Tuesday, November 28, 17
Equity Market Recap
· Stocks surge! It was a volatile afternoon for U.S. stocks, ending near the best levels on late day news the Senate Budget Committee advanced the Republican tax bill on party-line vote, moving the measure closer to a full vote as early as Thursday. The news sent the dollar higher as well. The sharp rally came after stocks had sunk on reports North Korea had fired three ballistic missiles from its west coast at around 3:18 a.m. and one of the missiles was believed to have landed outside of Japan’s EEZ. While markets had a brief downdraft on the Korea news, all ended well with major averages posting new closing all-time highs.
· Stocks were cruising by midday, setting fresh all-time intraday record highs, but slipped early afternoon after reports North Korea had fired a ballistic missile, US and South Korean officials confirmed, flying to the east and landed in the sea near Japan. Gold prices perked up following the reports as stocks pared gains. Prior to the news out of Korea, stocks were soaring on hopes Senate Republicans would come to a compromise on the tax reform legislation as President Donald Trump was set to meet with Senate Republicans today. However, President Donald Trump said he didn’t see a deal to keep the government open ahead of a meeting with congressional leaders, leading his Democratic adversaries to then cancel the get-together. That news failed to dent market optimism.
· The third top story today was the Senate confirmation hearing for Jerome Powell, the Federal Reserve official tapped by President Donald Trump to replace Janet Yellen as Chair of the FOMC. Financials outperformed after Fed chair nominee Jerome Powell said in his nomination hearing that “too-big-to-fail” is over, and that bank rules are tough enough. In the end North Korea news was a minor setback, but gave investors yet another opportunity to jump in and “buy the dip.” There were also several strong economic data reports with Richmond Fed manufacturing and Consumer Confidence (17-year highs) both handily topping estimates, keeping expectations of a Fed rate hike in December on track. Stocks rally in broad based move, but led by financials.
· Consumer Confidence for November rose to 129.5, topping est. of 124.0 and 126.2 in the prior month; the Present situation confidence rose to 153.9 vs. 152.0 last month while the consumer confidence expectations rose to 113.3 vs. 109.0 last month
· Richmond Fed’s November manufacturing survey at 30, well above the 12 reading last month and the 14 estimate; shipments rose to 33 after 9 the prior month while new order volume increased to 35 after 17 prior; order backlogs rose to 21 after 7 the prior month
· Advanced trade deficit of goods for October widened to (-$68.3B) from (-$64.1B) in prior month, the Commerce Department said; Imports rose 1.5% in Oct. to $197.381B from $194.447B in Sept., while Exports fell 1% in Oct. to $129.084B from $130.334B in Sept.; Wholesale merchant trade inventories fell 0.4% in Oct. to $605.7B
· S&P CoreLogic Case-Shiller National Home Price index rose 6.15% y/y in Sept. after rising 5.95% in prior month; the S&P/Case-Shiller 20-city NSA index at 203.5 after 202.68 in Aug.; the 20-city SA index rose 0.52% m/m in Sept. after rising 0.44% the prior month
· National home price index rose 0.72% m/m in Sept. after rising 0.66% the prior month
· Oil prices end the day slightly lower, dipping 12c to $57.99 per barrel a day after sliding more than 1% from two-year highs ahead of the official OPEC meeting this week in Vienna. There were lots of headlines/reports citing members, with Bloomberg noting all OPEC members support extending their oil production cuts until the end of 2018, although Russia hasn’t yet committed to the proposal before Thursday’s meeting. Other reports indicated that Iraq will go along with any OPEC consensus on extending cuts in oil output, whether the extension is for 6 months or 9 months, citing Iraqi an oil ministry spokesman. Also tonight the weekly API inventory report followed by the EIA data tomorrow at 10:30 AM EST.
· February gold contract closed higher by 30c, settling at $1,299.20 an ounce, getting a boost late day as investors rotated into defensive assets with another North Korea missile threat. Prior to that, gold traded up and down given a rebound in the dollar and better economic data.
