Wednesday, December 13, 17
Equity Market Recap
· Markets end higher as the FOMC concluded its two-day meeting in Washington with a well telegraphed 25 bps hike (to range of 1.25%-1.50%) while the median estimates show three hikes in 2018, two in 2019. Overall, U.S. stocks added to the recent gains leading into the meeting, as the Dow Industrials extended its winning streak to 5-day (and closed at record highs for a 4th straight day), though the S&P 500 slipped into the bell to close lower, snapping its 4-day win streak. Treasury yields and the U.S. dollar dropped incrementally after the Fed’s interest-rates decision and amid a “softer” inflation report this morning in the CPI. Precious metals/gold miners surged as gold and silver got a boost from November’s U.S. inflation data/the FOMC decision. Industrials and Machinery stocks led today’s gains, with CAT, MMM, BA rising. In Washington, the House and Senate GOP leaders reached an agreement on sweeping tax changes that paves the way for final votes next week, the Associated Press reported. European stocks slipped from a five-week, led by weakness in Italian markets. Tomorrow, four European central banks meet: Norway, Switzerland, the BOE, and the ECB. Late day, the UK government was narrowly defeated in a key vote on its Brexit bill after a rebellion by Tory MPs. Financials declined after 2-weeks of gains on profit taking/as bond yields tumble. In tax news: Democrat Doug Jones won Alabama’s Senate election Tuesday night, defeating Republican Roy Moore. That has raised concerns that it will be harder for the Republicans to push through major overhauls.
FOMC Meeting recap
· Federal Reserve officials followed through with an expected interest-rate increase and raised their forecast for economic growth in 2018, even as they stuck with a projection for three hikes in the coming year. The Fed omitted prior language saying it expected the labor market would strengthen further. Instead, they said monetary policy would help the labor market “remain strong.” The 7-2 vote to hike, the Fed’s third this year, raises the benchmark lending rate 25 bps to a range of 1.25%-1.5%. Adding to policy tightening, the Fed also confirmed that monthly roll-offs from the central bank’s balance sheet would step up, as scheduled, to $20 billion from $10 billion beginning in January. Fed median shows funds rate 3.1% at end-2020 vs 2.9% in Sept. and leaves estimate of longer-run funds rate at 2.8%. The Chicago Fed’s Charles Evans and the Minneapolis Fed’s Neel Kashkari dissented. Forecasts for GDP were revised up, particularly for next year, and the unemployment rate forecast fell. Core PCE price forecasts were unchanged.
· Oil prices reversed earlier gains, with WTI crude oil losing 54c, or 1%, to settle at $56.60 per barrel (lowest in a week), down from prior highs of $57.83 per barrel following mixed inventory data as crude stockpiles fell more than expected, but gasoline jumped. The EIA said weekly crude oil stockpiles fell -5.117M barrels vs. an est, -2.894M barrel draw, while gasoline a big build of 5.66M vs. est. 2.3M and distillates a surprise draw of -1.37M vs. build est. 1.2M. Overnight, the API said U.S. crude supplies dropped -7.4M barrels for the week ended Dec. 8, a rise of 2.3M barrels in gasoline stockpiles, while inventories of distillates rose 1.5M barrels
· Gold prices ended higher (closed prior the FOMC announcement), rising $6.90, or 0.6%, to settle at $1,248.60 an ounce and snapped its four-day losing streak as the dollar slid. It appeared selling abated as prices touched 6-month lows yesterday ahead of the anticipated interest rate hike by the Fed (which they followed through with today). Gold futures have dropped three weeks in a row with last Friday’s result and on track for another weekly decline.
· The U.S. dollar slipped after jumping the last two-weeks on tax reform bill passage hopes and expectation for a Fed rate hike today. The dollar extended losses as the FOMC statement came in pretty much in-line with expectations and forecasts were also on par with views. The move appeared more on profit taking given the jump in the greenback the last few days, helped by a softer inflation reading earlier today as well (the CPI report). News that Democrat Doug Jones defeated Republican Roy Moore in Alabama’s U.S. Senate election, potentially endangering buck-boosting tax reform, also weighed on sentiment. The dollar sunk vs. the euro and yen while the British pound falls off session highs as parliament votes to change Brexit plan. More volatility in Bitcoin, falling as low as $15,752. Brazil’s real erased gains after local media reported that Congress will postpone a vote on pension overhaul until February.
