Wednesday, January 3, 18
Equity Market Recap
· It was another strong session on Wall Street, as the S&P 500 Index advanced past 2,700 for the first time, while the Nasdaq Composite adds to record gains, topping 7,060 after closing above the 7,000 level for the first time yesterday (a 1,000-point milestone in just over eight months). Economic data once again comes in above consensus, led by December’s ISM manufacturing index rising at its fastest pace in three months (rising prices-paid subcomponent climbed to 69 from 65.5, fueling inflation expectations). The data helped lift the dollar, snapping a 5-day losing streak for the dollar index and bouncing off 3-month lows. Treasuries advanced, retreating briefly after U.S. data. Odds of a Fed rate hike by March rose to 71% from 68% after the slightly hawkish tone from the December FOMC minutes. Oil prices jumped to 3-year highs.
· The worst winter storm yet this season is already hitting the Southeast and expected to sweep the Northeast Thursday, threatening to send electricity prices and natural gas demand even higher, boosting energy stocks. While price jumped in energy, retailers and airlines declined amid the expected impact to sales (restaurants held up well on a positive analyst call).
· In sector news, monthly U.S. auto sales for GM, F and FCAU posting slightly better results. Transports bounce off earlier lows, trading at fresh all-time highs led by FDX/UPS, while airlines weaken given the impact from the winter storms/cancelled flights. Many global stock indexes have hit records or multiyear highs in recent months, lifted by signs of a pickup in economic expansion around the world. Healthcare and biotech (best levels since October) stocks rise
· FOMC Minutes showed Federal Reserve officials in December debated the risks to the U.S. economic outlook, with some concerned about low inflation and others pointing to robust growth that was about to get a further boost from tax cuts. Most participants reiterating support for “continuing a gradual approach to raising the target range” for the benchmark policy rate, according to minutes of the FOMC. Fed officials discussed several risks that could result in a faster pace of increases. “These risks included the possibility that inflation pressures could build unduly if output expanded well beyond its maximum sustainable level,” owing to fiscal stimulus or “accommodative” financial conditions, the minutes said. Bloomberg
· The December Institute for Supply Management (ISM) manufacturing index rose to 59.7, the second highest reading of the year, from 58.2 in November (which was also the estimate); sixteen of the 18 industries tracked by ISM reported growth as production rose to 65.8 from 63.9 and new orders jumped to 69.4 from 64; employment index however fell to 57 from 59.7
· Construction Spending for November rose 0.8%, topping the 0.5% estimate while October was revised to 0.9% from 1.4%; Private construction rose 1.0% in Nov., Private residential construction rose 1.0%, Private nonresidential construction rose 0.9%
· Gold prices advance for a 9th consecutive session, rising $2.40, or 0.2%, to settle at $1,318.50 an ounce and marking the highest settlement since Sept. 15 despite a partial recovery in the U.S. dollar. However, prices slipped in futures trading after minutes from the FOMC December meeting showed a sharp divide over the central bank’s own forecast of three interest-rate hikes this year.
· Oil prices rise, hitting three year highs following a sixth day of unrest in OPEC member Iran. The move also comes ahead of inventory data as API inventory data to be reported tonight (pushed back a day due to New Year’s Holiday on Monday), while the EIA report due out tomorrow at 11:00 AM EST. WTI crude settled at $61.63 per barrel, rising $1.26
· The buck bounces; the dollar index (DXY) rebounds off 3-month lows following a stronger-than-expected ISM manufacturing and construction spending reading, helping it reclaim the 92 level (after hitting lows of 91.75 yesterday and off recent highs of 94 back on 12/17). The rebound also snapped its 5-day losing streak vs. a basket of currencies. Individually, the euro slipped to $1.2014 from $1.2061 late yesterday when it traded at its highest dollar level since January 2015. The dollar also pared recent losses against the Pound and yen.
· Bonds partially recovered after yesterday’s decline, as the yield on the benchmark 10-year slipped 2 bps to 2.44% from 2.46% late yesterday; the 30-year bond yield slipped to 2.797%, compared with 2.809% in the prior session and the 2-year note yield was little changed at 1.915%. Bonds slipped slightly following the FOMC minutes release as commentary was seen with a slightly hawkish tilt, sending yields off lows.
