Friday, December 8, 17
Equity Market Recap
· Stocks opened higher and held gains throughout the session (although technology stocks pared gains, ending well off their best levels), after the November nonfarm payrolls showed strength in the economy by adding more jobs than expected, though inflationary pressures were muted as hourly earnings fell short of expectations. Now that an imminent government shutdown has been averted after the U.S. House passed a bill overnight to fund the government through December 22nd (was set to expire today), attention now turns back to the tax reform bill, where the House and Senate look to finalize a bill after both chambers recently approved their own versions. The two remain apart on several points (SALT and AMT issues along with the tax rate) and look to have an agreement to give to President Trump by Christmas.
· Back to the economic data today, the U.S. added more jobs than forecast in November, rising 228K vs. the 195K estimate while the unemployment rate held at an almost 17-year low of 4.1%. Wages did disappoint slightly, rising 0.2% vs. an expected 0.3%. There were also positive developments in Europe and Asia (Brexit divorce bill and China data). Markets will be closely watching central banks next week with the FOMC, ECB, BOE and SNB all expected to provide color on rates (it is widely anticipated for a 25 bps interest rate hike by the FOMC).
· This week the industrials and metals sector led market gains after financials, consumer discretionary and telecom led equity markets to record highs late last week. In November it was REITs that paced gains while Technology hasn’t been a market leader since October after falling the most this week in a bout of profit taking. Biotech stocks outperformed today ahead of the American Society of Hematology (ASH) Annual Meeting on December 9-12 in Atlanta. Wildfires in California ravage Southern California for a fifth day Friday (impacting insurance companies, utilities, wine companies and other natural growers). Lastly, Bitcoin was all the rage again this week, falling over 5% today, but trade in a massive range for the week, setting new all-time highs (according to Bloomberg, high was $17,027 on 12/7 and low $10,549 on 12/3, ending the week with a near 40% gain. This comes ahead of Bitcoin futures to begin full-day trading at CBOE on December 11th and at CME on December 18th – stay tuned!
· Jobs data better as nonfarm payrolls rise 228K, topping the 195K estimate (though prior month was downwardly revised to 244K from 261K), with unemployment holding near 17-year low of 4.1%; the participation rate 62.7% vs prior 62.7% while average hourly earnings rose 0.2% MoM below the 0.3% estimate, while prior month revised down to (-0.1%); Nonfarm private payrolls rose 221K vs prior 247K and above the est. 195K, while manufacturing payrolls rose 31K
· University of Michigan preliminary consumer sentiment survey for December fell to 96.8 from 98.5 prior month and was below the 99.0 estimate; Current economic conditions index rose to 115.9 vs. 113.5 last month while expectations index fell to 84.6 vs. 88.9 last month
· Oct. wholesale inventories fell (-0.5%) to $605.3B from $608.3B in prior month and worse than the expected (-0.4%) decline; Sept. inventories unrevised at 0.1%; Wholesale inventories excluding oil fell 0.5% in Oct.
· Oil prices rise on better China import data overnight (China’s crude oil imports rebounded from a one-year low to near a record in November) as shipments averaged about 9.05M barrels a day in November, a 23% jump from the previous month, according to Bloomberg. WTI crude ended the day up 67c or 1.18% to settle at $57.36 per barrel, supported by elevated geopolitical tensions and the data. Geopolitical tensions, including President Donald Trump’s decision to recognize Jerusalem as the official capital of Israel and the death of former Yemeni President Ali Abdullah Saleh, also helped to lift prices. For the week, oil prices actually slipped about (-1.7%)
· Gold prices declined on Friday, falling -$4.70, or 0.4%, to settle at $1,248.40 an ounce, dropping for a third straight week and to the lowest since July 20. For the week, gold prices slumped -2.6% as strength in the U.S. dollar and stocks, and a recent rally in bitcoin drew attention away from the safe-haven investment.
Currencies & Bonds
· The U.S. dollar advanced again, bringing its 5-day rally total to above 1% for the dollar index (DXY), briefly topping the 94 level for the first time since Nov 21st following the stronger jobs report and expectations of a rate hike by the Fed next week. The dollar index jumped to highs of 94.08 after the jobs report, but pared gains as average hourly wage data disappointed. The Canadian dollar hits a 1-week low while the greenback posted gains against the yen and euro. The British pound fell below $1.34, down from $1.3475 late Thursday and overnight highs of 1.3520 following a breakthrough in Brexit negotiations. Bonds dropped on the day as the 10-year yield ended up 2 bps at 2.38% and the 2-yr 1.79%, but both little changed on week.
