Monday, January 29, 18
Equity Market Recap
· U.S. stock averages end lower, pulling back from record highs last Friday as markets take a breather ahead of a very busy week of potential market moving catalysts. Interest rate sensitive sectors under siege as 10-year yields trade near 4-year highs (tops 2.72%), making defensive and dividend paying sectors less appealing as rates rise (shares of Utilities, Telecom and REITs were among the biggest drags on the S&P 500). Note that just 1-month into the New Year, and the yield on the 10-year is up around 28 bps, and the 2-yr up about 24 bps as investors have rotated out of bonds and firmly into equities and commodity prices. The U.S. dollar rebounds, helped by 10-year Treasury yield pop while commodity prices pare some of last week’s gains (oil and gold), falling from multi-year highs. Economic data was strong as consumer spending hits a 6-year high earlier today. Little more hedging of late as the CBOE Volatility Index (VIX) above 13 for first time since Dec 1st, rising more than 22%. Apple shares tumbled after a Nikkei report on a reduction in iPhone X output (Apple to report earnings Thursday).
· Very busy week ahead: Janet Yellen’s last policy meeting as Federal Reserve chair (2-day FOMC meeting starts tomorrow – with decision on Wednesday), and the first State of the Union address from President Donald Trump Tuesday night. Of course this week also marks another volatile one for corporate earnings, with results expected for around 125 S&P components (including AAPL, AMZN, GOOGL, PFE, and MSFT) along with the all-important monthly jobs report on Friday.
· Even with stocks slipping, new records again for major U.S. averages in one way or another: 1) today marked the 400 trading days since the last S&P 500 5% correction (recent record was 394 sessions); 2) today marked the 112th consecutive day w/o a 1% close lower for S&P 500 (longest since 1985) and the new high for the Dow today was the 100th since Trump took office.
· U.K. stocks rose for a second straight day, with miners leading the charge higher as copper prices rallied, while a drop in the pound also helped prices. The FTSE 100 index inched higher, adding to Friday’s 0.7% gain. The British pound dropped to $1.405 from $1.4160 late Friday (and now down highs above $1.43 last week, the first time since the U.K.’s EU referendum in June 2016).
· Consumer spending climbed 0.4% in December, capping off the biggest increase in household buying since 2011, and was in-line with economist estimates and advanced 3.1% for the full year, the largest increase since 2015; the savings rate fell to 2.4%, the lowest level since 2005. Personal income rose 0.4%, topping the 0.3% estimate
· The PCE index, the Federal Reserve’s preferred inflation gauge, edged up 0.1% in December (in-line with consensus), while the “core” rate that strips out food and energy rose 0.2% (in-line). The rate of inflation over the past year slipped to 1.7% from 1.8%, however; core rate flat at 1.5%.
· Gold prices dropped -$11.80, or 0.9%, to settle at $1,340.30 an ounce, falling for a second straight session after prices closed at $1,362.90 last Thursday, its highest settlement since Aug. 4, 2016, driven higher by the greenback weakness. But as the dollar rebounds, commodity prices pare recent gains). Markets await the outcome of the Federal Reserve’s two-day monetary policy meeting, which concludes Wednesday, and monthly U.S. jobs data due Friday.
