Wednesday, November 29, 17
Equity Market Recap
· Markets ended mixed with market leadership names/sectors this year (semiconductors and Internet) falling in a bout of profit taking as money rotated into underperforming or lagging sectors this year, namely retail/consumer discretionary and financials. After falling from record highs in mid-October, the Transports played catchup today, rising over 3% to new record highs amid gains in airlines and rails (though the whole group was strong). FAANG stocks and semiconductors were big losers on the day, with the Philly semi index (SOX) falling over 4% on the day. Outside of tech, markets were helped by a higher than expected revision to U.S. Q3 GDP growth and rising hope that Republicans will be able to push through the tax reform legislation. Bonds dropped and yields spiked following that 3.3% upwardly revised Q3 GDP reading. All three benchmarks were coming off record closing highs on Tuesday, as progress on a Republican tax overhaul appeared to offset worries about a North Korean missile test. Banks were up for a second day after Fed chair nominee Jerome Powell said too-big-to-fail is over and that bank rules are tough enough. There were 52-week highs for nine of the 30 Dow components today (though some have reversed lower midday): HD, NKE, UNH, JPM, CSCO, AXP, MCD, BA, and V. Oil prices fell for a third day on bearish inventory data and ahead of the OPEC meeting tomorrow. Out of Washington, Senate Republican John Cornyn said the Senate will vote to proceed to the tax bill this afternoon, and Republicans have the votes to bring the bill to the floor. GOP Sens. Bob Corker and Jeff Flake, who both have voiced concern over bill’s effect on deficits, say they’ll support motion to proceed to the measure. Following vote, Senate will debate measure and floor amendments before final vote, which may be as soon as tomorrow.
· U.S. Q3 growth was revised to a three-year high of 3.3% from 3% under the government’s latest revision to gross domestic product (GDP); adjusted pretax corporate profits rose 4.3% to an annualized $2.22 trillion, marking the biggest gain in a year. Spending on equipment, especially in transportation-related areas, rose 10.4% instead of 8.6%. Consumer spending, biggest part of the economy, grew 2.3% (est. 2.5%); revised from 2.4%; down from 3.3% in 2Q
· Pending Home Sales for October rise 3.5% MoM, above the 1% estimate; Northeast up 0.5%; Sept. rose 1.2%; Midwest up 2.8%; Sept. rose 1.4%; South up 7.4% (outperformance); Sept. fell 3% and West fell 0.7%; Sept. rose 1.5%
· Fed Beige book showed the central bank detected “a slight improvement in the outlook” among contacts in its 12 districts saying growth in the U.S. remained at “a modest to moderate pace,” where it has been for most of the past year. It noted inflation pressures “have strengthened” over the past month, with some growth in transportation and manufacturing costs. In many cases, these increases were passed through to consumers.
· Oil prices slipped again, falling 69c, or 1.2% to settle at $57.30 per barrel (high $58.30 and low $56.75) ahead of the official start to tomorrows OPEC meeting in Vienna (though several oil ministers were quoted over the last few days). Prices dropped on mostly bearish inventory data today as overnight, API posted a build of 1.8M barrels though EIA posted a larger drawdown of -3.4M barrels (but bigger builds in gasoline and distillates). According to reports, a committee of ministers from major producers including Saudi Arabia and Russia recommended extending their supply agreement for six to nine months beyond the current end-March expiry, Kuwait’s Oil Minister said, Bloomberg reported. Gold prices dropped sharply on the better GDP reading, as February gold slipped -$13, or 1%, to settle at $1,286.20 an ounce
Currencies & Bonds
· The U.S. dollar index (DXY) was little changed after rallying yesterday, holding around the 91.20 level most of the afternoon (down slightly); the dollar edged slightly higher against the yen, but slipped vs. the euro and Pound. The dollar failed to extend early gains after a stronger-than-expected GDP reading. The pound rose as high as $1.3448 before paring gains, up from $1.3339, as the currency touched levels last seen in late September on Brexit bill news.
