Friday, December 1, 17
Equity Market Recap
· Volatile day for U.S. stock markets, filled with tax reform news, drama out of Washington from former NSA advisor Flynn, mixed economic data, a jump in oil prices and a decline in the dollar as stocks trade in a wide range (Dow 400 points from high to lows). Stocks opened mixed after reports overnight that Senate Republicans suspended a vote on a tax bill as lawmakers continued to debate a number issues related to cutting rates for individuals and corporations. Lots of commentary throughout about getting the 50 votes to pass the bill – but ended unresolved.
· Attention then quickly turned to President Trump and the Russian probe as Michael Flynn, Donald Trump’s former national security adviser pled guilty to lying to federal agents and is providing cooperation with Special agent Mueller’s investigation saying that Trump asked him to make contact with Russians and that he told incoming administration what he was doing. Stocks dropped sharply (Dow down as much as -350 points, and Nasdaq -120 point move off the highs) as did the dollar following on expectations it could sway minds voting for the tax reform bill today and or have greater implications in the White House. Volatility spiked as the VIX rises for a 5th day (touched highs of 14.58 – off lows 10.54). However, stocks closed well off their earlier lows as tax reform hopes overshadowed uncertainty regarding the Flynn news.
· Energy was the only one of the S&P’s 11 sectors to remain higher, bolstered by higher prices for oil and natural gas. Tax-sensitive banks slipped on the day after outperforming the entire week, trading to decade highs, while Transports took a breather after record highs yesterday. For the week, major averages post strong returns after yesterday’s jump, with all major indices (Dow, S&P 500, Nasdaq, Transports and Russell) all trading to record highs at one point this week.
· ISM Manufacturing Index reported in-line at 58.2 and down slightly from 58.7 last month; component breakdown showed: new orders rose to 64 vs 63.4 prior, employment fell to 59.7 vs 59.8, inventories fell to 47.0 vs 48.0, prices paid fell to 65.5 vs 68.5
· Construction Spending for October rose 1.4%, topping the 0.5% estimate; Private construction rose 0.6% in Oct. while private residential construction rose 0.4%; private nonresidential construction rose 0.9%; public construction rose 3.9% in Oct.; largest gain since Oct. 2014
· Manufacturing PMI for Nov as reported by Markit was 53.9, mostly in-line with flash reading 53.8 and falls from 54.6 in Oct. (and year ago 54.1); employment falls to 54.7 vs 55.4 in Oct
· Oil prices end the day higher, with January WTI crude oil rising 96c, or 1.7%, to settle at $58.36 per barrel, but ended the week with a 1% decline. Oil got a boost yesterday, snapping a 3-day losing streak after OPEC’s decision to maintain oil output cuts until the end of 2018 was announced (in-line with expectations). Oil started the week softer after bearish inventory data, but rebounded on the OPEC/non-OPEC member agreement and the dollar decline.
· Gold prices settled higher Friday, rising $5.60, or 0.4% to settle at $1,282.30 an ounce, but closing off its best levels after surging to highs of $1,292.50 an ounce after former U.S. national-security adviser, Michael Flynn, pleaded guilty to lying to the FBI. The news caused a sharp pullback in risk assets (stocks) and a jump in defensive ones (gold). However, stocks pared their losses and gold gains, logging a loss for a second week in a row (down -0.7%). November’s economic data did little to sway markets from expectations for a gold-negative interest-rate hike later this month and more tightening next year.
· The U.S. dollar reversed earlier gains, falling against comps after former national security adviser Michael Flynn pled guilty to lying to federal investigators and a news report said he would testify that President Donald Trump directed him to contact Russian officials. The dollar slipped against the euro, yen and Canadian dollar (on oil strength/economic data), thought the British Pound pared recent gains after trading highs of 1.355 overnight (was up about 1% vs. the USD this week)
· Bitcoin rises as much as 12% to highs of $10,830 after the US Commodity Futures Trading Commission on Friday said it would allow bitcoin futures trading on three exchanges starting December 18th (the CME and CBOE self-certified new contracts for bitcoin futures products and Cantor Exchange self-certified a new contract for bitcoin binary options). The contracts will make it possible to bet on bitcoin prices without buying the cryptocurrency. Bitcoin posted a volatile week with an all-time high of $11,434 on 11/29 and a weekly low of $9,009 (also on 11/29)
· Very choppy day for bonds, ending higher (and yields lower) after former NSA head Michael Flynn pled guilty to making false statements to the FBI about his contact with Russia, as the yield on the 10-year ended down about 5 bps at 2.36% (after touching highs above 2.43% yesterday). Treasury markets initially climbed, pulling yields lower after the Senate tax bill hit snags, delaying a floor vote that had been expected a day earlier. However, as reports indicate they have the 50-votes needed for the bill this morning, bonds slipped and yields rose (to 2.42%). The political fallout prompted investors to take risk off the table as they see what Flynn’s testimony spells for Trump’s pro-growth agenda.
