Wednesday, March 7, 18
Equity Market Recap
· U.S. stocks end mixed on Wednesday, dragged down by energy as oil prices decline, while industrials and materials remain pressured on potential cost increases if President Trump follows through with his planned 25% tariff on steel imports and 10% on aluminum. Stocks fell sharply overnight after Gary Cohn, the head of President Donald Trump’s National Economic Council, resigned late Tuesday after disagreeing with the President regarding the expected tariff hikes. Market jitters over a potential trade war climbed after the Trump administration also said it was considering clamping down on Chinese investments.
· Prior to paring losses late session, the Dow Industrials fell as much as -349 points, threatening to log a decline of at least 1%, which would have marked a ninth decline of at least 1% for the average so far in 2018 (after not posting decline of greater than 1% in all of 2017). Small Caps outperformed again, led by the Russell 2000 (after rising 1% yesterday). Oil prices fell by the most in more than three weeks (over 2.4%) as equities declined, the dollar rose and a U.S. government report showed an expansion of crude stockpiles and production.
· Economic data mostly stronger, with private payrolls (as per ADP) topping consensus views ahead of the nonfarm payroll report on Friday, while Productivity also came in above views…but inflation fears rise as unit labor costs top expectations. The Fed’s Bostic, speaking this morning said that in December was forecasting two interest rate hikes, but has adjusted to three (and notes that 2, 3 or 4 hikes are all on the table this year).
· By the end of the day, many questions remain, such as: 1) who will replace Gary Cohn as economic advisor to the White House, 2) how does NAFTA play out with tariff situation, 3) do trade tensions with China begin to heat up after Trump comments overnight, 4) and will inflationary pressures force the Fed’s hand to raise rates quicker (after higher labor costs data today, Fed Minute comments and expected rise in wages as this Friday’s jobs report)
· The Beige Book, which was released at 2:00 PM EST this afternoon, showed growth remained at a modest to moderate pace in January and February, though the report saw building inflation pressures. “Prices increased in all districts,” the Beige Book said. In addition, “most districts saw employers raise wages and expand benefit packages in response to tight labor market conditions.” Still, overall wage and price growth were described as “moderate.”
· Private-sector employment remained strong, as ADP reported employers added 235K jobs, topping the 200K forecast by economists and compared to an upwardly revised 244K jobs in January. February was the fourth month in a row where job gains were 200,000 or higher. Small firms added 68,000 jobs in February, medium-sized businesses added 97,000, and large companies added 70,000.
· U.S. productivity in Q4 was revised to show no gain instead of a (-0.1%) decline, however, unit labor costs rose more than expected, up 2.5% vs. the estimate 2.1%. The increase in output — or goods and services produced — was left at 3.2%. Hours worked was also unchanged at 3.3%. Compensation per hour rose 2.4% in 4Q vs. up 1.8% preliminary
· Trade deficit for January widened 5% to (-$56.6B) from (-$53.9B) in the prior month, hitting a nearly 10-year high and continuing a steady rise since President Trump took over. Trade deficit excluding petroleum at $49.52B in January. Imports little changed in Jan. at $257.51B from $257.51B in Dec. and exports fell 1.3% in January to $200.91B from $203.61B in Dec.
· WTI crude oil prices slumped, falling -$1.45, or 2.3% to settle at $61.15 per barrel, tracking overall weakness in riskier related assets after the resignation of the White House’s chief economic adviser, Gary Cohn. Oil prices pared losses after weekly inventory data showed a smaller-than-expected build in U.S. crude stockpiles. Prices, which posted gains in the last three sessions, traded as low as $60.58 before paring losses. Overnight, the American Petroleum Institute on Tuesday reported a rise of 5.7 million barrels.
· Precious metals declined, with gold prices sliding -$7.60, or 0.6% to settle at $1,327.60 an ounce as the U.S. dollar gave up earlier gains. Gold prices have fluctuated the last few weeks, rising on safe haven interest only to decline the last few weeks on rising interest rate expectations. Prices settled Tuesday at $1,335.20 an ounce, the highest finish since Feb. 16th after falling to its lowest levels of the year last Thursday.
Currencies & Bonds
· The dollar index (DXY) ends little changed, bouncing off overnight lows (down at 89.40), getting a lift on positive economic data (private payrolls), while currency market volatility continues amid news of Gary Cohn stepping down as economic advisor to the White House. The move follows conflicting views with President Trump on tariffs, raising trade war fears. The Canadian dollar held losses after the Bank of Canada left interest rates unchanged. The euro ended little changed around the 1.24 level (highs 1.2444 and lows 1.2385), while the dollar slipped vs. the yen.
