Thursday, May 10, 2018
Equity Market Recap
· U.S. stocks in full-fledged rally mode, rising to the best level in nearly 2-months while the US dollar pulled back on a “tamer” inflation reading, reducing expectations for the Fed to get more aggressive on their rate hike campaign. With today’s gains, the Dow Industrial Average extended its win streak to 6-straight sessions (helped by Dow component Apple which rose for an 8th straight session to another record high), while the S&P 500 index traded back above its 100-day moving average of 2,706 (first time above since mid-April). The tech heavy Nasdaq Composite and SmallCap Russell 2000 outperformed, as the Russell 2000 traded as high as 1,609, below its all-time highs 1,615.51 on Jan 24th of this year, as the rising dollar seen less impactful to them than multi-national corporations. The NASDAQ traded as high as 7,414 before paring gains. Trade with China and the NAFTA deal with Mexico and Canada remains a potential concern for markets.
· In sector news, Healthcare stocks bounced off recent weakness ahead of President Donald Trump’s speech on his plans to address drug pricing Friday. Technology shares pacing the gains again ahead of key earnings in the chip sector tonight with NVDA reporting. Interest rate sensitive sectors (Telecom) rebounds as bonds rise, sending yields lower on the tamer CPI inflation report. The dollar also pulling back from recent gains along with oil on profit taking. Retailers fall as LB guided next quarter to low end of earnings range after April comps were flat, while department stores drop on Morgan Stanley downgrade of Macy’s.
· Consumer price index (CPI) for April rose 0.2% in April, slightly below the 0.3% estimate, but up from last month’s (-0.1%) decline. The more closely followed core measure (strips out food and energy) advanced 0.1%, also missing the consensus estimate of 0.2%. The consumer price index has risen 2.5% in the past 12 months – the highest rate in 14 months…but the yearly increase in the core rate was unchanged at 2.1%
· Weekly jobless claims remained steady at 211K, but was below the estimate of 219K, holding near a 49-year low in early May; the 4-week moving average fell by 5,500 to 216,000 to touch the lowest level since December 1969. The record streak of weekly claims below 300K is now in its 166th week, and the streak of sub 250K readings is up to 25!
· Oil prices rebound from earlier lows (touched $70.56 low), as WTI crude rose 22c to settle at $71.36 per barrel, building on yesterday’s gains on bullish inventory data and follow through strength as the US pulled out of Iran nuclear accord, reimposing sanctions. Prices climbed 3% on Wednesday, a day after the U.S. announced its decision to exit its deal with Iran. Gold prices settle higher by $9.30, or 0.7% at $1,322.30 an ounce, its first gain in the last 4-trading days and finishing near a 2-week high as the dollar slipped off its recent 5-month highs.
· The U.S. dollar pulled back for a 2nd day from 5-month highs, as the dollar index (DXY) pulls back below the 93 level (lows of 92.54 after highs of 93.41 yesterday). The move lower comes amid profit taking as markets digested another softer inflation report, this time in the form of CPI missing estimates (after PPI came in tamer yesterday as well). The data raises expectations the Fed will hold back on its more aggressive rate hike campaign with inflation not ramping. The dollar slipped vs. the euro and yen but rises vs. the British Pound after the Bank of England kept rates unchanged at its policy meeting today.
· Treasury markets end higher as yields slip, as aggressive rate hike expectations from the FOMC ease given the tamer inflation readings the last two days (CPI today below views); the 10-year drops back to 2.97% (after trading above 3% yesterday) and the 2-yr down about 3 bps from yesterday highs above 2.54%. The U.S. Treasury sold $17B in 30-year notes at a yield of 3.13% vs. 3.138% when issued prior at a bid-to-cover (demand) of 2.38 vs. 2.41 prior auction and indirect bidders awarded 62.7% of auction and directs 8.3%.
