Monday, November 27, 17
Equity Market Recap
· U.S. stocks end mixed on light volumes and in narrow trading ranges (the Dow Industrials traded in a 20-point range in the afternoon). Outside of a few M&A deals (MDP to buy TIME in $2.8B deal, CUDA being taken private in $1.6B deal, and BV taken private in $521M deal), corporate news was relatively quiet as the focus this week remains on tax reform and the holiday shopping season. AMZN new record highs, leads retailers higher following strong Black Friday sales. Stocks slumped late morning following reports from Kyodo News saying that Japan earlier received radio signals suggesting North Korea is preparing for a missile launch test, citing multiple government officials. North Korea satellite image doesn’t show missile or mobile launcher but Japan didn’t specify type of possible missile. However, markets rebounded quickly, while the dollar ended mixed. Emerging-market equities dropped by the most in two months following a slump in oil prices (1st drop in 4-sessions) from 2-year highs ahead of OPEC meeting Thursday. Housing Sales data came in better than expected, but bonds gained following weak auctions. Note all three major indexes hit intraday records in early trading before paring those gains. The other top story remain the interest in Bitcoin, making another new record high, and closing up more than 15%, trading as high as $9,747 before paring gains.
· New home sales for October rose 6.2% to 685K annual rate, well above the 627K estimate, though the prior month was downwardly revised to 645K from 667K; Median new home price rose 3.3% y/y to $312,800; average selling price at $400,200; new home sales on pace for 611k this year compared to a 2016 total of 561k; Months’ supply at 4.9 in Oct. compared to 5.2 MoM
· Dallas Fed Manufacturing activity for November at 19.4 vs 27.6 in the prior month; the six-month outlook at 39.0 vs 38.5 prior month
· U.S. WTI crude oil futures pulled back from two-year highs, falling 84c, or 1.4% to settle at $58.11 per barrel, as attention now turns to the OPEC meeting and hopes for an extension to a production-cut deal later this week. On Friday, WTI crude shot up 1.6% to $58.95, settling at a level not seen in more than two years and touched $58.99 today before sliding. WTI crude prices have risen in recent sessions as U.S. inventory data showed crude stockpiles falling and on disruption to the Keystone pipeline in the U.S. after an oil spill in South Dakota.
· December gold settles at $1,294.40 an ounce, up $7.10, or 0.6%, rising to 6-week highs earlier on the dollar weakness. February gold which is also actively traded, tacked on $7.10, or 0.6%, to finish at $1,298.90, after tapping highs above $1,300. Gold rallying on dollar weakness ahead of tax reform legislation and FOMC meeting in December which is expected to produce a rate hike.
· The dollar rebounds; dollar index rises back near 93 level after trading broadly weaker to start the day, falling against nearly all major counterparts ahead of tomorrow’s nomination of the Fed’s Powell as next FOMC Chairman and as markets still await final legislation on tax reform from the Senate (as it continues to get pushed out). The euro fell to lows below 1.19 (from overnight highs 1.1961), though the dollar still remained weak against the safe-haven Japanese yen (dropping below 111 to lows of 110.88 before paring losses). However, the dollar reversed losses as U.S. stocks faded intraday after European shares ended lower. The yen has broken out to the strongest level against the dollar since Sept. 18 versus the dollar.
· Bonds gained mid-session despite weaker bond auctions (soft 2-year results, 5-yr demand little changed from last auction though yields higher), after slipping early on better housing data (which initially helped lift yields). The benchmark 10-year Treasury yield was down 1 bps to 2.330% while the 2-year note yield was virtually unchanged at 1.753%. Markets await tax legislation news from the Senate sometime this week; bonds pared early gains following a better Oct reading for New Home Sales. The U.S. Treasury sold $34B of 5-yr notes at 2.066% vs. 2.064% WI yield at deadline and was highest 5Y auction stop since 2.124% in April 2011 (bid-to-cover was 2.46 vs. 2.44 prior); followed a softer 2-yr note earlier today.
Other Interesting tidbits
· Among the Federal Reserve highlights this week, Jerome Powell, nominated by President Trump to be the next Fed chairman, will take questions from the Senate on Tuesday. Fed. Gov. Powell is set to take over from outgoing Chairwoman Janet Yellen, who will testify to the Joint Economic Committee on Wednesday.
