Tuesday, January 16, 18
Equity Market Recap
· What looked to be another record setting performance for major U.S. averages, with new intraday record highs across the board earlier in the Dow Industrials (trading above the 26K level for the first time, and rising 1,000 points in just 7-days), S&P 500, Nasdaq Comp, Russell 2000 and Transports…stocks ending up giving up all its gains to close lower. The Russell 2000 Index slipped about 1% after an 0.8% advance, while the Dow Industrials traded off more than 380 points from its record high of 26,086, falling as much as 100 points before ending little changed. Markets preparing for earnings season, with financials out the last few days and more to come (GS and BAC tomorrow morning), while healthcare stocks were mixed as UNH advanced on earnings and MRK on data news, though the biotech space sank. Energy stocks declined after posting gains last week, with WTI crude falling for the first time in six session and transport slumped.
· Bitcoin the other big story, sinking as much as 20% to just above $11,000 as investors speculated about the prospect of regulatory crackdowns (the entire crypto currency space got slammed today). The weakness in the space weighed heavily on Bitcoin related stocks/blockchain names (RIOT, OSTK, MARA, NETE, DPW, NXTD, KODK, etc.). The U.S. dollar erased earlier gains, falling late against the yen and euro. There was no apparent single news item to explain the sharp reversal lower for stocks other than markets may have “tired” after setting record highs nearly each trading day of the New Year.
· The Empire State manufacturing survey slipped to 17.7 in January from a revised 19.6 in December, and below the 19.0 estimate, its third straight monthly decline; the new-orders index and shipments gauges fell in January 7 points to 11.9 and the shipments index fell 9 points to 14.4 while unfilled orders and inventory indexes rose.
· Commodity prices mixed; after strong gains last week for oil (up 4.7% last week), posting its 5th straight weekly gain last Friday, WTI crude slipped 57c or 0.9% to settle at $63.73 per barrel and snapped its 5-day win streak as well as prices took a breather from 3-year highs. Shale crude-oil production from seven major U.S. oil plays is expected to see a monthly climb of 111,000 barrels a day in February to 6.549 million barrels a day, according to a report from the EIA
· Gold futures end higher, rising $2.20, or roughly 0.2%, to settle at $1,337.10 an ounce and marking its highest close since Sept. 8th. Gold prices managed to eke out a gain, erasing earlier losses despite a bounce in the dollar after 4-days of losses
· The U.S. dollar opened the morning higher against most counterparts, rebounding from a 4-day losing streak, but found itself slowly slipping throughout the trading session. The euro touched lows of 1.2195, pulling back from 3-year highs of 1.2295 yesterday before rallying, while the Pound falls rebounds after trading above 1.38 yesterday (highest since Brexit). Bloomberg note the Chinese yuan has risen to the highest level in two years amid speculation authorities in China may introduce new measures to cool currency gains; the dollar also lost gains vs. the yen
· Crypto-currencies under pressure all day; Bitcoin slid nearly 20% to a four-week low, as fears of a regulatory crackdown on the market spread after reports suggested it was still possible that South Korea could ban trading in cryptocurrencies. The slide triggered a selloff across the broader cryptocurrency market, with biggest rival Ethereum down over 20% at one point, and the next-biggest, Ripple, plunging by as much as a third
· After volatility last week, seeing the yield on the 10-year rising above 2.59% (highest since before 2017 before paring gains), bonds erased their earlier declines as stocks sold off from fresh intraday record highs. The 10-year Treasury note yield traded up to 2.559%, from 2.551% late Friday, and off earlier lows around 2.52%; the 2-year note yield rose to 2.026%, from 2.001% and the 30-year bond yield was mostly flat at 2.851%. Bond markets were closed on Monday in observance of Martin Luther King Jr. Day. Yields for European bonds and Treasury’s fell earlier after Reuters reported the European Central Bank was unlikely to drop its language on further bond buying at next week’s meeting.
Other Interesting tidbits
· The Dow Jones Industrial Average’s weekly RSI is the highest in 114 years, MKM Partners’ technical analyst Jonathan Krinsky said. Meanwhile, the NASDAQ’s weekly RSI is the highest since December 1999, just before the Internet bubble popped.