· Bitcoin mania continues, with the crypto-currency topping the $10,000 milestone Tuesday, only to surge to record highs of $11,434 early Wednesday as momentum continues (up over 36% in 3-day stretch to that point). However, a late day swoon took prices down sharply (down on news as quickly as it surged on none), trading to afternoon lows around $9,000 before bouncing back above $10,000 late day.
· Bonds rolled as yields jumped after Q3 GDP growth rate for the US economy was revised higher than expected on Wednesday to 3.3% from 3% prior and vs. est. 3.2%; 10-yr yield touched highs slightly above 2.39% and the 2-yr above 1.77%. As we approach the December FOMC policy meeting, expectations are high for a rate hike of 25 bps.
Sector News Breakdown
· Retailers; massive rally on retailers today, leading markets (M, JWN, KSS, TGT, BBBY AAP, URBN); TIF reported mostly in-line 3Q results that included some “slight improvements,” as well as disappointing European comp. sales; DLA results missed mainly due to hurricane-related disruptions, while further declines in retail licensing offset continued growth for Salt Life and in fashion basics said Roth Capital; Wayfair (W) said its 5-day Holiday weekend direct retail sales up 53%; ShopperTrak’s 2017 Black Friday Weekend data indicate that traffic levels for holiday week as a whole (11/19–11/26) fell about 2% y/y, the same rate of decline during the 2016 Black Friday holiday week, and much better than 2015’s traffic decline of 4.7%
· Staples and Restaurants; CMG announced founder Steve Ells to step down from CEO role, will become executive chairman; alcohol related stocks weaker (BUD, STZ); WING was removed from conviction buy list at Goldman Sachs and downgraded by Guggenheim; DPZ was upgraded to buy at Nomura/Instinet citing int’l growth potential; WEN rallied yesterday on Roark Capital $157 purchase of BWLD, as Bank America notes Roark Capital currently owns 81.5% of Arby’s and the remaining 18.5% is owned by Wendy’s; CL downgraded to sell at SocGen
· Weekly inventory data: The American Petroleum Institute (API) reported that U.S. crude supplies climbed by 1.8 million barrels for the week ended Nov. 24, a fall of -1.5 million barrels in gasoline stockpiles, while inventories of distillates climbed by 2.7 million barrels.
· The EIA said weekly crude stockpiles fell -3.49M barrels vs. est. -2.95M, while gasoline rose a greater 3.6M barrels vs. est. for build of little over 1M barrels and distillates bigger build of 2.7M barrels vs. est. for build of 700K barrels
· In research, NOV was upgraded to hold from sell at SunTrust saying the up-cycle for oilfield services and equipment will continue through 2019 and likely beyond, which could ultimately allow NOV’s later-cycle equipment and FPSO product lines to participate
· Large Cap banks extend yesterday’s strong gains, as shares of big banks (JPM, C, MS, BAC) and regional banks (PNC, ZION, BANC, TCBI) all strong – group surged yesterday on tax reform pushing forward and comments by Powell at nomination about “too big to fail”
· Fitch said it sees the potential for a significant rise in interest expense for U.S. commercial banks if forced to compete with online banks on retail deposit rates, thereby cutting profitability and interest margins.