Sector News Breakdown
· Retailers; lots of sales breakdowns over the weekend from Black Friday as retail group leads markets early on strong optimism for holiday season:
· 1) Adobe recorded $7.9B in online spending during the two-day period, +17% YoY, a 1% deceleration vs. last year. Thanksgiving Day accelerated to +18% YoY vs. +12% last year, offset by slower growth on Black Friday, +17% y/y vs. +22% y/y in 2016.
· 2) Salesforce.com measured 26% y/y online spending growth during Thanksgiving and Black Friday. Thanksgiving Day accelerated to +29% y/y, from +17% y/y last year. Black Friday sales also accelerated to +24% y/y from +21% y/y last year. Mobile was a significant driver on both days; mobile’s order share grew from 37% last year to 46% this year on Thanksgiving and from 34% to 42% on Black Friday.
· 3) Black Friday online sales reached a record $5.03 billion, according to the latest numbers from Adobe, up 16.9% from last year. Adobe forecasts online holiday sales will be $107.4 billion this year, up 13.8% from last year. The National Retail Federation expects a year-over-year increase in holiday sales of 3.6% to 4% for a total of $678.75 billion to $682.0 billion.
· 4) ComScore (SCOR) reported U.S. desktop retail e-commerce spending for Thanksgiving Day and Black Friday 2017. Thanksgiving Day saw a 22% gain to $1.57B in spending, while Black Friday followed with an even stronger spending day with $2.36B in desktop online sales, up 20% from Black Friday 2016
· Retail movers; DECK said it would appoint at least two new independent directors to its board, bowing to pressure from activist investor Marcato Capital Management that is looking to replace entire board; gun stocks (AOBC, RGR) active after reports say that FBI gun background checks on Black Friday set a new record, rising to 200,000 requests vs 2016’s 185,713; FNKO initiated with buy rating equivalent from eight Wall Street analysts today (street high $14 tgt at JPM);GPS positive mention by Jefferies saying checks over the weekend leave them with the view that Old Navy and Gap were the biggest positive surprises
· Housing & Building Products; LOW was upgraded to outperform at Raymond James saying shares more attractive following the Q3 beat and said underlying industry indicators, combined with industry supplier commentary, remain supportive of the home improvement industry heading into 2018; homebuilders pullback (TOL, LEN, DHI) from 52-week highs late last week
· Oil prices slipped from over 2-year highs reached last week, pulling back ahead of the OPEC production meeting later this week (Nov 30 in Vienna); the slip in oil weighed on already softer energy stocks; French oil and gas major TOT agreed to sell its stakes in two Norwegian oilfields to STO for $1.45B as it reviews its North Sea portfolio after acquiring Maersk Oil in August
· Solar movers; SEDG was downgraded to hold at Deutsche Bank saying shares are “fully discounting prospects of strong execution in solar and non-solar segments.”CSIQ wins solar power projects in Aguascalientes, Hermosillo and Obregón, Mexico in long-term auction
· MLPs remain soft on drop in oil prices, with the Alerian MLP Index just off 52-week lows (254.43 on 11/15), down again today – led by declines in CQP, NBLX, EEPearly; falling oil and rising rates weighing on the sector
· Banks quiet ahead of hopes for tax legislation out of Washington this week from the Senate; group seen as a beneficiary of lower taxes; in financial services, MARArises as the intellectual property licensing and management company is viewed as a cryptocurrency play, according to Marketwatch.com; COWN active after a deal with CEFC China fell apart Friday when the firms said they won’t pursue a transaction due to delays in securing approval from Cfius; Julius Baer (JBAXY) announced the unexpected departure of Boris Collardi as CEO
· Insurance; RE was upgraded to market perform at KBW Inc. primarily on valuation noting shares have significantly underperformed the broader markets; AFL will issue its 2018 outlook Friday morning, which typically includes EPS guidance along with margin, premium, investment income, and capital deployment expectations
