Thursday, February 1, 18
Equity Market Recap
· Markets end mixed in a choppy trading session, opening lower on mixed earnings and better data, rallying midday as investors buy the recent dip and after more bullish comments from President trump, but slipped late as bond yield extended their recent climb, as the 10-yr topped 2.77% and the 30-yr 3% (first time since last May). The S&P 500 Index gains were paced by banks (on rising rates) and tech shares (earnings from FB, EBAY, QRVO),while rate-sensitive shares led declines (utilities, REITs) after bond yields spiked higher. Tech shares in focus after the close with heavy weights Apple, Amazon and Google earnings all expected. Signs of rising inflation, which has been sluggish and hanging below the Federal Reserve’s 2% annual target, are beginning to resurface and rattle investors (note the Fed comments yesterday, along with rise in borrowing costs and bond yields rise). Monthly auto sales came in slightly better (more below). It was also a very busy morning of economic data, with ISM Manufacturing, Construction Spending, Jobless Claims and Productivity data released (details below), all ahead of the Nonfarm Payroll report tomorrow (estimate 180K jobs added and unemployment rate to hold at 4.1%). Commodity prices rebound with oil spiking and gold edging higher, while the dollar slips. In Europe, the Stoxx Europe 600 index fell -0.5% to end at 393.52, turning negative after a morning gain and closed at a four-week low. Germany’s DAX 30 index fell -1.4% to close at 13,003.90, also ending at a four-week low. Global bond yields have been climbing in recent sessions. The 10-year German bund was recently around 0.719% as it hovered around levels last seen in 2015.
· Oil prices climbed on Thursday, as March WTI crude oil gained $1.07, or 1.7%, to settle at $65.80 per barrel, moving back near 3-year highs after Goldman Sachs said the market has likely reached a balance between supply and demand, and forecast Brent crude to trade above $80 a barrel later this year. For January, the WTI March contract climbed 7.1%. Oil prices have been lifted on declining inventories and a weaker dollar. Weekly rig count data from Baker Hughes set to be released tomorrow afternoon, which has shown a big spike in rigs/production. Gold prices advanced $4.80, or 0.4% to settle at $1,347.90 an ounce helped by a drop in the dollar and ahead of the jobs data tomorrow morning. Natural gas prices resume yesterday’s decline with prices down to $2.85 mln Btu’s, down over 5%.
· Weekly Jobless Claims fell 1K to 230K, slightly below the 235K estimate, while prior week was revised to 231K from 233K; the 4-week moving average fell by 5,000 to 234,500; continuing claims rose 13K to 1.953M in the week ending Jan. 20; claims data for Puerto Rico and the Virgin Islands affected by fall hurricanes
· Non-farm productivity for Q4 fell an unexpected (-0.1%), below the expected 0.7% gain; Nonfarm output per hour rose 2.7% prior quarter (prior reading revised to 2.7% from 3.0%); Unit labor costs rose 2% in 4Q vs. down 0.1% prior quarter and above the 0.9% estimate; Output rose 3.2% in 4Q vs. up 4% prior quarter; Employee hours rose 3.3% in 4Q vs. up 1.2% prior quarter; Compensation per hour rose 1.8% in 4Q vs. up 2.7% prior quarter
· The ISM Manufacturing index in January slipped to 59.1 from 59.3 in December, but slightly above the 58.6 estimate; segment breakdown: New orders fell to 65.4 from 67.4 prior, employment fell to 54.2 from 58.1; prices paid rose to 72.7 vs 68.3 and backlog of orders rose to 56.2 from 54.9 in prior month
· IHS Markit said its manufacturing PMI remained steady at a final reading of 55.5 in January from the flash estimate; was up from 55.1 in December.
· Construction Spending for December rose 0.7%, topping the 0.4% estimate while Nov. revised to 0.6% from 0.8%; Private construction rose 0.8% in Dec., Private residential construction rose 0.5%, Private nonresidential construction rose 1.1% and Public construction rose 0.3%
Currencies & Bonds
· The dollar moved to lows of the day late Thursday, with the dollar index (DXY) down about -0.5% to 88.70 (recent 3-year lows 88.43 on 1/25), while the euro trades higher, back near three-year highs amid ongoing dollar weakness (trades up at 1.25, up about 0.7%). The British Pound also continued its move higher, up at $1.4268 compared with $1.4191 on Wednesday. Sterling ended January with a 5% gain against the dollar, its biggest monthly rise since May 2009. The dollar held small gains against the Japanese yen.
· Bitcoin prices dropped more than 15%, trading below the $8,500 level for the first time since Thanksgiving, as the crypto-currency has shed about 55% of its value since hitting a peak near $20,000 in late December. The pullback has come amid increased regulatory scrutiny and threats of a trade ban in South Korea. The total value of all cryptocurrencies tracked by research site CoinMarketCap.com is at about $450 billion, half of what it was early last month. Broad drop in other crypto-currencies over the past month (Ripple, Litecoin, Ethereum)
· Bonds rolled to the downside again, extending gains for yields, with the 10-year topping the 2.76% level for the first time this year and the 30-year back above the 3% level (since May – 2017 high was 3.21%). Lot of attention overseas in Germany, as yields have been rising the last few weeks as well, putting pressure on stock markets, which fell to 4-week lows.
