Wednesday, January 31, 18
Equity Market Recap
· U.S. stocks may have opened near the highs, but ended off those levels, erasing strong overnight gains as yields jumped, earnings were mixed and healthcare stocks were under assault for a second straight session. The yield on the benchmark 10-year U.S. note rose as high as 2.75% before reversing, renewing fears of higher borrowing costs, while markets watched the FOMC keep interest rates unchanged (as expected), adding slightly hawkish language saying measures of inflation compensation have increased in recent months. Healthcare/Biotech stocks were big losers for a second day as President Donald Trump brought up the high prices of U.S. drugs in his State of the Union address (BMY, JNJ, LLY, PFE, MRK declined). Yesterday it was managed care and service stocks that fell Amazon, Berkshire Hathaway and JPMorgan said they’ll collaborate on ways to offer health-care services to their employees.
· Despite the late day pullback, and dropping sharply the prior two sessions, major averages posted excellent returns for January, with the S&P 500 and Dow Industrials rising over 5% and the Nasdaq 7%, though smaller gains for the Russell, up over 2%. The S&P 500 Index gained early following strong earnings out of Dow component Boeing (BA) as well as better economic data (private payrolls handily topped views, in-line housing data and better manufacturing). The dollar rebounded in the afternoon after the FOMC commentary, while gold and oil end higher. Markets now prepare for another heavy dose of earnings, with FB, X, EBAY, MDLZ, T, and PYPL tonight. Still this week, monthly auto sales data tomorrow and the nonfarm payroll report Friday.
· In Europe, the FTSE 100 shed 0.7% to end at 7,533.55, closing at its lowest level since Dec. 20. For the month, the benchmark gave up 2%, erasing part of its 4.9% rally from December and cutting its 12-month gain to 6.1%. For the month, the benchmark Stoxx Europe 600 index achieved a 1.6% gain, its biggest monthly advance since October’s rise of 1.8%.
· Private-sector employment data was strong, as ADP reported a gain of 234K jobs in January, handily topping the 185K estimate by economists, while the prior month was revised to 242K from 250K; report showed that small private-sector businesses added 58,000 jobs in January, medium-sized businesses added 91,000 and large businesses added 85,000.
· Chicago PMI report shows manufacturing reading fell to 65.7 from 67.8 in prior month, but was above the 64 estimate; prices paid rose at a faster pace, signaling expansion, while new orders rose at a slower pace, signaling expansion and employment rose at a faster pace
· The cost of employing the average American worker (pay and benefits) posted the biggest 12-month gain in almost three years, reflecting the strongest labor market in decades. The employment cost index rose 0.6% in the fourth quarter, in-line with estimates. Wages – some 70% of employment costs – rose 0.5% in the final three months of 2017.
· Pending home sales for December rose 0.5% MoM, in-line with estimates; unadjusted pending homes fell 1.8% y/y after rising 0.6% y/y in November
· Oil prices end higher, as WTI crude rose 23c to settle at $64.73 per barrel, snapping the 2-day losing streak (was down from 3-year highs on Friday), after inventory data. Inventory data was mixed as the EIA reported the first jump in U.S. crude supplies in 11 weeks, but declines in petroleum-product stocks helped ease the price pressures. The U.S. Energy Information Administration reported Wednesday that domestic crude supplies rose 6.8M barrels for the week ended Jan. 26. That was the first weekly rise reported by the government agency in 11 weeks. Natural gas prices dropped over 6%, falling 20c to move back under $3.00 mln btu
· Gold futures advanced $3.60, or 0.3% to settle at $1,339 an ounce, but pared gains in futures trading following the FOMC meeting results. Gold was once again effected by the dollar trading, which was initially lower despite mostly better economic data. The FOMC said it expects inflation “to move up this year” in a sign it’s likely to hike rates at its next meeting in March.
