Monday, December 4, 17
Equity Market Recap
· U.S. stocks end mixed, with financials, retail, transports and energy among top gaining sectors, while technology shares came under pressure as the prospect of tax reform has flipped the script on Wall Street. Battered or underperforming sectors such as retail, advanced while sky-high tech shares fell, led by semiconductors, as investors deconstruct the legislation’s impact. The Russell 2000 index fell -20 points from earlier record highs, as small caps, which are seen as a top beneficiary of reduced taxes, pared gains. The Nasdaq Composite fell over -120 points from earlier highs of 6,899 with share declines in MSFT, AMD, and NVDA among others. While the S&P 500 index and Dow were higher most of the day, the tax-cut euphoria faded from the open, with the S&P 500 paring an earlier gain of 0.9% before turning negative late day. The dollar climbed against vs. most rival currencies after Senate Republicans narrowly approved the tax code on Saturday while the House and Senate are set to begin working on compromise legislation this week. The two chambers must agree on a single bill before sending it to Trump for signature. There were 109 stocks touching 52-week highs in the S&P 500 today at one point and 10 (of 30) Dow names reaching yearly highs. In Europe, the Stoxx Europe 600 advanced 0.6% to 386.45 as all sectors moved higher, led by industrial and financial stocks.
· WTI crude oil prices fell for the first time in three sessions, slipping 89c or 1.5% to settle at $57.47 per barrel after a busy week of inventory data and results from the OPEC meeting. Prices fell 1% last week despite OPEC agreeing to extend its production cuts through 2018 (which was widely speculated), as inventory data came in bearish and data Friday showed that U.S. drillers added more oil rigs, fueling concerns over growing domestic crude production. Commodity prices in general slumped on a stronger dollar as well.
· Gold prices retreated -$4.60 or 0.4% to settle at $1,277.70 an ounce as a “risk-on” day of trading for stocks weighed on the safe-haven status of gold prices following the weekend passage in the Senate of what’s seen as business-friendly tax changes. The passage helped buoy the U.S. dollar which weighed on the dollar denominated commodity. Gold finished higher Friday, paring its weekly decline, as the dollar weakened and equities dropped in the wake of news that former national security adviser Michael Flynn pled guilty Friday to lying to the FBI after reaching a deal with the special counsel investigating Russia’s alleged interference in the U.S. election
Currencies & Bonds
· The U.S. dollar opened higher and held its gains, with the dollar index rising around 0.4% (to around 93.20) amid a boost on tax reform optimism, as euro and yen declined. The British Pound declined on reports that there was no Brexit deal agreed upon today. UK Prime Minister Theresa May has failed to reach a “complete” agreement over the country’s first phase divorce talks with the EU after intensive talks in Brussels on Monday – the GBP finished around the break-even level of 1.3475 (off overnight highs 1.3539 and lows 1.3414). Bitcoin prices traded as high as $11,845 before paring gains (traded as low as $10,549).
· Treasury market’s decline as yields rise after the Senate over the weekend passed its version of tax legislation, stoking growth and inflation expectations; the 10-year Treasury yield up 2.5 bps to 2.385% while the 2-yr yield adds nearly 4 bps to 1.80% – bonds opened lower and remained in a tight range most of the session.
· Factory Goods Orders for October fell (-0.1%), better than the expected (-0.4%) decline as new orders ex-transportation for Oct. rise 0.8% and new orders ex-defense for Oct. rise 0.2% after rising 1.7% in September; durables orders for Oct. fall 0.8% after rising 2.4% in Sept.