Other Interesting tidbits
· President Trump’s former national security adviser, Michael Flynn, pleaded guilty on Friday morning to a charge of making false statements to the FBI. Flynn also indicated he plans to cooperate with special counsel Robert Mueller’s investigation into alleged Russian interference in the 2016 U.S. presidential election. Mueller filed the charges against Flynn on Thursday
· New York Fed President William Dudley said in an interview Thursday that any effort to make the tax code less complex “makes sense.” But with the economy expanding solidly and the unemployment rate at a low level of 4.1%, Fed policy makers will be watching closely to see whether any tax changes might cause the economy to overheat
Sector News Breakdown
· Auto movers; November auto sales data: 1) GM Nov. U.S. auto sales down (-2.9%) vs. est. down (-1.5%) and GM sees U.S. economic growth momentum carrying over into 2018; 2) Ford (F) Nov U.S. light vehicle sales up 6.7% vs. est. 3.7% and vs. year ago on sales of 210,771 vehicles (total car sales +2.0%, total SUVs +13.3%, total trucks +4.1%); 3) FCAU Nov. U.S. auto sales down (-3.7%) vs. est. down (-5.5%) as reported sales of 154,919 units vs 160,827 YoY with Jeep brand sales -2%, Chrysler brand +14%, Dodge brand -15%, Ram brand -5% and Fiat brand -28%; 4) TM Nov U.S. vehicles sales down (-3%) vs. est. up 0.4%; 5) HMC US auto sales rose 8.3% vs. est. 5.4%
· Retailers; ULTA shares fell as reported Q3 EPS that topped expectations but same-store sales growth slowed and the Q4 outlook was mixed (sees EPS $2.73-$2.78 vs. $2.84 est.); in footwear, GCO shares plunge as missed Q3 earnings estimates by 10c citing decreased interest in NFL gear further hurting sales at its Lids stores;TIF was upgraded to overweight at KeyBanc as think TIF’s 3Q17 +1% Americas comp (first positive Americas comp since 3Q14) points to the early stages of a more broad-based sales recovery; ZUMZ Q3 EPS in-line though gross margins of 33.9% was below views and prior year at 34.4%
· In discount retailers, BIG posted mixed Q3 results (EPS beat, but comps and overall sales just shy of estimates) though guidance came in better for year; FIVE Q3 earnings results and Q4 guidance both topped expectations; DLTR CFO sell $1.3M worth of shares (second insider sale in last few days – officer sold $530K worth of shares 11/29)
· Consumer Staples; APRN shares bounced after naming current CFO Brad Dickerson as its new CEO, pushing out co-founder Matthew Salzberg as shares have fallen post IPO; beauty product stocks (EL, AVP) active after ULTA’s Q3 results; DF shares active as activist shareholder Value Vals reports 8.2% stake
· Casino, Lodging & Leisure; shares of WYNN, LVS, MLCO, MGM higher early as Macau reports November casino revenue up 22.6% to 23.03B patacas (vs. est. 19%); JP Morgan said November GGR beat is very impressive given the high expectations and very tough comps and average daily revenue (ADR) came in at MOP768m, well above MOP728m in 3Q despite being a seasonally slow month; SEAS positive mention at Stifel saying believe the turnaround story remains grossly underappreciated and misunderstood and still see significant upside from current prices
· Energy stocks were among the top performers after OPEC’s decision to maintain oil output cuts until the end of 2018 gave energy stocks some room to move higher as they continue fighting the global supply gut. Shares of ETFs XOP and OIH jumped, with decent sized gains in E&P, drillers, and integrated companies, though refiners declined. The weekly Baker Hughes (BHGE) rig count showed total rigs rose 6 to 929 with oil rigs up 2 to 749, and gas rigs up 4 to 180, and miscellaneous rigs unchanged; Utilities slipped after some names touched 52-week highs earlier (PEG, AEP, D); MLPS outperformed with Alerian MLP Index up over 1.5% after falling to fresh 52-week lows on 11/29 this week
· It was a rocky day for US banks and brokers, after posting tremendous gains the earlier part of the week. Tax-sensitive banks retreated from fresh decade-highs on Thursday as Senate Republicans were working to salvage their tax bill (JPM, PNC, GS, FITB, and C among others). Tax reform remains one of the single biggest drivers of the sector currently. Banks extended losses after ex-national security adviser Michael Flynn pleaded guilty to lying to federal agents about communications with Russia’s ambassador – the BKX pared losses after falling as much as 2.5%
· Exchanges and Brokers; GCAP announces the launch of Bitcoin trading on City Index platform for U.K. users; as the CFTC noted it would allow bitcoin futures trading on three exchanges starting December 18th (the CME and CBOE self-certified new contracts for bitcoin futures products and Cantor Exchange self-certified a new contract for bitcoin binary options).