Sector News Breakdown
· Autos; monthly auto sales data out for January: 1) GM Jan. U.S. auto sales up 1.3% versus an estimate of 3.4%/total sales in January totaled 198,548; 2) Ford (F) Jan. U.S. light-vehicle sales down (-6.3%) vs. est. down (-1.5%); Ford overall U.S. sales for Jan. total 161,143, down (-6.6%), Total SUVs down 5.9%, Total trucks up 2.2%; 3)FCAU Jan. U.S. sales were down (-13%) vs. est. loss (-10%) – Fiat brand sales down 43%, Chrysler brand sales down 21%, Jeep brand sales up 2%, Dodge brand sales down 31%; 4) TM Jan U.S. auto sales rose 16.8% vs. est. up 9%/January 2018 sales of 167,056 vehicles; 5) NSANY Jan U.S. auto sales up 10% vs. est. 2.1%; 6) HMC Jan US auto sales fell (-1.7%) vs. est. up 2.5%
· Retailers; RL posted disappointing holiday-season sales, with a same-store sales decline of (6%) worse than the (4%) decline forecast (apparel names KORS, VFC, PVHactive); TSCO posts high-quality 4Q17 EPS beat of 3c, driven by better-than-expected comp sales growth and GM% gains; BOOT Q3 comps in-line at 5.2% on in-line sales, while year guidance tops views; EZPW moves to 52-week highs after earnings results
· Consumer Staples; MDLZ posted a small 1c EPS beat on slightly lower margins and in-line revenue of $6.97B for Q4; HSY falls as Q4 EPS and sales miss estimates and midpoint year guidance also short of views; in tobacco, MO Q4 EPS beat, but guided year view to $3.90-$4.03, below the $4.18 estimate and announced CEO to retire; RGS Q2 EPS/revs missed; INGR shares drop on earnings miss while sales were in-line
· Restaurants; CMG downgraded to sell at UBS and tgt down to $290 saying brand perceptions remain depressed while competition is unlikely to ease in 2018; SBUXwas downgraded to neutral at Mizuho saying as long as the company’s U.S. comps continue to decelerate in the near-term, investors will be less willing to justify a premium valuation
· Casino, Lodging & Leisure; in gaming, Macau gross gaming revenue increased 36.4% in January, according to the Gaming Inspection and Coordination Bureau, topping the most optimistic estimates from analysts and was almost ten full points over the consensus mark of +27%. JPMorgan estimates that VIP revenue shot up 50% during the month and the mass market segment saw a 22% to 24% increase (gaming stocks LVS, MGM, WYNN, MLCO)
· In leisure vehicles; boating company BC reported Q4 EPS and sales that fell short of consensus views though guidance was in-line with the Street; has been a rough week for leisure vehicles with HOG and PII falling earlier in the week on “softer” results/guidance
· Oil prices rising, helping the energy complex on bullish Goldman Sachs call; Dow components XOM and CVX due to report earnings tomorrow in the integrated oil space; MUR capex was in-line with expectations and the midpoint of production was only a touch below consensus; refiners active after results from MPC and VLO, with PSX tomorrow morning
· E&P sector; Goldman Sachs raises oil services and equipment coverage view to attractive from neutral, offshore drilling to neutral from cautious; BHGE upgraded to neutral as sell thesis “broadly” played out; says top large-cap buys SLB, HAL; SMid-cap PUMP, NBR, ESV top offshore pick; raise SMid-cap coverage view to attractive from neutral and adds WPX to conviction buy list; CRC, WLL upgraded to neutral from sell on exposure to oil beta; SWN cut to sell from neutral
· Large Cap banks continue to march higher with rising rate expectations and as bond yields soar, making margins on lending better for banks; strength for large cap and regional banks, with earnings behind the group, not more for insurers and asset managers; in exchanges, CME record highs after earnings
· Insurance; AFG shares rise on Q4 beat and higher guidance; AFL Q4 results topped views, boosts dividend and sees buybacks of between $1.1B-$1.4B in 2018 after tax reform; UNM share dropped after reporting 4Q results which included long-term care (LTC) interest-adj. loss ratio of 93.1% that was higher; LNC Q4 sales topped consensus lifting shares; MMC Q4 revs beat
· Payments and services; PYPL shares dropped after earnings/guidance results, but also as EBAY said its shifting its payments business to Adyen BV, a global payments company (away from PYPL); MA Q4 results topped consensus saying its cross-border volumes have risen 22% so far this year, fueled partly by clients using their cards to buy digital currencies (note Dow component and MA comp Visa reports earnings tonight)
· REITs; AVB core EPS in-line as SSNOI grew 2.0% for the quarter, but the downward trend in growth appears to have stabilized; MAA Q4 beat on the bottom line on some non-operating line items; DRE Q4 FFO of 30c was 1c above consensus as continues to benefit from strong demand for industrial warehouse space; EGP Q4 FFO 3c better and introduced 2018 guidance with a mid-point of $4.50, 3c above consensus; in mortgage REITs, AGNC and CMO both surprised to the upside on earnings last night
· Large Cap Pharma/Managed Care; CI the latest managed care name to report earnings, topping Q4 estimates but the recent announcement by AMZN/BRK.A/JPM to cut health-care costs for their workers continued to shake the sector and present a particular threat to Cigna on the potential loss of JPMorgan as a client; TEVA said to get $7800M payment from AGN in settlement pact; MYL announces the U.S. commercial launch of Efavirenz Tablets USP, 600 mg, its generic version of BMY’s HIV-1 med Sustiva.