Sector News Breakdown
· Retailers; group broadly higher on tax reform – JP Morgan said in note today that U.S. tax legislation is “the most significant upside catalyst for equities” and they expect rotation out of “momentum and richly-valued internet retail into brick and mortars” (multiline, specialty, department stores, restaurants) as Consumer Discretionary sector (along with Telecom) benefit from tax reform given their “higher domestic exposure and effective tax rates.” – note shares of M, KSS, TGT, WMT, LOW, ANF, GPS, URBN all advanced
· Consumer Staples; APRN was upgraded to equal-weight at Barclays w/$4 tgt saying risk/reward appears more favorable, and views the promotion of Brad Dickerson to CEO as a positive; GNC withdraws proposed offering of notes/to explore options
· Restaurants; SBUX active after Cleveland Research raised its Q1 comp sales view; WING tgt raised to $44 at Baird as believe the setup for owningWING remains favorable; most restaurant chains should see both sales, EPS benefits from potential corp. and individual tax cuts, RW Baird; CMGadded to Best Ideas Long list at Hedgeye as search for new CEO “suggests that the potential for transformational change will be the biggest driver of the stock
· Housing & Building Products; OC was upgraded to top pick at RBC Capital and raise ests to reflect incremental confidence in next year’s guidance, and increase price target from $100 to $112
· Casino, Lodging & Leisure; cruise companies including CCL, RCL and NCLH should “perform well” after final Senate Bill revealed absence of cruise-related tax item, Stifel and SunTrust said; in lodging, HST upgraded to buy at BTIG on improving visibility on better long-term growth
· Oil prices slipped with the rally in the dollar, though energy stocks in general outperformed with the broader stock market rally; oil drillers (NE, ESV), refiners (ANDV, PBF), services (BHGE, WFT) were among the top gainers early while E&P was mixed; solar stocks FSLR, SPWR, CSIQ dropped
· Story movers; CVX said it will receive $337M in a settlement with Ecuador on terms of payment to its unit Burlington. Repsol SA (REPYY) is considering options including a potential sale of its $4.4 billion stake in Spanish gas distributor Gas Natural SDG SA, Bloomberg reported
· Utilities; SunTrust said based on the latest peer group valuations, they increased price targets on AEP, CMS, DUK, EXC, PNM, PNW, and XEL; AEP was added to the Bank of America Merrill Lynch US 1 list and updating tgt to $84
· Research; HCLP was upgraded to buy at Johnson Rice after mgmt meetings saying visibility exists on industry pricing improvement into 1Q18; Barron’s cautious on natural gas prices saying while a colder winter could be in store this year, “record production” and improvements in transportation will probably keep prices down
· Large Cap banks/regional banks and brokers surging early, extending last week’s solid gains, following this weekend’s Senate passage of the tax bill – parted gains with broader market
· Insurance; HIG said Monday it will sell an annuities operation that it has been winding down since 2012 to a group of investors for $2.05B, which includes $1.4B in cash, a 9.7% stake in the new company; Goldman Sachs initiates Property & Casualty: PGR added to Americas conviction list, as auto pricing power will “reveal stock opportunities”; CB is “the most defensive choice among commercial insurers while says sell TRV, as underwriting margin pressure isn’t fully priced and there is limited investment income upside in the near term; and says sell WLTW
· Brokers & Exchanges; CBOE aid Monday that it will launch trading of bitcoin futures on Sunday, Dec. 10. Trading will begin, under the ticker symbol “XBT,” at the start of global trading hours at 6 p.m. ET, and will be free through December; AMTD and Ally Invest said they will support Bitcoin futures once they become available (set for Dec. 18) – Fidelity said it won’t, while SCHW and ETFC haven’t commented on the matter
· REITs; Raymond James updated estimates for each of the ”Big Three” healthcare REITs (HCN/VTR/HCP) following 3Q17 results, while also downgrading VTR to Underperform citing view of a more challenging outlook for its domestic seniors housing operating segment and rich valuation; SunTrust increasing price targets for DCT to $60 from $56, REG to $74 from $71, and WSR to $14 from $12; Bank America upgraded ARE and CUZ to buy from neutral; downgraded OFC to neutral and PSA to underperform; Evercore/ISI upgrades 10 REITs (BDN, ESRT, OFC, PLD, PK, DRH, ELS, SUI, AMH, LSI) and downgrade three (DDR, VNO and CLI)
· Managed Care/Services; CVS will buy AET for about $67.5 billion, paying $207 per share in cash and stock ($145 a share in cash) – $77B including debthttps://goo.gl/qYL7zS ; Leerink said ATHN, CVS and ESRX may gain the most from tax reform and a new, slashed tax rate/a repeal of the orphan drug tax credit would be a headwind for CVS, ESRX, WBA and DPLO/drug distributors OMI and ABC seen benefiting most from a new corporate tax rate
· Large Cap Pharma; VRX to offer $1B of notes due 2025, proceeds to be used to repay debt; ABBV says Risankizumab met all co-primary and ranked secondary endpoints in fourth pivotal Phase 3 Psoriasis study; IRWD reported positive results in mid-stage trials of a treatment (IW-1973) for diabetes with hypertension; JNJ shares mentioned positively in Barron’s noting shares had a blockbuster year, but says could rise almost another 20%; ZGNXfalls after Phase 3 data of ZX008 for the treatment of Dravet syndrome showed some trace changes in echocardiograms that may fall into the “benign/not worrisome category,” Leerink said
