Tuesday, November 21, 17
Equity Market Recap
· Full-fledged market rally today as major averages (Dow Industrials, S&P 500, Nasdaq Composite and Russell 2000) all recorded new life-time intraday highs, led by gains in technology and healthcare, while energy stocks lagged again. NASDAQ outperformance was once again led by semiconductors as the Philly Semi index (SOX) overtook its 2000 peak to trade at a fresh record today. Market momentum continued as investors focused on upbeat corporate earnings and still have high hopes for tax reform to further boost markets. The recent market weakness (Dow and S&P 500 came into the week with 2-week losing streaks), has been long forgotten as market fear disappears again (the VIX traded back below the 10 level). More upbeat economic data (existing home sales) also helped boost investor sentiment. The dollar slipped as Nafta negotiations also seem to be making some progress, reducing the chances of a disruption in trade in North America. European stocks rise as the Stoxx Europe 600 rose 0.5% to 388.32 after darting between small gains and losses earlier in the session. The regional benchmark on Monday tacked on 0.7% and logged its highest close since Nov. 10. The German DAX pushed through earlier losses and leapt 1% to 13,195.84. Markets await a few more tech earnings after the close with CRM, GME, HPQ, HPE expected to report along with retailer GES and farm equipment machinery maker DE tomorrow morning before markets slow into the Thanksgiving Day holiday.
· Oil prices close higher on Tuesday, helped by a small pullback in the dollar and as investors rotated back into “riskier” assets, while markets await an update on U.S. crude supplies tonight (API) and tomorrow morning (DOE) that comes ahead of a key meeting of major producers next week. On the day, WTI crude advanced 41c to settle at $56.83 per barrel. OPEC’s decision on whether to extend its production-cut agreement with other major producers beyond the pact’s expiration in March is expected on November 30th when the country delegates meet. Rising crude stockpiles and production in the U.S. have been a key concern for other producers who have reduced output in an effort to rebalance the market.
· Gold prices managed to rally despite the “risk-on” attitude for riskier assets, with stocks touching all-time highs across the board. Gold prices clawed higher, helped in part by a small pullback in the dollar after a few days of gains. Not much in way of catalysts for gold today, closing higher by $6.40 to settle at $1,281.70 an ounce ahead of the Federal Reserve meeting minutes due out tomorrow and of course the FOMC policy meeting in December, which is widely expected to produce a 25 bps rate hike.
Currencies & Bonds
· Relatively quiet for bonds and currencies, with the dollar sliding against most currencies, though posted biggest declines against emerging market currencies, as the Mexican Peso (MXN) and Canadian dollar (CAD) posted strong performance in particular. The euro traded modestly higher most of the afternoon (overnight highs of 1.1758), while the dollar slipped against the yen. The lone piece of economic data (existing home sales) came in better, but failed to move markets in any direction. Bitcoin prices dropped overnight after a hack of cryptocurrency peer Tether, but Bitcoin rebounded (touched low of $7,798 before rebounding back to highs of $8.374). Bonds were initially higher, with the yield on the 10-year falling to around 2.33% from 2.37% late yesterday, but climbed back above 2.35%. The 2-yr yield however continues to march higher, as the yield curve continues to flatten, narrowing the spread as its yield jumps above 1.76%.
