Wednesday, December 6, 17
Equity Market Recap
· U.S. equities end mixed, with the Nasdaq Composite snapping its 3-day losing streak (which was longest since August), though the S&P 500 extended its losing streak (barely) to 4-days, the longest streak of daily declines since March. The Small Cap Russell 2000 underperformed as markets struggled for direction most of the day. Stocks were mixed as technology led after falling the past week on profit taking/rotation, while energy prices declined amid a near 3% decline in oil prices (settling near the lows) to their lowest level in more than two weeks after a sharp rise in U.S. gasoline inventories and a jump in U.S. crude production. Financials slipped late day following some comments out of Citigroup at a conference saying it sees Q4 trading revs down “high-teens” and that its sees a $20B charge if Senate passes tax bill. Treasuries advanced while the yield curve flattened further, while the dollar was broadly higher. Economic data was mostly in-line today with private payroll and productivity data offering no major surprises.
· All eyes still on tax reform bill out of Washington: the reality of new tax-reform inches closer, with bills passing in both the House and Senate, but markets still awaiting a compromise between the two chambers (few details of each bill differ such as AMT, tax rate, state/local tax provisions, etc.) before presenting the bill to President Trump. House lawmakers are examining whether to let taxpayers deduct state income taxes in addition to property taxes under a set of changes to the Republican tax plan that will be worked out with the Senate in a conference committee, Ways and Means Cmte Chairman Kevin Brady told reporters today
· Bitcoin madness showing no signs of slowing as just hours after the crypto-currency crossed the $12,000 mark for the first time, it has now sailed past $13,300 (started the year around the $1,000 level). In central Bank news, Brazil cut its benchmark interest rate by 50 bps to 7%, while the Bank of Canada kept its key interest rate target on hold at 1% (as expected), but sends fresh signals that hikes are on the horizon (both decisions were in-line with expectations).
· President Donald Trump said Wednesday a government shutdown “could happen,” a day before he prepares to meet with Democratic leaders. Federal government operations are funded through Friday, and would partially shut down if there’s no deal. Senate Minority Leader Charles Schumer and House Minority Leader Nancy Pelosi are scheduled to meet Trump at the White House Thursday to discuss funding the government and immigration.
· Private sector employment as reported by ADP increased by 190,000 jobs last month, in-line with estimates and compared with October estimate of a gain of 235,000. Small private-sector businesses added 50,000 jobs in November, medium businesses added 99,000 and large businesses added 41,000, while most of those gains were in the service sector
· Increase in productivity of American firms and workers was unchanged at 3% in the third quarter, slightly below the 3.3% estimate by economists, while unit labor costs fell (-0.2%) in 3Q, compared to a 0.2% expected rise and below the 0.5% preliminary reading; output rose 4.1% in 3Q vs. up 3.8% preliminary while employee hours rose 1.1% in 3Q
· Energy futures end near the lows of the day, as WTI crude fell over 2.9% to settle at $55.96 per barrel, impacted by weekly inventory data: the API reported that U.S. crude supplies dropped by -5.5M barrels for the week ended Dec. 1, but on the bearish side, posted a jump of 9.2M barrels in gasoline stockpiles, and 4.3M barrel build for distillates. This morning, the DoE reported a larger draw in crude stockpiles of -5.6M barrels vs. est. -2.5M, but like the API report, bigger builds for gasoline (+6.78M vs. est. 2.55M) and distillates (+1.66M vs. 1.1M)
· Gold prices posted modest gains, rising $1.20, or less than 0.1%, to settle at $1,266.10 (after falling to 4-month lows) an ounce in what was a lackluster session; prices have slumped over the last 2-weeks on a stronger dollar, rising expectations of increased interest rates, and easing global macro fears.
· The U.S. dollar extended gains for a third session, rising broadly against rivals on tax reform bill hopes and increased interest rate expectations at next week’s FOMC meeting. The euro moves back below 1.18 vs. the dollar, down about -0.25%, though the USD falls vs. the yen; the pound slipped -0.4% vs. the US dollar amid consistent worries over Brexit talks. Bitcoin at it again, making new record highs as takes out the $13,300 level, up over 13% (up over 100% since its drop below $6,000 on 11/13). Canadian dollar drops as Bank of Canada leaves rates unchanged.
· Bonds opened higher and remained there, with yields falling to lowest levels in over a week following in-line economic data and as stocks finally take a breather after weeks of setting all-time record highs. The 10-year benchmark Treasury yield slipped over 4 bps to 2.315%, while the 30-year yield fell about 3 bps below 2.7% and the 2-year note yield dipped 2.4 bps to 1.802%. Demand for haven assets saw a pickup as stock markets in Asia, Europe and the U.S. came under pressure after commodity prices fell. A lower reading on unit labor costs during the third quarter also helped to attract a bid in bonds.