Sector News Breakdown
· Consumer movers; UNFI Q1 revs beat on in-line EPS and boosted its year outlook; PRTY 10M share Spot Secondary priced at $12.90; gun stocks lower initially as AOBC reported Q2 results that beat expectations, but provided guidance that was significantly lower than the consensus as high inventory levels in the channel and a heavy promotional environment continue to pressure firearms companies (RGR, SPWH); in leisure, THO was downgraded to hold at Argus saying shares seem over overvalued at the $145-$150 price level, but still likes the company
· Oil prices rise on better China import data overnight (China’s crude oil imports rebounded from a one-year low to near a record in November). In stocks news, the Baker Hughes (BHGE) weekly rig count showed total rigs rose 2 rigs to 931, with oil rigs up 2 at 751 and gas rigs steady at 180, miscellaneous rigs unchanged; DOV announced it will pursue a tax-free spin-off of its Wellsite business to shareholders, creating a separate public company no later than 2Q18
· Refiners; Bank America downgraded HFC to Underperform citing full valuation and raised its price target to $45 from $36 to reflect a lower corporate tax rate while downgraded DK as well to underperform- the firm said ANDV and VLO have the most upside in absolute terms, and any sector pullback on margins could offer a “particular” buying opportunity. U.S. refining outlook has improved given increased exports and wider crude spreads and sees a “reversion to a more traditional seasonal pattern in 2018”
· Frac sand sector; bullish initiation for group out of Seaport Global saying the sand sector is “grossly misunderstood” as Permian supply additions “actually increase the competitive barriers to entry” for the whole industry; initiated buys on FMSA (PT $8), HCLP (PT $17), SLCA (PT $59), SND (PT $15) and reiterates buy on EMES (PT $12)
· Banks have enjoyed a nice rally on the tax reform hopes coming to fruition and as bond yields rise ahead of an expected rate hike by the FOMC next week which can help margins – weak trading revenue comments this week from BAC, C and JPM at conferences pared some of the recent gains; in stock news today, QD shares bounced (though shares down over 50% in about a month after reports a few weeks back of China suspension on new micro lenders); WFC slipped from highs after President Trump said fines for their “bad acts” may be increased
· Insurance; California wildfires could mean over $27 billion in damages to homes, CoreLogic says. More than 86,000 homes in Southern California are at risk as wildfires rage through Southern California, according to a CoreLogic analysis. Of that total, 16% are at significant risk of damage and fall into “high” and “extreme” categories; also in insurance space, WSJ reported that VOYA is in advanced negotiations with Apollo Global to sell about $50B of retirement-income annuities
· Exchanges; Barclay’s noted that Bitcoin futures will begin full-day trading at CBOE on December 11th and at CME on December 18th, marking the first foray into crypto-assets for the traditional exchanges (NDAQ announced a planned 2018 launch while ICE is on the sidelines for now). The firm boosted its target to $155 for CME (from $149) and $114 for CBOE (from $105) as estimates moved slightly higher due to increasing optimism on volumes and using an expanded P/E to account for more optimism around tax reform
· REITs; JP Morgan cut its 2018 estimate for average same store revenue growth to 2.5% from 2.7% as the analyst isn’t as optimistic about apartment REIT stocks as he was a few months ago (overweight ratings on AVB and ESS, and neutral ratings on AIV, CPT, EQR and UDR); at KBW Inc. upgraded AMH and GPMT to outperform saying investors should take a selective approach with real-estate stocks headed into 2018 and downgraded DHI and BXMT
· Pharma/Managed care movers; PRGO was upgraded to buy at Argus reflecting improving results, a promising pipeline, efforts to pay down debt, and valuation; MNOV said it received positive top-line results from the company’s clinical trial of MN-166 in amyotrophic lateral sclerosis; STDY said the FDA will not require any additional clinical trials to support its NDA resubmission for Trevyent for the treatment of pulmonary arterial hypertension (PAH), sending shares higher; LJPC downgraded to underweight at JP Morgan and cut tgt to $20 as believes consensus LJPC-501 pricing and sales estimates are at risk; ANTM announces $5B stock buyback; IPXL said the FDA approved generic version of GSK’s heart failure drug; TEVA said may cut up to 10K jobs globally
· Biotech movers; ALXN rises as hedge fund Elliot Management, which has built a stake in Alexion Pharmaceuticals, is urging the company to take more action to boost its stock price, including exploring a sale, the New York Times reported https://goo.gl/tx6Kov; GILD announced acquisition of Cell Design Lab for up to $567MN as continues to build a sustainable cell therapy business after its recent purchase of Kite as well https://goo.gl/8vJEMq ; DNLI 13.888M share IPO priced at $18.00; all eyes on the American Society of Hematology (ASH) Annual Meeting on December 9-12 in Atlanta with results expected from (ABBV, AMGN, BLUE, CELG, KPTI, REGN and others); CDXC active following research data on vitamin nicotinamide riboside (NR) in a mouse model of Alzheimer’s disease (AD) published in the journal Nature
