Thursday, December 14, 17
Equity Market Recap
· U.S. stocks slipped, snapping the 5-day win streak for the Dow Industrials after major averages opened at new records initially. Small Caps led the declines with a more than 1% decline in the Russell 2000 index as fear mounted that the Republican tax overhaul package may struggle to pass the Senate. Fears arose following headlines Senator Marco Rubio’s spokeswoman said he told Senate leaders he’ll oppose tax legislation unless they agree to a larger child tax credit. Republicans can only afford to lose two votes and still guarantee passage. The commentary along with worries about the deficit (from Flake, Corker), and the reduced top individual rate (Collins) weighed on sentiment. Economic data once again point to a strong economy as sales at U.S. retailers climbed 0.8% in November, the start of the holiday shopping season, doubling forecasts wile jobless claims fell 11,000 in the latest week, and U.S. import prices rose 0.7% in November.
· Media and cable active today after Dow component DIS agreed to buy key assets from FOXA valued at over $52B, meanwhile, the FCC followed through on its pledge to scrap U.S. net neutrality rules adopted in the final years of the Obama administration by a vote of 3-2 along party-lines. Pharma and Healthcare related names among the biggest drags on markets, with between 1%-2% declines for several names (HUM, ANTM, BMY, UNH, CI, LLY, and MRK). There are also a few noteworthy earnings tonight after the close with software companies ORCL and ADBE expected as well as COST in retail and JBL in tech. Industrials such as CAT take a breather after outperformance the day prior.
· Central bank news: A day after the FOMC raised its interest rate by 25 bps to 1.25%-1.50% range yesterday (and upped growth outlook), the SNB kept its deposit rate at minus 0.75% and said it was still willing to intervene in currency markets if the Swiss franc gets too strong. The ECB made no changes to its monetary policy on Thursday, keeping rates at record lows but ECB President Draghi noted the Eurozone’s economic growth outlook is significantly improving, but that it’s too soon to take the punch bowl away. The Bank of England said its key interest rate will remain at 0.5% after raising it last month for the first time in a decade.
· Retail Sales for November surged, rising 0.8% and well above the 0.3% estimate, while retail sales less autos rose 1% in Nov, topping the 0.6% estimate amid a good start to the holiday season; Sales in October, meanwhile, were also revised up to 0.5% from 0.2%; Internet retailers posted a whopping 2.5% increase in sales
· Weekly jobless claims fell by 11,000 to 225,000 in the latest week, below the 236K estimate; the 4-week moving average, a more stable monthly view, slipped by 6,750 to 234,750; continuing claims dropped by 27,000 to 1.89 million
· Import prices for November rose 0.7% MoM, in-line with consensus views and after rising 0.1% in Oct; excluding fuel, import prices were up 0.1% (also in-line); the increase in import prices over the past 12 months rose to 3.1% from 2.3%. If fuel is omitted, the increase in import prices over the past year was a scant 1.4%.
· Markit flash U.S. manufacturing PMI rose to 55 from 53.9 in November, while the flash U.S. services activity index fell to 52.4 from 54.5
· The 30-year fixed mortgage rate for week ended today fell to 3.93% from 3.94%, Freddie Mac said; the 15-year rate avg 3.36%, unchanged from a week earlier.
· Commodity prices edge higher; a generally quiet day for crude, with WTI oil climbing 44c, or 0.8%, to settle at $57.04 per barrel. Gold prices rebounded off nearly 6-month lows, settling at a more than one-week high, rising $8.50, or 0.7%, to settle at $1,257.10 an ounce. The central bank lifted a key short-term U.S. interest rate to a range of 1.25% to 1.5% and stuck to its earlier forecast for just three rate increases in 2018 – all in-line with expectations, easing pressure on gold prices.
Currencies & Bonds
· The U.S. dollar was mixed, with the dollar index initially rising on the better economic data earlier today (dollar index touched high of 93.75), but pared gains alongside the pullback in equities to end modestly higher. The euro topped out at 1.1863 prior to the data this morning that showed a jump in retail sales and a decline in jobless claims, but ended lower on the day around the 1.18 level (off lows 1.1771). The dollar slumped against the Japanese yen, under its post-FOMC low of 112.46, while the Pound climbed slightly against the greenback. The Mexican peso jumped vs. the U.S. dollar after Mexico’s central bank lifted its overnight interest rate to 7.25% from 7% before, as expected.
