Friday, January 5, 18
Equity Market Recap
· A remarkable end to a remarkable week for U.S. stocks, with major averages posting record closing highs each of the four days to start the New Year, and the S&P posting one its biggest weekly gains in over a year. Today’s surge was a little surprising given the unexpected “softer” than expected jobs report and a weaker ISM services reading. Stocks had rallied on strong economic data points throughout the week, but found strength despite the jobs miss (has to have Bears wondering what if anything can turn this market lower, or correct)? It has been a week of milestones to say the least, with the Dow shooting above 25,000 points for the first time, the S&P 500 topping the 2,700 mark, the Dow Transports knocking on the door of 11,000, and the Nasdaq Comp topping 7,100 as investors continue to put money to work to start the year.
· Today’s market move was once again broad based, but notable that shares of Dow component Boing (BA) topped $300 for the first time and was responsible for nearly half the price weighted Dow gains. Financials took a break today after leading markets higher this week. After trading as high as 10,986 (new intraday record high), the Dow Transport index held on to small gains led by CAR and rails KSU, CSX, NSC and UNP also higher. After outperforming last year, the Nasdaq Comp again leading markets higher, up over 3% this week alone as tech rallies.
· The monthly Nonfarm payroll report showed only 146K jobs were added in December, below the 190K estimate while unemployment held at 4.1% and wages rose 0.3% (in-line with economist expectations). The December ISM Non-Manufacturing report (services) also fell short of estimates (55.9 vs. 57.6 est.), but again, stocks ignore and look to set records for a 4th session.
· It is not just strength in the U.S. as the German Dax trades back near record highs and Japan’s Nikkei (which surged nearly 1,000 points this week alone), trades to best levels since the early ‘90’s. That doesn’t include the strength in Emerging markets as well. The dollar slipped, bonds fell (lifting yields higher) and gold prices eked out an 11th consecutive session advance.
· Jobs data misses views; the U.S. added 148K jobs in December, the slowest pace in three months and below the 190K estimate (though prior month upwardly revised to 252K from 228K); the unemployment rate remained steady at 4.1% for the third straight month while worker pay increased 2.5% YoY up from 2.4% in the prior month (rose 0.3% for Dec, in-line with views)
· The U.S. trade deficit widened 3.2% to (-$50.5B) in November, the highest trade gap since January 2012 and above the (-$49.9B) estimate; imports rose 2.5% to $250.7B while exports rose 2.3% to $200.2B; the year-to-date, the deficit is up 11.6% from the same period in 2016
· Factory orders for October rose 1.3% vs. an estimate 1.1% rise; orders were revised up to 0.4% from a previous reading of (-0.1%); new orders ex-transportation for Nov. rise 0.8% and new orders ex-defense for Nov. rise 1.2% after rising 0.6% in Oct.
· ISM Non-Manufacturing (service sector) fell to 55.9 from 57.4 prior and was below the 57.6 est.; the composite index was the lowest level since August; component breakdown: Business activity fell to 57.3 vs 61.4 prior month while New orders fell to 54.3 vs 58.7 (its third decline in a row and largest decline since July) while employment rose to 56.3 vs 55.3
· Oil prices pull back from 3-year highs after strong gains this week, with WTI crude falling 57c or 0.9% to settle at $61.44 per barrel, touching, but failing to hold its close above the $62 level. For the week, WTI oil prices end higher by 1.7% amid support from a weaker dollar and concerns about potential crude output disruptions in the wake of unrest in Iran.
· Gold prices end higher by only 70c to settle at $1,322.30 an ounce, but it was enough to keep the streak alive, rising an 11th straight session and finished the week up about 1% (its 4th straight weekly gain) and at its best levels since mid-September. Gold initially spiked (highs around $1,324) after the weaker jobs report, only to slide early morning as markets made heads/tails of the jobs report. Gold perked up mid-session, ekeing out a small gain despite the dollar rise.
· The U.S. dollar posts a modest gain, as the dollar index (DXY) inched higher, ending down only modestly for the week. Given the recent pullback in the greenback vs. other currencies (emerging markets and Euro specifically), the dollar actually got a small lift today (off 3-month lows) despite a round of weaker economic data. The U.S. dollar rebounded from an initial dip against its rivals following the December jobs report. The employment report came in below expectations and showed that wage growth remained sluggish, turning the greenback negative before it bounced back. The euro slipped today but ended higher by about 0.4%. Bitcoin prices jumped over 9% in a rebound off recent pullback. The Canadian dollar rallied the buck after its economic data.