· In foreign banks; Canadian bank CM was upgraded to outperform at Credit Suisse on a stronger outlook for Canadian personal and U.S. commercial banking; RBSsaid it will close 259 branches and cut 680 jobs to reduce costs as more customers having been using mobile and online services
· Finance and Lending; VNTV was upgraded to outperform at Wedbush with $100 tgt predicated on company’s pending transformative transaction to acquire WPAY (expected to close mid-January 2018), which we believe will de-risk VNTV’s exposure to national merchants; in China lending, QD announced stock buyback of $300M in shares
· Pharma movers; generic names higher (MYL, ENDP, VRX) after it was reported AMZN has had early talks with generic drug makers about a potential entry into the pharmacy business; MYL also announced it has received final FDA approval for its ANDA for Heparin Sodium Injection USP, 1,000 USP/mL, 5,000 USP/mL, 10,000 USP/mL, and 20,000 USP/mL; LCI announces FDA acceptance of 505(b)(2) NDA for HCI Topical Solution
· Biotech movers; REGN was downgraded to neutral from buy at Citigroup and cut tgt by $100 to a Street low of $380 saying the threat to Regeneron’s eye business from Novartis’ experimental therapyRTH-258 is underappreciated; QURE was initiated buy and $28 tgt at HC Wainright while the firm also initiated GBT with a buy and $73 tgt
· Medical equipment and devices; FMI shares jumped after the FDA and CMS jointly announced the approval and proposed coverage for the company’s FoundationOne CDx test, making it the second company to successfully navigate the Parallel Review process
· Healthcare services; PDCO and HSIC shares slipped after Cleveland Research made cautious comments regarding Amazon’s headway into the dental industry; MDshares jumped after Reuters reported it was approached by potential private equity bidders https://goo.gl/npqRcm , but MD later said in statement “we have not retained an investment bank for any sale process”
Industrials & Materials
· Industrial & Machinery; AGCO upgraded to conviction buy at Goldman Sachs with upped $90 tgt as prefers exposure to agriculture over trucks, while downgradedCMI to neutral; Jefferies said PCAR and REVG could be relative winners from U.S. tax reform, as lower tax rates most likely to impact U.S. end markets with small/medium customers; FTV was upgraded to buy at Argus
· Transports; index coming off record closing highs yesterday, led by strong gains from airlines and rails; overall for the week, despite the decline in the index today with broader markets, the Dow Jones Transport index rose over 5%
· Chemicals; CC announced a $500M share buyback and provided 2018 guidance at its first investor day; AXTA was downgraded at Vertical Research after the company ended deal talks with Nippon Paint, making the stock fairly valued; BAYRY said that the Committee on Foreign Investment in the U.S., or CFIUS, has no national security concerns related to the German company’s planned takeover of MON
Technology, Media & Telecom
· Software movers; VMW posted a Q3 F3 beat and raise with strong initial top line guidance for F19 as 3Q beat on nearly all metrics and billings were particularly strong at 21% YoY; overall a busy week of earnings in software this week with WDAY, ADSK, VMW reporting)
· Internet; broad based pullback in high beta Internet names after the Flynn testimony weighed heavily on tech shares (AMZN, FB, GOOGL, BABA dropped); PCLNwas downgraded to hold at Argus after the company’s weaker-than-expected 4Q guidance and says the valuation is appropriate based on the company’s near-term prospects
· Semiconductors; AVGO does not intend to increase its $105B bid for QCOM ahead of a proposal next week to replace directors on its board, Bloomberg reports, and Broadcom doesn’t expect to boost its $70-per-share offer until around QCOM board meeting in March https://goo.gl/n2V1KC ; CY downgraded to hold at SunTrust saying it faces risks of potentially slowing sales growth and relatively high financial leverage; MLNX upgraded to buy at Longbow as believe activist encouragement could lead to 2 value creation options; MU shares slipped after 128Gb TLC NAND contract pricing decreased 2% MoM in November while 16GB and 32GB DDR4 contract pricing increased slightly MoM in November, following a 7% increase MoM in October; AMBA rises after reported and guided for inline revenue and beat on non-GAAP EPS while outlook for FY19 remained about the same as management’s previous outlook
· Hardware & Storage; NTNX shares jumped after posting 1Q results and 2Q forecasts that topped estimates as stronger margins, large-deal momentum (15 >$2M deals booked), and Federal strength were bright spots according to Oppenheimer; ST downgraded to hold at SunTrust owing primarily to sector dynamics citing a “fading growth” part of the semi cycle