Tuesday, December 19, 17
Equity Market Recap
· U.S. stocks end lower in a bout of “sell the news”, falling from record highs after the House voted yes for the tax legislation bill. The U.S. House tallied enough votes by a 227 to 203 vote (218 votes were needed) to pass tax overhaul that slashes corporate rates from 35% to 21% permanently and temporarily reduces individual rates. Now the Senate plans to vote this evening and appears to have sufficient support to clear the measure following recent GOP members on the fence (Rubio, Collins) swinging to yes votes. Note the bill would also eliminate Obamacare mandate that individuals must purchase health insurance. If the Senate votes yes, the bill will go to President Trump’s desk for signing. Stock averages have rallied for over a month, setting various new highs along the way (Dow touched 70th record high yesterday) on hopes and expectations the tax reform bill will spur spending amid lower corporate tax rates.
· The tech heavy Nasdaq Composite slipped after briefly crossing 7,000 Monday for the first time, coming under pressure late day. The other big story has been the bond market, falling for a second straight day and lifting yields across the spectrum as long-end bond yields jump sharply. UST curve steepened with weakness led by long end of the curve as 30Y yields extended through 2.80%. The only question remains, if the Senate does indeed pass the bill tonight, is if the positive impact of cuts to corporate taxes is already priced into the market?
· Minneapolis Federal Reserve Bank President Neel Kashkari, who this year has dissented three times in votes at the U.S. central bank’s policy meetings which raised rates despite low inflation, repeated his view that the labor market still shows signs of slack and could be improved. “Why should we raise rates until we actually see inflationary pressures building, he said?”
· Housing Starts rose 3.3% to 1.297K, up from 1.256K in the prior month and above consensus of 1.25K after rising 8.4% the prior month; Building permits fell to 1,298K vs. 1,316K in Oct.; and above est. 1,270K; single family completions fell to 752K; multifamily completions fell to 364K
· Current account deficit narrowed to (-$100.6B) from (-$124.4B) prior quarter and vs. estimate of (-$116.2B); Balance of goods and services deficit narrowed to $134.36B compared to $141.72B prior quarter; balance on primary income widened to $57B compared to $50.5B prior quarter
· WTI crude oil prices settle higher by 30c at $57.46 per barrel ahead of inventory data tonight for from the API and tomorrow’s DOE weekly report. Natural gas prices slipped 1.93% to $2.692 mln Btu’s. Overall, prices were mostly range bound ahead of the data and the expiration of the January West Texas Intermediate contract. Brent prices end higher as the continued outage of a North Sea pipeline (announced over a week ago) helped keep a floor under crude futures
· Gold prices gyrated between gains and losses most of the session before slipping -$1.30 to settle at $1,264.20 an ounce and snapping its 4-day win streak following 6-month lows early last week. Despite the decline in gold ahead of the tax bill and FOMC meeting the last few weeks, prices are still up around 10% YTD. Markets await final passage of the tax bill and implications for the dollar.
· The U.S. dollar posted a mixed performance against comp currencies, with the euro topping the 1.185 level (nearing the post FOMC peak of 1.1863), but the greenback rallied back to the 113 level against the Japanese yen while trading little changed against the Pound. The passage of the tax bill in the House the first step today, with Senate up next this evening.
· Treasury prices fell sharply for a second straight day, pushing yields to multi month highs after a solid reading for housing data helped strengthen the outlook for the U.S. economy while markets await the tax plan passage by the Senate this evening after the House passed it today. The 10-year Treasury note yield rose above 2.46% (highest since late October), from 2.392% late Monday, the 2-year note yield edged higher to 1.850% (back near 9-yr highs), from 1.832% and the 30-yr rose to 2.825%, versus 2.745%.
