Friday, December 15, 17
Equity Market Recap
· Stocks soared throughout the session though ending off the highs and allowing major averages to close at fresh all-time records in the S&P 500, Dow Industrials and Nasdaq Comp, as Washington gets closer to the passage of the tax reform bill. U.S. stocks moved in lock-step with commentary out of Washington, as late day reports suggested Senator Marco Rubio will back legislative compromise for rewrite of U.S. tax code, with Rubio confirming later. Rubio has tweeted change in child tax credit was “solid step”, leading the speculation. GOP Senator Corker also said late day he would vote for the bill after earlier voting no. According to media reports, the tax bill is to be released at 5:30 PM EST tonight. After declining the most yesterday on tax bill concerns, the Russell Small Cap 200 was the top gainer today, rising up as much as 2% before paring gains, as reform seen as a big boost to small businesses. Treasuries were lower, though the dollar rebounded. Gold climbed with crude, which continued to trade above $57 a barrel. Some stock movers today: COST to record highs after better earnings while ORCL shares slip on disappointing cloud revenue guidance. Today is also quadruple witching, which is the third Friday of the last month of every quarter, with the simultaneous expiration of stock-index futures, stock-index options, single-stock futures, and stock options, as well as an index rebalancing….which boosted volume late day.
· Some potential bullets points in the tax reform bill as per commentary earlier this week citing various news outlets (NYT, AP). Reports have suggested the bill includes a 37% top individual rate (from 39.6%) and a 21% corporate tax rate (Trump said mid-week he’d be “thrilled” with a 21% rate after earlier seeking a rate of 20%), which would be down from 35%. The corporate rate would go into effect next year, not in 2019 as the Senate originally intended. Individuals would be able to deduct up to $10,000 in state and local taxes, split between property taxes and income/sales taxes. The corporate alternative minimum tax is repealed under the agreement. Rep. Kristi Noem, a South Dakota Republican on the House-Senate tax conference committee, said the refundable portion of the child-care tax credit has been boosted to $1,400 per child, up from $1,100…we still await the final details of the bill, possibly tonight
· Empire Manufacturing Index slipped for a third straight month to a reading of 18 from 19.6 in November and just below the 18.7 estimate; new-orders index dipped -1.2 points to 19.5, while shipments index rose 4 points to 22.4; employment index fell -6.4 points to a reading of 5.1 and the average work week edged up; the six-month general business conditions fell to 46.6 vs 49.9
· Industrial production for November rose 0.2% MoM after rising 1.2% in Oct. (was upwardly revised from 0.9% prior) and was slightly below the 0.3% estimate. Capacity utilization rose to 77.1% from 77% in Oct., which was unrevised from initial release and vs. 77.2% estimate
· WTI crude oil prices closed higher by 26c, or 0.5% to settle at $57.30 per barrel, ending the week with a modest loss of (-0.1%), but did notch its third straight losing week amid ongoing concerns over growth in U.S. crude production. Brent outperformed the early part of the week after reports that a major North Sea pipeline had 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, but Brent had pared gains later in the week.
· Gold prices posted a small 40c gain to settle at $1,257.40 an ounce, snapping a 3-week losing streak. For the week, gold managed a gain of 0.7% after the dollar slipped on profit taking as the FOMC followed through on its 25 bps hike earlier in the week, but offered no additional surprises. The Fed maintained its pace of three additional hikes in 2018, and didn’t change its forecast for inflation as well.
Currencies & Bonds
· The U.S. dollar advanced, posting gains against the Pound and Euro, while emerging-market currencies renewed their climb, buoyed by the South African rand. The Argentine peso tumbled as the nation postponed a decision on overhauling its pension system. The Pound dropped after Juncker warned of a difficult second stage of Brexit talks. South Africa’s rand gained as the ruling African National Congress meets this weekend to elect what is expected to be a market friendly new leader. What can you say about Bitcoin as it topped the $18,000 level again today after a few days of weakness
· Bonds slid as yields end higher following a strong rebound in stocks, though yields pared gains to end up only slightly around 2.36% (from 2.34% late yesterday). Investors rotated back out of bonds and into riskier stocks on expected approval of the tax bill today. The shorter term-2yr yield back up around 1.84% while the 30-yr yield down at 2.69% following the FOMC expected interest rate increase on Wednesday to 1.25%-1.50% range.