· Bitcoin prices, along with other crypto currency markets declined sharply (Ripple, Ethereum, Litecoin), falling after the SEC issued a public statement warning that there are potentially unlawful online platforms for trading digital assets, notably the coins and tokens offered and sold in initial coin offerings. https://goo.gl/15Fy3p. The cryptocurrency had stabilized between $10,000 and $11,500 since the start of February but it dipped below $10,000 today.
· Treasury market’s rise as yields slipped amid turmoil in Washington with White House economic advisor Gary Cohn resigning overnight after disagreeing with the President’s tariff news. The yield on the 10-yr falls to lows around 2.86% before sending little changed. White House news and Fed Beige Book comments did little to move bonds meaningfully.
Sector News Breakdown
· Retailers; URBN strong comp sales driven by better full priced selling while for the first time in five years, all three brands posted positive comps, driven by strength in e-commerce/negative was margins falling 33 bps more than the Street expected according to Deutsche Bank; ROST Q4 earnings beat along with stronger than expected comps and gross margins, but guidance fell short of consensus views; ANF Q4 EPS missed by 2c, but sales of $1.19B beat views and comps of 9% topped the 8.4% estimate while its sales view for year above views; Dollar stores declined as DLTRQ4 EPS and sales both fell shy of consensus along with weaker comp sales
· Consumer Staples; BGS downgraded to underperform at Credit Suisse saying despite management lowering its EBITDA outlook for 2018 well below consensus, we expect another year of negative revisions ahead; MDLZ 19.5M share Block Trade priced at $43.90; MED shares surge on earnings beat and positive 2018 outlook (upgraded at Sidoti) – lifted NTRI and WTW
· Restaurants; DPZ upgraded to buy and $260 tgt at Argus saying at current prices, we believe that DPZ shares inadequately reflect prospects for rapid earnings growth and increased market share; BOJA Q4 EPS beat by 5c on higher sales $148.1M and guided the year above forecasts, recovering after recent news of CEO departure; Peyton Manning sells his 31-Papa John’s (PZZA) franchises before split with NFL
· Housing & Building Products; DHI was upgraded to outperform at Wedbush in housing sector; AWI was downgraded at JP Morgan to Underweight with an unchanged price target of $64 as sees limited upside potential following the stock’s year-to-date outperformance
· Casino, Lodging & Leisure; in cruise lines, Stifel said confidently reiterate our Buy ratings on CCL, NCLH and RCL, and reaffirm NCLH’s inclusion on the Stifel Select List; GOLF posted better Q4 revs and Ebitda figures; TRK full-year rev outlook fell short of consensus and Q4 EPS/rev miss
· Shares of U.S. energy companies dropped sharply in early afternoon trade, following a nearly 3% decline in oil prices; XOM held its analyst day today, with shares reacting negatively (along with broader general market weakness), trading at 52-week low below $74 per share (had traded at 52-week high on 1/29 at $89.30) – XOM said it plans to triple production by 2025 comes at a cost: $24B spending on capital projects this year, $28B next and an average of $30B during 2023-25
· Inventory Data: Overnight the API reported U.S. crude supplies rose 5.7M barrels for the week ended March 2, showed a decline of -4.5M barrels in gasoline stockpiles, while inventories of distillates saw a climb of 1.5M barrels. This morning, the EIA said weekly crude stockpiles rose 2.4M barrels, less than the estimated 3M barrel build, while gasoline inventories fell
· Solar & Utilities; RUN shares fell as delivered a healthy Q4 of inline volumes and strong NPV/W, but a weak Q1 guide of down 8% YoY vs. estimates for up and an inline 2018 outlook of up 15% YoY; DUK 18.5M share Spot Secondary priced at $75.00; PLUG Q4 EPS loss wider-than-expected, whileFCEL results expected tomorrow
· Research analyst comments/changes; WLL upgraded to buy at Seaport as in the underlying quality of WLL’s sizable ~410K net acre Bakken footprint and its ability to execute on its development has been revived; FI upgraded to buy at Wolfe Research as see risk/reward much more balanced now;ECA was upgraded at Evercore/ISI, while downgraded RRC shares
· Large Cap banks among hardest hit sectors in broad market sell-off, with Dow components GS, JPM underperforming; the tax cuts helped boost the sector along with rising rate environment (higher yields), but trade war fears have cause broader market profit taking; SNV was upgraded at Morgan Stanley as believe the market is more appropriately valuing the shares of; HRB posted a narrower than expected quarterly loss and reaffirms revenue growth, margin guidance, as one analyst noted delivered F3Q18 outperformance/strong volume/pricing throughout tax season
