Tuesday, December 12, 17
Equity Market Recap
· Outside of outperformance in the Dow Industrial (due to a few big gainers), major averages were little changed ahead of the FOMC policy meeting tomorrow, as the S&P 500 and Dow both closed at record highs again. The Dow Industrials were powered higher by BA (stock buyback), GS (record all-time highs with financials surge on tax reform hopes), and VZ (analyst upgrade). Tech stocks underperformed with another decline in semiconductors, while financials broadly outperformed. Stocks pared gains early afternoon after Senator Rand Paul said in a tweet, he’ll oppose any “budget-busting” spending bill (regarding deficit spending), but in another tweet later he did say tax cuts were good (which pared the market pullback). The U.S. dollar advanced following the stronger producer price (PPI) reading and ahead of the two-day FOMC meeting that is expected to produce a 25 bps hike tomorrow. Bonds rebounded early afternoon after early weakness, while oil prices declined. The rotation to financial companies and especially regional and money-center banks continued as several analysts have said the positive effects from the tax cut are not priced in. Still a busy calendar this week: Wed Dec 13 – FOMC decision (2:00 PM EST) and press conference (2:30 PM EST). On Thursday Dec 14, the Swiss National Bank (SNB) rate decision at 3:30 PM EST, Bank of England (BOE) 7:00 AM EST and the European Central Bank (ECB) rate decision at 7:45 AM EST and the Draghi press conference at 8:30 AM EST
· The producer price index (PPI) in November surged 0.4% for the third straight month, slightly above the 0.3% estimate while the PPI core reading (ex: food, energy and trade) also rose 0.4%, coming in above the 0.2% estimate. The increase in the PPI pushed the 12-month rate of wholesale inflation to 3.1%, the highest level since January 2012. The yearly rate of core inflation climbed to 2.4%, the highest mark at least since mid-2014.
· The U.S. government ran a budget deficit of $139 billion in November, the Treasury Department said Tuesday, up just 1% from the same month a year ago. Spending rose 3% in the month, and revenues climbed 4%.
· The index of small-business optimism from the National Federation of Independent Business (NFIB) rose 3.7 points to 107.5 in November, the second-highest reading in it 44-year history and easily topped the 104.4 consensus
· Energy prices pulled back following strong gains yesterday on news that a major North Sea pipeline has been shut down. A crack in the Forties pipeline, which carries about 40% of North Sea crude across land for processing at a refinery in Scotland, was discovered last week sending Brent to 2/12 year highs on supply disruption fears. Today, WTI and Brent both gave back gains on profit taking and ahead of inventory data tonight (API) and tomorrow (DOE). WTI crude declined -85c to settle at $57.14 per barrel (high $$58,56 and low $56.85), while Brent oil drops $1.35, or 2.1%, to settle at $63.34 per barrel (off highs $65.82)
· Gold prices down to near 6-month lows, falling to its lowest finish since July 17 as prices dropped -$5.20, or 0.4%, to settle at $1,241.70 an ounce ahead of expected Fed rate hike tomorrow. It was the 3rd straight session decline for gold propelled lower by a stronger dollar and economic data. All eyes on the FOMC tomorrow about future pace of rate, where a 25 bps hike is assumed. Gold was down about 2.6% for last week, for a third-straight weekly loss (up about 8% YTD).
· The dollar index (DXY) advanced, adding on to last week’s gains to trade back above the 94 level (up about 0.3%) after a strong inflation reading this morning (PPI) further boosted the case for the FOMC to raise rates further (rate decision tomorrow and CPI report). The Japanese yen was little changed around 113.60, while the euro sank; the British pound slipped to around 1.33, its lowest levels in about 2-weeks. Bitcoin prices keep chugging along, topping the $17,000 level again on the second day of futures trading.