Sector News Breakdown
· Retailers; COST helping sentiment after posted solid membership trends, steady core gross margin and top/bottom line beats, pushing stock to record highs; in clothing,H&M shares dropped overseas as reported record poor sales trends, as constant-currency 4Q17 sales declined 2%, well below consensus of +5%; in research, shares of UA andCROX were both upgraded to buy at Stifel; SKX was upgraded to buy and $44 tgt at Argus; FL was upgraded to buy with $64 tgt at Canaccord citing gross margin recovery, buyback and tax rate
· Consumer Staples & Restaurants; SBUX shares dropped after JP Morgan said that U.S. comp trends are concerning given the weak afternoon/evening daypart comps that are “deep in the red.”’ CHEF 1.9M share Spot Secondary priced at $18.50; ELF was downgraded at JP Morgan; a day after CNBC reported LNCE was working with an investment bank to weigh a possible sale after an approach from CPB https://goo.gl/xxKoUS a few analysts (Deutsche Bank and UBS) said shares could be worth at least $50 per share
· Baker Hughes (BHGE) weekly rig count fell -1 to 930, with oil rigs down -4 to 747, gas rigs up 3 to 183 and miscellaneous rigs unchanged – it was the first week in six that drillers cut oil rigs; in another story, HES shares active after activist and shareholder Elliott Management Corp. is calling for the company to sell assets in Southeast Asia and wants Hess to focus on share buybacks instead of dividends
· In research; JP Morgan with various changes in the E&P sector following sustaining free cash flow and debt-adjusted production growth analysis (upgraded GPOR to overweight, and downgraded NFX to Neutral and EGN, LPI, JONE and SN to underweight); JP Morgan also upgraded MRO to Neutral and downgraded NBL to Neutral and HESto underweight; HCLP initiated equal-weight at Barclay’s; in Canadian E&P, Credit Suisse upgraded HSE to outperform and revised estimates and TPs largely to reflect the recent changes to the Credit Suisse commodity price outlook (Top Picks – SU, ECA, ERF, VII and NVA)
· Utilities; EXC was initiated underperform at Mizuho and $36 tgt; EIX tgt cut to $70 from $80 at Goldman Sachs saying recent share sell-off stresses impact of the California wildfire’s likely impact on related cash outflows
· Sector moving on tax reform passage hopes and rates with group again broadly higher – led by gains in banks (large and regional), lenders, specialty finance (several positive analyst calls this week pertaining to impact from tax reform – positive on DFS, COF, SYF, CIT, SC, SLM as any increases in consumer confidence from more cash flow could lead to more consumer borrowing); MET shares slipped after issuing 2018 guidance and hosting a business update call, which prompted some analysts to lower estimates; LFINshares surged as announced the acquisition of Ziddu.com “a blockchain-empowered solutions provider”
· Credit Card data: COF reports November net charge-offs 5.16% vs. 4.70% last month and delinquencies 4.11% vs. 4.13% MoM; DFS Nov NCO’s 3.1% vs. 3.0% last month and delinquency rate 2.3% vs. 2.2% MoM; JPM Nov NCO’s 2.36% vs. 2.35% last month and delinquencies 1.22% vs. 1.24% prior; SYF Nov NCO’s 5.03% vs. 5.23% last month/ delinquencies 3.09% vs. 3.16% prior; ADS Nov NCO’s 5.8% vs. 6.3% last month and delinquency rate 5.0% vs. 5.2% last month; AXP Nov NCO’s were 1.9% vs. 1.8% prior month and delinquencies steady at 1.3%
· REITs; DDR shares rise as announced plans to spin-off 50 assets into a separate REIT named Retail Value Trust; in research, JP Morgan downgraded RMAX and RLGY to underweight saying potential tax reform may level playing field away from home ownership