· Existing-home sales for October rises 2% at 5.48M, topping the 5.4M estimate, while Sept. was downwardly revised to 5.37M from 5.39M; there were 3.9 months’ supply in Oct. vs. 4.2 in Sept., while inventory fell 3.2% to 1.8M homes; said 1st-time buyers 32% of total sales; all cash 20%; investors 13%; median home price rose 5.5% from last year to $247,000
Sector News Breakdown
· Retailers; URBN reported above-consensus EPS on better-than-expected comps (+2%), greater SG&A leverage and ~in-line gross margin as for the time since 2Q15, all three URBN brands comped positively this 3Q17; in footwear, DSW adjusted its year forecasts downward to reflect 3Q results that missed analysts’ estimates citing weather impact (group got a big boost last Friday on FL surprise beat); TGT announces 15% off site-wide sale on Target.com on Cyber Monday; other movers on earnings included CHS, STRN, DLTR, KIRK, and BURL
· Watch and jewelry names active: SIG plunges on Q3 miss and lower forecast, sending shares down as much as 19% citing its “challenging Q3” on unfavorable weather-related incidents and worse-than-expected disruptions during transition of credit services, along with anticipated sequential slowdown in comp sales; MOV reported better-than-expected 3Q sales and adj. EPS and raised its FY18 outlook above the highest estimates; overnight, was reported that Swiss watch exports in October rose at the fastest monthly pace in more than four years
· Consumer Staples; in food, CPB Q1 EPS missed by 5c on weaker sales ($2.16B) and guided year outlook to $2.95-$3.02, below $3.06 est.) citing the increased costs of transportation, logistics — and carrots; HRL Q4 EPS/sales top consensus; PFGC 5M share Spot Secondary priced at $28.25; in restaurants,BLMN confirmed what was revealed late yesterday that Jana had taken a stake in shares (BLMN rose 12% yesterday on news)
· Housing & Building Products; in home improvement retail, LOW shares weak initially as 3Q results topped estimates but company failed to boost its year forecast, unlike rival HD’s beat and raise quarter last week; in homebuilders, DHI was added to US 1 and named top pick in homebuilding/products; BECNposts 52-week high after mixed Q4 (EPS miss/sales beat); SSTI slips early after Mox Reports said the shares could have 80% downside to $2-$4/share as IPO lockup expires in early December
· Energy names continue to outperform, with the broader energy complex trading mixed; movers on news; SGY said it will merge with privately held Talos Energy LLC, creating a company with an equity market capitalization $1.9 billion; BBG agreed to sell its Uinta Basin oil assets (BBG’s remaining non-core assets) for ~$110M; six top-ranking Citgo managers detained in graft probe while its interim president Pereira detained in Caracas
· In research; Mizuho boosted its 2018 WTI view by $1.50 per barrel to $55, 2018 Henry Hub nat gas est. cut 15c to $3/mcf/in conjunction with call, CPEwas raised to buy from neutral, PT to $14 from $12 saying sell-off presents entry point and upgraded QEP to buy on incremental assets sales, oil growth improves near-term outlook/downgraded SWN to neutral from buy; SunTrust upgraded shares of SPN to buy saying they expect completions results will benefit from improving pricing and customer demand
· Large Cap banks: U.S. banks and thrifts had $47.9 billion in third-quarter profits, as widening margins boosted net interest income, the Federal Deposit Insurance Corp. (FDIC) says in report released Tuesday. Bank revenue reached record $191.7 billion in the three-month period that ended Sept. 30, a 4.5% increase from a year earlier, pushed by higher interest income even as trading income fell slightly; in services, INTU reported Q1 EPS and revenue beat while guidance came in slightly above views for next quarter but only reaffirmed its year outlook
· Chinese online lenders fall (QD, XRF, HX, YRD) after NTES said the country has decided to immediately suspend approvals for new online micro-lenders – also reports Qudian suffered a data breach that exposed information related to millions of student users.; QD shares had slid more than 30% pre-market, but rallied off lows as management set $100M share buyback
