and Lodging; movie theater stocks active (RGC, AMC, CNK) after Warner Brothers’ “Justice League” generated $96M in box office revenue from its opening weekend in the U.S. below some estimates of above $125M (the opening weekend for “Justice League” was the lowest opening of a film in the D.C. Universe)
· Consumer Staples/Restaurants; in beverages, FIZZ was upgraded to positive from neutral at Susquehanna saying the recent pullback in presents an opportunity for long-term investors, while the firm downgraded MNST to negative from neutral as believes trading at a historically high PE; BLMN shares spiked after Jana reports stake, says may push for sale; HAIN shares rallied late day after Bloomberg reported NSRGY is among companies exploring a purchase of Hain Celestial Group Inc., a U.S. maker of organic and vegetarian food https://goo.gl/N1WYDr
· U.S. oil stocks slipped on Monday, extending recent declines ahead of month-end OPEC meeting, with Brent and WTI crude down over 1% early; Nov. 30 OPEC meeting producer group will decide whether to continue output cuts that have helped lift prices (MRO, XOM, CVX lower today along with other sub sector service and equipment names) – note since the first output cut was announced in Nov 2016, Brent has gained ~37% and WTI crude 25%
· E&P sector; Barclays upgrades the mid-cap E&P sector to positive from negative, large-cap to neutral from negative, reflecting the “valuation disparity and the expectation that producers can capitalize on efficiency gains to deliver improved returns,/also upgraded FANG and EGN to Overweight and downgraded ARand GPOR to Equal-weight noting; TRP wins approval to construct Keystone XL pipeline in Nebraska
· Frac sand sector; Barclay’s also upgraded SLCA to overweight and $39 tgt based on sum-of-the-parts, as believe it offers defensive downside support and decent upside, particularly if frac sand fundamentals prove more resilient than we expect (also raise FMSA tgt to $5)
· Other movers; in service sector, Barron’s was positive on BHGE and thinks that the stock is undervalued noting shares came for sale after GE’s commitment to BHGE came into question; in refiners, HFC upgraded to buy at Argus which reflects our expectations for sustainable oil prices in the $50-$60 per barrel range over the next year, which we expect to further boost refining margins; ANDV & ANDX will hold a joint NYC Investor Day on 12/5 to review business ops, discuss strategic plans, and provide updated financial guidance
· Large Cap Pharma; RHHBY announced positive Phase III data on hemophilia med Hemlibra (emicizumab) in hemophilia A patients without inhibitors to factor VIII – news weighed on competitors SHPG and BIVV; MRK weak as Roche announced study of its Tecentriq with Avastin and chemotherapy met its primary target in patients with non-small cell lung cancer (NSCLC); ITCI receives FDA fast track designation for Lumateperone
· Biotech movers; GLPG reported positive top-line results from ALBATROSS, a Ph2 study of its CF corrector GLPG2222 (three triple combo trials are set to begin with first data expected 2H18); TSRO received European approval for ZEJULA; ZIOP gene therapy candidate Ad-RTS-hIL-12 shows positive effect in treatment-resistant brain cancer in early-stage study; PRTA cut at Wedbush; CATB upped to buy at Citi saying company’s guidance towards initiating a Phase 3 trial of edasalonexent in 1H18, and a potential financing partnership could lead to upside for the stock
· Healthcare services; CAH was downgraded at Morgan Stanley saying it has outsized exposure to Amazon via its medical segment compared to its peers/earnings risk underappreciated; on Friday evening, the Centers for Medicare and Medicaid Services (CMS) issued its final Medicare Clinical Lab Fee Schedule (CLFS) for 2018, and, unfortunately for clinical labs, such as DGX and LH, it looks pretty much as bad as the preliminary rule released on September 22 according to KeyBanc; KND was upgraded to hold at Stifel on valuation; OMI falls after Credit Suisse cuts tgt to street low $17 saying its core distribution business, hurt by contract losses and competition
Industrials & Materials
· Industrial & Machinery; heavy duty truckers/freight names fell on Friday in reaction to TSLA’s energy efficient semi-rig, group tried to recover some losses (CMI, PCAR, CHRW); GNRC and SPXC were downgraded to underperform by Wolfe Research; MTW rises after Seaport Global upgrade earlier saying there’s more confidence end markets are in a bottoming phase; in building, construction, DY shares jumped, erasing earlier losses despite Q1 results and Q2 outlook missing the mid-point of estimates (erased pre-mkt losses)
· Transports; not much doing in the sector today with truckers and freight (LSTR, R) recovering after falling last Friday while airlines posted modest losses early; the Dow Jones Transport index was around the 9,500 level most of the day up slightly
Technology, Media & Telecom
· valued at around $6B https://goo.gl/NH8xCq ; Toshiba Corp. said it would raise ¥600 billion ($5.3B) through the sale of new shares to foreign funds, a step to avoid a delisting from the Tokyo Stock Exchange if the planned sale of its chip unit is delayed; AVGO deal to acquire BRCD closed on Friday
· Software & Hardware; big week of earnings for a few software names with PANW in security tonight, INTU in services, and CRM tomorrow night; IBMmentioned positively in Barron’s saying shares could make 30% or more over the next year; in 3-D printing, DDD was upgraded to neutral at Piper saying new product introductions throughout 2018 should stem share loses; UTSI shares traded to a 5-year high after earnings results
· Media movers; VIAB upgraded to hold at Deutsche Bank as see limited room for further multiple compression as Viacom now trades at a 10.5% 2018E unlevered FCF yield and 6.3x 2018E EV/EBITDA (said never seen multiples this low in media since the credit crisis); LYV downgraded to Evercore/ISI on valuation; DISH lower initially as CBS said Dish could black out its programming, including holiday weekend sports events, if companies fail to resolve dispute over fees Dish pays to carry its content
· Telecom; VZ was upgraded to outperform at Wells Fargo and raise price target to $50 noting shares are down 16% (vs. a 12.3% move in the S&P) since mid-January; late day, reports indicated that AT&T (T) is said to face U.S. antitrust suit over the TWX deal