Tuesday, January 2, 18
Equity Market Recap
· Stocks gapped higher on the open, holding those gains, but traded in a very narrow range throughout as investors put money to work to start the New Year. Bonds declined sharply as defensive asset classes came for sale, while broader equities rallied (Utilities and Telecom lagged while Tech, Consumer, Healthcare and Energy led). Transports were among the top sector gainers, with the Dow Transport index rising over 1% to new all-time highs. Financials failed to rally despite a spike in bond yields, as the broader complex was dragged down by weakness in the insurance sector (ALL, TRV, CB). The semi index among tech leaders, as the Philly semi index (SOX) rises over 2%, with all 30-components trading higher (top gainers AMD, MU, TER, CY), while the high-beta Internet sector climbed. The combination pushed the tech heavy NASDAQ back above 7,000 to close at new all-time highs. All-in-all, a strong start to the New Year for riskier assets, while commodities were mixed and the dollar extended losses from last year.
· There were a few geopolitical headlines over the weekend with attention turning to Iran after nine people were reported dead after overnight clashes between protesters and security forces. In North Korea, leader Kim Jong Un said Monday that Pyongyang had completed its nuclear weapons program, which could reach any point in the continental U.S. Kim, however, also suggested he is willing to engage in talks with South Korea. Neither had an impact on financial markets today. The FTSE 100 index fell 0.2% to 7,676.97, easing back from the all-time closing high scored on Friday, the last trading session of 2017; weakness as the Pound rises vs. dollar weakness. Out of Washington, late day news as Sen. Orrin Hatch, a Republican from Utah, announced Tuesday he will retire from the Senate, opening a path to the Senate for former Republican presidential nominee Mitt Romney.
· Gold prices advanced $6.80 or 0.5% to settle at $1,316.10 an ounce, its highest settlement since September and registered the 8th consecutive daily advance on a weaker dollar. WTI crude oil falls a modest 5c or less than 0.1%, to settle at $60.37 per barrel, while Brent oil fell after earlier touching its highest level in more than two years amid concerns about possible supply disruptions following unrest in Iran. Still, oil prices ended not far off their 2 ½ year highs it closed at back on Friday. Natural gas prices ended higher by about 9c to 3.043 mln btu on cold weather.
· The U.S. dollar ended lower, extending weakness from last year, falling for a 5th straight session and moving to the lowest levels since September. The dollar index (DXY) traded lows of 91.75 before paring losses as the euro touched highs of 1.2081 (just shy of 2017 high at 1.2092). The dollar slipped vs. the yen as well. The British Pound rises to its best levels against the greenback since September as well, trading highs of 1.3568. Note the dollar index lost 9.9% in 2017, suffering its worst year since 2003. Expectations of higher U.S. interest rates later this year and the passage of the Republican tax bill have failed to give the dollar a lift. Emerging-market currencies rose to the highest since July 2014 as a weakening U.S. dollar stoked demand for riskier investments. Bitcoin prices jumped late day on a Dow Jones report that Founders Fund, the venture-capital firm co-founded by Peter Thiel, has amassed hundreds of millions of dollars of bitcoin (Bitcoin traded above $15,000 after the report, above the $14,000 level prior.
· Bonds fell and yields rose for the first time in six sessions on both the long and short end; the yield on the benchmark 10-yr advanced 6 bps topping 2.47% from a 2.41% year-end close, while the 2-yr topped 1.92% and the 30-yr was up about 8 bps to 2.82%. Treasury prices extended a drop, pushing up yields, after the final reading of the Markit U.S. manufacturing purchasing managers index came in at 55.1 versus a reading of 53.9 in November.