· Bonds declined, sending yields higher, but pared losses in the afternoon as stocks slipped following comments out of Washington. The yield on the benchmark 10-year topped 2.41% earlier and the 2-yr traded above 1.74% following robust inflation data (PPI) and ahead of tomorrow’s FOMC meeting where a rate hike of 25 bps is widely expected; the monthly CPI inflation report is also expected tomorrow. As the “wind” came out of the “sails” of stocks late day, money rotated back into bonds
Sector News Breakdown
· Retailers; COLM downgraded to neutral from buy at Goldman Sachs saying valuation now more appropriately reflects the improving fundamentals; URBN said in 10-Q filing 4Q comparable retail segment net sales are mid-single-digit positive thus far; MAT was downgraded to Neutral and estimates cut at Monness Crespi; AAP tgt raised to $120 at Morgan Stanley saying its transformation beginning to take shape with new management steering in the right direction
· Consumer Staples; in food, CAG upgraded to neutral at UBS based on improving baseline sales in CAG’s high margin frozen biz, while the firm also positive on PF as it remains a top SMID cap pick for 2018 (but trimmed estimates); one analyst noted recent price checks showed Whole Foods as cut prices even more in December (grocers – KR); COTYupgraded to buy at Citigroup and upped tgt to $21 citing credibility in the management team improving as core sales growth accelerates and margins expand; CASY was downgraded at Raymond James as Q2 comp sales missed their recently lowered expectations, while in-store margins also missed their model
· Restaurants; Stifel said they believe the pizza segment has seen softer sales 4QTD, and lowered domestic system SRS estimates for PZZA to -1.5% (from +1.0%, Street -0.7%) andDPZ to 4.7% (from 5.7%, Street 6.9%) and cut tgt on DPZ from $235 to $225
· Housing, Lodging & Building Products; NCS 7.15M share Spot Secondary priced at $19.55; DHI was downgraded at Wedbush as firm noted potential catalysts, but says believe they are fairly reflected in the share price; Hyatt (H) 2.7M share Block Trade priced at $71.00
· Oil prices active again today, paring some recent gains early after jumped yesterday following the reports of a cracked oil pipeline from the North Sea. Brent outperforms again after jumping 2% Monday on reports that a major North Sea pipeline has been shut down. A crack in the Forties pipeline, which carries about 40% of North Sea crude across land for processing at a refinery in Scotland, was discovered last week. UK gas prices for January soared by as much as 20% after an explosion at Austria’s main import hub added to fears of tightening supplies, with the shutdown of the key North Sea. . The station is owned by Gas Connect Austria–a subsidiary in which OMV holds 51%–and is one of Central Europe’s most important gas hubs
· E&P movers; CRZO said it is selling about 24,000 acres in Eagle Ford Shale, which had 3q production of 3,400 boe/d, to unnamed seller for $245M in cash; OAS 32M share Spot Secondary priced at $9.55, raising cash after it reports Delaware Basin purchase for $946M, buying 20,300 net acres consists of about $483M cash, 46M shares from Forge Energy (also boosted production outlook); Northland said deal has implied multiple of ~$38,200/acre; sees this as a positive read-through for Delaware Basin peers including CPE, CRZO, FANG, LLEX, MTDR, PE, REN, RSPP, WPX
· Credit Suisse initiate coverage on 38 E&Ps along with CVX and XOM: top E&P picks: MRO, CLR, APC, XEC, XOG…Underperform ratings: HES, CHK, SRCI, QEP…and outperforms:APC, MRO, NBL, DVN, CDEV, XEC, PE, PXD, RSPP, VNOM, CLR, XOG, SM, WPX, EQT, RRC
· Utilities; SRE and Oncor say the FERC has authorized the acquisition of Energy Future Holding, the indirect owner of ~80% of Oncor; ETR was upgraded to buy at Bank America citing the pullback in the shares; UTL 600K share Spot Secondary priced at $48.30; EIX falls after its unit said California wildfires investigation to include role of its facilities
· Banks added to recent gains alongside strength in specialty/consumer finance names as tax reform hopes continue to fuel the sector; UBS said they adopt an incrementally positive view of bank stocks despite the recent rally as tax reform should meaningfully increase earnings power (the firm upgraded STI to buy and both RF/MTB to neutral and downgraded USB to neutral); 52-week highs for financials BAC, GS, BRK/B, BLK, RF, AFL, PNC, STI, DFS, WFC, CBOE
· Asset managers; AB prelim Nov AUM increased 1.3% to $549B from $542B at the end of October; APAM prelim Nov AUM totaled $115.6B; BEN Nov prelim AUM of 753.2B compared to $750.7B at October 31, 2017; CNS Nov prelim AUM of $62.6B was an increase of $986M from October 31, 2017 due to market appreciation of $1.3B and net inflows of $7M; IVZ prelim Nov AUM of $937.6B was an increase of 1.0% MoM driven by favorable market returns, foreign exchange, and PowerShares QQQs inflows; LM prelim Nov AUM was about $763B with inflows in fixed income of $1.4B partially offset by equity outflows -$1.0B; TROW prelim AUM was $991B
· REITs; mall REITs were active (GGP, MAC, SKT, TCO) after Unibail agreed to buy Westfield for $16B https://goo.gl/axbWXn; AIV was downgraded to outperform from strong buy at Raymond James following updated supply analysis specific to Aimco’s competitive submarkets; IRM to buy U.S. operations of IO Data Centers LLC for $1.32B, including land and buildings in Arizona, New Jersey and Ohio, and announces debt offering https://goo.gl/mKvcbZ
