Friday, January 12, 18
Equity Market Recap
· What word can you say or use to explain this market rally? Parabolic? Euphoric? Fear of missing the out? Either way, stocks end the day and week at record highs for an 8th time in the last 9 days to start the year, with the Nasdaq Comp up 5% YTD and 4% gains for the S&P 500 and Dow. Stocks have been ripping on higher oil prices (lifting energy names), rising yields (supporting financials), a rebound in underperforming sectors (retail), and of course the ongoing follow through benefits to corporate earnings through the recently passed tax reform bill which many analysts says could still be underestimated. Industrial and metal stocks have also rallied on hopes for a new infrastructure plan by the Trump administration. Economic data has been strong, boosting the underlying sentiment for the economy, but interest rates remain not far off lows.
· The rally has been broad based with Small Caps surging to record highs and the Dow Transports up for a 9th consecutive session to a record as well. There were a whopping 161 S&P 500 components trading at 52-week highs today! There were also ten 52-week lows in the S&P (interest rate sensitive REITS such as HCN, HCP, VTR, KIM, AVB, O, AIV and MAA and utilities SO, EIX). As expected, banks earnings were mixed and messy today (JPM, WFC), but the boost from the Tax Cuts and Jobs Act is just starting to boost economic growth and profits and markets overlooked the results to focus on the future. This is the second straight weekly gain for both the Dow and the S&P, as well as their seventh positive week of the past eight. The U.S. stock market will be closed on Monday for Martin Luther King Day
· European stocks edged higher Friday, despite a surging euro on the back of a breakthrough in German government-coalition talks. The Stoxx Europe 600 index rose 0.3% to close at 398.49, swinging into positive for the week and ending with a 0.3% weekly gain. Germany’s DAX 30 index advanced 0.3% at 13,245.03, and the U.K.’s FTSE 100 index edged up 0.2% at 7,778.64 a new record closing high.
· Retail sales for December rose 0.4% in December to mark the fourth straight gain, but was slightly below the 0.5% estimates; both the November and October sales total were revised higher; ex: autos and gasoline for December, retail sales also rose 0.4%, above the 0.3% estimate;
· The consumer price index (CPI) rose 0.1% in December (mostly tied to housing), which was in-line with economist estimates; the core CPI (gas and food are stripped out), rose a much sharper 0.3%, slightly above the 0.2% estimate; the 12-month rate of inflation as measured by the CPI slipped to 2.1% from 2.2%; the core rate edged up 1.8% from 1.7%
· Business Inventories for November rose 0.4% MoM, in-line with expectations while business sales rose 1.2% in November after rising 0.8% the prior month; Inventory/sales ratio at 1.33 in Nov. vs 1.40 a year ago; the ratio is the lowest since Nov. 2014, when it was at 1.32
· Jan. IBD/TIPP economic optimism index at 55.1 after Dec.’s 51.9; the economic outlook rose to 55.5 vs 49.8 last month; personal finance rose to 64 vs 59.1 last month and Federal policies fell to 45.7 vs 46.7 last month
· Oil prices higher, reversing from earlier declines (traded lows of $63.06) and rising 50c or 0.8% to settle at $64.30 per barrel for its 5th consecutive daily gains. WTI crude posted an advance of 4.7% for the week (its 4th straight weekly climb). Oil prices saw a modest pull back early off 3-year highs reached yesterday, but momentum, a weaker dollar, bullish oil inventory data and Iran sanctions have lifted prices over the last week. Markets have ignored the larger than expected gasoline and distillate builds and the bearish rig data this afternoon. Brent crude advanced, but down from highs above $70 yesterday.
· Gold prices ended at their highest close since Sept. 11th, rising $12.40, or 0.9%, to settle at $1,334.90 an ounce, closing out the week with a 1% gain (its 5th straight weekly gain in a row). The pullback in the dollar provided momentum for the precious metal this year so far, along with being seen as a hedge against inflation’s erosive effects on other assets (stronger CPI reading).
· Not a good week for the dollar, with the dollar index (DXY) sliding about -0.9% on the week back to September lows, with sharp declines against the Euro and Pound. The Pound hits strongest level vs. the dollar since 2016 Brexit vote, with intraday high of $1.3723 following a report that Spanish and Dutch finance officials will work toward the EU reaching a so-called soft Brexit deal with the U.K. (GBP up 1.3%). Meanwhile, the Euro surged to 3-year high against the dollar after reports Chancellor Angela Merkel’s conservative CDU party and Martin Schulz’s center-left SPD agreed to a blueprint for formal coalition negotiations. The Germans voted in a general election on Sept. 24, where Merkel’s party came out with the most votes, but fell short of an outright majority (euro highs 1.2167). Crypto currencies rebound following yesterday decline.