· Biotech movers; RARE said that the rare disease therapy (burosumab) it is developing with Kyowa Hakko Kirin Co. Ltd. 4151, had positive results in a late-stage clinical trial; AMGN’s Repatha is the first PCSK9 drug inhibitor approved by the FDA for prevention of heart attacks, strokes and coronary revascularizations in adults with established cardiovascular disease; RARX plunges as Piper said data ‘underwhelms’ compared to ALXN’s Soliris
· Medical devices and equipment movers; EXAC said TPG Capital raised its offer to buy the company to $737M cash for a revised offer of $49.25 (from $42 on Oct 23rd) and its board agreed to the amended terms, saying the offer was in the best interests of shareholders. https://goo.gl/f5BQ2g; Wells Fargo upgraded GMED to outperform saying they like the company’s diversification strategy amid a weak spine market, while the firm downgradedKTWO noting the company derives 100% of its sales from the spine market which has slowed recently; Leerink cut TMO tgt to $200 from $216 as gets cautious on risk to its Lab Products and Services business
Industrials & Materials
· Industrial & Machinery; RBC Capital said DLPH is well positioned as OEMs move to adopt advanced powertrain technologies/moreover, growth accelerates beyond 2020 as propulsion becomes more electrified; distributors outperformed early (FAST, GWW) as RBC Capital said U.S.-centric distributors best positioned to benefit from tax reform, foreign domiciled worst placed with biggest winners to include AQUA, GWW, HDS, ATKR
· Transports; KSU added to the US1 list at Bank America, highlighting it as a top pick in Transports; Deutsche Bank said it is applying a more stringent approach to stock selection in 2018- balancing the cyclical exuberance of near-term fundamentals with the structural realities of returns over a cycle – the firm upgraded UPS to buy with $135 tgt while downgraded ODFL to sell and maintains sell rating on CNI; in airlines, Global demand for air travel climbed 7.2% in October, rebounding after September was disrupted by hurricanes, the IATA said; DAL said November load factor rose from a year ago (85.4% vs. 85% YoY), as traffic growth outpaced an increase in capacity
· Metals & Mining; Iron ore has rallied back into a bull market, with spot ore with 62% iron content jumping 3.7% percent to $72.68/metric ton, the highest since Sept. 14 and up more than 20% from the low hit in late October. Prices are surging as China’s crackdown on steel production to cut pollution this winter runs trims inventories, helping mills’ profitability and stoking demand; uranium stocks (CCJ) rise early after world’s number 1 producer, Kazatomprom, announced another production cut which is expected to reduce supply by 20%; steel and industrial metals stock prices were widely higher
· Chemicals; (SHW, CF, AGU) seen to benefit lower U.S. corporate tax rate, as all of these stocks generate more than 60% of sales in U.S. according to Citigroup (notes the U.S. Senate’s tax bill lowering corporate tax rate to 20% from 35%, effective in 2019, would strongly benefit companies with an outsized footprint in U.S.)
Technology, Media & Telecom
· Internet; EBAY was upgraded to outperform at BMO Capital and up tgt to $45 saying the current consensus for Gross Merchandise Volume are conservative; Bank America said tax reform more likely to pass; mixed benefit for US Internet stocks with FANGs taking a back seat to other sectors/repatriation (M&A, buybacks) could benefit Internet stocks with high $ of int’l cash like EBAY, PCLN, TRIP & GOOGL
· Semiconductors; group was under pressure as investors rotate out of yearly winners; AVGO said it notified QCOM that it plans to nominate 11 individuals for election to Qualcomm’s board of directors at the annual meeting (comes after QCOM rejected buyout bid of nearly $105B); AVGO tgt raised to $335 at Raymond James; Dialog Semiconductor shares fell overseas after the company acknowledged it eventually could lose some of AAPL’sbusiness; UCTT upgraded to buy at Stifel and $27 tgt as believe Ultra Clean is well positioned to benefit from another projected strong year in wafer fan equipment (WFE) and display spending
· Media movers; DIS has re-engaged in discussions with FOXA to purchase some of the media giant’s assets, and CMCSA remains in the mix, with deal talks gaining momentum, according to reports https://goo.gl/BM7aAo ; DISCA boosts ownership interest in Oprah Winfrey network paying $70M to buy added 24.5% stake
· Telecom; BGC shares spike as Italy’s cable maker Prysmian SpA said that it will acquire them for $30 a share, in a deal that values the latter at approximately $3 billion. https://goo.gl/BtTb53 ; in research, Barclays’s downgraded the U.S. cable and satellite communications industry to neutral and also downgraded CHTR to underweight as now sees headwinds including competitive pressure in video, a slowdown in broadband growth, levered balance sheets, more uncertainty on M&A payoffs and optimistic valuations; CMCSA said at UBS conference that it sees Q4 broadband additions ahead of expectations
· Software and Hardware movers; CRM mentioned positively in Barron’s saying shares have 25% upside to $130, as it launches new products, and its “addressable market” expands; INFY highs as announced Salil Parekh as its new CEO (was a member of Capgemini’s executive board); in optical, FNSRdowngraded to buy at Needham on Data Center market concerns ahead of earnings this week; PANW upgraded to outperform at William Blair