· Dec. Manufacturing PMI rises to 55.1 vs Flash Reading 55 (and prior 53.9 reading and year ago 54.3) – marks the highest reading since March 2015; said employment rises to 55.8 vs 54.7 in November (highest reading since Sept. 2014)
Sector News Breakdown
· Retailers; strong move higher for retail; lots of analyst research coming back from the holiday and to start the new year with LB upgraded to outperform at Baird and raise tgt to $70 as thinks the Victoria’s Secret brand is turning a corner under new leadership; Citigroup raises estimates for all 21 companies in our universe and up tgts on 19 of them after tax reform (downgraded LULU after rise in stock price); Jefferies said top long ideas into the new year are GPS, KORS, FL andUAA, while the firm also downgraded DECK to hold citing sector headwinds in department stores and firm reiterates LB as our top short idea into ’18; Jefferies also said AEO remains a top pick in the space and upgraded GCO to buy saying market underappreciates the potential of the Journeys segment; JP Morgan said by their recent fieldwork, a strong first half of November (+700bps foot traffic acceleration YOY) combined with record finish to December (up double digits aided by calendar shift) resulted in the best Holiday since 2014. (they upgraded JWN to neutral)
· Other retail; auto parts active with AAP rising as Wedbush said continue to see the best risk/reward for AAP, which is not only the biggest beneficiary of favorable weather, but also is starting to gain traction with its turnaround; PLNT was downgraded at Jefferies saying fieldwork suggests accelerating unit growth at low-cost peers, which we believe could moderate new membership acquisition and comp sales growth
· Consumer Staples; Jefferies on beauty sector (EL/ULTA) saying expect the space to continue to offer MSD growth vs. the broader cosmetics and HPC space; on protein sector, Jefferies said believe the Street is underestimating the size of the breeder flock and note that our proprietary model implies 4% chicken production growth in ’18, well ahead of the 2% expected by USDA, PPC & SAFM; WTW active as DJ Khaled joins as social media ambassador
· Restaurants; MCD tgt raised to $200 at BTIG saying McDonald’s is returning to an offensive strategy after years of playing defense with the launch of its new Dollar Menu, Experience of the Future, Mobile Ordering and delivery initiatives; JACKwas downgraded at BTIG; YUM said its Pizza Hut unit offering a 50% discount on menu-priced pizza orders placed online for delivery or carryout from Jan. 2 to Jan. 8
· Homebuilders; Citigroup upgraded TMHC to buy as the company “appears to be one of the better acquisition targets” and its markets in Texas and Florida will be the biggest beneficiaries of personal tax reform while they downgraded KBH to sell on the likelihood of a deferred tax asset write down by ~20%, California being disproportionately affected by tax reform; LEN was upgraded to outperform at Wells Fargo based on our post-tax reform EPS estimate but without the CAAacquisition included
· Casino sector; was under pressure early after gaming revenue rose 14.6% in December to 22.7 billion patacas, missing the median estimate of 20% increase in a Bloomberg survey (WYNN, LVS, MLCO shares dropped early); Nomura noted December was MOP22.7bn, or +14.6% y-y. The lift was about 600bps below the latest cons. est. of +21%, which could put pressure on the group in the near term.
· The energy complex was mostly higher, with shares of XOM and CVX among the top gainers in the Dow Industrials today; some top stories in energy – the Trump administration threatened new sanctions on Iran as the number of civilians arrested in spontaneous nationwide protests that began last week neared 1,000; gas prices unchanged after surging last week ahead of the cold weather blast hitting the Northeast
· Top stories; BP takes $1.5 billion charge on US tax overhaul; in services, WFT shares fell after agreed to sell to SLB all of its US pressure pumping (approximately 1 MM HP) and pump-down perforating assets for $430 MM while WFT keeps all of its NAM multistage completions operations (Bank America said views the transaction negative for WFT, as it would miss out on upside to the U.S. market and combined JV); CVX mentioned positively in Barron’s saying shares are positioned to benefit in 2018 noting it would spend about $18B next year
· Utilities; sector under pressure to start the New Year as defensive asset classes came for sale today while broader equities rallied; Goldman Sachs downgraded PCG to neutral saying resolution of claims from the California wildfires could take years and cash flow/balance sheet impacts could prove significant still; Guggenheim also comments today on the group saying there will be a more pronounced capital rotation within the utilities sector to power/energy-levered names in 2018, – the firm upgraded NYLD to buy but downgraded AEP to sell, as PT remains Street-low $64, cut NWN to sell on stretched valuation and cut PCG, AWK and VVC ratings
· Large Cap banks failed to rally despite the sharp spike in bond yields (that tend to help lending margins for banks), though the group had posted solid returns in December on Fed rate hike news and passage of the tax reform bill that will help lower corporate tax rates
· Insurance weaker; ALL downgraded to underperform at KBW Inc. saying the company’s margin expansion story just about played out; JP Morgan raises EPS estimates, consensus numbers to reflect the benefit of tax reform and, to a lesser extent, the stronger than assumed equity market in 4Q17. Conversely, they reduced forecasts for ATH, VOYA, and HIG(upgraded LNC from Neutral to Overweight, as expect healthy business trends, steady capital deployment, and an attractive valuation to enable the stock to outperform and downgraded BHF to Underweight due to a sustained poor ROE, marginal capital generation, and challenging business trends)
· Business Service Technology/Blockchain; TEUM announced services deployment to its first India- based customer for their mobile subscribers and will begin revenue generation in the 1Q, well ahead of scheduled backlog implementation;NETE shares rise again as announces $7.55M institutional investment to support Blockchain-focused developments & continued growth
· Pharma movers; JNJ was downgraded to neutral at JP Morgan as greater upside potential in other large cap names; AKAOsaid the FDA has accepted for review its marketing application seeking approval for aminoglycoside antibiotic plazomicin for the treatment of complicated urinary tract infections; GSK positive mention in Barron’s saying earnings estimates have been sliding and shares have tumbled since the summer, but now looks like a good time to buy; ATRA initiates two Phase 3 clinical trials, MATCH and ALLELE, assessing tabelecleucel
· Reuters reported that the FDA greenlighted 46 new medicines in 2017, the highest tally in 21 years and more than double the total in 2016. 2017’s total was actually 49 if cell therapies from Novartis (KYMRIAH) and Gilead Sciences (YESCARTA) and Spark Therapeutics’ gene therapy LUXTURNA are included (all were approved under a different category).