· The U.S. dollar rebounded off earlier lows, a sharp spike against major currency rivals after the Fed kept interest rates unchanged (in-line with forecasts – though a hike seen in March), helping push the dollar index (DXY) out of negative territory (DXY to 89.20 after FOMC, well off earlier lows 88.78). The euro turned negative following the meeting, sliding under 1.24 (after highs of 1.2475), while the dollar jumped to highs of 109.45 vs. the yen (off overnight lows 108.60). The Fed’s updated policy statement indicates that inflation is expected to rise in 2018. The central bank left short-term interest rates unchanged at a range between 1.25%-1.50%
· Treasury yields advanced further following the FOMC meeting results as the final Fed statement with Janet Yellen as chief appeared to keep expectations in place for an interest rate hike in the March meeting. Strong economic data has kept policy makers on the path for at least three more hikes this year, with today’s report failing to dispel those notions. The yield on the 10-yr tops 2.75% for the first time since April 2014 (before paring gains), now up over 30 bps since the start of the year, while the 2-yr rises to 2.15%. Also today, the Treasury Department said it plans to raise the size of upcoming bond and note auctions this quarter by $42 billion to meet the increased funding needs from the Federal Reserve’s shrinking of its balance sheet and the recently passed tax bill. (bond yields reversed sharply lower late day – erasing gains)
Sector News Breakdown
· Retailers; FL was upgraded to Outperform at Oppenheimer with $70 tgt saying between onset of innovation at NKE (Epic React sets on 2/22, React scaling over the Summer), FL is poised to stabilize as ’18 unfolds; FLWS shares fall as Q2 Ebitda of $94.5M missed estimate $101M, while revs also trailed; TUP shares dropped on lower Q1 forecasts
· Consumer Staples; KR announced it will introduce its new and exciting Scan, Bag, Go shopping technology in 18 operating divisions, making the service available this year to customers at 400 stores; MGPI rises after Sidoti upgraded to buy; poultry names slipped late morning after Dow Jones reported SYY/USFD sue chicken company’s over manipulated Poultry pricing
· Restaurants; CMG tgt raised to $290 from $240 at Deutsche Bank but maintained its sell rating citing questions surrounding leadership, near-term fundamentals, its long-term strategic direction and overall earnings power; WING announced a special $3.17 dividend
· Inventory data: the API reported that U.S. crude supplies rose by 3.23M barrels for the week ended Jan. 26; gasoline stockpiles also rose 2.69M barrels, while inventories of distillates dropped by -4.1M barrels. The EIA data also bearish as: weekly crude inventories rose 6.7M barrels (vs. est. +900K), while gasoline fell -1,980M vs. est. +2M and distillates fell-1,940M. Overall, the EIA reported the first jump in U.S. crude supplies in 11 weeks, but declines in petroleum-product stocks helped ease the price pressures.
· Movers on news; CVX announces major deepwater oil discovery in Gulf of Mexico; RDSA’s unit Shell Offshore says the Whale deep-water well encountered more than 1,400 net feet of oil bearing pay; earnings this week for XOM, CVX and COP; in E&P sector; SRCI guides 2018 production of 48K-52K boe/day after averaging ~34.2K boe/day during 2017 (47% oil), which came in slightly ahead of the mid-point of the company’s previously issued guidance
· MLPs bouncing off the lows, but Alerian MLP Index (AMZ) down over -0.45%, more than $3 points off earlier highs and now down for a 3rd straight session and down nearly 5% since last Wednesday highs around 305 level. Utilities also paring gains as yields rise
· Banks again benefitting from the lower tax rate and higher bond yields (improving lending margins), but earnings for regionals have disappointed of late; TCF falls a second day on earnings (downgraded at JPM today); in insurance, CB shares rose despite profit down on catastrophe losses in quarter, in asset managers, IVZ slipped after its adjusted operating margin decreased by 100 bps q/q, overshadowing its EPS and revenue beats; WDR upgraded at Citi
· Consumer finance and lending; CASH Q1 revs/EPS ahead of consensus as net interest income was better due to a higher investment balance and non-interest income beat; auto lending sector falls on CACC/SC results; CACC shares fall as Q4 results well below consensus with one analyst noting major provision expense tied to longer-duration loans; SC shares fall after posting Q4 results; ALLY downgraded at BMO Capital; FNF falls after Q4 results
· Services and payments; ADP shares jump after earnings top estimates, company raises outlook; KODK shares fall after saying verifying the “accredited” status of potential investors in its initial coin offering may take several weeks
· Large Cap Pharma; lots of talk last night in State of the Union from Trump about high drug prices which weighed on sentiment today; LLY Q4 results topped consensus for Q4, but big cap Pharma weak on the drug pricing situation (PFE, BMY, JNJ); JNP said it has initiated the process of evaluating strategic alternatives aimed at boosting shareholder value
· Managed care; sector rebounds after yesterday drop following news Amazon, Berkshire Hathaway and JPMorgan said they’ll collaborate on ways to offer health-care services to their employees; rebounds today with BMO saying ANTM reported a strong 2018 outlook today, fueled by a “big tax benefit” – firm said 2018 guidance is stronger than expected, with the recent tax overhaul providing ~15% boost to profits (CI, AET, UNH, HUM move on news); AET downgraded to neutral at Citigroup today