· Pharma and managed care; group was among the top underperformers yesterday; CNC reaffirmed 2017 guidance and issued initial 2018 guidance, mostly in-line with expectations; ACRS said the FDA approved ESKATA topical solution, 40% (w/w) for the treatment of raised seborrheic keratoses; GBT 2.632M share Spot Secondary priced at $38.00; TEVA upgraded to buy at Goldman Sachs after cost cutting initiatives announced yesterday
· Biotech movers; ALNY and SNY said the FDA has lifted a hold on clinical trials for hemophilia therapy fitusiran/ALNY also added to conviction buy list at Goldman Sachs;VSTM 8.4M share Block Trade priced at $3.07; biotech (IBB) overall rallied with broader markets
· Medical devices, equipment and services; WMGI agreed to acquire IMASCAP for about $88.8M, though analysts (Piper) said presents some near-term pressures; ESRXadded to gains after Baird upgraded to outperform as setup appears to be its most favorable in years; ABC upgraded to buy at Goldman Sachs; CSII was downgraded at Needham saying there is limited potential for upside to FY18 consensus rev. and that BSX’s new device may make it more competitive
Industrials & Materials
· Machinery & Transports; rail operator CSX shares fell after its new CEO Hunter Harrison went on medical leave citing unexpected complications from a recent illness; despite the decline in CSX shares, the transport index outperformed, trading up as much as 90 points, led by gains in ALK, CAR, MATX and other airlines; ALK posted strong November metrics with traffic up 9.2%
· Packaging sector; Barclays said self-help margin initiatives combined with M&A ability and willingness drives 2018 equity outperformance as packagers see limited benefits from accelerating economic growth/the firm upgraded SEE to overweight as the strategy evolves towards their preferred path and said AVY is Top Pick with EPS now ~5% ahead of Street
Technology, Media & Telecom
· Internet; Needham said DIS deal to buy certain FOXA assets is negative for NFLX as it implies more over-the-internet competition, less hit content on NFLX; SunTrust said intra-quarter data shows a sequential increase in global search interest growth for Booking.com (PCLN); BABA with positive mention at MKM after pullback in shares
· Software movers; ORCL shares dropped as its forecast for cloud revenue growth was below analyst estimates, though license revenue topped views/RBC Capital downgraded shares based off the cloud guidance; ADBE Q4 results showed rev/EPS beats driven by strong Creative Cloud revenue (+30% y/y) and Marketing Cloud up 18% y/y and raised the FY18 revenue guidance
· Hardware and services; JBL shares rise following Q1 results, as top and bottom line came in above consensus and issued Q2 revs guidance above consensus ($4.75B-$5.05B vs. $4.75B est.); in networking, ANET resumed buy at Stifel with $270 tgt and holds on CSCO and JNPR; CASA 6M share IPO priced at $13.00
· Media movers; TV was upgraded to overweight at JP Morgan following significant underperformance, with shares down 21% since 3Q results; Barclay’s upgraded CTL to equal-weight from underweight citing limited downside, while initiated WIN and FTR with underweight ratings on dividend cut concerns/debt maturities
· Telecom movers; DIS’ “Star Wars – the Last Jedi” movie expected to post big box office returns this weekend; DISCA benefits from filing that director John Malone bought over 333K shares at avg price $19.715 on Dec 13th; CRTO extends yesterday’s -22% decline after lowered rev outlook on Apple’s iOS update – downgraded by one analyst asAAPL iOS update “knocked out” the company’s ITP workaround to target Safari users; SIRI fell after the company disclosed that it will have pay higher royalties to play music on its satellite radio programs (y will be required to pay a royalty of 15.5% of gross revenue through 2022, up from the 2017 rate of 11.0%)