· REITs; Goldman Sachs said a deep dive shows REIT sector as a whole stands to benefit from a lower tax rate under both House and Senate plans, and that the rent-to-own equation may shift to rentals; also points to caution on apartment/office exposure to states with high income taxes
· Lending and Finance movers; Student lenders NAVI and NNI weak initially after the WSJ reported the Trump administration is reaching out to finance and tech companies for help in managing the government’s $1.3t student-loan program; SQ shares dropped over 10% as payment service names pressured all day (PYPL), with SQ down over 20% the last 3-days since BTIG cut to sell
· Biotech movers; not much movement in biotech, though services and Pharma rallied; PETX shares bounced after the company terminated its stock offering; MDCO said it would sell its infectious disease business for $265M to MLNT; CAPR said the FDA has approved its IND to conduct a new clinical trial, HOPE-2, assessing CAP-1002 in boys and young men with DMD;
· Pharma movers; PRQR drug candidate, QR-313 for dystrophic epidermolysis bullosa (DEB) receives orphan drug designation in the EU from the EMA;ZTS was upgraded to overweight and $80 tgt at Morgan Stanley saying strong growth prospects, rising cash flow conversion, and franchise durability should drive further outperformance; AGN upgraded at Morgan Stanley saying Botox fears are overdone; PCRX downgraded to neutral at Mizuho
· Medical devices, equipment and services; BSX announced overnight additional delays to its Lotus transcatheter valve program, confirming the speculation that started early Tuesday morning after cancelling out of an investor conference; TDOC announced 3.25M share offering; hospital stocks outperformed early (another beaten sector) – LPNT, THC, UHS, HCA
Industrials & Materials
· AG & Machinery; CNHI was upgraded to buy at Citigroup as they see significant upside to out-year consensus estimates on the back of both operational and below-the-line benefits; Citi downgraded PCAR to neutral as no longer see catalysts in place to warrant a Buy (but noted this was not an earnings call)
· Transports; group surges nearly 3%; in rails, at conference today, UNP said it sees Q4 coal volumes flat to slightly down, while CNI said Q4 expenses may be higher than normal but said may use tight capacity to raise prices; in airlines, UBS said U.S. airlines may raise Prasm guidance – AAL, DAL, LUV, JBLUall posting strong gains as UBS expects at least a few airline companies to raise guidance when they issue their November traffic reports next week
· Metals & Mining; Longbow said Stainless steel could be turning into one of the stronger metal categories heading into 2018 citing proprietary North American channel checks of the sector (raises tgts on ATI and CRS); Morgan Stanley said the U.S. starting probe into Chinese imports of aluminum sheets, should benefit aluminum-fabricators such as KALU and CSTM but is unlikely to move prices
· Aerospace & Defense; WAIR shares fall after Q4 results missed lowest estimates and guides year sales up low-single digit; defense stocks (BA, GD, NOC, LMT) mixed despite North Korea missile test yesterday
· Chemicals; LNDC reduced its Q2 EPS guidance while reiterating its full-year EPS and revenue guidance saying significant weather events, including the hurricanes in August/September, have caused supply disruptions; shares in lithium producers FMC, ALB, SQM fall after a Reuters report that more than 90% of Tesla Model S and Model X vehicles needed repairs after assembly.
Technology, Media & Telecom
· Tech sector lambasted, let by sharp declines in Internet related names (NFLX, AMZN, GOOGL, FB), many of them off recent all-time highs and semiconductors (AMAT, KLAC, MKSI, MU, NVDA) with the broader sector crushed on no specific news. These names have led gains in 2017, with many soaring on a daily basis and posting massive gains for the year – but today, rotation out of these winners and into financials, telecom/media and consumer discretionary
· Software movers; ADSK shares slumped as lower 2018 net subscription guidance seen as disappointing by analysts/announced a restructuring plan which should be disruptive short-term/said total net subscriber adds of 146,000 fell just slightly below consensus expectations; NUAN shares rise as reported a strong set of 4Q results exceeding consensus’ estimates across a majority of metrics
· Semiconductors; Semiconductors among the biggest drag in tech, as the Philly semi index (SOX) falls as much as 3%, with all 30 components lower;MRVL turned in another solid quarter with revenue slightly beating estimates combined with gross margins and expense control led to a beat on the bottom/also slight beat on top and bottom line for year; QCOM was downgraded to hold at Stifel as risk in the shares is now greater than the potential reward following the company’s recent rejection of AVGO $70 bid; PLAB rises on earnings
· Hardware and Storage; PSTG beat Q3 revenue and adj EPS consensus and boosted the full year revenue midpoint, with one analyst noting upside came from the All-Flash products rather than the new FlashBlade (FlashBlade growth slowed some in the quarter due to lumpy orders); ZBRA was upgraded to outperform at Imperial Capital after better Q3 results earlier this month
· Media & Telecom; movie theatres active again after RGC confirmed British movie theater operator Cineworld Group PLC offered $3.1B/$23 per share for chain https://goo.gl/gHAB62 ; in telco, FTR removed from S&P MidCap 400 (replaced by DLPH) and moves to S&P SmallCap 600; media movers outperformed (DIS, CBS, VIAB, FOXA)