· REITs; Baird downgraded KIM to neutral on reduced earnings growth outlook while the firm lowers ’18 estimates across the board for shopping center REITs (CDR, DDR, RPAI, RPT, KRG, REG) saying headwinds will persist and numbers are too high
· Lending and Finance movers; SQ falls after being downgraded to sell with $30 target at BTIG saying that while the company’s bitcoin trial “makes it hip to be SQ,” the stock’s rally is overdone
· Pharma movers; ALKS entered into a global license and collaboration agreement with BIIB to develop and commercialize ALKS 8700 for the treatment of relapsing forms of multiple sclerosis (MS); GSK was upgraded to buy at UBS saying concerns of continuing earnings decline and the dividend sustainability are now overdone;ARWR upgraded to Overweight from Neutral and increasing our price target to $5.50 from $3 at Piper; ALNA initiated with equivalent buy rating by four different analysts today; TEVA announces major reorganization, leadership changes
· Biotech movers; REGN weak initially after halting development for the combination of angiopoietin2 (Ang2) antibody nesvacumab and Eylea; CPRX said a second Phase 3 study, LMS-003, assessing Breakthrough Therapy-tagged Firdapse for the treatment of Lambert-Eaton myasthenic syndrome (LEMS) met its two co-primary endpoints
· Other movers; ALGN active early after announced that 5M patients have started Invisalign treatment; QDEL shares dropped after Beckman Coulter said it plans in the future to sell directly to its customers a natriuretic peptide assay for its Access Family of Immunoassay Systems (currently, BNP assay is sold exclusively by Quidel and its designated distributors); 52-week highs in Healthcare for ISRG, XRAY, ALGN, PKI, BDX, BCR, in medical equipment sector
Industrials & Materials
· Transports; in railroad NSC was downgraded to sell at Loop Capital saying operating efficiency metrics look like a bit of a disaster at present and cut tgt to $120;EIHC received non-binding proposal from Goliath Advisors to be bought for $13.35 in cash per ADS https://goo.gl/5VU2VV
· Metals & Mining; VALE upgraded to overweight at Moran Stanley; CSTM was upgraded to outperform at Cowen; broad weakness in industrial metals: FCX, CLF, AKS, X, and AA
Technology, Media & Telecom
· Media & Telecom; MDP agreed to acquire TIME for $2.8 billion including debt, offering $18.50 per share in all-cash; the billionaire Koch brothers also agreed to support Meredith’s offer with an equity injection of $650 million https://goo.gl/D7MSdj ; VZ mentioned positively in Barron’s saying shares could return 20% over the next year; tower stocks AMT, CCI, SBAC higher on the day after KeyBanc raised tgts
· Semiconductors; Morgan Stanley downgraded WDC to equal-weight as believes the NAND industry is entering a downturn for the first time since early 2016. Part of Morgan call for European semi’s: downgraded TSM, HIMX ASM Pacific, and ASE as await better entry points – expect these four companies to benefit from long-term trends (TSMC: HPC demand; Himax: Android 3D sensing; ASM Pacific: dual cam, automotive semis; and ASE: OAST industry consolidation), but we believe that their stock prices now reflect high valuations
· Software & Hardware; in Internet Security space, CUDA to be acquired by Thoma Bravo for $27.55 per share in deal valued at $1.6B https://goo.gl/zywVUN ; shares of FEYE, PFPT, FTNT, PANW also active on deal news); NUAN said it will work with NVDA to advance artificial intelligence and machine learning for radiology applications; busy week of earnings in software with results expected from ADSK, NUAN, GWRE, WDAY, VMW; Marlin Equity Partners to buy BV for $5.50 per share in cash for a total value of about $521M https://goo.gl/ZxKRrg
· Internet; AMZN trades above $1,200 for the first time, up more than 2% early ahead of an expected strong Cyber Monday sales day; SHOP announced that its over 500,000 merchants cumulatively experienced their highest Black Friday sales to date; TRIP tgt was raised to Street high $40 at Cowen
· Optical and Hardware; CIEN was upgraded to buy at Bank America with $28 tgt saying shares are at the low end of the historical range and the earnings growth profile is attractive; ROKU rises as tgt raised to street high of $50 at Needham today