Friday, January 26, 18
Equity Market Recap
· U.S. stocks do what they do best, trade to fresh all-time closing highs, rallying today on the heels of strong earnings from Dow component Intel (leading the chip sector up around 3%) as the tech heavy Nasdaq outperforms (trades 7,500 for the first time). The rally was broad-based, with nearly all S&P sectors advancing while the dollar fell to a three-year low, reversing yesterday’s Trump bump on slower than forecast GDP growth. Healthcare was another standout sector to the upside, with Biotech (IBB) shares trading to fresh 52-week highs this week and Pharma jumped as well. Back to the data, the 2.6% annualized GDP gain missed estimates of 3% and fell below the prior quarter reading of 3.2% (but economists focused on the stronger personal consumption data – always the silver lining these days). The yen jumped to 5-month highs before paring gains after the Bank of Japan clarified earlier comments from Governor Kuroda to say that he hadn’t revised the country’s inflation outlook. Treasuries declined, oil topped out at 3-year highs and gold prices pulled back after settling at more than 1-year highs yesterday. With today’s gains, the S&P and Dow Industrials are up over 7% to start the year and the NASDAQ up 8.5%.
· U.S. Gross Domestic Product (GDP) grew by 2.6% in Q4, slightly below the 3% estimate (and 3.2% the prior period) amid weakness from trade and inventories, offsetting strength in consumer spending and business investment; personal consumption was strong rising 3.8% (vs. the 3.7% estimate and 2.2% prior); The annual rate of inflation, measured by the PCE index, rose to 2.8%, the highest pace since 2011; core inflation data in-line with views as core PCE rose 1.9%
· Durable Goods Orders for December rise 2.9%, above the 0.8% estimate; Durable goods new orders revised up to 1.7% for Nov. from 1.3%; new orders ex-trans. rose 0.6% in Dec. after 0.3% rise and new orders ex-defense rose 2.2% in Dec. after 1.5% rise
· The December advanced trade deficit of goods widened to (-$71.6B) from (-$70B) in prior month, and greater than the (-$68.9B) estimate; imports rose 2.5% in Dec. to $209.218B from $204.021B in Nov, while exports rose 2.7% in Dec. to $137.639B from $134.027B in November
· Oil prices end the day and week higher, back to three-year highs on positive inventory data and a weaker dollar. March WTI crude oil climbs 63c, or 1%, to settle at $66.14 per barrel, gaining gains roughly 4.5% for the week and recovering most of yesterday’s declines (touched highs of $66.66 yesterday and $66.35 today). Crude had been buoyed recently after OPEC-led oil supply curbs and a record 10th straight weekly drop in U.S. crude inventories supported the market. Even data from Baker Hughes that 12 oil rigs were added in the most recent week failed to dent the rally (oil rigs rose 12 to 759, the biggest increase in 10-months.
· Gold futures drop -10.80, or 0.8% to settle at $1,352.10 an ounce, paring it weekly gain to roughly 1.4% amid the dollar decline. Gold closed up $6.60 to $1,362.90 yesterday, the highest settlement since Aug. 4, 2016, driven higher by the greenback, which declined in the wake of Wednesday’s comments from Treasury Secretary Steven Mnuchin who said a “weak dollar was good for trade.” President Trump tried to back-track the comments from Mnuchin saying in Davos he wanted to see a stronger dollar and expressed optimism that the battered U.S. currency would strengthen. The commentary pared gold gains today (though the dollar remained weak).
Currencies & Bonds
· The U.S. dollar declined, capping an awful week as the dollar index (DXY) fell nearly 2% to more than 3-year lows (DXY = 88.43 yesterday). The dollar pared losses late after the Bank of Japan downplayed governor Kuroda’s comments saying he didn’t revise its inflation outlook (taking the buck back above the 109 briefly). Earlier, the greenback dropped to lows of 108.28 vs. the yen as Kuroda reaffirmed commitment to lose monetary policy. He said a 15-year period of deflationary mindset is not easy to eradicate from consumers but central bank is committed to achieving 2% inflation target (spoke in Davos) – for the week the dollar fell -1.8% vs. the yen; similar move for the euro vs. the dollar this week as it touched 3-year highs of 1.2537 yesterday; the Pound small gains today, but up 2.3% on the week.