· Specialty lending and finance; Credit Suisse the latest to remain positive on sector saying they view tax reform, in its current state, as highly beneficial to U.S. consumer finance companies as most companies are full U.S. tax payers and any increases in consumer confidence from more cash flow could lead to more consumer borrowing, driving faster revenue growth and improved credit quality (said favorites to benefit from tax reform are SYF, DFS, OMF, CIT, SC, SLM, AL)
· Pharma and Managed care; AET removed from Citigroup focus list and added HCA (which it also upgraded to buy today); PTI shares surge following positive phase II results across its three cystic fibrosis (CF) pipeline programs
· Biotech movers; more highlights on final day of American Society of Hematology (ASH) conference: JUNO was downgraded at Wells Fargo following data update for its cell therapy platform including CD19 CAR-T therapeutic JCAR017; VRTX and CRSP said that the companies will co-develop and co-commercialize CTX001, an investigational gene editing treatment; BLUE and BPMC both announced stock offerings overnight after share gains post ASH data; GLYC shares surge on news of positive results from early stage trial for leukemia treatment
· Hospitals and services; Citigroup upgraded shares of hospital operators HCA, THC and UHS to buy as the firm takes a more constructive view of the hospital space, as they expect a better volume backdrop in 2018 with stabilization and some level of “bounce” off a reset baseline this year post the rollover of reform (also notes low sentiment/expectations, discounted valuation, and favorable “external” considerations such as no AMZN risk, tax reform – for attractive upside)
· Medical devices & Equipment; MDT was upgraded to buy at Argus saying after a long period of underperformance, they see better opportunities ahead; ABT was upgraded to outperform at BMO Capital and raise tgt to $65 placing it on Top Picks list; DVA upgraded by another analyst following recent deal, raised to outperform at Baird
Industrials & Materials
· Aerospace & Defense; JP Morgan said fundamentals for the sector remains solid into 2018 and valuations are still reasonable vs elevated multiples across the market, but expects to see more moderate returns vs 2017 as the group outperformed this year. JP Morgan said its top aerospace picks are BA and BBD/B, while expects ARNC to “become more interesting” with new leadership; as for defense, the firm upgraded NOC to overweight from neutral, cuts RTN to neutral from overweight and downgrades GD and TDG to underweight from neutral; in other news, BA raised its dividend by 20% and set a new $18B stock buyback plan; HXL issues 2018 EPS guidance of $2.80-$2.94 on sales $2.1B-$2.2B, below the $2.97/$2.18B estimate
· Metals & Mining; gold miners lower again ahead of FOMC meeting tomorrow – expected rate hike – ABX, AEM, GG lower with gold; Morgan Stanley issued an updated metals & bulks commodities price deck with a more constructive 2018 outlook and upgraded FCX to equal-weight and tgt up to $14 on higher copper prices and increasing likelihood of a resolution in Indonesia. Firm also upped tgt on AA to $55 (still his top pick with 33% upside) as now forecasts upside to spot aluminum in 2018 and copper/zinc prices remaining near current levels; Cowen said CSTM exposure to strong secular growth of aerospace and automotive markets and attractive valuation make it a top pick for next year
· Industrial & Machinery; NAV was upgraded to buy at Stifel as views the company’s new products as promising and believes the shares should continue to rise over the next year (raised the tgt to $50 from $45); TSLA rises a 3rd session, rising another 2.3% after PepsiCo orders 100 Tesla semi-trucks in biggest deal since launch
Technology, Media & Telecom
· Semiconductors; NVDA shares fell early after CNBC interview with Chamath Palihapitiya of Social Capital says saying artificial intelligence will never be a single vendor environment in three-to-four years (talked about Nvidia in regards to short ideas in the space). Note semiconductor stocks have slipped over the past two weeks largely to late-year profit taking (semi’s posted a 37% gain in 2016 and is up another 37% YTD on a combination of upside growth and accretive M&A); CREE outperforms after Deutsche Bank said earlier street underappreciates the silicon carbide substrate opportunity for Cree; AMD and NVDA fell after Susquehanna said the two rivals’ graphics chips could see lower demand from cryptocurrency miners in 2018
· Video gamers; Goldman Sachs said the recent selloff in video game stocks has largely been due to positioning around tax reform and doesn’t reflect any change in fundamentals for the group, adding that there are attractive entry points across the firm’s coverage; upgraded ATVI to buy from neutral, PT to $73 from $67 as sees accelerating earnings growth over next 2-3 years while EA removed from America’s Conviction List, remains buy and PT $136; citing fewer n/t catalysts
· Software sector; JP Morgan made several rating changes: the firm said they cut a host of software stocks as “exceptional performance” in 2017 is unlikely to repeat next year and adds that several stocks significantly outperformed S&P 500 and stand within 15% of JPMorgan’s price targets: ADBE, CUDA, CHKP, FTNT, GDDY, MIME, MODN, NEWR, PTC, QLYS, QTWO, RNG, NOW, SSNC and WEB downgraded to neutral from overweight; CSGP, IMPV, TYPE and SNPS downgraded to underweight; said top picks: LOGM, FIVN, PANW, andTIVO.
· Media & Telecom movers; VZ upgraded to buy with a $61 tgt at Nomura/Instinet; ZAYO upgraded to overweight at Morgan Stanley citing REIT conversion announcement, and improving revenue trends; CMCSA is no longer bidding for entertainment assets from FOXA according to an afternoon report, which could leave DIS as the sole bidder remaining. “We are no longer engaged in the review of those assets” Comcast said https://goo.gl/3bEPjX