Sector News Breakdown
· Retailers; UAA downgraded to underperform and cut tgt to $8 at Macquarie citing lower FY18 EBIT, sees amendment to credit agreement and likely capital raise;HIBB upgraded to buy at Bank America and up tgt to $30 from $14 as expect same-store sales and earnings inflection in 2018; MIK was upgraded to buy at Goldman Sachs on low valuation; JCP pares recent gains along with several other retailers
· Auto movers; sector active (autos and suppliers) after GM said it expects 2017 adjusted EPS at the high end of prior view and forecast 2018 results to be largely in line with 2017, a view that was above analysts’ estimates; Ford (F) said it was looking to help German mail operator Deutsche Post AG on electric vans; LEA guided 2018 adjusted Ebitda and net sales that were above estimates, while VC and MGA 2018 sales view fell below expectations – note the U.S. auto show taking place in Detroit this week
· Consumer Staples; in food, Citigroup upgraded CPB to buy and raised price target for the shares to $57 from $54 as sees a good setup for food stocks in 2018 due to improving fundamentals as well as benefits from cost savings and tax reform – and also added K to US focus list; in products, PG upgraded to neutral at Goldman Sachs as acknowledge the cost-saving benefits of its recent investments, and are most optimistic on China; HSY cut to sell at Goldman Sachs; SFS upgraded to overweight at Barclays citing easy comps/differentiated format and the impact of tax reform; Barclays also upgraded UNFI to equal-weight (and downgraded USFD)
· Housing & Building Products; ENR agrees to acquire SPB Global Battery and Portable Lighting Business for $2.0 billion in cash; TSCO tgt upped to $88 at Guggenheim as believe the financial flexibility provided by TSCO’s under-leveraged balance sheet and tax reform outweigh the risk
· Casino, Lodging & Leisure; in cruise lines (RCL, CCL, NCLH), Nomura said after rising 30%-50% LTM (vs. the S&P 500 +23%), they expect that 10% topline and 18% EPS growth through 2019 will drive another 20% upside in the stocks this year; in gaming, Morgan Stanley raises 2018 Macau gaming revenue growth forecast to 16% from 11%, noting that Q4 revenue growth of 20% topped his expectation for growth of 15% (WYNN, LVS, MLCO)
· After leading markets higher last week, the energy complex was mostly lower on the day as oil pared recent gains; natural gas-exposed and offshore drillers were notable underperformers after leading last week on higher nat gas
· Energy research; Mizuho raised its ’18/’19 WTI outlook to $58.50/$59 (+6%/+4%, respectively) and trim natural gas price deck on concerns about a “wall of gas” we believe may swamp demand (downgraded CHK and SWN to Underperform, SD to Neutral from Buy, and upgraded DNR and MTDR to Buy from Neutral; Morgan Stanley said sees potential for U.S. E&P stocks to rally another 15%-20% into 2Q; WFT was upgraded to Neutral from Underperform at Bank America ahead of higher expected int’l rig count into 18E, particularly in LatAm, where they see 16% 2018E rig count growth.
· MLPs; last week, the Alerian MLP Index (AMZ) closed at 300.50, up 4.6% for the week, 9.2% YTD and 19.1% from the recent low hit November 29th vs the S&P up 5.4% as oil prices and energy stocks have benefitted; OKE was upgraded to outperform at RBC Capital as like the attractive asset footprint, including a premiere position in the Williston Basin
· Large Cap banks; group was mixed last Friday after results from JPM, WFC, PNC, but a very busy week ahead for earnings in the banking sector; Citigroup (C) results, if strip out the tax reform, Q4 EPS beat estimates, as did fixed-income revenue (took $22B Q4 tax hit which includes $19B related to DTA re-measurement and $3B related to deemed repatriation of unremitted earnings; CMA Q4 EPS beat by 5c on lower provision for credit losses of $17M; earnings tomorrow from GS
· Consumer Finance and Lending; HAWK agreed to be acquired by private-equity firms Silver Lake and P2 Capital Partners for about $3.5 billion in cash, with holder getting $45.25 per share https://goo.gl/7VXx2P
· Asset managers; BEN mentioned positively in Barron’s saying despite suffering high outflows recently, the shares could be a smart contrarian play, noting the asset manager is likely to repatriate a large chunk of its overseas cash under new tax rules; says cash represents some 42% of Franklin’s current share price of $44, and its real estate could be worth another $2-$3 a share
· Monthly Master Trust credit card data: JPM Dec Net Charge-offs (NCO) were 2.43% vs. 2.36% MoM and Dec. delinquencies fell to 1.20% from 1.22% MoM; DFSDecember charge-off rate 3.1% vs. 3.1% last month and 30 days delinquency rate 2.3% vs. 2.3% last month; ADS December net charge offs 5.9% vs. 5.8% last month and delinquency rate 5.1% vs. 5.0% last month; SYF December charge-off rate 4.94% vs. 5.03% last month; delinquencies 3.02% vs. 3.09% last month; BAC Dec default rate 2.60% vs. 2.74% last month and delinquencies 1.66% vs. 1.64% last month
· Insurance; William Blair downgraded insurance brokers AON and WLTW to market perform uncertainty around the current regulatory investigation in the London market as it will likely be an overhang on the stocks at least until the preliminary announcement in the fall; life insurance names weakened after GE surprised investors with a $6.2 billion Q4 charge tied to a legacy insurance portfolio (UNM and CNO fell)