· Bonds extend losses and yields rise (especially on short-end) after stronger-than-expected inflation data (CPI data) look to give the Federal Reserve more room to tighten monetary policy and raise interest rates; the yield on the 2-yr rises as much as 4 bps to highs 2.01% (first move above 2% since Sept 2008), while the 10-yr yield was up only slightly to 2.55% (off its earlier week high of 2.59%). Bonds have slumped this week on earlier reports that China was slowing purchases of US debt (which was later denied by China), stronger economic data and rising rate hike expectations. The yield on the 10-yr is up 15 bps to start the year and the 2-yr up 13 bps.
Sector News Breakdown
· Retailers; sector among the top outperformers today (and the week – TGT, KSS); KSS receives two analyst upgrades, raised by both JP Morgan (to overweight) and RBC Capital (to sector perform); Video game retailer GME shares fell as reported a big jump in holiday sales (comps rose 11.8%), but said it would take impairment charges of $350M-$400M related to its technology brands business, primarily a result of the negative impact of a longer upgrade cycle for new mobile devices and the changes made by AT&T Inc. to the compensation structure; DKS was upgraded to buy at Deutsche Bank as believes industry trends are bottoming and notes that Dick’s inventory levels are coming back into balance; SIG downgraded at RBC Capital; the NRF said U.S. holiday retail sales increased YoY to $691.9B, exceeding forecast of $678.75B-$682B; LOW shares jumped late day after Bloomberg reported D.E. Shaw is said to build an activist stake
· Consumer Staples & Restaurants; KO upgraded to outperform at Evercore/ISI saying company looks poised for multi-year outperformance on fading negative drivers and a strong case for multiple expansion; WEN downgraded to neutral at Longbow; BOBE replaced by TVPT in the S&P 600 index; Stifel said COST could add $1.8b in sales on WMT’s move to close 63 Sam’s Club stores and convert as many as 12 locations into e-commerce fulfillment facilities
· Auto sector; Wells Fargo upgraded the autos supplier sector to market weight from underweight saying demand for the group is likely to stay resilient and prevent an earnings reset in 2018/the firm also upgraded MGA to outperform from market perform saying consensus 2018/2019 revenue and EPS estimates too low (sees GNTXas biggest beneficiary of tax reform and raised targets for ALV, APTV, ADNT, DLPH, GNTX, and VC)
· Another strong showing for energy shares, helping lead major averages to fresh record highs the last two days as oil prices march to fresh 3-year highs; given the strength in oil this week, Baker Hughes (BHGE) showed that total rigs soared 15 to 939, with oil rigs up 10 to 742, gas rigs up 5 to 187; in news, T. Boone Pickens, the influential Texas oil man, said that he is closing the energy hedge fund he has run since 1996, citing health concerns and poor financial performance
· Utilities and Solar sector; CSIQ said it sees Q4 and year results below views citing delayed closings (guided Q4 revs to $1.04B-$1.08B from $1.77B-$1.81B); utilities fell this week amid bets in riskier assets (and out of defensive sectors) and on rising yields making dividend paying sectors less attractive (the UTY fell over -1.7% this week)
· MLPs; the Alerian MLP Index (AMZ) down about -0.5%, failing shy of the 300 level today (a level not breached since early August). With the AMZ index up ~8% YTD and ~18% from its late November low, it appears U.S. Midstream has regained its momentum on rising oils)
· Financial earnings among top stories today with results from JPM, WFC, BLK and PNC; 1) JPM record highs as Q4 EPS beat and revs mostly in-line while trading revs fell 26% to $3.37B, led by 34% decline in fixed income (Bloomberg est. was for -19% decline); equity-trading rev. was little changed YoY while investment banking revs also missing views; 2) WFC Q4 EPS beat while revs missed and said NIM 2.84% below Bloomberg est. 2.87%; higher profits, aided by new tax law; 3) PNC Q4 EPS beats by 9c and reported NIM on taxable-equivalent basis that missed the average analyst estimate (2.88%, vs. Bloomberg estimate 2.91%); said 4Q provision for credit losses $125M; 4) BLK rises after Q4 revenue top estimates and year’s net inflows rose to record $367B; 59% increase in year diluted EPS to reflect net tax benefit from tax law and raises dividend
· Consumer finance sector; JP Morgan maintained view that the consumer credit cycle has entered extra innings. Thus, while the optics of tax relief make consumer finance stocks appear cheap, we wonder if this implicitly assumes a mid-cycle multiple on peak earnings (the firm downgraded AXP and ALLY to neutral, cut NAVIand OMF to underweight and upgraded SC to overweight);
· Insurance movers; AFL shares fell sharply on reports it has exploited workers, manipulated its accounting, and deceived shareholders and customers, according to nine former employees https://goo.gl/2W8Wao . Aflac later issued a statement saying the fraud allegations are “false.”