· Yesterday, long-dated yields rose, while short-dated yields fell, with the 30-year bond yield rising 5.9 bps to 2.745%, marking its largest one-day gain since Nov. 10. The 10-year note yield rose 3.9 bps to 2.392%, while the 2-year note yield slipped 0.8 bps to 1.832%. Strong sell-off in European bond markets, with the Italian 10-yr yield touching 1.9% (best levels since late Oct), while German 10-yr yield up at 3-week highs at 0.37%
Sector News Breakdown
· Retailers; sector slipped after strong gains the last few weeks on hopes that tax reform will increase consumer spending; Citigroup with a broad sector note today saying they favor co’s with optionality of distribution either through online pure plays, specialty and/or direct to consumer and those that can benefit from market share gains. The firm said its top ranked Buy-rated ideas include FL, PVH, NKE, DKS and CRI, while they upgraded DKS to a buy and top pick FL, while they downgraded HBI; in broadlines, Citi upgraded WMT to buy and raised tgt to $117
· In other retail news; CHKE announced the appointment of Steven Brink to replace Jason Boling as CFO; CONN 1.6M share Block Trade priced at $34.50; DECK tgt raised to $72 at Wedbush, as shares trade to near 3-year highs; in toys, FNKO downgraded at BMO Capital citing expanding inventory/clearance sales
· Consumer Staples; CL was upgraded to outperform at Macquarie and $81 tgt; CVGW reported mixed Q4 results as EPS beats by 9c on weaker revs; Maxim had a report saying on packaged foods sector and said HAIN could be attractive target for CPG manufacturers; overall sector outperformed following yesterday’s M&A deals in food space
· Retail bankruptcies hit a six-year high in 2017, totaling 50 in 2017 as of Dec. 14, according to S&P Global Market Intelligence data. That’s higher than 47 for all of 2016 and the highest since 59 total in 2011. Among the companies that filed for bankruptcy protection in 2017 were Toys R Us Inc., True Religion Apparel Inc., and Payless Inc.
· Restaurants; JACK said it is selling its Qdoba chain to private-equity firm Apollo Global Management LLC for $305M; DRI Q2 EPS beat by 3c on better sales ($1.88B) and comps (rising 3.1% vs. est. 1.3%) on better Olive Garden and Longhorn comps
· Housing & Building Products; JP Morgan with housing sector upgrade saying top pick for 2018 is PHM, (was also top pick for 2017) and also highlights BZH among the smaller-cap builders as well CCS and WLH among the higher growth small-cap builders/firm maintains Underweight rating on MDC and downgrade KBH to Underweight following its strong outperformance
· Casino, Lodging & Leisure; in gaming, MLCO was upgraded to overweight at JP Morgan as views the stock’s valuation discount to peers as compelling and thinks a dividend raise can narrow the gap; in lodging, STAY announced that CEO Gerry Lopez will step down at year-end and will be replaced by CFO Jonathan Halkyard and raised its guidance; in leisure, cruise line CCL Q4 EPS and sales top consensus, but Q1 guide of 37c-41c below 46c estimate
· Auto’s; TSLA said UPS pre-ordered 125 Tesla electric semi-trucks while RBC also raised its tgt to $380; GM was upgraded to Outperform at RBC Capital as the stock fits squarely into their preferred narrative for 2018 – increased confidence on downturn resiliency with a seat at the table on new mobility/and also see upwards 2018 earnings revisions
· Energy sector awaits weekly inventory data for crude, gasoline and distillates later this evening (API) and tomorrow morning (DOE)
· Movers; XOG said it sees 2018 drilling & completion capex $770M-$840M and expects to drill 170-175 gross wells, complete 185-190 gross wells and turn to sales 170-175 gross wells during 2018; SWX was upgraded to buy at UBS as firm said due to a favorable regulatory environment, upcoming rate cases, trackers in place and a capex ramp-up, we expect ATO, SWX and NI to grow 2018 EPS at above-average rates vs LDC peers
· E&P sector; Seaport Global with sector call as they upgraded APC, CDEV, CRZO, DVN, ECR, GST, MCF, MRO, NBL, PXD, SBOW, SNDE, XEC to a buy rating and raise CLR, NFX, WLL, WPX to neutral (from sell) as they are “more constructive” on the sector given a more balanced macro backdrop, though remains guarded
· Utilities; sector was the top S&P sector underperformer yesterday and decline again today, bringing its 2-day decline to over -2% as rising yields make group look less attractive; PPL downgraded to Underperform at Macquarie and lowered its price target to $30 as thinks the next UK regulatory review will result in a meaningful drop in revenues and believes the high dividend debate will come back into focus
· After weeks of rallying on tax reform hopes and expectations, seen as providing a lower tax rate, banks slipped ahead of the vote today and oddly decline despite a massive surge in bond yields, which is seen as a beneficiary to banks regarding lending
· Insurance movers; Credit Suisse upgraded HIG to Outperform, and lowered CB to Neutral while noting industry margins have held up relatively well despite several years of pricing declines
· REITS; group pressured by second day of rising bond yields, making dividend paying and interest rate sensitive stocks less appealing; Wells Fargo with several changes in index today, as upgraded regional mall sector to overweight and upgraded MAC to outperform; the firm also downgraded the shopping centers and multifamily sectors to market weight from overweight
· Bitcoin/Blockchain sector: group saw three offerings overnight given the surge amid Bitcoin mania; MARA raises $7.5M after agreed to sell 1.35M shares of common stock at $5.50 to certain accredited investors in a registered direct offering; RIOT sells 1.64M restricted units at $22.50 in private placement; DPW files prospectus to sell 1.16M shares “from time to time”; the SEC suspended trading in CRCW (halted last $575 per share) citing concerns regarding the accuracy and adequacy of information in the marketplace about, among other things
· Pharma/Biotech movers; AERI announced the approval of Aerie’s lead product Rhopressa yesterday, two months ahead of a scheduled February 28, 2018 PDUFA goal date;IPXL to Sell Taiwan Manufacturing facility to Bora for $18.5M; MDGL 1.5M share Secondary priced at $83.00; SHPG said Hunter syndrome treatment fails in key study/also gets FDA Clearance for mypkfit for advate to help personalize care for hemophilia A; NVAX was downgraded at Citigroup saying the delay in Phase 1/2 NanoFlu data by two months to February 2018 makes them more cautious; ONCE active as the FDA approves Luxturna, a new gene therapy to treat children and adult patients with an inherited form of vision loss that may result in blindness.