Sector News Breakdown
· Retailers; there were a few earnings in retail space today, with VRA Q3 EPS results topping expectations on in-line revs, though comp sales fell more than estimates (-7.4% vs. -3.4%) while provided mixed Q4 guidance (lower rev view); AEO Q3 revs in-line with comps slightly above views and Q4 EPS view tops consensus; LULU reports earnings tonight; FRED shares drop as reported wider than expected Q3 loss of (42c) and a revenue miss and pulls dividend; OXM with mixed Q3 results as EPS beat but sales missed and raised bottom end of year EPS outlook
· Consumer Staples; BF/B boosted its earnings outlook after beating Q2 views handily (62c/$914M in revs vs. est. 53c/$870M); overall the group traded well today; tobacco names outperformed (PM, BTI, MO); BUFF positive mention by Susquehanna saying it has quickly captured pet food market share (positive rated and $33 tgt)
· Restaurants; BLMN downgraded to Market Perform at Raymond James as believe the stock is fairly valued following its recent pop on activist Jana and do not see opportunities to unlock significant shareholder value from current levels; PLAY Q3 results seen as “ugly” by a few analysts and also lowered its year rev outlook, but some analysts think comp sales have bottomed (SunTrust noted Q3 beat driven by lower-than-expected G&A costs and taxes); BOBE reported in-line Q2 sales results
· Housing & Building Products; HD announced a $15B stock buyback plan and reaffirmed its view but set new long-term financial targets for total sales $114.7B-$119.8B and targets operating margin 14.4%-15.0% at its investor day today; RH reported 3Q results in line with its pre-announcement on 11/15 (note shares were up 238% YTD coming into the day)
· Casino, Lodging & Leisure; WWE initiated overweight and Street high $37 tgt saying the company is well positioned to monetize its video content; in cruise lines, Morgan Stanley upgraded CCL to equal-weight citing a survey of travel agents which suggested strong cruise demand in November (says top pick in industry remains NCLH)
· Guns and sporting goods stores; adjusted FBI NICS data was down (-12.4% YoY), as adjusted firearms background checks (ex: permit checks and rechecks) fell to 1,454,617 in November (U.S., excluding territories), which compares to NICS checks of -16.4% in October (revised from 17.0%) – but was up 29% MoM; shares ofAOBC, RGR, SPWH, active on the data
· Oil prices fall on inventory data; Brent and WTI slide after EIA data showing a crude drawdown that was on the larger side, but also product builds that were sizable. Product builds and rising refinery inputs amid swelling U.S. domestic production didn’t help sentiment.
· Weekly Inventory data impacts oil prices: overnight, the API reported that U.S. crude supplies dropped by -5.5M barrels for the week ended Dec. 1, but on the bearish side, posted a jump of 9.2M barrels in gasoline stockpiles, and 4.3M barrel build for distillates. This morning, the DoE reported a larger draw in crude stockpiles of -5.6M barrels vs. est. -2.5M, but like the API report, bigger builds for gasoline (+6.78M vs. est. 2.55M) and distillates (+1.66M vs. 1.1M)
· Utilities; group sharply lower yesterday; overnight in Ventura County CA, the fire blaze extends damage to around 55,000 acres in less than a day, destroying at least 150 structures and forcing at least 27,000 residents to evacuate according to reports; yesterday, shares of EIX declined as uncertainty on potential liabilities has the market taking a “sell first, ask questions later”
· Stock movers; BBG shares fell as priced 21M share secondary at $5.00 and agreed to a strategic business combination with Fifth Creek Energy Company, a portfolio company of NGP, in a transaction valued at approximately $649M; stocks generally lower on weak oil prices with drillers (RIG, DO, ESV), E&P (APA, NFX, PXD), services (WFT, SLB) lower; NFX was downgraded by Wolfe Research on valuation
· Solar/renewables; Roth Capital noted the passage of the Senate Tax Cuts and Jobs Act on Saturday (51-49 vote) took a toll on solar & wind stocks yesterday as the Senate bill includes multiple elements that could negatively affect renewable tax equity capacity, including (1) a cut in the corporate rate from 35% to 20%; (2) the passage of the Base Erosion Anti-Abuse Tax (BEAT) without exemptions for solar/wind credits; and (3) a reduction in the number of years the product tax credit (PTC) could be claimed from 10 down to four years (FSLR, SPWR, CSIQ, JKS)
· Large Cap banks pared recent gains, also hurt by a falling treasury yield as bond buying intensified ; big banks and regionals saw some mild profit taking after surging last week on hopes of the tax reform bill lowering corporate rate; HRB rises as Q2 revs top consensus and sees modest 2018 revenue growth; BRO was raised to buy at SunTrust and target to Street-high $63 from $52 on momentum, tax reform and valuation; MMC was downgraded to neutral at UBS; AIG was upgraded to hold with a $59 target at Deutsche Bank. The Financial Times reported the world’s largest banks are pushing back on the introduction of bitcoin futures, raising concerns with US regulators that the financial system is ill-prepared for the launch of the contracts as the value of the volatile cryptocurrency has soared.
