Tuesday, January 30, 18
Equity Market Recap
· Stocks drop for a second straight session, posting their biggest 2-day slide since August amid mounting worries over higher borrowing costs (10-yr yield rises to 4-yr high 2.73% and 30-yr 3%), along with profit taking ahead of several market moving events the next few days. Healthcare was the biggest drag on the Dow (UNH, PFE) falling over 400 points at one stretch while the S&P slumped as well after Amazon, Berkshire Hathaway and JPMorgan said they’ll collaborate on ways to offer health-care services to their employees. The news weighed heavily on managed care stocks (UNH, CI) and services (ESRX, CVS). Energy stocks a drag, weighed down by a decline in oil prices (from 3-year highs) and some weaker operational updates overnight (PE, GPOR). Technology fell ahead of a busy week of earnings for large caps (AAPL, AMZN, GOOGL, BABA, and MSFT), with AAPL trading to the lowest levels since December as concerns mount over its iPhone X model demand. Breath of the market decisively weak as Bloomberg reported 80% of S&P 500 stocks are falling in this two-day retreat. That’s the most since June 24 and 27, 2016 when 88% of stocks were hit. The CBOE Volatility index (VIX) gained over 6% after a 24% spike yesterday.
· Major catalysts the next few days include: 1) President Trump’s State of the Union address, where infrastructure, immigration, defense spending are expected topics (and tout the rally in stocks since election – along with passage of tax reform); 2) the 2-day FOMC meeting kicked off today, the last one for Janet Yellen as FOMC Chair, with no rate hikes expected tomorrow; 3) the monthly jobs report out Friday morning (ADP private payrolls tomorrow). Economic data again comes in strong today with consumer confidence rising to around 17-year highs.
· Interest rate sensitive sectors dropped again as the 10-year yield holds at 4-year highs (tops 2.72%), making defensive and dividend paying sectors less appealing as rates rise (shares of Utilities, Telecom and REITs declined again on the S&P 500 for a second session).
· U.S. consumer confidence rises to 125.4 in January from an upwardly revised 123.1 in December (from 122.1) and above estimates of 123.0. An index of future expectations rose to 105.5 from 100.8 and returned close to a 14-year high. The present situation index slipped to 155.3 from 156.5. It’s just a few ticks below a 17-year high, however
· WTI crude-oil prices dropped, falling -$1.06 or 1.5% to settle at $64.50 per barrel and registering back-to-back session declines (down from 3-year highs Friday) on renewed concerns about mounting U.S. crude production. The move comes ahead of weekly inventory data that has been mostly bullish, with 10-straight weekly inventory drawdowns (API tonight and EIA data tomorrow). Natural gas prices erased early gains to end flat.
· Gold futures fell -$9.70, or 0.4% to $1,335.40 an ounce, reversing earlier gains after initially finding support on global weakness in stocks and weaker bonds. Several catalysts the next few days giving markets an excuse to take some profit profits after settling at multi-year highs last week (jobs data, FOMC meeting).
Currencies & Bonds
· The U.S. dollar was volatile, but ended little changed overall, as the dollar index (DXY) dropped from overnight losses, but bounced from intraday lows as markets await the State of the Union from Trump tonight and the FOMC decision tomorrow on rates. Stronger consumer confidence helped bounce the dollar early (dollar index high 89.63 and low 88.91). The moderate selloff reversed Monday’s recovery in which the index inched up 0.4% and partly retraced last week’s drop that sent it to a three-year low. The euro ended little changed, off earlier highs.
· In crypto currencies, prices dropped sharply in afternoon trade after Bloomberg reported that U.S. regulators are scrutinizing one of the world’s largest cryptocurrency exchanges as questions mount over a digital token linked to its backers. As Bloomberg details, the U.S. Commodity Futures Trading Commission sent subpoenas last week to virtual-currency venue Bitfinex and Tether, a company that issues a widely traded coin and claims it’s pegged to the dollar. Prices of Bitcoin traded down about 10% on the news as did Ripple
· Bonds dropped again, with the yield on the 10-year up about 3 bps to around 2.73% and the 30-yr right around the 3% level (2017 high was 3.21%), as markets saw a broad pullback in bonds, stocks and commodity prices. Bonds have been reeling since the starts of the year, with the 2-yr, 10-yr and 30 yr up over 20 bps on rising rate expectations.