· Bonds end the weak lower as yields rally into the close; Treasury markets initially gained and yields fell after the December monthly jobs report fell short of expectations (reported at 148K, below the 190K est.); the 10-year Treasury yield fell to 2.439% from 2.465% prior to the release and the 2-yr slumped 2 bps to 1.932% from 1.972%. However, the report was seen as a “one-off” following several other strong data points the last few weeks, as bonds reversed lower and yields ended higher on rising rate expectations (10-yr above 2.47%, 30-yr 2.81%)
Sector News Breakdown
· Retailers; busy week of analyst calls this week for the sector which has been volatile post-holiday sales surge; FRAN falls as cut its EPS view to 18c-23c from 35c-40c (below est. 36c) and lowers Q4 revenue guidance to $137M-$139M from $145M-$150M; Barclay’s upgraded TGT (raise tgt to $70 from $45) and LOW (tgt to $120 from $85) to overweight saying the Trump tax reform positions the retail industry exceptionally well in 2018; Buckingham Research upgraded FL to buy saying key product assortments are improving and we expect an inflection in comp by 2Q18, while the firm cut CROX & FOSL to underperform; BKS shares fell as its holiday period comp-store sales down (-6.4%) YoY while total sales also fell (-6.4%) and online sales fell (-4.5%); UAA shares rallied after Buckingham upgraded to neutral
· Consumer Staples; STZ mixed Q3 results as EPS beat, but revs fall short of consensus and said that for FY18, it now expected wine & spirit results to be at lower end of previous ranges; in grocers, KR was upgraded to buy at Jefferies as expect improvement in FCF generation after an investment period and expect comps to improve; CALM posted lower Q2 EPS and revenue results
· Restaurants; SONC reported Q1 results that were mixed, as comps fell slightly short of expectations but EPS exceeded estimates, aided by a favorable tax rate; JACK was upgraded to buy at Goldman Sachs saying the company is a strong beneficiary of tax reform; WING was downgraded to neutral at Wedbush saying checks point to Q4 trends below consensus; Piper said on the group, they recommend CMG and PBPB as “recovery stocks”; and also highlight a small basket of “strategically interesting or value” stocks including BJRI, CAKE, HABT and PBPB
· Mass Merchants; OLLI raised its full-year guidance and said same-store sales for the nine weeks ending Dec. 30 rose 3.9%, and sales rose 19.4% for the period; CASY was added to the Franchise Picks List at Jefferies and removed MUSA; CORE cuts FY17 adj. EPS view to 94c-$1.01 from $1.20-$1.24 and below consensus $1.19 and backs FY17 revenue guidance of $15.7B
· Housing/Building; several analyst calls today on building products, with three separate upgrades of USG today (JPM, Barclays, Baird); 1) JP Morgan upgraded USG to overweight as anticipate higher capacity utilization for the wallboard industry will drive improved pricing and downgraded MAS to neutral while saying MHK consensus is too high and top picks SWK, FBHS; 2) Barclay’s boosted price targets to account for the intrinsic value benefits from tax reform, driving higher multiples than our prior forecasts (firm said MHK remains top pick while upgrading USG and CBPX to overweight – within builders they upgrade TPH to overweight); 3) Wells Fargo follows Tuesday upgrade of LEN with upgrade of TMHC to outperform despite its fast start out of the gate the past three trading days (top Picks remain DHI and OC); 4) Baird upgraded USG to outperform as believe the company’s underlying EPS power is underappreciated by investors
· Autos; the end of a strong week for autos with FCAU, Ford, LEA, BWA up again today; over the last 3-days (after better auto sales monthly data Wednesday): FCAU is up 17.5%, GM 5.3%, F 4.2%, BWA 6.2%, and LEA 6.5%; auto retailers AAP up about 6%, AZO 5.4% and ORLY 4.2% over the last 3-days as well
· Energy stocks have been strong this week as oil prices touched 3-year highs yesterday and Dow components XOM and CVX been strong; today; Goldman Sachs upgraded AMGP to buy as the stock now has more favorable risk/reward due to tax reform upside, as well as top quartile growth, return and debt-free balance sheet and downgraded SEMG to neutral after recent rally in share prices; OKE 19M share Spot Secondary priced at $54.50 and said it will invest approximately $1.4B to construct new pipeline and related infrastructure, to transport natural gas liquids