· The U.S. dollar made a late day push higher after the Senate Republicans’ tax legislation narrowly cleared a critical hurdle on Tuesday, after a committee advanced it on a tight party-line vote. The move further extended gains against the euro and yen, ending near its best levels of the day. The dollar did end lower against the British Pound, which jumped off lows of 1.3221 after the Telegraph reported Britain and the EU agree on Brexit divorce bill (traded to highs of 1.3387). The dollar index traded up about 0.4% late day to 93.25
· Bonds advanced following Jerome Powell’s Fed nomination hearing, along with more warnings about North Korea, and lack of cooperation between President Trump and Senate Democrats today. The yield on the benchmark 10-year fell to lows around 2.31% but shortly after touching those levels, rallied back around the 2.33% level after another weak bond auction (7-year today). Stronger economic data failed to weaken bonds early after a better manufacturing reading and a 17-year high confidence number. The yield on the 10-year remains down about 11bps this year. The U.S. Treasury sold $28B in 7-year notes at a yield of 2.23% vs. 2.213% WI yield deadline while the bid/cover ratio (demand) fell to 2.36 from 2.39 from prior auction and indirect bidders awarded 58.6% vs. 63.4% in prior auction.
Other Interesting tidbits
· Bitcoin remains a very hot topic on Wall Street, trading just shy of $10,000 today (just days after topping $9,000 for the first time) and is up more than 900% in 2017 alone, hitting dozens of records throughout the year (touched high of $9,975 today). At current levels, bitcoin has a market capitalization of $166.5 billion, according to pricing website CoinMarketCap, making it larger than all but 25 S&P components https://goo.gl/6hKRRR
Sector News Breakdown
· Retailers; NKE was downgraded to hold at HSBC Holdings; CBK reported quarterly earnings; Online retail sales likely rose faster than last year on Cyber Monday, particularly on mobile devices that accounted for more than 34% of sales as of midday, according to IBM Watson; TIF to report earnings tomorrow morning
· Consumer Staples; NOMD posted its 3rd straight quarter of organic sales growth and better-than-expected adj. EPS and raised its year forecast;
· Restaurants; BWLD agreed to be bought by Arby’s Restaurant Group, which is owned by Roark Capital, for $157 per share (up from prior offer of $150) in deal valued at about $2.9B including debt https://goo.gl/nHwH5P; DPZ cautious mention by Longbow Research saying talks with franchisees in the U.S. lead them to believe Q4 has had a much slower start than consensus view
· Housing & Building Products; HD was upgraded to buy at Atlantic Securities, while the firm downgraded LOW to neutral; homebuilders edge higher (TOL, MTH, PHM)
· Casino, Lodging & Leisure; RV stocks active after THO quarterly revenue and EPS topped previously raised expectations, fueled by strong dealer orders (backlog up 70%) – said towable RV sales rose 33.7% y/y, motorized RV sales increased 22.8% (WGO, CWH active on report)
· Other movers; in education, RYB shares rebound as Beijing police said there were no child abuse incidents found at RYB Education (recall shares fell 38% on Friday amid allegations of improper conduct enrolled there)
· All eyes remain fixed on the OPEC meeting later this week, though there were a few headlines out today that barely moved the needle – also weekly inventory data tonight and tomorrow
· Stock movers; RDSA said it would be canceling its scrip-dividend program–dividends paid in shares in lieu of cash payments–from Q4’17, as well as announcing a planned share-buyback program of $25 billion between 2017 and 2020; XOM reported a fire at its refinery in Beaumont
· Refiners; Goldman Sachs downgraded PBF to sell to reflect: downside to 2018/2019 consensus expectations for both earnings and free cash flow, driving a below-average capital return profile; less favorable crude differentials; elevated RINs costs; and premium valuation versus history
· Large Cap banks; big banks (JPM, BAC, WFC) advanced after Fed Chair nominee Jerome Powell said improvements in U.S. bank regulation and supervision since the financial crisis have eliminated problem of “too-big-to-fail” banks; regional banks also surge, with the KRE posting its best day since June with a 3% move
· In other movers; TCF announced after the close that it is exiting the auto business owing to a “less favorable” financial outlook compared to alternative uses of capital (said is taking an after-tax charge of between $80M-$85M) – Piper upgraded saying shares should garner more of “a peer-like multiple” due to less auto-related expense; the WSJ reported that WFC cheated a number of their foreign-currency exchange business customers by overcharging them; KBW upgraded Puerto Rico banks BPOP & OFG to Outperform from Market Perform; BNS offered $2.2B for a majority stake in the Chilean operations of BBVAhttps://goo.gl/A49c22