Sector News Breakdown
· Monthly auto sales released today; auto sales for December out: 1) GM Dec U.S. auto sales fell (-3.3%) to vs. est. down (-7.3%); 2) Ford (F) Dec U.S. light-vehicle sales rose 1.3%, vs. est. down (-1.8%) saying total car sales down (-5.5%), total SUV sales up 8.0% and total truck sales down (-1.0%); 3) FCAU said Dec U.S. auto sales fell (-11%), in-line with consensus views – reported sales of 171,946 units, an 11% decrease compared with sales in December 2016; 4) HMC Dec auto sales for U.S. fall (-7%) vs. est. (-4.1%); 5) TM U.S. auto sales fell (-8.3%) vs. est. (-8.4%)
· Retailers; consumer discretionary sector with a big boost yesterday after strong holiday sales data recently, as several analysts with rating changes: Wells Fargo today upgraded ULTA and DKS to Outperform and downgraded TJX to Market Perform – firm said potential near-term/January catalysts and see the most bullish setup at GOOS, LULU and URBN (likely potential holiday upside could be pre-announced ahead of ICR next week) and more cautious on SIG; FIVE was upgraded to buy at Deutsche Bank as firm also makes several price target changes in sector; gun stocks slipped (AOBC, RGR) as background checks for month of Dec. total 2.586M vs. 2.771M YoY according to FBI NICS data
· Consumer Staples and restaurants; CASY rises as activist investor JCP Investment recommends the company explore strategic alternatives, including sale; SunTrust positive on the restaurant sector on the tax reform passage as they raise estimates and targets for industry saying that tax reform will be a windfall for restaurants, boosting both the top-line (as consumers spend their tax savings) and bottom-line; BJRI upgraded to buy at Stifel
· Housing & Building Products; HDS downgrade at RBC citing a dimming takeout scenario and the persistent disruption of e-commerce/AMZN; Canada has begun legal challenges of U.S. lumber duties under NAFTA, through WTO – Canada minister said; in homebuilders, MDC was upgraded at Evercore/ISI saying tax reform should benefit earnings and ROE, while the firm raised tgts for AWI, CAA, DHI, FPH, KBH, LEN, MTH, OC, PHM, TOL, TPH and USG
· Casino, Lodging & Leisure; in leisure, HOG was downgraded to underperform from neutral with $43 tgt at Longbow after 4Q checks revealed HOG’s U.S. retail sales are trending down 5%-7% with U.S. shipments probably down “at least 20%” vs. prior forecast for 4Q shipments up 10%-22% y/y to 46,700-51,700 motorcycles
· Energy stocks outperform on rising oil with XOM, CVX, COP leading and SLB paring some of yesterday’s losses. Strong economic data from U.S. also pushes up oil. Also note OPEC’s crude production held steady in December as the group approached a fresh year of output curbs in full compliance with its supply deal. The 14 members of the Organization of Petroleum Exporting Countries pumped 32.47 million barrels a day
· E&P sector; Citigroup says capital discipline will be the overriding mandate for the exploration and production sector in 2018 after the group’s underperformance last year with several changes, as they upgrade COG & EOG to Buy and downgrade APC & CPE To Neutral – Based on valuations and other factors, we upgrade COG & EOG to Buy, and downgrade APC & CPE to Neutral; Price targets raised for COG, EOG & APC; but CPE unchanged. Top Picks For 2018 – Top picks for the year on the large-cap side are PXD, DVN, NBL, ECA andFANG, and WPX and JAG among the small-to-mid-cap E&Ps
· Utilities; sector under pressure yesterday as investors rotate into riskier assets and out of defensive sectors such as utilities (rising yields also not helping dividend paying sectors; on deal in the space today as SCG to be acquired by Dominion Energy (D) in a $7.9B stock deal, valuing the company at $55.35 per share https://goo.gl/e5a7x5
· MLPs extend recent gains as the Alerian MLP Index (AMZ) near best levels of the day up 2.2% around 287 level (also best levels since mid-October) – AMZ index off 52-week lows of 249 back on 11/29 (a more than 11% gain over that stretch); WES, ANDX, BPL, DCPamong top gainers
· Iraq’s oil exports surged to a record in December as oil prices strengthened due to production cuts by the Organization of Petroleum Exporting Countries and allies, including Russia. Iraq is OPEC’s second-biggest oil producer. Its compliance with the output cuts fell to 67 percent in November from 77 percent in October, according to the latest data from the International Energy
· Large Cap banks; WFC was upgraded to outperform at Bernstein saying believe a meaningful step up in capital returns in ’18/’19 and cost save realization in ’19/’20 can provide a lift to out-year EPS growth/ROE, and help the stock re-rate closer to a superregional
· Consumer Finance and Payment systems; MGI shares fell after Ant Financial’s plan to acquire the money transfer company collapsed after a U.S. government panel rejected it over national security concerns; Barclay’s said heading into 2018, they see strong risk/reward from names with multiple expansion potential and/or material earnings upside, including ADS (which was upgraded to Overweight),PYPL, FLT, and FDC and also remain Overweight on solid compounding growth names such as V, MA, SQ, GPN, and TSS…remain sidelined, in most cases given valuation levels, on ADP, PAYX, WEX, PAY, and WU, although they see little downside risk to shares
· Asset Managers and Brokers; Morgan Stanley raised its 2018 EPS by +13% and price targets by 16% on lower tax rates and strong equity markets – firm also upgrading APO and ETFC to Overweight with compelling valuation and catalysts, and LPLA to Equal-weight and downgrading IVZ to Equal-weight with more balanced risk/reward; Credit Suisse downgraded shares of AMG and LM based on valuation; Nomura upgraded SF and LAZ to buy in 2018 bank/broker outlook, saying they expect tax clarity to reinvigorate large / cross-border deal activity in ‘18
· Pharma; Leerink with several initiations in the specialty pharma sector, underperform rated on TEVA, and outperform rated on JAZZ, IPXL, HRTX and ENDP; VRX says total debt amounts to $25.7B as of end of 2017/says it has paid down an additional $300M in debt;ARNA was upgraded to outperform at Wells Fargo and tgt up to $53 from $19
· Biotech movers; the IBB trades to the best levels since mid-October for biotech; SGMO in ALS gene therapy collaboration pact withPFE/Sangamo will get $12M upfront payment from Pfizer and up to $150M in milestone/royalties; GLPG announced positive updates from the FLAMINGO study evaluating GLPG2222 as a monotherapy against placebo for F508del homozygous CF patients; ONCE said its Luxturna drug, which was approved by the FDA last month for blindness therapy, could come at a price tag of $850K
· Medical Devices & Equipment; MYGN said AZN will use myChoice HRD Plus in an exploratory analysis to identify women with advanced ovarian cancer who may benefit from maintenance treatment with Lynparza (Olaparib) and Avastin (bevacizumab).