· Treasury markets ends little changed; bonds initially slipped early following another round of strong economic data (jobless claims, retail sales and import prices), sending yields higher across the board on an improving economy. However, as stocks pared gains from record highs, bonds picked up strength, sending yields back below yesterday levels. The 10-year Treasury yield rose to highs above 2.37% from 2.353% yesterday before slipping, while the 2-year note yield ticked higher to 1.815%, from 1.786%.
Sector News Breakdown
· Retailers; Deutsche Bank upgraded LULU to buy from hold and tgt to Street high $89 and upgraded FINL to hold from sell and raised tgt to $11 from $5; also raises targets onDKS, HIBB, FL, NKE, UAA, and BGFV; said athletic sector is “on more solid ground” following a period of disruption which included consumer product-preference switch to more of a lifestyle focus from purely performance; TIF upgraded to buy at Citi and tgt to $115 saying shares look attractive as currency tailwinds and tax reform should benefit the company’s earnings; GPS downgraded to perform at Oppenheimer noting shares up 50% since June; NKE was upgraded to buy at Argus with $75 tgt (shares at 52-week highs);COST reports earnings tonight
· Consumer Staples; SAFM Q4 EPS missed by 30c though revs toped consensus saying weaker on Hurricane impact and chicken output as market conditions weakened and prices dropped (shares of TSN, PPC also weakened on comments/eps miss); PF reaffirmed guidance for investor day; BUFF was downgraded to hold at Deutsche Bank after rally in shares; CAG upgraded at Bernstein; APRN rises after CEO disclosed purchase this week of 180,000 Class A shares; LNCE shares spiked late day after CNBC reported it is working with an investment bank to weigh a possible sale after an approach from CPB https://goo.gl/xxKoUS
· Housing & Building Products; in home furnishing, PIR reported 3Q EPS below consensus, with negative comps and substantial gross margin erosion, while Q4 guidance also below consensus on negative comps (BBBY, WSM, ETH among movers on report)
· Utilities; JP Morgan with sector call noting the sector has largely kept pace with broader market strength in both 2016 and 2017, and at 20.0x fwd P/E, relative upside for regulated utilities is now limited, in their opinion; said they expect 2018 to be a reset year as the sector faces the prospect of rising long-term interest rates, subtle tax reform risk and many names are dealing with increased company-specific risk; top picks PEG and WR, and upgraded D to overweight
· Energy sector; Goldman Sachs raised its view on North American oil majors to attractive from neutral, saying it is well positioned to generate more free cash flow in 2018-2019 vs any time in recent history; in conjunction with the note, they upgraded COP to buy given the firm’s higher 2018 Brent oil outlook, and free cash flow improvement and also upgraded Husky Energy
· The IEA said the amount of crude oil on the global market rose by 170,000 barrels a day in November to 97.8 million barrels a day. The agency cited a surge in U.S. shale production and increased drilling and completion activity
· REITs: Citigroup said in conjunction with their 2018 Outlook, they made several changes in the sector, including upgrading DRE, ESS & H to buy from neutral, while downgradedLSI to Neutral from Buy and cut CBL & LHO to Sell from Neutral
· Brokers & Asset managers; SCHW month-end total client assets $3.32T, up 21% from Nov. 2016 and up 2% compared to Oct. 2017 and new brokerage accounts totaled 122,000 in Nov., up 31% from Nov. 2016; ETFC Nov. Average Daily Trading 248,669Daily avg revenue trades for November were 248,669, up 19% YoY and added 41,473 gross new brokerage accounts in Nov
· Consumer Finance and Lending; VNTV was upgraded to buy at Jefferies and tgt raised to $94, while Wells upped tgt to $84, both citing the positive impact of the Worldpay acquisition and potential U.S. tax reform; EEFT init buy and $110 tgt at Goldman Sachs and pick up WU with a sell rating as believe the money transfer industry is at a crossroads: the improving economic environment should drive better remittance volumes, but material changes in the competitive landscape could drive significant pricing disruption; OMF7.5M share secondary priced at $25.50
· Credit Bureaus; Barclays downgraded EFX to equal-weight from OW, and prefer TRU and EXPN; says have been long-term bulls on the credit bureau space; and broadly remain constructive given the secular tailwinds (i.e. rise of big data; advanced analytics; financial inclusion) and reflect this view with raised PTs that look out to 2019 and are tax adjusted. However, also trying to manage expectations due to high valuations (mainly TRU & FICO), which could be tested by fears around the U.S. credit cycle (~1/3rd of revenues)