· Cryptocurrency prices declined on Friday after one of Japan’s leading Bitcoin exchanges announced that it was halting client withdrawals. Tokyo-based Coincheck said t it is halting withdrawals of all coins except Bitcoin and has stopped accepting deposits into NEM coins. The exchange did not specify a reason behind the sudden move.https://goo.gl/iBwk9F
· Another week for bond yields to climb, with the shorter-term 2-yr yield rising above 2.12% earlier (highest in 10-years), while the benchmark 10-year edged higher to around 2.66%. Stronger economic data, rising rate expectations and bullish sentiment about the economy has pushed yields to best levels in years to start 2018 as bonds slip.
Sector News Breakdown
· Retailers; BBBY downgraded to underweight from neutral at J.P. Morgan, with trends appearing to slow sequentially quarter-to-date and further gross margin erosion appearing inevitable (notes same-store sales were down 0.3% last quarter despite including November); GPS downgraded to peer perform at Wolfe Research as good news baked into stock price; AGS 10.25M share IPO priced at $16.00
· Consumer Staples; in consumer products, CL Q4 EPS and sales fell short of consensus views as organic revs rose 2% missing the 2.9% estimate; NWL shares rebound following yesterday’s -20% decline on lower outlook; tobacco rebounds after a U.S. FDA advisory committee meeting yesterday where PM’s heated tobacco product IQOS failed to win the panel’s backing that it reduced the risk of tobacco-related diseases for smokers who switched from regular cigarettes.
· Restaurants; SBUX Americas segment missing comparable-restaurant sales estimates for the fifth straight quarter/EPS beat driven by tax-related benefits and higher interest income that offset weaker comps and margins; JACK upgraded to outperform from neutral and up tgt to $115 from $104 as expect comp sales growth stabilization starting in FQ2
· Casino, Lodging & Leisure; in leisure, SunTrust said the weakening USD is unlikely to catch many by surprise; however, we expect this to provide a benefit in 2018 for many of our companies with meaningful international revenue streams/raise tgts for BC (to $68 from $62), PII (to $125 from $115), GOLF (to $24 from $20), HLF (to $76 from $67) and TUP (to $68 from $65); in RV sector, Northcoast downgraded WGO and THO to neutral saying dealer inventory is at “an unsustainable level,” which will likely lead to 2018 wholesale shipments falling “short of expectations” or resulting in “disappointing margins.” WYNN shares slid more than 10% on a WSJ report of sexual misconduct by owner Steve Wynn https://goo.gl/nXz9mF (Steve Wynn later refuted the story)
· Quiet in energy stocks news, but a good weekly return for oil prices in general; in services and E&P; Baker Hughes Rig Count data showed total rigs rose 11 to 947, with oil rigs up 12 to 759 and gas rigs down 1 to 188 (miscellaneous rigs unchanged); CRR adds to yesterday -11% decline following earnings results; EGN upgraded to buy at Seaport Global as 2018 activity likely higher than expected with 2019 poised to crush expectations; Jefferies today they reduced estimates for refined products and crude tankers given weaker spot rates
· Banks were flat with most major bank earnings behind us, as regional banks now the focus; ETFC announced relatively in line quarter featuring a slightly better than expected NIM and adj. OM, and another favorable loan loss reserve reversal/also agreed to acquire more than one million retail brokerage accounts with $18B in customer assets from COF for a price of $170M; asset manager FII trades higher after earnings results; others bank movers after earnings: ASB, FHB (also downgraded at JP Morgan), IBKX, SIVB (missed Q4 EPS and higher provisions); CNS was downgraded to underperform at KBW Inc.; in insurance; AJG trades at 52-week highs after Q4 revenues and earnings beat and reports double-digit growth in fourth quarter; AHL fell as said it sees recording underwriting loss of $245M in 4Q