· Hospitals and providers; KND to be acquired by three companies – HUM, and firms TPG Capital and Welsh, Carson, Anderson & Stowe – for about $4.1 billion in cash, including debt, amounting to about $9 per share for company shareholders https://goo.gl/NqdQt4; THC said it’s exploring the sale of its subsidiary (Conifer) that provides debt collection and financial services to other hospitals, while also guides year EPS $1.06-$1.36, below estimate $1.39
· Hospital supply chain; JP Morgan with a sector call saying it does not foresee near-term relief for the declining utilization trend, citing pressures surrounding regulatory uncertainty, and an increasing shift to value-based care as headwinds for some health supply chain companies/the firm downgraded OMI to underweight and PINC to neutral as its supply chain services and performance segments are exposed to a challenging hospital environment
· Medical distributors/services/equipment; JPM raises ABC PT to $100 from $86, ESRX $85 from $75, LH PT $198 from $174, MCK $193 from $189, DGX $105 from $96, TDOC$40 from $38; lowers CAH PT to $72 from $75, CVS to $93 from $97; CHCT replaces RT in the S&P 600 index; PKI was upgraded to neutral at Bank America
Industrials & Materials
· Industrial & Machinery; NAV leads heavy duty truckers higher as reported a 4Q profit and strong revenue growth, helped by a 31% jump in the company’s core volumes, comprised of Class 6-8 trucks and buses in the U.S. and Canada (peers PCAR, CMI, ALSN, WBC, WNC); CBI sold itself to MDR in transaction valued at $6B, with MDR investors owning about 53% of the combined company and CBI the other 47% https://goo.gl/r1cZZq ; in ag machinery, AGCO guided 2018 EPS about $3.50 on sales $9B compared to est. $3.83/$8.54B
· Transports; sector held up better than major averages after reaching all-time highs yesterday; CAR announced it is now the exclusive car rental partner of Hawaiian airlines;FDX reports earnings after the close which may be driver for sector tomorrow
· Chemicals; SunTrust said the chemical sector in 2018 will not see a similar rally to 2017, but current trading multiples for the stocks should be supported due to global macro and sector fundamentals/firm upgraded CBT to buy and cut CINR to hold while favorite ideas are ASH, APD, HUN, VNTR, PAH; PX upgraded to buy at Bank America citing accelerating volume growth, improved pricing discipline in the industrial gas industry and increased confidence in New Linde; Raymond James initiated coatings sector withSHW strong buy and $496 (top pick), PPG outperform and $139 tgt and AXTA with market perform
· Paper & Packaging; CCK entered into an agreement to acquire Signode Industrial Group Holdings (Bermuda) Ltd., a leading global provider of transit packaging systems and solutions, from The Carlyle Group, in a cash transaction valued at $3.91 billion
Technology, Media & Telecom
· Internet; CARS rallies after the WSJ reported that activist investor Starboard had acquired a significant stake in the company saying shares were undervalued due to heavy short selling and is a potential buyout target for private-equity firms https://goo.gl/SNqaBu ; MEET said prelim Q4 revs came in “at or above the high end” of forecast $36.5M-$38M (est. $37M); TWTR shares rise to 2-year highs, extending gains yesterday after analyst upgrade
· Semiconductors; CREE received negative analyst mention, downgraded to underperform on valuation at Northland while JP Morgan added it to the Analyst Focus List as a Short Idea saying despite posting in line F1Q results and issuing weak F2Q guidance, shares have topped targets; MU reports earnings after the close
· Software, Hardware and Equipment movers; AAPL was downgraded to neutral at Nomura and cut tgt to $175 saying gains for the iPhone X supercycle are in the late innings;ARRS downgraded to equal-weight at Morgan Stanley citing continued pressure on memory pricing in the CPE business and execution risk on RKUS integration; RHT reports earnings after the close