· Pharma movers; MDGL shares surge as reported that MGL-3196 hits its primary endpoint, statistical significant reduction in fat (-36.3% vs. -9.6% placebo, P<0.0001) in its Phase 2b trial in 125 NASH patients; VKTX rallied in sympathy with MDGL as company is developing VK2809, which has the same mechanism as MGL-3196, for treatment of fatty liver disease; IRWD downgraded to neutral at Mizuho because they see no near-term catalysts, and say Linzess consensus estimates appear too high
· European Pharma: Bank America with several changes in the sector as they upgraded NVO to buy citing high visible growth from the GLP-1 franchise, while they downgraded SNY (on valuation) and NVS (on recent share strength, Cosentyx competition, and lack of catalysts)
· Biotech movers; attention turns to the upcoming ASH conference this weekend with plenty of news seen in CAR-T space with JUNO’s JCAR017 efficacy/safety update in NHL, BLUE bb2121 update in multiple myeloma, GLYC’s Phase I/II durability and survival update for GMI-1271; in news; NERV announced enrollment of its first patient in a Phase 2b trial of seltorexant (MIN-202) in patients with insomnia disorder; EDIT 1.97M share Spot Secondary priced at $26.00
· Managed care; HUM disclosed that the company expects to see higher growth rates for both individual and group Medicare Advantage (MA) in 2018. Management is scheduled to meet with investors in December and will discuss its MA growth in 2018; DVA to sell its DaVita Medical Group to UNH’s Optum in a $4.9B deal, bolstering its primary and urgent care services https://goo.gl/jvVZLS
· Healthcare services and suppliers; HSIC/PDCO were both downgraded to Underweight (and cut targets) at Morgan Stanley on evidence of AMZN disruption/says drivers of price discovery and customer/supplier consolidation challenge the economics of Dental distribution; WBA said it would buy 40% stake in Chinese pharmacy chain Sinopharm Holding GuoDa Drugstores Co Ltd, for $416M; TRHC 3M share Secondary priced at $27.50; ESRX was upgraded to Market Perform at Bernstein with $65 target based on improved upside risks from potential policy; HQY Q3 EPS and revenue tops consensus while lowers top end of year EPS view
Industrials & Materials
· Industrial & Machinery; distributors active after FAST November sales growth rate disappointed investors, as daily sales rose 15.4% (below some estimates as Stifel recently said the company would need to post a growth of 16.9% in order to hold the 2-year annual stack at 18.3%); OSIS shares fell after short seller Muddy Waters negative on name citing bribery concerns
· Aerospace & Defense; AVAV shares jumped as reported impressive FQ2 results with revenues and EPS both well above Street views with strength in sales was primarily due to strength in unmanned aircraft; LLL was upgraded to outperform at RBC Capital following its analyst meeting for its combination of a best-in-defense runway for operating margin improvement, near-term organic growth acceleration, and bolt-on M&A potential; KLXI rises on earnings
· Metals & Mining; industrial metals crushed yesterday, led by declines in copper on China slowing demand fears; steel sector active after the DoC found in favor of US steel mills who claimed that certain imports of flat steel from Vietnam were circumventing existing AD/CVD duties on Chinese steel (Citigroup said this ruling will not directly reduce near-term imports, but it sets an important precedent in terms of what is define to be “significant transformation” and also applying duties retroactively – said expect a small positive reaction for X, AKS, STLD and NUE in that order).
· Chemicals; TROX shares plunge over 20% early after the FTC challenge to Tronox’s $1.7B purchase of Cristal’s unit and Goldman’s downgrade of two companies (cut rating on CC and VNTR); JP Morgan called for a standalone value of $16 ex-Cristal for Tronox
Technology, Media & Telecom
· Internet; GOOGL said it is pulling YouTube from the AMZN Echo Show and Fire TV streaming devices in retaliation for Amazon refusing to sell many Google products; NFLX positive mention by Piper as firm said search trends suggests upside potential for both international and domestic subscriber in Q4; AMZN starts Prime membership in Singapore
· Semiconductors; AVGO reports earnings after the close tonight; AAPL suppliers declined (QRVO, CRUS, SWKS) after Taiwanese optical-lens maker Largan Precision warned that its December revenue would fall MoM, citing a drop in orders from unspecified customers, according to a Nikkei report; HIMX was mentioned negatively by Citron Research; the Philly semi index (SOX) is down over 7.6% from its all-time highs on 11/24 of 1,342
· Software & Hardware movers; HUBS shares defended at both UBS and SunTrust following negative comments from Citron Research yesterday; VEEV reported better earnings but shares declined as guidance was only in-line with forecasts; Financial Times reported AAPL will be the biggest beneficiary of the tax reform legislation now working its way through Congress as they will see as much as $47B slashed from its expected tax liability if Republicans push through the current plan