· Managed Care/Large Cap Pharma; LLY downgraded to neutral at Goldman Sachs saying while continue to like the long-term setup for this diversified topline and margin expansion story, they believe the thesis is well understood and better appreciated in valuation; MRK rises as interim results from a late-stage study of Keytruda in combination with chemotherapy as a first line of treatment in non-small cell lung cancer show overall survival (peer BMY slips); UNH Q4 results beat estimates and raises year outlook amid tax cut benefit; MOH upgraded at JP Morgan
· Biotech movers; EIGR shares plunge after the company said its pulmonary arterial hypertension drug failed to meet a primary and secondary endpoint both overall and in key subgroup; GILD was upgraded to outperform and $96 tgt at Wells Fargo as expects more stable hepatitis C virus trends in 2018; ONCE downgraded to underperform at Wedbush and cut tgt to $35 from $50 saying Luxturna pricing came in below our expectations; in healthcare services and suppliers; MDRX andCERN downgraded at SunTrust on valuation
Industrials & Materials
· Industrial & Machinery; GE said it sees a $6.2B charge in 4Q and GE Capital expects to make statutory reserve contributions of about $15B over seven years/sees goodwill and other non-cash impairments of $1.8b after-tax related to GE Capital actions
· Transports; airlines, ALGT upgraded to buy at Stifel as sees a “relatively lower-risk” revenue outlook given the company’s positioning in non-competitive markets and ramping revenue initiatives in 2018 while the firm downgrade SAVE to hold on valuation; in car rental, CAR said it expects continued headwinds in 2018, including incremental impact of rising interest rates
· Aerospace & Defense: Wells Fargo with a few changes: in defense downgrade LMT to market perform and upgraded NOC to outperform; in Aerospace downgradeCOL to market perform and upgrade SPR to outperform; in small cap upgraded CW to outperform, as see continued organic defense growth but initial guide could be conservative, have not adjusted for new tax laws yet; BA was upgraded to outperform at Wolfe Research based on 1) valuation, and 2) stronger conviction that this OE cycle will continue longer than we previously believed it would; Citigroup upped BA tgt to $380 and lifted estimates to reflect best guess at tax reform & richer valuation
· Metals & Mining; Deutsche Bank downgraded VALE and NEM to hold on valuation noting preference to steel stocks with tailwinds in 1H includes tax reform benefits, pricing upside, potential for further reduction in imports, some progress by Trump administration toward proposed infrastructure plan (likes STLD, X, RS and NUE)
· Chemicals; CBT upgraded to buy at SunTrust and up tgt to $73 based on our view of tightening global supply/demand fundamentals for carbon black; WLKdowngraded to underperform at Bank America as valuation seems stretched and expectations appear too high for the stock (firm also resumed AXTA with underperform on fundamental sector outlook and now that M&A speculations have subsided; cautious comments by Hedgeye on CF saying has 50% downside; Lithium stocks (ALB, SQM, FMC) fell as Bloomberg citing supply addition talks are coming from Toyota buying a stake in Orocobre, and Chinese investment to increase capacity
Technology, Media & Telecom
· Internet; AMZN tgt raised at BMO Capital to $1,600 and to $1,460 at Bank America, named top pick at Oppenheimer; YNDX estimates upped at Deutsche Bank as see upside to 4Q Yandex Taxi ests for 20% q/q ride growth and now assume lower 4Q loss ests; BABA assumed buy and $240 tgt at Jefferies as see multi-year legroom for growth in both Alibaba’s customer management and cloud revenue; VIPS upgraded to outperform at Bernstein; TWTR upgraded to buy from sell at Aegis with $30 tgt as believes 2018 will be an inflection point
· Semiconductors; QCOM sends letter to stockholders urging to reject AVGO’s undervalued takeover proposal by voting “for” re-election of Qualcomm’s board; separately, QCOM upgraded to buy at Nomura; SIMO downgraded at Susquehanna noting shares up ~25% since last August, and trading at an ~13x ’19 EPS (o longer find the risk/reward attractive); TSM upgraded to buy at HSBC Holdings, looking beyond seasonal/cyclical indicators as structural growth story accelerates; in semi-equipment, AMAT and LRCX upgraded to positive at Susquehanna saying demand should remain stable through the end of the decade; ASML upgraded to outperform at Credit Suisse; NVDA rises after analysts praise automotive opportunities
· Media & Telecom; SoftBank Group Corp. said it was considering listing its Japanese wireless business – a move that could reportedly raise $18 billion. SoftBank Group is aiming to sell about 30% of SoftBank Corp, for around 2 trillion yen ($18 billion) https://goo.gl/WB2D49 ; tower stocks defended at Goldman Sachs saying pullback overdone (SBAC, AMT, CCI); U.S. lawmakers are urging AT&T, to cut all commercial ties to Chinese phone maker Huawei Technologies and oppose plans by telecom operator China Mobile to enter the American market because of national security concerns; VIAB downgraded at Rosenblatt Securities
· Optical sector; Goldman Sachs downgraded FNSR to sell, saying it faces increasing risks of oversupply and competition in the optical component market; still, sees a more supportive environment for carrier spending on equipment in 2018 than 2017 and CIEN upgraded to buy from neutral — as a key beneficiary and also upgradesADTN to neutral after underperformance