· Medical devices & Equipment; BSX was upgraded to strong buy at Needham; KTWO was downgraded at Needham saying it is unclear when the slowing spine market will start to recover, and no longer expects the company to produce significant upside to consensus estimates
· Healthcare services and suppliers; EVH said that it terminated its agreement to purchase Premier Health as the two parties were unable to reach terms on the related party agreements; COO shares dropped slight beat for Q4 EPS/revs, but midpoint of year guidance fell short of estimates; Reuters reported CVS expects the DOJ will handle the antitrust review of its planned $69B acquisition of AET
Industrials & Materials
· Industrial & Machinery; MMM slipped early after JP Morgan said valuation overstates the fundamental profile of the story, adding that the franchise value at the company remains solid; JBT was downgraded to neutral at Bank of America on valuation; GGG announced a 3-for-1 stock split and boosted its dividend; Goldman Sachs said it was optimistic on multi-industry as bottom-up capex remains positive while tax reform could spur investment, though wouldn’t own the group indiscriminately and prefers high quality cyclicals (upgraded IR and cut FLO and JCI); HON authorizes up to $8B in stock buyback
· Transports/Auto movers; MTOR upgraded to overweight at Piper after deep dive into 12 truck & auto stocks in the context of BMW’s “ACES” disruption framework; SYY said it placed an order for 50 TSLA electric semi-trucks; has been a decent week for Transports, bouncing back over 2% after pulling back from record highs late last week, led by airlines; UAL metrics out overnight and announced buyback plan
· Metals & Mining; strength in industrial metals the last few days; steel names getting bounce on positive ruling earlier in the week as analysts said the Vietnam steel circumvention decision seen as “very positive” for the domestic steel industry and related stocks (JPM upgraded AKS yesterday on news); better trade data overnight out of China also helping the group today, helping lift shares of CLF, NUE, X; gold miners down on the week with gold falling to lowest levels since July (ABX, GG, AEM, NEM all down on the week)
· Aerospace & Defense; HXL agreed to acquire the aerospace and defense business of Oxford Performance Materials; financial terms are not disclosed; Citigroup initiated the Air Leaser sector saying current demand fundamentals for aircraft leasing are strong, but has neutrals on AER, AL and AYR and a sell on FLY; BA touched another record high today
· Packaging sector; KeyBanc downgraded BLL and SLGN to Underweight on concerns about industry fundamentals and valuations and are below consensus for both in 2018; both have significant leverage such that M&A/share repurchase catalysts will likely be limited in the next few months, and both are trading at close to all-time high multiples
Technology, Media & Telecom
· Internet; a day after online travel names fell on an analyst downgrade (PCLN, EXPE cut at MKM), TRVG was upgraded to buy at Deutsche Bank as analyst day boosted confidence that the worst is likely behind it with regard to bid reductions on the platform; CVNA was downgraded to hold at Deutsche Bank on valuation
· Semiconductors; VECO shares fell after China’s Fujian High Court ruled that Veeco Shanghai must “stop importing, making, selling and offering to sell Veeco EPIK 700 model MOCVD systems” in China; SLAB will acquire SIGM for $7.05 per share in a cash transaction valued at approximately $282M https://goo.gl/WG7DX6 ; SYNA was upgraded to perform at Oppenheimer saying near-term downside is limited and negative catalysts understood; OLED announced that is has signed a multi-year portfolio license and material supply agreement with BOE Technology Group
· Software; in video games, NPD Group, Inc. released video game sales for November that showed was up +27% (vs. Stifel est. +11%) and all categories posted double-digits growth, led by the Call of Duty franchise, the Nintendo Switch, and current gen hardware (EA, ATVI, TTWO gamers); Piper noted video game software sales were up 9% y/y; MSFTtgt raised to Street high $106 at Evercore; CLDR reported results above consensus expectations as billings showed upside; FSCT another stock gainer after quarterly revenue and operating profitability in line with expectations and showcased strong billings upside
· Optical sector; FNSR mixed Q2 results (EPS miss/revs beat), while guidance for next quarter fell short of consensus while CEO said he’s not feeling “warm and fuzzy” about demand from China after meeting with his company’s top customers; CIEN was downgraded to neutral at Piper after earnings yesterday as believe the growth objectives (up 5-7%) could be challenging