· Biotech movers; BLCM shares fell after the company announced that the BPX-501 trials in the US have been placed on clinical hold by the FDA because of three cases of encephalopathy which were possibly caused by the cell therapy; CASC to be acquired by SGEN in $614M deal, receiving $10 per share in cashhttps://goo.gl/67yujd; BIIB upgraded to buy at UBS
· Medical equipment and devices; ILMN reported EPS above the Street and 2018 guidance remains unchanged from their pre-announcement; TMO shares record highs after earnings and guiding year EPS and revenue above consensus; ALGN falls as investors study a 2018 outlook that reflects another year of heavy commercial investment, according to one analyst; SYK reported Q4 earnings and outlook that were better, but not enough to lift shares; ZBH was upgraded to buy with $168 tgt at Stifel citing a dynamic and highly-experienced CEO in place
· Healthcare services and suppliers; ESRX upgraded to Outperform at RBC Capital and increasing price target to $98 from $68 as believe the negative news is largely priced into ESRX shares with the Amazon announcement and the Anthem move; ASGN said it is buying ECS Federal LLC, a privately held government services contractor, from its owner and founder Roy Kapani and investment firm Lindsay Goldberg for $775M in cash https://goo.gl/tCexhZ
Industrials & Materials
· Industrial & Machinery; construction materials and cement stocks underperformed after President Donald Trump’s State of the Union speech Tuesday in which investors had been looking for more color on any infrastructure bill. Details on the infrastructure initiative from Trump were few in number, did not outline any funding sources (EXP, MTZ, MAS); other industrial movers included IR (lower year EPS view), TXT lower profit for quarter
· Aerospace & Defense; Dow component BA rallied after 4Q results beat and 2018 outlook topped expectations/forecast a higher profit margin and a big rise in cash generated from record jetliner deliveries. (BA suppliers such as SPR, UTX, GE, COL, ARNC, TGI were active on report)
· Transports; Transport index spike on airlines upgrade at Bernstein and KNX results lifting truckers; truckers led by KNX as shares jump after the company reported 4Q EPS above market estimates and said it expects contract rates to rise high single-digits to low double-digits throughout the year (analysts very positive post earnings);CHRW underlying earnings beat on better than expected net rev. growth and net operating margins (LSTR, JBHT move in reaction)
· Airlines; AAL and UAL upgraded to outperform at Bernstein saying the fare environment is expected to be strong enough to offset higher-than-expected capacity growth out of UAL, and that he sees the recent reaction to the news as overdone. Maintains outperform on DAL and LUV, continues to like these as multi-year compounding stories
· Paper & Packaging; SunTrust said relative to 2017, they generally believe Packaging and Polymers related companies will benefit from incremental global GDP expansion, raw material tail winds (in 2H18), and in some cases higher cash flow from the recent US tax reform. Favorite ideas remain KRA and BERY while they upgraded RAVN and downgraded VRTV and SEE to hold; PKG shares dropped after Q1 EPS guidance of $1.52 fell below $1.75 estimate; SLGN up on earnings
Technology, Media & Telecom
· Internet; FB reports earnings tonight; TWTR rises early, back to fresh 2-year highs and marks 4th straight day of gains; BABA shares rise ahead of earnings tomorrow morning; SFLY among the day’s top performers after sales beat/guidance and acquisition of Lifetouch
· Semiconductors; AMD rises after earnings top estimates, company raises outlook/noted strong DT GPU and Crypto, and was aided by a $100M accounting change;AVGO shares jumped after earnings and upbeat outlook; QCOM due to report tonight
· Software movers; EA reported Dec. quarter EPS essentially in-line with consensus and revenue slightly below/Star Wars Battlefront II was weak, but fully offset by strength of digital revenue; CMCM announced release of its secure mobile cryptocurrency wallet, called SafeWallet; DATA active as Maxim said channel checks suggest Tableau is getting displaced at large organizations, though islands of Tableau remain; other software movers on earnings: SAP, CA, CHKP; NTDOY rises on earnings/raised its sales projection for the popular Switch game console; MSFT reports earnings tonight
· Hardware movers; AAPL downgraded at BMO Capital and cut tgt to $162 from $199 saying that iPhone average selling prices are now likely to “plateau as with the rest of the industry” after 10 years of gains; SMCI said its CFO resigned effective immediately, along with co-founder and SVP of International Sales; firm said additional time is needed to analyze the potential impact of the investigation on historical financial statements; Fujifilm Holdings Corp. said that it would take a majority stake in XRX (50.1%) and a $2.5B cash dividend would be paid https://goo.gl/6go3st
· Networking and comm equipment; group weak after JNPR sees Q1 EPS 22c-28c below consensus 42c and sees Q1 revenues of $1.05B, plus or minus $30M vs. consensus $1.15B (did announce $2B buyback and dividend boost); ATEN slides after postponing its earnings report due to a review of accounting and internal control matters.