· Large Cap Pharma; ABBV shares to record highs after quarterly results and boosted its 2018 forecast to $7.33-$7.43 from $6.37-$6.57 to include 8c on “stronger operating performance” and gains from corporate tax reform; AZN said that its PT010 therapy for chronic obstructive pulmonary disease showed positive results compared with existing treatments in a trial; PFE momentum continues as shares trade to best levels since 2004 (helped after-market sees the improved guidance by ABBV due to tax reform – PFE reports Tuesday)
· Biotech movers; biotech (IBB) up another 1% today – back to 52-week highs and up over 5% this week alone on M&A deals Monday, analysts getting more bullish and earnings; GILD got upgraded to buy at Jefferies and upped tgt to $95 from $87 saying the worst is generally moving behind them after a tough three years/see better days ahead as investors shift focus beyond GILD’s waning hepatitis C franchise
· Medical devices and Equipment; ISRG announced 17% 4Q procedure growth, preliminary sales of $892M that exceeded Street forecasts, and 2018 procedure growth guidance of 11-15% y/y that was in line with consensus expectations; ABAX shares jump after Q3 results top consensus; HRC, QSII, and PKI among movers after earnings
· Companies announced deal pricings overnight: SBBP 5M share Secondary priced at $6.75; SLDB 7.8M share IPO priced at $16.00; TORC 5.67M share IPO priced at $15.00
Industrials & Materials
· Multi industry and Industrial; HON posted slight Q4 EPS and sales beat while year EPS view of $7.75-$8.00 just below the $8.05 estimate; COL Q1 EPS/sales top consensus; in a setback for BA, a U.S trade panel Friday rejected the aerospace giant’s complaint that it was harmed by subsidies provided to Bombardier Inc. effectively blocking a Trump administration proposal for steep tariffs against the Canadian jet maker.
· Transports; sector has been a notable decliner the last few days, led lower by airlines Wednesday on capacity comments from UAL (raising price war fears/lower margins), and several earnings/capacity data recently (AAL, JBLU, ALK, LUV); note shares of ALK (coming into the day) down 8 of the last 9 days; FDX said it is committing more than $3.2B in wage increases, bonuses, pension funding; in truckers, CHRW upgraded to buy at Cleveland Research
· Chemicals; APD underlying 1Q Ebitda missed estimates, EPS was in-line and guidance bump was mostly due to tax benefit; HUN raised Q4 views due to strong MDI ops demand/margins
Technology, Media & Telecom
· Internet; all-time highs for AMZN as Morgan Stanley the latest to raise tgt, taking it up $1,400 but says bull case price tgt could be $2,100; ZG was upgraded to overweight at KeyBanc saying stock’s underperformance since their July initiation (down 6% vs. S&P up 15%) reflects more appropriately tempered optimism; TWTRshares outperformed early on (snapping its 8-day losing streak); BABA new record highs again
· Semiconductors; after two days of selling pressure on Apple iPhone X demand fears (as analyst ratchet down estimates for suppliers), group rebounds today; Dow component INTC leads the way as 4Q17 revenue and EPS well ahead of consensus and guided 1Q18 roughly in-line with consensus expectations, while showed growth in non-PC areas such as cloud data center, memory and IoT (low expectations into quarter); MXIM reported solid results and guided above expectations due to strength from the consumer and industrial end markets; KLAC also a mover on earnings to the upside; (broad strength in semi’s AMD, ASML)
· Hardware & Software; VMW active after the WSJ reported that Dell Inc. could be exploring a deal to buy the cloud computing company/Dell may also be considering an IPO https://goo.gl/Pkg9Aj ; in hard-disk drives, WDC mixed Q2 results though rev and margin guidance for Q3 better; in EMS, FLEX better Q3 results and good guidance (after lower views from SANM, CLS this week); FTNT was downgraded to Raymond James
· Media & Telecom movers; EGHT shares jump and trades at 52-week high as earnings and revs/guidance top consensus; EA and the National Football League (NFL) announced they are teaming up with ESPN and Disney XD (DIS) for exclusive broadcasts of the upcoming EA SPORTS Madden NFL 18 Championship Series; in movie theatres, AMC shares fall after MoviePass (HMNY) cuts ties with AMC Theaters in battle for revenue share