· Marijuana stocks advanced today (WEED, HMMJ, SPRWF, ACBFF) after California’s move on Monday to begin sales of marijuana in the state added another state to a growing list of those allowing sales of the product in some form, and delivered a boost to shares of companies
· MedTech sector; several analyst calls to start the year; 1) Bank America upgraded MDT and BAX to Buy and downgradedIART to neutral saying MedTech faces headwinds, but MedTech innovation remains a step ahead & valuations reasonable; 2) JP Morgan has 2018 industry outlook note with top large-cap picks: BAX/ZBH; top small-cap picks: XENT/IRTC; upgrading ABT, BAX, XENT, and SYK to overweight and downgrading EW, JNJ, and PEN to neutral and cut CFMS and ELGXto underweight; 3) Morgan Stanley upgraded shares of both GMED (citing recent launch into robotics and upcoming entry into trauma position) and HAE to overweight (saying visibility on transformation at Haemonetics has improved)
· Other movers; ILMN was upgraded to Outperform at Wells Fargo; INCY was upgraded to Outperform at RBC, while the firm downgraded MRUS as sees fewer potential upside drivers in 2018 for the shares; TSRO under pressure after Cowen and Piper each cut its tgt to $80 from $125 and adjusts model to reflect the initial launch metrics for Zejula and the early limited uptake of PARP maintenance therapy in real-world practice
Industrials & Materials
· Transports, Industrial & Machinery; in heavy duty trucks, PCAR was upgraded to buy at Bank America noting it was by far the biggest laggard in large cap Machinery in 2017, but see the stock playing catch; Transports holding strong gains as the index traded to fresh intraday all-time highs, led by gains in package delivery giants FDX and UPS; nearly all twenty components outperformed today, with rails and airlines also moving higher
· Metals & Mining; strong returns for industrial metals and commodity prices on hopes the Trump administration will turn its attention to infrastructure spending after passing the tax reform legislation late last year; shares of metal producers such as AKS, STLD, X, CLF, FCX and others were strong gainers to start the year. Note steel companies in China curbed output this fall to comply with government-mandated air pollution targets during the winter heating season.
· Package and Paper stocks; Bank America upgraded IP to buy from neutral, PCH to neutral from underperform, BRC to buy vs underperform and GEF to buy vs neutral – recommends investors adding to equities that offer “more offense” for the sector for 2018, and highlights BERY as his “single best idea to start 2018;” also downgraded BMS and SLGN to underperform from neutral. Says a review of historical relationships and catalysts for the sector suggests that paperboard and pulp (IP, PKG, WRK, KS, UFS, GPK) should do best; specialty packaging (AVY, SEE, SON, BERY) and industrially-exposed companies (GEF, BRC, SON) will benefit from better-than-average growth
Technology, Media & Telecom
· Media & Internet; Macquarie with a sector call as they upgraded NFLX to outperform and $220 tgt (from neutral and $200) saying the company is “miles ahead of peers,” with subscription OTT TV as Disney’s service is still two years away; Firm also upgrades DIS to outperform from neutral, citing long-term potential from direct-to-consumer (DTC) OTT, international distribution; upgrades DISCA to outperform from neutral: under-appreciated upside from Scripps merger, “burgeoning DTC opportunities” in Europe; downgrades CBS, AMCX to neutral from outperform, and VIAB to underperform from neutral amid worries about their advertising base
· Advertising; Macquarie said it is moving to a more negative stance on ad agencies, downgrading all ad agencies under coverage: OMC and IPG to Underperform, and WPPGY and PUB to Neutral, based on lower underlying demand for their services leading to a slower top-line outlook and flattening margins; also downgrading NLSN to Neutral with this backdrop and lack of n-t catalysts
· Optical sector; Craig Hallum said believes that a large cloud player has placed large orders for 100G CWDM4 datacom modules for 1Q17 well in excess of volumes seen last quarter, and is likely shifting away from PSM4, but with materially lower pricing – the firm believes FNSR, LITE and OCLR are all qualified suppliers (along with a couple of private companies), and of our coverage universe, FNSR is likely to see the largest share – firm remains doubtful of OCLR’sparticipation at the module level given the lower pricing.
· Other movers; in semiconductors, TER upgraded to outperform and tgt to $52 at Evercore ISI saying research shows higher earnings potential into 2018 with the SOC Test market expected to grow to at least $2.9B; ORCL slipped after a report in The Information that AMZN and CRM are looking to end their respective deals for Oracle database software.https://goo.gl/m7CHby
· Movie theatre sector; Benchmark noted according to BoxOfficeMojo, the 2017 box office was down an estimated 2.8%; while ATP was up an estimate 3.2%, which implies attendance down nearly 6% compared to prior year. The domestic box office generated an estimated $2.887B in calendar ‘Q4 grosses, or up +2.8% compared to the prior year (AMC, CNK, RGC)