· Large Cap Pharma; not immune to selling pressure despite lack of news in Pharma, with Dow components JNJ and MRK sliding; Merck KGaA said that a study of evobrutinib in relapsing multiple sclerosis has yielded positive results; ZFGN’s ZGN-1061 was safe and well tolerated in interim data
· Biotech movers; ESPR said late-stage trial of its experimental Cholesterol drug met the main goal of reducing cholesterol by 28% in patients suffering from, or at a high risk of, an artery-clogging heart disease (SNY is partner while MDCO and ALNY also developing an experimental cholesterol cutting medicine known as inclisiran; RARE said that the first dose cohort of three patients in a phase 1/2 gene therapy study had positive longer-term safety and efficacy results
· Gene editing sector; CRSP tgt raised to Street high $59 at Barclay’s saying several recent events including acquisitions of KITE/JUNO and SGMOcollaboration with GILD validated the value of cell therapy and the potential of gene-editing technologies; EDIT tgt raised by several analysts ($67tgt JMP and $46 at Barclays) as reported 4Q17 earnings and pipeline progress
· Healthcare services and facilities; IQV upgraded to buy at SunTrust as think this story has legs for another 2-3 years, with the recent sell-off post 4Q17 providing an attractive entry point; DGX upgraded to buy at Argus as has a positive view of the company’s cash generation, cost controls, and share repurchases
Industrials & Materials
· Aerospace & Defense; AVAV shares dropped as swung to a surprise Q3 loss of (4c) vs. est. for gain of 2c and revs rising 20% to $64M vs. est. $63M;HA selected BA’s 787 Dreamliner as its flagship airplane for medium to long-haul flights/intends to purchase 10 787-9 jets valued at $2.82B at list prices; Airbus’ A380 production cuts said to impact 3,700 jobs
· Transports; the sector outperformed the Dow Industrials, bouncing well off earlier lows of 10,331; in auto space, Reuters reported Renault and alliance partner Nissan (NSANY) are discussing plans for a closer tie-up https://goo.gl/Z3yL1W
· Metals & Mining; steel and metal names move higher (X, AKS, STLD, NUE, AA, CENX) after Gary Cohn departure as economic advisor, as likelihood that President Trump will follow through on foreign steel and aluminum tariffs
· Chemicals; SunTrust raises ‘18 earnings estimates for TiO2 producers VNTR and KRO based on upwardly revised forecasts for TiO2 prices as expect upward TiO2 pricing momentum to be maintained through year-end; VVV initiated outperform at Wolfe Research and $28 tgt; TROX withdrew its complaint against the U.S. Federal Trade Commission/had sued FTC to move FTC’s challenge to Cristal deal to federal court from agency’s administrative court; Reuters reported Bayer in exclusive talks to sell vegetable seeds business to BASF https://goo.gl/mSf1xM
· Paper & Packaging; IP was downgraded by at least two analysts (Wells Fargo and BMO) due to an overhang on shares associated with a potential combination with Smurfit Kappa
Technology, Media & Telecom
· Internet; NFLX was downgraded to hold at Stifel on valuation, as the shares are up by nearly +70% YTD (versus the S&P 500 up +2% YTD), following a +55% move in 2017; CVNA missed expectations for the second quarter in a row and guided 1Q18 and FY18 well below consensus as marketing effectiveness and inventory management appear to drive miss; AMZN said that it is extending the $5.99-per-month Prime membership rate offered to low-income customers with a valid EBT (electronic benefit transfer) card to Medicaid recipient; GRUB all-time highs
· Semiconductors; Philly semi index (SOX) turns positive early, touching all-time highs of 1,400 earlier today; MU another 52-week high today (along HDD stocks STX and WDC); CREE was upgraded to neutral at Goldman Sachs saying transformational shifts at the Wolfspeed segment progressing more quickly than we originally envisioned
· Software movers; ADSK shares rise as posted a Q4 subscriber miss (while Q4 EPS and revs beat) but Street focused on the better than expected FY19 recurring growth forecast; 52-week highs for S&P 500 components: ADBE, RHT, ADSK, and CRM; INOV said it would buy privately held Ability Network for $1.2 billion, as the healthcare data analytics company seeks to reduce its dependence on insurers and add more clientshttps://goo.gl/d928mV