· Pharma and biotech movers; CYTK shares plunge as Phase III clinical trial of tirasemtiv in patients with amyotrophic lateral sclerosis (VITALITY-ALS) did not meet primary endpoint of change from baseline in slow vital capacity/to suspend development of tirasemtiv; CELG advanced after the deadline for a key competitor to file for a patent procedure known as inter partes review (IPR) on the drug-maker’s top-selling drug, Revlimid, passed without a filing; ARDXscraps late-stage drug in another pipeline setback/prepares to launch second late-stage study in a second Phase 3 study assessing lead candidate tenapanor for the treatment of hyperphosphatemia; ENTA Q4 missed
· Medical devices and equipment; MDT beats Q2 profit and sales estimates even though sales declined driven by the company’s sale of its Patient care, Deep Vein Thrombosis and Nutritional Insufficiency businesses to CAH; Agilent (A) Q4 results topped views, but Q1 and year EPS guidance fell short of expectations raising fears if market slowing; OSUR rises midday after announcing $143M pact for supply of DNA collection devices
· Healthcare services and facilities; ABC agrees to acquire independent drug wholesaler H.D. Smith for $815M and now expects FY 2018 revenue to grow by 8%-11% because of the acquisition; dental product company PDCO slid to a 52-week low after Q2 EPS/revs missed estimates and lowered its year outlook
Industrials & Materials
· Industrial & Machinery; DE was upgraded to outperform from neutral by Baird saying equipment demand in “seasonally important” October was very strong, while dealers pointed to emerging replacement demand in spite of low crop prices (reports earnings tomorrow); Monthly Class 8 retail sales truck data up 28% YoY to 23,684 in October (up 28% YoY but down 4% YTD) while net orders were 36,033 units (up 159% YoY and up 55% YTD (largest incremental impact on NAV, PCAR, CMI, ALSN (primarily Class 8 straight and Class 6/7 truck) and ETN); JEC jumps in E&C space after top and bottom line beat for Q4 and guidance tops mid-point of estimates
· Metals & Mining; AKS upgraded to outperform at Credit Suisse and raised tgt to $7 as its 21% FCF yield for 2018 and near-term catalysts are too compelling; for the steel sector, CSFB said despite seasonal softness, steel prices are sharply recovering from October weakness and are poised to test $650-675/ton in 1Q-18; KeyBanc with comments on carbon steel, as they maintain selective view them as U.S. sheet supply/demand momentum appears more balanced into 2018, supporting 1Q18 pricing and demand improvement, consistent with our existing view (the firm downgraded RYI to Sector Weight from Overweight, though raised RS estimates a bit following solid 3Q execution and maintain our Overweight rating/prefer STLD on the mill side
Technology, Media & Telecom
· Semiconductors; another strong rally for semiconductors early as the Philly Semi index (SOX) earlier overtook its 2000 peak to trade at a fresh record today in a group that has been buoyed by better earnings, M&A consolidation and benefits from iPhone; ASYS delivered a FQ4 beat and provided higher-than-expected FQ1 revenue and operating margin guidance; 52-week highs for CAVM, TSM, MPWR, ON, MRVL, TXN, MU, CY and LRCX in the semi index alone today; MLNX rises as Starboard takes 9.8% stake calling shares undervalued; ADI falls despite beat/raise
· Software movers; Internet security sector active after PANW raised total revenue, product revenue and billings guidance for year after quarterly beat (the guidance comes after rivals CHKP and FTNT recently issued softer outlooks); CRM reports earnings tonight
· Media & Telecom; late yesterday, the DOJ sues to block TWX/T merger largely on the grounds that the merger would harm consumers due to higher content prices; CMCM rises after Q3 results, upside guidance and offers slightly higher guidance; TMUS upgraded by HSBC Holdings; Sporting News reported ESPN (DIS) to cut $80M in salaries in coming weeks
· Telco – FCC Chairman Ajit Pai proposes vacating Obama-era net neutrality rules, according to statement as draft order was circulated to commissioners this morning. Pai says Obama-era rules “imposed heavy-handed, utility-style regulations upon the Internet,” that have “depressed investment in building and expanding broadband networks and deterred innovation” Pai, a Republican, is expected to hold a Dec. 14 vote on the plan to undo the rules adopted in 2015 (Republicans and Internet service providers have fought the FCC rules, while Democrats and Internet companies support them) as AT&T and Comcast from interfering with web traffic sent by Google, Facebook and others
· Internet; VIPS shares fell after reported an in-line 3Q with a slight beat on revenue on slight margin upside; no apparent news on the day, but online travel stocks outperformed, led by more than 6% gains midday by TRIP