· Healthcare services and suppliers; BAX upgraded at Raymond James based on our recognition that BAX stock should be considered a core holding based on high confidence in management execution;, while also upgraded CMD and HRC, but downgraded STE on valuation
· Managed Care & Hospitals; Hospitals weak today on cautious analyst calls: 1) Piper downgraded HCA and UHS to neutral on belief that the consumerism of healthcare is causing a 5-10 year structural headwind for the hospital industry, while Goldman Sachs initiated CYHwith a sell rating and $3 tgt (sell also on LPNT…neutral on HCA and THC) and overall cautious view on numerous structural and secular headwinds for industry
Industrials & Materials
· Industrial & Machinery; ETN was upgraded to outperform at Baird; RBC Capital with several changes as they upgraded UTX to outperform as expect 2018 to mark the final year of margin headwinds in Pratt and Otis, while cut HON as they expect them to take a breather after a solid run in 2017; 52-week highs today for EMR, APD, PX, DOV, CF, WRK, PKG, EMN, UTX, FMC, LYB, NUE, FCX, WM, URI in industrials and materials; WM 52-week high after Macquarie upgraded shares to outperform
· Transports; after trading to all-time record highs yesterday, the Transport index got another boost early before sliding; DAL said Q4 PRASM is tracking to the high end of initial guidance and reiterated its 11% operating margin view for Q4; 52-week highs for UNP, FDX, JBHT as index continues to power higher after strong holiday sales season leading package delivery names up
· E&C Sector; Baird said they are positively biased towards the E&C sector as the industry enters 2018 with best opportunity for net backlog/earnings growth in several years. Further, at modest discount to broader market/industrials, the sector offers pockets of better relative risk/reward. Also said previous problem projects and multi-year restructuring activities are now largely completed, providing a cleaner basis for investors returning to the space OP rated on ACM &FLR (which they upgraded today) as well as MTZ/MYRG
Technology, Media & Telecom
· Internet; EXPE was upgraded to buy at Bank America saying it has set a reasonable bar for 2018 and the Street may start anticipating accelerating growth in 2019; ANGI upgraded to buy at MKM Partners saying the home services sector is one of the largest opportunities still relatively untouched by Internet platforms; Wayfair (W) downgraded to neutral at Bank America ahead of likely deceleration in growth and added investment spending in 2018
· Semiconductors; AMD and NVDA shares jumped after a report that INTC has a flaw in its products that makes commonly used operating systems vulnerable to hackers https://goo.gl/fvTrQb; INTC later replied saying reports caused by a “bug” or “flaw” are incorrect, which helped pare losses on the day for INTC; AMBA was upgraded to outperform at Oppenheimer on belief that declining EPS and customer concentration risks (GoPro and DJI) are behind them; overall semi index extends recent surge
· Hardware & Components movers; IBM was upgraded to outperform at RBC Capital as see a host of cyclical and secular levers that should enable share performance through 2018; ROKU that it plans to release a voice assistant and expand its licensing program to additional home entertainment devices for its TV operating system, Roku OS; BB signed a deal with Chinese internet giant BIDU to work together on automotive software
· Software movers; KEYW was downgraded to neutral at Chardan and lowering revenue and EBITDA estimates for 2018; INXN 1.5M share Block Trade priced at $57.50; ORCL was upgraded to overweight and $57 tgt at Morgan Stanley
· Media & Telecom movers; QVCA upgraded to outperform at FBN Securities; CHTR was upgraded to buy at Guggenheim and tgt to $400 saying strategic value and free cash flow growth will outweigh an intensifying competitive environment in 2018; RBC Capital with media call today saying DIS remains our Top Pick on defense, tax and the efficacy of its mighty content strategy and says LGF remains preferred smidcap with strong organic earnings growth and take-out optionality and said new FOXA SpinCo appears to have asymmetric risk/reward as the market is ascribing value of ~$5/sh while we think it’s worth $13
Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.