· Pharma & Biotech movers; ARDM shares fall as the FDA did not recommend approval for Linhaliq as a treatment for non-cystic fibrosis bronchiectasis patients; CNCEshares slide as the USPTO Patent Trial and Appeal Board (PTAB) rejected its petition challenging the validity of INCY’s U.S. Patent No. 9,662,335 covering deuterated ruxolitinib analogs; FDA approves AZN’s PARP inhibitor LYNPARZA (olaparib) for the treatment of HER2-negative breast cancer patients whose tumors harbor the BRCA genetic mutation; HZNP was upgraded to buy at Mizuho; PBYI said CHMP to discuss neratinib on January 23
· Managed care; ANTM and HUM were both upgraded to buy at Jefferies saying stable MCO fundamentals and the low cost trend env’t make them biased toward positive earnings revisions for the group. For HUM, after two years of below-market enrollment in MA, the book is running to a more normalized 7% increase in ’18. As for ANTM, they are confident new CEO can improve execution and deliver on the $4B PBM gross savings goal, which is worth $2.50 of EPS in ’21
· Healthcare suppliers, services and equipment; BDX says has received FDA warning letter for its pre-analytical systems business; EXAS announces offering of $500M in convertible senior notes
Industrials & Materials
· Transports; incredible strength in the sector, setting another record high for the Dow Transport index, rising for a 9th consecutive session (not a down day in 2018 so far), led by broad based rally in airlines (last two days DAL, UAL), package delivery (FDX, UPS record highs), truckers and rails
· Aerospace & Defense; Credit Suisse said they continue to be particularly enthusiastic about commercial OE on revenues, cash flows, and margins and have Outperform ratings on each of the three OEMs we cover (and raised tgt on BA to $375) – the firm upgraded AIR to Outperform from Neutral, but cut CACI to Neutral and downgraded ESL and MOG/A to Underperform
· Metals & Mining; Steel stocks active as Secretary of Commerce Wilbur Ross formally delivered the Section 232 report to the President a few days ahead of the statutory deadline. KeyBanc said the submission of the report and the prospect of further tariffs could boost sentiment, while lack of immediate details could offset some of the boost (X, AKS, NUE, STLD)
· Paper & Forest names; CIBC said it is upbeat on Lumber, Pulp, Containerboard in 2018, however, oriented strand board equities have downside risk due to supply addition during 4Q17-1H18 – the firm upgraded WFT.CN, WEF.CN, CFX.CN to outperform on improved outlook for lumber and pulp sector; cuts RFP.CN to neutral from outperform after recent share price rally
Technology, Media & Telecom
· Internet; FB shares dropped after the company said it’s making major changes, shifting users’ news feeds back toward posts from friends and family and away from businesses and media outlets (analysts caution the move creates a risk to the company’s financial performance given likely fewer ads in news feeds); in research,EBAY upgraded to buy at SunTrust (raise tgt to $46) upbeat Q4 holiday sales boosting revenues and gross merchandise volume among other factors; WEB also upgraded at SunTrust to buy with $28 tgt as see greater benefits accruing from the company’s push into value-added solutions; SNAP downgraded to underperform at Raymond James saying Snap is largely a Chat/Message app and not a camera company as it refers to itself; in broader sector calls, Raymond James raised FY18 PTs on favorite Internet stocks as bullish thesis is strengthened; lastly, Morgan Stanley bullish on AMZN with sum-of-the-parts bull case $2,000, in addition to FB andGOOGL – also positive on EXPE and Z (both upgraded yesterday) as well as ZNGA, GRUB, PCLN and ATVI – but firm downgraded EA and ETSY; TWTR tgt raised to $30 at BTIG saying the company is in the early stages of a multi-year turnaround; AMZN tops $1,300 level for the first time as analysts continue to get more bullish on the company
· Semiconductors; SYNA upgraded to overweight at KeyBanc on greater confidence in turnaround story thanks to strong in-display fingerprint sensor positioning, shrinking dependence on single product; AMD one of few underperformed in the Philly semi index (SOX) as company changes its stance saying vulnerabilities put its chips at risk as well (after INTC flaws revealed last week)
· Software & Hardware; MSI upgraded to buy at Deutsche Bank and upped tgt to $110 as analysis suggests the company’s Software Command Center Solutions business likely to grow annually at 25%; INFY shares dipped after earnings results