Friday, February 2, 18
Equity Market Recap
· Broad based selling in stocks send major averages plunging and posting their first losing week in over a month. With today’s move, the S&P 500 has now posted a 3% decline from its record high now, the first such percentage pullback since July 2016. The Dow Jones Industrial Average fell over 600 points late session, with Fed’s Kaplan adding fuel to the fire (more below). It was a broad pullback with nowhere to hide, as stocks, bonds, and commodities came under pressure – stocks fell over 2% for biggest declines since September 2016.
· Major averages snapped their 5-week winning streak, with the S&P and Dow posting their biggest weekly declines in over 2-years amid a surge in bond yields (borrowing costs), hawkish commentary from the Fed this week (Kaplan late day), rising rate expectations and mixed earnings reports (numbers had been good until late week). Energy stocks led losses after Dow components Exxon and Chevron profit and output missed estimates. The NASDAQ dropped after Google missed earnings and the Street was lukewarm on Apple results, with shares now down 10% from recent record highs (though Amazon results sent shares to fresh all-time highs).
· Inflation concerns have been picking up steam, with today’s data backing that talk as average hourly wages jumped 0.3%, to $26.74, pushing the yearly increase to 2.9% from 2.6%, marking the highest level since the end of the 2007-09 recession in June 2009. The Fed’s Kaplan also said late day that the base case is for three rate hikes in 2018, but could be more, noting central bankers must be vigilant and that if they wait to see actual inflation, they will be too late. His comments followed a strong set of economic reports (payroll, sentiment figures beat), which already had markets pricing in more aggressive rate hikes.
· Today wrapped up a busy week of news (State of the Union, FOMC meeting) and earnings (over 125 S&P companies reported), though next week marks another heavy dose of corporate results. Will investors run to buy beaten up stocks on Monday after the first weekly pullback of the New Year (which has been the case over the last year), or will this be the start of weakness given the surge in borrowing costs and a more hawkish Fed?
· Nonfarm Payrolls for January rose 200K, topping the 180K estimate and unemployment held steady at 4.1% (in-line with estimates); the participation rate steady at 62.7%; average hourly earnings 0.3% MoM above the 0.2% estimate. Nonfarm private payrolls rose 196K vs. prior 166K and also above estimates of 181K, while manufacturing payrolls rose 15K vs. the 20K est.
· University of Michigan Sentiment for January slipped to 95.7 from 95.9 in December (but above est. of 95) and compared to the preliminary reading of 94.4. Current conditions gauge dipped to 110.5 from 113.8 in the prior month; while the expectations measure advanced to 86.3 from 84.3; the year-ahead inflation expectations were unchanged at 2.7%
· Factory Goods Orders for December rise 1.7%, slightly above the 1.5% estimate while Factory orders for Nov. revised up to 1.7%; new orders ex-trans. for Dec. rise 0.7% and new orders ex-defense for Dec. rise 1.4% after rising 1.6% in Nov. Durables orders for Dec. rise 2.8% after rising 1.7% in Nov.; Consumer goods shipments for Dec. rise 0.7% after rising 1.4% in Nov.
· Oil prices decline, falling 35c to settle at $65.45 per barrel, rebounding in the afternoon and closing well off its earlier lows of $64.47. For the week, WTI crude posted a decline of roughly 1%. Gold prices fall -$10.60 or 0.8% to settle at $1,337.30 an ounce as a stronger-than-expected U.S. jobs report drove up the dollar and Treasury yields and further boosted the case for aggressive rate hikes by the FOMC (estimates for 3 hikes, but strong data and rising inflation could raise case for 4 hikes). For the week, gold futures declined -1.5% and trimmed its year-to-date gain to 1.8% (gold had posted a weekly gain in six of the past eight weeks). Natural gas futures fell -1c to settle at $2.846/mmbtu, but was down 19% this week, its biggest weekly decline since Feb. 2014.
· The U.S. dollar posted solid gains, with the dollar index rising 0.5%, ending the week in positive territory (barely) after strong economic data (jobs beat, factory orders and sentiment also above expectations) boosted market odds of a rate hike by the FOMC at its March meeting. Bitcoin prices very volatile on Friday, falling as much as 16% overnight to lows of $7,614 (which had marked a 25% drop for the week), but managed to claw its way back to breakeven by noon, but lost ground late afternoon (with just about every other asset), falling more than 5%.
· Bonds yields jump, with the benchmark 10-year yield trading to around 2.85%, its highest level in four years as strong economic data boosts odds of more rate hikes from the Fed this year (market counting on three – but data could push to four); the yield on the benchmark 10-yr climbs over 6 bps to around 2.85% (best levels since Jan 2014 and now up over 40 bps to start the year); the 30-year rose over 5 bps to 3.06% and the 2-yr yield was up slightly at 2.165% (traded above 2.18% earlier). Bonds have come under pressure on concerns that stronger wage gains could spur inflationary pressures, eroding the value of debt. Hourly wages rose 0.3% in January to raise the 12-month increase to 2.9% from 2.6%, the fastest pace since June 2009.