· Bonds erased losses late day as yields sank, following the FOMC meeting, with the 10-yr yield falling around 5 bps to trade below 2.36% (form highs above 2.41% yesterday). Earlier, bond yields rose ahead of the rate decision, and after inflation data. The 2-year yield slipped to 1.78% from highs above 1.84% early yesterday.
· Consumer prices (CPI) for November advanced 0.4%, in-line with estimates, but the core reading (ex: food & energy) rose 0.1%, below the 0.2% expected increase, while YoY increase came in at 1.7%, below the 1.8% forecast; Three-quarters of the total CPI gain reflected higher gas prices; the yearly rate of inflation as measured by the CPI rose to 2.2% from 2%
Sector News Breakdown
· Retailers; RL downgraded to underperform and $80 tgt at Bank America saying they are skeptical that sales will inflect positively in the near term, and think margin beats are waning; Goldman Sachs with specialty retail call as estimates increased across coverage universe amid “better early reads into holiday; Boosts EPS ests. on: M, JWN, KSS, TJX, ROST, BURL, AEO, LB, URBN, CRI, GOOS, HBI, RL; Lifts PTs on M, JWN, KSS, TJX, ROST, BURL, AEO, LB, URBN, CRI, RL, GOOS; 52-week high for Dow component NKE; TGTannounced it has agreed to acquire Shipt, Inc., a leading online same-day delivery platform, for $550M in cash
· Auto sector; AXL 10.7M share Block Trade priced at $17.00; ORLY upgraded to outperform at RBC Capital saying 2018 set-up remains favorable with building demand from mild weather, easing comps headwinds, and an attractive relative valuation
· Consumer Staples; defensive staples jumped early, with early gains in PG and KO in the Dow; LMNR cut is FY18 EPS and revenue outlook below estimates saying excessive heat in the Arizona desert slowed fruit sizing and delayed timing of the lemon harvest
· Restaurants; positive mention at Bernstein today saying that steady operating cash flows, recognized brands, and the opportunity to slow growth CapEx and OpEx in service of higher free cash flow, make restaurants attractive acquisition targets (highlighted CMG, HABT, DFRG, FOGO, CHUY and PBPB); HABT initiated buy and $13 tgt at Maxim as are cautiously optimistic that same-restaurant sales will stabilize in 2018 after a three-year period of deceleration
· Casino, Lodging & Leisure; in lodging, JP Morgan upgraded STAY to overweight citing recent underperformance, a low valuation, and depressed expectations, while downgradedCHH to underweight from neutral saying the recent outperformance is overdone; HT was downgraded to underweight at Barclay’s
· Inventory data: bigger headline crude inventory drawdowns from the API and DOE this week; the EIA said weekly crude oil stockpiles fell -5.117M barrels vs. an est, -2.894M barrel draw, while gasoline a big build of 5.66M vs. est. 2.3M and distillates a surprise draw of -1.37M vs. build est. 1.2M. Overnight, the API said U.S. crude supplies dropped -7.4M barrels for the week ended Dec. 8, a rise of 2.3M barrels in gasoline stockpiles, while inventories of distillates rose 1.5M barrels
· OPEC said that global oil markets won’t rebalance until late next year after boosting forecasts for supplies from the U.S. and other rivals. In its monthly report, OPEC raised its outlook for non-OPEC supply in 2018 by 300,000 barrels a day, as its projections for American output caught up with those of the U.S. government.