Other Interesting tidbits
· Treasury Secretary Steven Mnuchin said that he will extend a debt issuance suspension period “into February” in order to be able to keep using extraordinary measures that allow the U.S. government to stay below the debt ceiling. The suspension period had been scheduled to expire on Jan. 31 but Congress has not yet acted to raise the debt limit. Mnuchin did not give a specific date for the end of the suspension period. In testimony to the Senate Banking Committee, Mnuchin urged Congress to act “as soon as possible” to raise the debt limit.
Sector News Breakdown
· Auto sector; ALV Q4 sales topped consensus views and issues strong guidance for 2018 (though Q1 guidance is disappointing); LEA upgraded to neutral from sell at Goldman Sachs and ADNT tgt cut to $62 from $72 after evaluating earnings from the two auto parts suppliers, and the backlog update from Detroit Auto show; TSLAslipped early after CNBC reported yesterday that a key TSLA engineer, who helped design batteries, has left the company.; CARS and media company TRNC said they’ve agreed to a deal to convert Tronc’s eight affiliate markets; MNRO falls after 3Q results, year EPS view fell below expectations
· Restaurants; Dow component MCD reported Q4 EPS and sales that topped consensus, while comps pf 5.5% was slightly better and in-line US comp sales of 4.5%; YUMwas downgraded to neutral at Nomura; EAT mixed Q2 as EPS beat, but revenue of $766.M missed the $774M estimate amid a decline in comp sales; CMG shares dropped late day
· Leisure movers; HOG shares dropped after forecasting 2018 motorcycle shipments of 231k-236k, trailing Stifel’s estimate of ~242k after mixed Q4 results, while PII shares dropped after lower guidance (Q4 EPS/revs beat), as saw 2018 adj. EPS of $6.00-$6.20, reflecting tax adjustments included in recently passed Tax Cuts and Jobs Act vs. est. $6.99; recreational vehicle manufacturers and suppliers move in sympathy (shares of THO, LCII, FOXF, WGO, JOUT and PATK active on reports); BC rises as Owl Creek Asset Management is pushing the company to spin out its fitness business after building an activist stake in the company
· Energy stocks dropped with weakness in oil prices and broader “risk-off” appetite as riskier assets come for sale, both stocks and commodity prices
· Integrated oil; Wolfe Research said they see 15% upside on average across the large-cap group and make rating changes (upgraded DVN and PDX while downgrade NBLand MRO) based on a preference for greater oil exposure and preference for operators with more de-risked near-term outlooks, where wellhead results can better translate to corporate production and cash flows.
· E&P sector movers; GPOR guided in 2018 for a lower capex and growth rate than analysts expected (new 2018 guidance of 17% mid-point and growth rate on $800M capex); SD 1.9M share Block Trade priced at $19.00; PE shares fall as came in with Q4 oil production -5% miss vs. Street), Q4 capex came in way high (+21% vs Street), and 2018 guidance was revised lower (follows recently lower update from fellow Permian player LPI); AR said it is working with advisers to address its relative “discount in trading value;” NBL to sell 7.5% of field to Tamar for about $800M (below the $900M Mizuho expected, but came in ahead of 2H18 timetable)
· Natural less leveraged; SWN was downgraded to underperform at Raymond James citing bearish outlook on natural gas, but firm notes outlook has clearly improved as oil futures have improved and E&P stocks have reacted in kind, as evidenced by the S&P E&P Index rising by ~10% in 4Q17
· Bank movers on earnings; FMBI shares drop as Q4 EPS missed the lowest estimates on weaker sales; HTLF another bank that mixed lowest earnings estimate; in asset managers, shares of TROW, BEN, WDR among earnings movers this morning
· Insurance; MET shares fall as said material weakness found in annuity reserves review and expects to report 4Q prelim EPS 61c-66c vs. est. $1.08; PFG shares dropped after Q4 profit missed (weakness in general in space with PRU, VOYA, BHF, UNM, LNC lower)
· Business Services; BX is in advanced talks to buy an approximate 55% stake in the Financial and Risk business of Thomson Reuters Corp (TRI), a deal that would value the unit at about $20 billion including debt, Reuters https://goo.gl/Jb8nGw; WEX added to the Franchise Pick list and removing FLT at Jefferies
· Managed care: sector pressured (UNH, AET, CI, HUM) today after Amazon, Berkshire Hathaway, JPMorgan to create independent company focused on technology solutions “that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.” Company is free from profit-making incentives and constraints. IN earnings, AET Q4 operating EPS topped consensus, while revs fell short of views