· Biotech movers; ICPT said the FDA added a boxed warning to ensure correct dosing and reduce risk of liver problems for PBC patients taking Ocaliva with moderate to severe liver disease/RBC noted that a boxed warning on overdosing in severe patients was likely and would not be a major restriction; overall, biotech failed to rally off lows yesterday amid fears of drug prices being under assault from President Trump after State of the Union talked about prices
· Medical devices and equipment; NUVA downgraded at Leerink citing soft spine market/cuts tgt to $51 as sees limited near-term upside to estimates beyond one-time tax benefit; CNMD rallies on earnings results as the ortho company posted 4c EPS beat on higher guidance; other medical device makers active on earnings:BSX, DGX, ABMD, IDXX,
· Healthcare services and suppliers; OMI shares dropped after preliminary 2017 adj. EPS trailed the prior forecast and gave no update on 2018 results, citing increased prices, margin compression among other factors (shares of HYH, CAH, ABC also weak); MCK boosted its year EPS outlook thanks in part to tax reform and posted better quarterly results
Industrials & Materials
· Industrial & Machinery; TXT was upgraded at Morgan Stanley citing the growing chances of a bizjet recovery and the stock’s relative underperformance; ETN shares advanced after Q4 top and bottom line beats; lots of hopes about infrastructure bill out of Washington seen as bullish catalyst for industrials and materials
· Transports; sector weak initially, dragged down by UPS after its outlook misses estimates and announced investment climb (said cap-ex to rise as much as $7B from $5.2B in 2017); ALGT higher in airlines after earning and analyst upgrade; truckers help pare index losses with LSTR the latest to report better results/strong guidance (CHRW and KNX better yesterday)
· Chemicals; Dow component DWDP shares fell after earnings and as 2018 EPS guidance fell below estimates, with one analyst (Morgan Stanley) saying was likely due to synergy realization timing
Technology, Media & Telecom
· Internet; FB shares at a fresh life-time high today after Q4 results came in above consensus forecasts, though ad revenue came in below the most bullish expectations; EBAY 52-week highs after earnings/upgraded at RBC Capital citing GMV growth/said it will shift its payments business to Adyen BV, a global payments company (away from PYPL); BABA pulls back from record highs after earnings results/beats forecasts again, takes 33% stake in affiliate Ant Financial; PCLN tgt raised to $2,100 at Raymond James as favor its global positioning in hotel, quicker path to room night recovery, and buyback potential; today marks the 5th straight day of gains for TWTR, rising over 20% during this stretch; still earnings to come tonight for AMZN and GOOGL
· Telco & Media; AT&T (T) helped lead telco higher on positive earnings results saying with lower tax rate, expects free cash flow to rise by $3.4 billion this year to $21 billion, providing financial flexibility and reported a surprise gain of 329,000 U.S. phone subscribers in Q4; EGOV shares dropped after one analyst noted Texas shunning NIC’s contract re-bid is a “major loss” and means the company may stand to lose an estimated ~$58M-$62M of the $68M the contract generated; CACIupgraded to buy at Loop Capital after earnings; MDP fell on change to outlook practices
· Semiconductors; a handful of semi chip earnings overnight including QRVO which beat top and bottom line but weaker forecast (few analyst upgrades) – though QRVO said its custom mid- and high-band PAD socket had been approved at Apple which rallied shares; QCOM results topped views and expanded its global patent cross-license agreement with Samsung; AMD upgraded to buy at Argus after rallying on earnings yesterday; ESIO shares dropped after earnings (had already preannounced results)
· Software movers; Dow component MSFT, which had surged to record highs late yesterday into results, posted quarterly results that topped consensus; OTEX strong quarter with total revenue and non-GAAP-EPS handily outpacing Street consensus/saw positive organic revenue growth; in security, SYMC shares dropped overnight on lower guidance but pared losses early; TTWO shares slipped late morning after they said Red Dead Redemption 2, which had been planned for release during Spring 2018, is now planned to launch on October 26, 2018; CDNS sink on accounting changes; other software related movers following earnings included CTXS, NOW
· Hardware movers; all about AAPL as company reports after the close; NOK rises on licensing boost ahead of 5G rollout/earnings; EFII posted mixed Q4 as EPS missed but revs beat