· Lending and Finance movers; QD shares rebound after the company says it hasn’t found any data leaks from an internal probe, which remains ongoing – Bloomberg reported; VNTV traded to record highs as company said in an 8-K filing that it expects to complete the proposed acquisition of Worldpay Group on Jan. 16, subject to shareholder approvals; after falling -16% yesterday on BTIG downgrade to sell, and opened up to the downside, SQ shares rebounded; FNMA andFMCC will be allowed to buy mortgages of as much as $453,100 for most of the U.S. in 2018, the Federal Housing Finance Agency said (from $424,100)
· REITs; Baird downgraded CUBE to Neutral and PSA to Underperform largely due to valuation saying the recent run-up in the sector has them concerned the stocks have overshot to the upside with current valuations relatively expensive
· Information services; CLGX was downgraded to hold from buy at SunTrust and cut tgt to $48 from $55, seeing slowing organic revenue growth; INFO upgraded to buy at SunTrust and raised tgt to $52 based on increased expectations of faster organic revenue growth due to recovery in Resources and further strength in Transportation
· Large Cap Pharma; MRK and PFE said a late-stage trial of stomach cancer drug did not meet its main goals of overall survival; in managed care, UNH provided initial guidance for 2018 that missed some Street expectations (Cantor said forecast was “a touch light” but overall “not too concerning”, while Mizuho said midpoint was seen by some as “below consensus”); MRK announced a $10B stock buyback and raised its dividend
· Biotech movers; PTLA added to value creators SMID focus list at Citi; EGLT says Egalet-002 showed statistically significant difference in average pain intensity from baseline to week 16; FDA accepts DOVA’s marketing application for avatrombopag for thrombocytopenia, with action date May 21, 2018; VYGR assumed with an Overweight rating at Piper and $28 PT based on value from lead candidate VY-AADC; OTIC said it plans to stop commercialization of ear drug Otiprio
· Medical devices and equipment; APEN shares rise as the FDA announced 510k clearance of the OverStitch Sx, a new, full-thickness flexible endoscopic suturing system that will work on a broad range of single-channel flexible endoscopes
Industrials & Materials
· Industrial & Machinery; ROK shares volatile after EMR withdrew its $29B offer to buy the company; EMR CEO said it may be interested in some GE assets and that it was seeking bolt-on-deals of $250M-$1B each/said sees no break-up of EMR’s two business units; TXT shares were active after the company said it sees AMZN as a potential customer
· Chemicals; AKZOY shares slipped initially after PPG CEO said at Citi conference that “we’ve moved on” from Akzo Nobel and would like to do more M&A in Asia;HUN said it sees Q4 results better than year earlier (speaking at Citi conference)
Technology, Media & Telecom
· Internet; AMZN tgt raised to Street high $1,450 from $1,300 saying that investors are likely expecting shares to climb during this week’s Amazon Web Services (AWS) conference in Las Vegas; Japan’s SoftBank Group Corp is offering to purchase shares of Uber at a valuation of $48B, a 30% discount to its most recent valuation of $68.5B – Reuters https://goo.gl/jkkzTQ
· Semiconductors; MU tgt raised to $60 at Baird on a stronger-than-expected DRAM outlook for the medium term; AMD weak as Mizuho said expect crypto-mining will be a much less meaningful market for AMD/NVDA in 2018 (~6-7% of revenues currently) underlining an increased need for AMD/NVDA to focus on core PC/NB/Data Center markets in 2018
· Hardware, Networking and Services; TECD 3Q earnings came in better than expected, as overall gross margins were within expectations, while Avnet integration was tracking well; Rosenblatt said IPhone X production appears to have increased to 3 million units per week and may reach 4 million units per week in December
· Media & Telecom; AT&T and TWX agree to further extend termination date to April 22; CTL shares fell to 20-year lows; GTN filed to sell 15M shares of common stock; advertising stocks IPG and OMC outperformed early; movie theatre stocks jumped late day after Reuters reported Cineworld has approached RGC about possible merger valuing company at $23 per share https://goo.gl/ShCDbJ (shares of AMC, CNK, IMAX moved in reaction)
· Software movers; Chinese mobile chat app MOMO reported better-than-expected Q3 results but midpoint of Q4 revs guidance falls short of estimates ($370M-$385M vs. est. $382M); busy week of earnings in software with results expected from ADSK, NUAN, GWRE, WDAY, VMW