· Large Cap Pharma; Dow component PFE shares came into the day at best levels since 2004, while earnings today beat on top and bottom line and guidance tops views helped by tax law; CRBP shares active as awarded $25M from CF Foundation to support development of lenabasum; AMRN 19.2M share Spot Secondary priced at $3.65;TEVA files to sell $5B in debt securities; Bloomberg reported private equity firm Blackstone has teamed up with Nordic Capital in its bid for SNY’s European generics pharmaceuticals business; MNTA rises (TEVA/MYL slip) as company sees possible near-term approval
· Biotech movers; GILD receives another analyst upgrade, with Citi the latest to raise to buy and $103 tgt saying pipeline catalysts with JAK-1 and NASH would start to outweigh HCV declines; biotech ETF (IBB) falls from 52-week highs yesterday in broader healthcare pullback
· Healthcare equipment, services and facilities; HCA helps lift hospitals after Q4 revenue and Ebitda topped consensus ($11.56B and $2.36B) and initiates dividend of 35c;DHR Q1 EPS view missed forecasts; ZBH in-line Q4 earnings and weaker guidance
Industrials & Materials
· Industrial & Machinery; GGG shares tumbled as profit, outlook disappoint amid high expectations (both the Americas and EMEA segments had slight organic growth declines); PCAR weak initially as margins disappointed despite 4Q profit/sales that were above analysts’ estimates; CR shares advanced on earnings
· Transports; in airlines; JP Morgan upgraded UAL & JBLU while downgraded shares of ALK & LUV as the firm continues to believe prevailing capacity fears will not quickly abate…but remain steadfast in conviction that American & Delta will not lash out. We also happen to view United’s network ambitions – while disconcerting to many – as highly rational; in logistics and freight, CVTI and WERN each reported quarterly results
· Metals & Mining; steel names active on earnings; AKS fell despite Q4 revenue and Ebitda topping forecasts and EPS beat after impairment charge, helping lift steel stocks; U.S. Steel (X) initiated at sell and PT of $25 by Vertical Group, while Longbow analyst raised his 2018 Ebitda estimate and remained positive on the stock; NUE also posted better Q4 revenue beat
· Chemicals; ASH Q1 EPS missed/sales beat and reaffirmed year; SMG plunges as posted wider Q1 EPS loss on weaker sales of $221.5M while cutting its sales forecast for the business that serves cannabis growers, citing disappointing growth in California; ALB was upgraded to buy at UBS saying while spot prices may decline, we see ALB as well protected due to its shift to longer term fixed-price contracts (~3-5 years) for the majority of its battery grade volumes
Technology, Media & Telecom
· Internet; TWTR trading up around 2-year highs amid recent strength; GRUB was downgraded to underweight by Barclays based on view that shares are likely to underperform relative to coverage universe; AMZN touched fresh record highs; big week of earnings for sector with AMZN and GOOGL later this week
· Semiconductors; MXIM shares dropped after Japan-based Renesas Electronics Corp. denied that is in discussions to buy Maxim for close to $20 billion. Recall late yesterday, CNBC reported that Renesas was in talks to buy Maxim https://goo.gl/ibxktc ; RMBS shares fell after Q1 guidance missed estimates; IDTI Q3 results beat but only in-line guidance disappointed
· Hardware movers; AAPL weakness continues ahead of earnings this Thursday – today Deutsche Bank said new IPhone models are too expensive to fuel a so-called “super cycle” and Street estimates for the March and June quarters are still too high; note numerous Asian supply chain data points indicate iPhone production plans are being cut; also, UBS lowers Q118 iPhone X procurement forecast to 20m units from 37m with room for a further decline in Q218; also for AAPL, the DoJ and SEC are looking into comments about battery slowdowns to see whether the company violated any disclosure rules, according to Bloomberg https://goo.gl/6gtupE
· Software movers; HUBS downgraded at Morgan Stanley as continue to see as a unique software asset combining growth, profitability and strong execution, but after a ~100% move in shares LTM we think much of the upside has been captured; WDAY rises as William Blair said WDAY recently signed financials deals at a Fortune 100 distributor and a Fortune 500 insurer; RP and VEEV were both upgraded to overweight at Morgan Stanley saying they are well-positioned to benefit from improving margin leverage; EA reports tonight in video gamers
· Media movers; Morgan Stanley with several rating changes today as they upgraded WWE and FWONK to overweight saying they may benefit from disruption caused by a consumer shift to over the top distribution, while remains bullish on DIS, and sees CBS and VIAB “trading at deep discounts to the market.” The firm remains “incrementally cautious” on ad agency holding companies IPG, OMC; while saying ROKU is “well positioned but expensive” and stand-alone cable networks like MSGN are exposed to slimming bundles. Firm also lowers media industry view to in-line, and downgraded LGF to equal-weight