· Energy futures drop, pulling back from three-year highs late last week on likely profit taking, along with a rebound in the dollar off 3-year lows. WTI crude closed at fresh 3-year highs last week, buoyed by positive inventory data (weekly stockpiles have declined for 10-straight weeks) and a weaker dollar. Today appeared profit taking after WTI crude posted a 4.5% gain last week. Natural gas prices advanced over 3.5% to finish around $3.63 mln Btu’s. Brent oil fell over a $1 to close at $69.46 per barrel
· The U.S. dollar rebounded, recovering some of last week’s drop as it got a lift from a jump in the yield on the benchmark 10-year Treasury note. The ICE U.S. Dollar Index (DXY) gained about 0.3% to around 89.35 (touched highs of 89.61), following last week’s slide of about 1.6% that put it around 89.085, near 3-year lows. The euro slipped as low as 1.2337 before paring losses after ECB officials said to assume QE ends with short taper. The Canadian loonie and Mexican peso were active as NAFTA officials spoke today, citing progress as talks come to an end
· Treasury market’s fall as yields rise; the 10-year Treasury traded with the highest yields since April 2014 this morning (trading above 2.72% vs. 2.63% high in 2017), while the yield on the German five-year bond moved above zero for the first time since December 2015. The selloff comes as the dollar halts its recent slide. The long end yield still not rising with shorter-term, as 30-yr still under 3% (around 2.95%), below the 2017 high of 3.21%. The 2-yr yield back at 10-year highs today above 2.15% (but has pared gains) – but fell back below 2.12% late
Sector News Breakdown
· Consumer Staples; DPS shares soared after Keurig Green Mountain Inc. agreed to combine with them in a deal that will pay $18.7B in cash to shareholders and give them a stake in the company controlled by the Reimann family’s JAB Holding Co./DPS holders will get $103.75 a share in a special cash dividend and retain 13%https://goo.gl/VFHVQs; AVP active as a group of activist investors is trying to push the seller of beauty products to find a buyer. https://goo.gl/hsfSBh
· Auto’s; auto sector mostly weaker; ADNT shares fell after 1Q results missed estimates/one analyst said the reduction in FY18 forecasts for adjusted EBIT, adjusted net income and free cash flow was “steeper than feared” (shares of Ford, GM, FCAU declined)
· Restaurants; Raymond James said they continue to believe a selectively more constructive stance towards our restaurant group is warranted as we’re encouraged by recent industry sales stabilization and believe firming consumer/macro underpinnings should support continued sales stability/the firm upgraded RUTH to outperform; after underperformance last week post earnings, shares of SBUX were downgraded at Bernstein to market perform; Dow component MCD reports tomorrow morning
· Casino, Lodging & Leisure; in gaming, all about WYNN again as shares extend losses after falling -10% on Friday regarding allegations against Wynn Resorts Ltd. (WYNN) CEO accused of sexual misconduct/Macau’s Gaming Inspection and Coordination Bureau met with Wynn Macau management to seek information (shares dropped more than 8% today)
· U.S. oil strengthened against Brent, reducing the gap to the lowest in five months, amid declining stockpiles. WTI was down 0.9% while Brent in London slipped more; the convergence is emerging amid concern that WTI’s recent jump — spurred by a record 10 weekly declines in American stockpiles — will encourage higher production;XOM said citing tax, regulatory relief, to spend $50B in U.S.
· In stock news; HAL upgraded to neutral at Atlantic with $57 tgt citing margin gains in the internationally focused Drilling and Evaluation segment, and a solid outlook for the core fraccing business; AR downgraded at Raymond James citing lack of n-t catalysts after investor day; RRC cut to underperform at Raymond James after co fell on a disappointing update to the company’s Terryville type curves and a much higher than expected 4Q capital spend number; BCEI prelim 4Q average production of 14.8 MBoe/day, which exceeded the high end of 14.2 MBoe/d forecast
· Solar movers; FSLR slipped after Barron’s noted recent outperformance on tariff news from Trump administration on incoming solar panel makers, saying investors should sash in on recent gains; JKS signs 1.75 GW, 3-year solar module supply pact in U.S.; CSIQ and Photon Energy to co-develop five utility-scale solar power projects, with a total capacity of 1.14 Gw in New South Wales, Australia;
· Large Cap banks extend gains; GS outperformance continues with another record high for shares after a positive mention in Barron’s this weekend (the rising bond yields and increasing expectations for interest rate hikes by the Fed also boosting sentiment for financials/banks along with the reduced corporate tax rates)
· Large Cap Pharma; SNY agreed to buy Belgian biotech company Ablynx (ABLX) for 3.9 billion euros ($4.8 billion), its second big deal this month after buying BIVVhttps://goo.gl/Dvvkii ; AGN was upgraded to overweight at Barclay’s and raise tgt to $230 as believe AGN’s aesthetics franchise is undervalued at current levels; ABBVdowngraded at Leerink and BMO Capital after shares surged to record highs Friday after better earnings and increased forecast; FWP shares dropped after losing challenge to European patent covering dimethyl fumarate, Tecfidera royalties at risk, appeal planned; ARDM falls as gets FDA rejection of inhaled antibiotic; PFE best levels since 2002 ahead of earnings tomorrow