Other Interesting tidbits
· Wage growth seen in the January jobs report was one of the “first signs” that wages are picking up and could cause the Federal Reserve to respond, said Minneapolis Fed President Neel Kashkari said Friday. In an interview on CNBC, Kashkari called the wage growth “the most important thing” in the jobs data”. “If wage growth continues, that could have an effect on the path of interest rates,” he said. Kashkari opposed all three rate hikes last year, saying he didn’t see enough evidence inflation was climbing toward the Fed’s 2% target.
Sector News Breakdown
· Retailers; DECK Q3 top and bottom line results handily topped consensus on stronger margins (52.2%) and guided year sales above views; in toy retail, MAT shares rebound, about a $2 bounce off lows after “kitchen sink” type quarter as posted quarterly loss of 72c vs. estimate for profit; GPRO downgraded to neutral at JP Morgan after misses revenue forecast for holiday quarter
· Consumer Staples; CLX Q2 sales missed, raised year EPS due to tax benefits but said year gross margin is now expected to “decrease modestly” due to higher input costs tied to commodities; EL Q2 results topped consensus and raises year view as well; NGVC reported a stronger-than-expected comp, but much weaker-than-expected gross margins and EBITDA, as the company ramped up promotional activity; HSY downgraded to neutral at Credit Suisse as the stock merits a more narrow valuation premium to food peers than in the past due to the deceleration of its growth rate; POST shares to 52-week lows after earnings results; Stifel said U.S. alcohol trends weakened last year, in spite of an improving economy, characterized by weakening beer volume and slowing spirits sales growth (lowers tgts for BUD, SAM, TAP, RI-FR, BF/B, MGPI)
· Energy stocks broadly lower, down after weaker earnings results from XOM and CVX and a drop in oil prices; XOM shares plunged, falling 15c short on EPS, while CVX also posted an earnings miss, and posted production misses for the two
· In E&P and services, CPE reported that 4Q17 oil production beat the midpoint of the guidance range by 10% while capex was essentially in line with the guidance (have not seen from many other E&Ps recently), while guidance was slightly higher on capex and slightly lower on production; WFT said it sees cash flow negative in Q1, breakeven for full year and expects higher Q1 operating income/expects upward trend in North America rig count in 2018
· Baker Hughes weekly rig count data showed the total U.S. rig count fell -1 to 946, with oil rigs up 6 to 765, gas rigs down -7 to 181, and miscellaneous rigs unchanged. The U.S. Rig Count is up 217 rigs from last year’s count of 729, with oil rigs up 182, gas rigs up 36
· Utilities; EXC said its Oyster Creek nuclear plant in Ocean County, N.J., to close in Oct., one year ahead of original deadline; UBS said regulated utes are cheap following a 16% correction vs the S&P 500 over the past three months, and investors should add to positions “opportunistically” in 1H18, said focus stocks: DUK, SRE, EXC and buys:DUK, PPL, FE, SRE, EXC, D, AEP, NEE, while sell rated on SCG, POR, PNM, HE
· Large Cap banks mostly lower; European banks fell as DB surprised with revenue that fell to the lowest in seven years and declines at businesses from transaction banking to equity derivatives, below consensus views; also hitting bank early, the Federal Reserve’s instructions for 2018 CCAR (Comprehensive Capital Analysis and Review) stress tests are tougher than expected (BAC, C, JPM, GS, WFC) according to Morgan Stanley with more intense recessions and lower asset prices; banks are not getting a boost early as bond yields touch news year highs
· REITs; apartment REITs dropped, led by AVB after Sandler O’Neill cut to hold from buy, and Q1 first-quarter forecasts missed estimates; EQR said that 2018 will be another tough year, with view 2019 will see less supply, better pricing dynamics (AIV shares also dip); CPT delivered an in-line 4Q report, with both FFO and SS metrics meeting estimates, but outlook disappoints; KRG falls after posting 4Q results and providing 2018 forecasts (downgraded at Bank America citing guidance – $1.98-$2.04 vs. est. $2.08); several 52-week lows today in the S&P 500 for REITs – KIM, MAA, PSA, O, VNO, EQR, AIV, HCN, HCP, VTR, AVB
· Cards, services and payments; Dow component Visa (V) Q4 earnings and revenues topped consensus views, with strong payment volume growth of 10% and announced a $7.5B stock buyback; MA also posted strong profit and revs in its results the day prior, both boosted by increased holiday spending (sector down with broader market)
· Large Cap Pharma; Dow component MRK Q4 EPS beat by 4c on slightly lower revs of $10.43B, but tough week overall for pharma/generics after President Trump went after high drug prices during his State of the Union on Tuesday night; in specialty pharma, MNK downgraded to underweight at Barclay’s saying acquisition of Sucampo reduces its strategic options and won’t address ongoing concerns over the company’s top selling asset, Acthar; ACET drops as misses Q2 estimates and guides year below views; AZN quarterly Lynparza revenue that exceeded estimates