· Large Cap Pharma; TEVA shares jumped after its new CEO announces restructuring plan that involves eliminating 25% of global workforce; VRX dropped after being downgraded to underweight at JP Morgan as sees better opportunities in the sector following the recent rally; FLXN is acquiring the rights to a novel gene therapy for osteoarthritis designed to stimulate the production of an anti-inflammatory protein, interleukin-1 receptor antagonist; GWPH upgraded to buy from neutral and raise tgt to $174 from $124; pharma names fell (MRK, LLY, BMY)
· Hospital operators; JP Morgan downgraded shares of CYH to underweight and removed its tgt (prior $5) saying that tax reform is a material negative for them along with high relative balance sheet leverage, structural challenges for the hospital sector and its long-term track record of poor free cash flow generation/the firm also cut THC to underweight
· Biotech movers; BMRN was upgraded to outperform at Wedbush recent events, namely Valoctocogene Roxaparvovec gene therapy for severe Hemophilia A; ONCE downgraded at Goldman Sachs and cut tgt citing lack of catalysts; AVXS announced it received FDA clearance to begin its first clinical study in Type 2 spinal muscular atrophy (SMA) which rivals BIIB and IONS
· Medical equipment, services and device makers; GHDX shares jumped over 20% at one point today after Bloomberg reported company is exploring its strategic options, including a possible sale; ESRX shares help lift PBMs and distributors after guided 2018 EPS $7.67-$7.87 above estimates of $7.65, with better Ebitda guidance as well (MCK, CAHalso active); HUM announced a $3B share buyback plan
Industrials & Materials
· AG & Machinery; ABM quarterly results disappointed with an operational miss and lower-than-expected FY18 guidance (although we note FY18 EPS consensus may not have fully baked in purchase amortization; JEC 5.69M share Block Trade priced at $67.10
· Transports; airlines positive outlook from DAL, which said it sees 4Q operating margin about 11%, vs. Oct. est. 11-13%, but now sees 4Q capacity up 2.5-3%, from prior view about 2% and higher Prasm of up around 4%, from prior view up 2-4%; Ryder (R) to buy back up to 1.5M shares;
· Metals & Mining; steel producers active after NUE said it sees Q4 EPS to be in range of 50c-55c, below the 77c estimate; NUE said expects earnings for the unit to be hit by pressure from imports combined with weakness in plate steel (shares of X, AKS, STLD, RS also active); BHP was upgraded to overweight at JP Morgan and downgraded RIO
Technology, Media & Telecom
· Media movers; DIS said it would buy selected assets of FOXA for $52.4 billion in stock after weeks on speculation, which includes its film and television studio and its international and cable TV businesses and will also assume $13.7B in debt https://goo.gl/g8w27d (the deal also lifted shares of TWTR); CRTO shares declined on lowered revenue outlook following Apple’s iOS update (said Apple’s new iOS 11.2 software “disables the solution that some companies in the advertising ecosystem, including Criteo, currently use to reach Safari users”); WSJ reported that the Justice Department has signaled it is willing to grant approval to SBGI’s planned takeover of TRCO but it wants the companies to sell off 12 to 13 television stations
· Net Neutrality rules: FCC commissioners vote to undo Obama-era net neutrality regulations, ending the U.S. agency’s power to regulate broadband provided by AT&T (T), CHTR, CMCSA and other internet-service providers – the vote was 3-to-2, along party lines. Back in 2015, the FCC order gave the agency sweeping power to regulate the service, a move aimed at stopping ISPs from favoring traffic on their networks
· Software movers; ORCL and ADBE reports earnings tonight; TNTR shares slide after significantly lower guidance for Q4 (downgraded at KeyBanc and BofA); CMCM to collaborate with MSFT on artificial intelligence services for Cheetah Mobile’s mobile application, CM launcher\
· Diversified information; Barclay’s another sector note where they name VRSK as its new Top Pick in diversified info space (replacing TRU), said IT remains a preferred long term idea but would also look for ‘speed bump’ related buying opportunities in the near term to get more constructive, and they downgraded NLSN to underweight given the combination of challenging end markets (CPG & US media) and credibility concerns after 1+ year of poor execution
· Telecom; JP Morgan raised 4Q video net add estimates for DISH to 60k (from 10k) as believe the company has seen some flow back from the USVI/Puerto Rico subscribers who were removed from the base in 3Q17 following Hurricane Maria; VZ downgraded to hold at HSBC