· Biotech movers; ABEO rises early after company’s cell therapy received a Regenerative Medicine Advanced Therapy designation from the FDA; PTCT assumed sector perform and $30 tgt at RBC Capital as believe recent stock price appreciation now better captures the LT opportunity for Emflaza and Translarna and SMA promise; SRNEgets FDA approval of clinical studies of PD-L1 inhibitor in China; FOLD announces CDR posts CDEC positive recommendation of Galafold
Industrials & Materials
· Industrials & Machinery; JEC was upgraded to buy at UBS as expect higher energy prices, improving corporate confidence, and rising defense budgets to support capex and backlog growth; CAT shares fell more than 4% after rallying last week on earnings; GE shares rebounded after falling over 4% the last 3-days; OSK shares dropped
· Transports; MATX shares surge, helping push the Transport Index higher after Matson’s potential new competitor Tote announced they have chosen not to move forward with an entrance into the mainland to Hawaii trade and Philly Shipyard has suspended construction of the vessel; transports were pressured last week on margin fears in airline space on capacity comments (UAL) and a pullback in rails after mixed earnings (UNP miss); ECHO 52-week upgraded to buy at UBS
· Metals & Mining; AKS announced that it will increase current spot market base prices for all carbon flat-rolled steel products by a minimum of $30 per ton; big week of earnings for the steel segment; gold miners (NEM, GOLD) falls as gold prices slip a second day
· Paper & Packaging/Containerboard stocks; sector active after KS agreed to be bought by WRK in a deal valued about $3.5B in the paper and packaging industry, with KS holders getting $35 per share in cash https://goo.gl/Xoc4Nf (shares of IP, PKG also active); note the group had risen Friday on optimism over a $50/ton containerboard price hike from International Paper
Technology, Media & Telecom
· Internet; BABA tgt raised to $250 at Morgan Stanley; NFLX new record all-time high levels again today (rally since earnings last week); SOHU shares drop as posted a wider than expected quarterly loss for Q4 on weaker revenue; CYOU Q4 revs of $144.5M misses $150M estimate; MELI tgt raised to Street high $415 at Stifel aa believe strong sales momentum continued through the holiday season particularly in Brazil and Mexico
· Hardware, Software and Components; IMMR shares surge as announced a global settlement and license agreement with AAPL for a multi-year period (Craig Hallum believes an Apple license is likely worth ~$20-$25M per year in royalties); AAPL shares pressured again after a report in the Nikkei saying that Apple notified suppliers it decided to cut iPhone X’s production target for January-March period to about 20m units due to slower-than-expected sales in year-end holiday shopping season in key markets such as Europe, the U.S. and China; STX erased a gain of more than 5% in premarket trading after providing few details on its stake in Ripple Labs Inc.; VMWshares dropped late morning after CNBC reported that the company could buy Dell in a reverse merger (Dell currently owns 80% of VMware, and the sale would let Dell go public without going through a formal listing) https://goo.gl/JJnZHJ
· Semiconductors; strength in crypto leveraged semis today (AMD, NVDA) as MKM Partners predicts strong quarter fueled by crypto business; WSJ reported that in initial disclosures about critical security flaws discovered in the company’s processors, INTC notified a small group of customers, such as Chines technology companies, but did not tell the U.S. government https://goo.gl/x5EGLr ; AAPL suppliers slipped early amid ongoing demand fears for the Apple iPhone X (SWKS, AVGO, CRUS)
· Telecom movers; AT&T (T) and VZ active after the Trump administration is considering nationalizing the next-generation, high-speed 5G wireless network in an effort to prevent Chinese spying on U.S. mobile traffic, according to reports Sunday. Axios first reported the proposal, and White House sources later confirmed it to Reuters. “We want to build a network so the Chinese can’t listen to your calls,” a source told Reuters https://goo.gl/onGFdR . After the weekend release of a draft plan calling for the nationalization of the 5G network, Federal Communications Commission Chairman Ajit Pai said he’s against such a move. “I oppose any proposal for the federal government to build and operate a nationwide 5G network.
· Optical sector; Piper downgraded three names in the sector, cutting NPTN to neutral believe China’s decision to source more optical components from domestic suppliers over the next few years could be a serious problem; cuts FNSR to neutral as believe demand trends will remain challenged for the next several quarters and the stock has historically not acted well during periods of margin compression; and cut AAOI to neutral on belief that 2018 will be a tough year for datacom transceiver suppliers given increased competition which will likely drive ASP and gross margin erosion throughout the year.