· Biotech movers; AMGN Q4 results and guidance were mixed despite tax reform benefits, amid higher than expected operating expenses/announced $10B stock buyback;ALNY said the FDA accepted for filing its NDA for patisiran, granting priority review and Pdufa action date of Aug. 11, but FDA isn’t planning to hold an advisory committee meeting to discuss this application yet
· Healthcare services and suppliers; ATHN shares jumped on strong headline 4Q17 results, reflecting cost reductions (3% beat on revenue delivered a 73% beat on operating income); DPLO shares were downgraded to hold at Deutsche Bank
· Medical equipment and devices; VREX shares dropped sharply after reporting 1Q revenue of $176M below the $194M estimate and on an earnings miss; EW shares to record highs after 4Q sales growth of its TAVR valves showed the underlying strength of the market’s fundamentals
Industrials & Materials
· Transports; in truckers, YRCW shares plunged as posted surprise 4Q loss, hurt by a shortage of equipment and a demand for drivers; though SAIA posted Q4 EPS that beat views; Transport index fell over 1% and down about 5% off record highs in mid-January, led by declines in UPS today (extends yesterday’s loss after earnings miss), but was broad based pullback
· Paper & Forest sector; WY posted Q4 EPS and sales that fell below consensus, sending shares lower and said sees significantly lower earnings, adj. EBITDA in 1q compared with 4Q for Real Estate, Energy and Natural Resource unit (shares of PCH, RYN, IP active)
· Chemicals; SHW upgraded to buy at Seaport Global and $465 tgt as think the Valspar deal adds another layer of growth potential; EMN Q4 earnings topped consensus;LYB Q4 eps and revs topped consensus though Ebitda was slightly below views and higher cap-ex spending
· Aerospace & Defense; SPR posted Q4 EPS and sales above consensus, a buyback of $1B in stock and an upbeat outlook; HII upgraded to buy at Cowen saying the stock is excessively discounted at 13x C18E EV/EBITDAP vs. large cap defense peer average of 16-19x; OSIS shares plunged as disclosed two separate investigations, prompting analyst downgraded despite posting 2Q revenue and EPS that beat estimates
Technology, Media & Telecom
· Internet; AMZN reported better than expected 4Q17 revenue and operating margins, while guiding 1Q18 revenue above consensus on lower than expected margins. Drivers of the 4Q margin beat included better revenue, strong operational execution and advertising; GOOGL shares dropped as Q4 EPS missed estimates and margins fell short due to elevated cost of goods sold, but many analysts note upbeat call; in research, AMZN added to Stifel Select List alongside BABA and removing NFLX as shares have risen by 38% YTD (they downgraded GOOGL); TRUE disclosed CFO Michael Guthrie’s resignation effective Thursday in a filing.
· Semiconductors; PI shares plunge over 40% as preannounced Dec-qtr revenue to $29–30M vs. prior guide of $28.25–$29.75M and said CEO stepping down for personal reasons (downgraded by a few analysts on news/guide); OMCL Q4 revenues came in below expectations on longer XT implementations due to size and customer push offs; CY moved on earnings, while NVDA mentioned cautiously by Citron Research (likes company just not at current price); BRKS shares were pressured despite beat and raise quarter
· Hardware and component; NOK upgraded to buy at MKM, bullish on its multi-year 5G opportunity, and view the company’s management team as strong; HPQdowngraded to neutral at Mizuho on valuation and played out catalysts; VIAV shares jump as Q2 results showed revenue and EPS beat, while providing in-line March guidance and agreed to acquire the AvComm & Wireless T&M business from Cobham; VMW shares active after its largest shareholder Dell disclosed that it was evaluating a business combination with VMware. Dell said it was evaluation other business opportunities, including an initial public offering of common stock and “maintaining the status quo https://goo.gl/mTHwBd; MSI rises on earnings and deal
· Apple results and read-through: AAPL reported modest upside to Dec-qtr and guided March-qtr below Street/was downgraded by a few firms noting soft iPhone sell-through suggests a saturated market and the lack of gross margin upside reduces view of potential profit growth; AAPL suppliers (CRUS, AVGO, SWKS, QRVO) were pressured
· Media & Telecom; Sprint (S) posts Q3 beat, raised cash flow outlook; CHTR posted Q4 subscriber gains in, just 2K, but marks the first gain since Charter acquired Time Warner Cable and Bright House Networks in May 2016; TIVO was upgraded to buy at B Riley
· Software movers; DATA shares jump as reported results that came in above consensus amid growth in license bookings, though guidance softer