· Utilities; Morgan Stanley affirmed preference for diversified utilities, its neutral view on electric utilities and “guarded” stance on gas utilities; favors stocks with strong balance sheets, offering cash flow and earnings resilience after potential tax reform; Upgrades ES, AEP to overweight and downgrades AEE to underweight; says companies seen weakest on credit metrics post-tax reform could need incremental equity to maintain ratings; sees most risk for ETR, DUK, FE, PPL, SO; sees new nuclear project being significant overhangs for SCG and SO heading into 2018
· Large Cap banks pared recent gains after FOMC decision and after rising the last few weeks as several analysts have noted the positive implications for the industry on tax reform passage; AMTD 27.7M share Spot Secondary priced at $51.50; STI, STT, MS, ZION the latest bank to get upgraded (by KBW today) on positive implications of tax reform
· REITs; IRM 14.5M share Secondary priced at $37.00; EQIX added to the US1 list at Bank America based on strong secular demand trends, exposure to expanding international markets and an attractive valuation; TCO upgraded to market perform at BMO Capital as think the flurry of M&A activity, activist involvement, and speculation in the mall sector is likely to keep shares elevated; Apartment REITs at BTIG, upgraded ESS to buy on improving visibility on top-line growth in the second half of 2018 – as for sector, says faces an improving supply picture in the second half
· Payments; Finance and Lending; PAY Q4 EPS with modest revenue beat/EPS beat, but guidance missed expectations; TREE guided FY revs $770M-$790M vs. est. $757.45M;PYPL tgt raised to $85 at BMO Capital as is upbeat about PayPal’s November decision to sell its loan portfolio to SYF and thinks that the move will be less dilutive to PayPal’s earnings than Street expects
· Pharma & Biotech movers; LLY said it will continue to work to reduce costs. Sees generic competition for Cialis as early as September; ICPT initiated new buy and $106 tgt at Deutsche Bank as believes Ocaliva safety concerns have presented a buying opportunity; several secondaries priced: BLUE 3.243M share Secondary priced at $185.00; BPMC3.704M share Secondary priced at $81.00; FATE 9.525M share Spot Secondary priced at $4.20; in other news, STML said a trial of a treatment for acute myeloid leukemia met its main goal
· Life Science tools/equipment movers; JP Morgan with several changes in sector, as top picks include DHR and TMO , while also positive on shares of A, ILMN, HOLX, XRAY; firm upgraded XRAY to overweight and tgt to $75 (from $65) based on turnaround potential w/new mgmt. and the favorable end market conditions; firm also downgraded GHDX andARAY to underweight
Industrials & Materials
· Industrial & Machinery; CAT said November rolling 3-month retail machine sales rise 26% vs Oct. 19% rise, Sept. up 13%/North America machine sales up 12% after rising 7% in Oct.; HON boosted its Q4 organic sales growth guidance to 7%-8%, but EPS view for the year below views at $7.55-$7.80 vs. est. $7.79 on sales $41.8B-$42.5B (est. $41.8B); BAtrades to another record high, leading the Dow Industrial Average, taking up shares of ARNC as BA a large customer; AYI shares fell after Baird said indicated that lighting volume in fiscal 1Q was flat y/y, slowing from +3% QoQ
· Transports; index outperformed early on broader market gains, led by truckers, freight and rails while airlines lagged; GWR reported traffic rose 8.5% in November to 21,249 carloads/same-railroad traffic during the month was down 2.8% to 243,609 carloads
· Chemicals; WLK resumed buy at Deutsche Bank saying it’s still not too late to own even after 80% YTD rally and with a valuation that is in-line with the peers; HUN was upgraded to overweight at JP Morgan saying shares offer a good risk/reward balance because of a strengthening of Huntsman’s balance sheet from asset sales, healthy Urethane Chemical business conditions.
Technology, Media & Telecom
· Optical movers; FNSR soars as AAPL awards the company $390M to ramp up chip production, while shares of rival LITE declined on the news as both companies make vertical-cavity surface-emitting lasers, or VCSELs, which help enable 3D-sensing capabilities and facial recognition (other movers on the news, AAOI, ACIA, IIVI) – note FNSR late day clarified saying the $350M referred represents anticipated future business between the companies over a period of time.
· Internet; JD was resumed buy and $48 tgt at Stifel calling it one of “two big winners” in a China e-commerce market estimated to be headed for $1 trillion in sales by 2019; MELItgt raised to $330 at Piper based on an analysis of its comparative market cap as a percentage of total addressable market.
· Hardware and components; WDC and Toshiba reached an agreement to resolve their legal dispute/WDC also provided positive updates to its Dec-qtr and FY18 outlook; TIVOdowngraded to neutral at FBR on increased concerns around a potential Comcast resolution, the poor optics of a post-ROVI/TIVO merger decline in revenues in 2018/2019; AAPLpositive mention at Citi citing super upgrade cycle continuing into FY18, tax reform benefit among others; DPW rises early as announces launch of new cryptocurrency mining division
· Software movers; MDB reported its first quarter as a public company that included all key financial metrics coming in ahead of consensus estimates and issued FY18 guidance above views; in security, FTNT tgt raised to $48 at Bank America saying conservative blue-sky scenario assumes modest share gains; ORCL and ADBE to report tomorrow night
· Telecom and Media; HMNY 8.262M share Spot Secondary priced at $6.50; ATUS shares slipped after 20% rebound from a three-year low earlier this week; TMUS said it plans for a “disruptive” new TV service in 2018 and signed a pact to acquire Layer3 TV to help build out the service (cable stocks dipped on headlines); in advertising, IPG was downgraded to hold at Jefferies