· Large Cap banks; after a week of gains in banks (large cap/regional) and finance/payment names, the group saw some profit taking early; DB shares slumped as the European bank said it sees small FY17 after tax loss on IFRS basis/saw low levels of Q4 client activity in key areas; MS said it sees net income for the quarter ending December 31, 2017 to include an aggregate net discrete tax provision of approximately $1.25B; in research, Nomura upgraded CMA to buy and Piper upgraded USB to overweight on the back of higher estimates largely due to tax reform (there were several analyst upgrades this week in financials)
· Pharma movers; LLY was upgraded to buy with $115 tgt at Argus as see new product launches, expanded indications for existing drugs, and potential regulatory approvals as catalysts for growth in 2018; TEVA was downgraded to underperform at Wells Fargo; KALA shares dip as announces topline results for two Phase 3 Trials of KPI-121 (misses primary symptom endpoint in STRIDE 2); OHRP Phase 3 MAKO trial did not meet its primary efficacy endpoint; MNTA reported positive top-line data showing safety, tolerability and proof of mechanism for M281 in a phase 1 single ascending dose and multiple ascending dose study
· Biotech movers; biotech has had a strong start to the year as the IBB traded to the best levels since October this week; Bank America with a few changes, as they upgraded VRTX and ESPR from Neutral to Buy with updated PO of $180 and $76, and downgraded CELG to neutral and IRWD to underperform on lack of significant catalysts and lower expectations on product sales (PO updated to $120 and $15, respectively) – said top large capo picks VRTX and AMGN; CRSP 5M share Secondary priced at $22.75; DNLI rises on $150M Takeda partnership
· Medical devices, services and equipment movers; BSX upgraded to Top Pick from Outperform; as shares offer the best risk/reward balance within our large-cap coverage; ANGO downgraded at Craig Hallum after lower guidance; CVS rises a second day on another analyst upgrade (raised to overweight at Morgan Stanley)
Industrials & Materials
· Industrial, Multi industry; Dow component BA extends gains, rising to fresh record highs, topping the $300 per share level for the first time; UTX was upgraded to outperform at Baird on pending COL deal and reflecting higher accretion from tax reform (was upgraded by RBC 2-days ago); WSJ reported midday that BA is in talks with its Brazilian counterpart ERJ and Brazil’s government on ways to address the government’s concerns, informally agreeing to terms that would value the Brazilian company at $28 a share https://goo.gl/YdNoPv
· Transports; sector all-time highs yesterday, led by FDX and UPS (both at record highs); FDX upgraded to buy today at UBS as well as rail UNP (which was also upgraded at Wolfe), and trucker WERN upgraded to buy; Rail cars weak early as GBX Q1 EPS missed by 10c and revs also fall short ($559.5M vs. $591M est.) – TRN, ARII, RAILactive; as mentioned above, the rail sector upgraded to overweight at Wolfe saying fundamentals are clearly positive right now with strong intermodal and merchandise demand trends (upgraded UNP)
Technology, Media & Telecom
· Semiconductors; story of the week remains INTC after admitted that its chips have a vulnerability that will require software patches, but denied a media report that said other companies’ chips were not affected; Goldman Sachs upgraded XLNX to buy and adds to conviction list while reiterate buy on NVDA and remains cautious TXN andAMD; Goldman maintains constructive view on semiconductor capital equipment sector; SIMO announced prelim Q4 rev at upper end of $130-136M guidance vs. est. $133.3M and gross margins near mid-point of 45.5-47.5% guidance; MTSI upgraded to buy at DA Davidson as predicted a reacceleration of growth this year
· Hardware movers; AAPL said all Mac, iOS devices affected by the chip security issue revealed this week in INTC, known by two names, Meltdown and Spectre; ROKUreceives 2nd analyst downgrade in as many days on valuation (Citigroup cut today, after Morgan Stanley yesterday)
· Networking and equipment; CSCO upgraded to buy at Bank America and raise tgt to Street-high $46 from $37 saying it is in early stages of positive transition to software and shares are likely to get a re-rating closer to industrial-like peers; Bank America also upgraded FFIV to buy with $157 tgt saying the company has new product offerings and a pricing strategy that could help
· Software movers; DWCH rises on report it hired a financial adviser after receiving expressions of interest from potential acquirers, sources familiar with the matter said on Thursday – Reuters https://goo.gl/RbTGXp ; CHKP estimates cut at Cleveland Research saying checks coming in soft
· Internet; another strong showing for the high-beta Internet sector, with good gains in large cap giants GOOGL, BABA, FB and AMZN, while P, TWTR also rally; SABR andTVPT downgraded at Evercore/ISI to underperform, citing higher expenses for technology and commission