Sector News Breakdown
· Retailers; space was under pressure (KSS, JWN) after Macys (M) downgraded to underweight at Morgan Stanley given its continued negative store comp. sales and ongoing decline in ROIC; also LB weaker guidance hurt sector; TPR was upgraded to buy at Bank America as sees upside to estimates from continued integration of Kate Spade
· Monthly same-store sales data; most retailers no longer provide monthly data, but COST said April comp sales up 10.9% vs. est. up 8.80% and April U.S. comp sales ex-gas up 7.9% vs. 6.6%; BKE April Comp Sales down (-3.4%) vs. est. down (-5.0%); CATO April Comp Sales down (-6%) vs. est. down (-5.0%) saying April sales hurt by the shift of Easter; LB guided Q1 EPS to the low end of 15c-20c view while posting April comp sales flat (Victoria Secret comps -2%) with Bed Bath & Beyond comps rising; ZUMZ posts unexpected comp rise for April
· Consumer Staples/Restaurants; COT upgrade to buy at Jefferies saying transition to a pure play water, coffee and filtration business is not fully appreciated; TWNK reported better than expected 1Q sales results with an EBITDA miss due to timing; ELF reported 1Q18 results with sales above expectations and EBITDA in line and maintained its full year outlook; GRUB announced it is partnering with JACK to provide delivery for hundreds of locations across the country; CHEF rises on earnings beat and offering guidance for year well above views
· Auto sector; Ford Motor Co. (F) has halted production of its best-selling F-series pickup trucks after a fire damaged a supplier’s plant in Michigan and caused a shortage of parts for the vehicles (maintained year outlook); CVNA shares surge as Q1 revs beat with Street noting its gains in gross profit per unit (GPU) amid strong execution and increased demand
· Major oils active all week as oil prices pull back from 4-year highs today; Bank America raised its Brent oil price outlook to $70 from $65 in 2018, and to $75 from $60 in 2019, and boosted tgts on several names saying sees greatest value in E&Ps such as HES, APC, NBL; upgraded OXY, EOG to buy from neutral and cut COG to underperform given gas weighting and XEC cut to neutral; PBR also upgraded to buy at Bank America given higher expected earnings over the next several years due to a materially more favorable oil price environment that they now expect; in sand frac space, SND shares dropped as rising expenses caused its earnings miss
· Oilfield services @ Equipment; NBR 35M share Spot Secondary priced at $7.75; FTI shares fall after Q1 earnings missed consensus views; in research, Bank America upgraded HAL to buy given a more bullish view on U.S. activity and continued confidence in stronger 2019E int’l markets, and also raise ests for pressure pumpers and drillers, and reiterate top pick PTEN…BoFa also downgraded BHGE to neutral as positives from upcoming LNG FIDs and its aggressive buyback now look more priced in…in offshore driller space, upgrade RDC to Neutral from Underperform, as we believe its joint venture with Saudi Aramco (ARO Drilling) offers the best visibility into future cash flows of any company in the offshore space.
· Refiners; Citigroup with changes recapping earnings season saying going into earnings, the focus was on rebounding regional margins, RINs relief, and IMO 2020 preparation. Coming out of results, these themes remain, but have made room for two new topics of discussion: the MPC-ANDV merger, and the steepening CF ramp for Permian levered refining. The firm makes MPC its new Top Pick ($95 TP) and downgrading ANDV to Neutral. Firm also upgraded CVRR to Buy ($22 TP), raises DK target to $62 on Permian Differentials and see meaningful upside to VLO CFs
· E&Ps sector; lots of research today as Tudor Pickering downgraded ECA to hold on valuation given limited upside to its $14/share NAV…cuts NFX to hold from buy on valuation and EOG cut to hold as sees better value elsewhere in E&P sector/remains positive long-term…LPI cut to hold as eyes execution in 2H 2018, while upped SM to buy. Bank America upgraded WLL to buy on solid momentum and EGN to buy from neutral on positive operational momentum and superior takeaway positioning…also upped OAS to neutral from underperform on higher oil prices; Bakken results to benefit from improved completion techniques, favorable differential outlook (form downgraded Canadian E&P Husky given uncertainty on recent fire at its Superior refinery)
· Solar sector; FSLR was upgraded to overweight at JPMorgan and raises tgt to $85 from $74, though sees FSLR’s earnings growth being range-bound, given absence of pricing power in a global commodity market, despite strong industry-wide unit growth outlook; RUN and VSLR outperform in space as seen the two best positioned to capitalize on California’s plan to require solar panels on almost all new homes; SEDG outperforms after several analysts up tgts following another beat and raise quarter.
· Large Cap banks moved slightly higher with broader markets though reduced rate hike expectations could be drag on group after soft CPI inflation report; RBSsaid it reached a tentative agreement to pay a $4.9 billion penalty to resolve a long-running U.S. probe into its packaging and sale of MBS securities before the 2008 financial crisis https://on.mktw.net/2ryocOJ ; in finance space, GDOT shares jump after earnings as reported another quarter of record revenue ($315M) and EPS ($1.40, +40% YoY) in 1Q; in investment space, ENV falls on weaker Q1 guide;
· Large Cap Pharma; LLY to acquire late-stage immuno-oncology company ARMO for $50 per share, or approximately $1.6 billion, in an all-cash transaction. https://reut.rs/2Kblzcy ; VRX said that it plans to borrow an additional $3.815B of Term B loans and issue $750M of secured debt securities and $750M of unsecured debt securities; Citigroup said MRK, BMY and LLY in the U.S. and AZN, BAYRY, and Merck KGaA in Europe are preferred in the next wave of cancer immuno-therapies in the wake of the pivotal study failure of INCY’s IDO-inhibitor; VTVT rises on statistics positive in Azeliragon study; AMPH falls as earnings and sales both missed analyst estimates
· Biotech movers; DVAX was upgraded to overweight at JPMorgan saying shares could reach as high as $25-share in a “homerun scenario” for experimental cancer medicine, SD-101 when results are presented at ASCO next month; EXEL and ARRY shares slide after partner Roche announced the Phase 3 IMblaze370 trial of atezolizumab combined with cobimetinib did not hit its primary target in cancer study; PBYI plunges after posting a wider than expected Q1 EPS loss
· Medical devices and equipment; ICUI results were nicely ahead of expectations (+2% on revenue, +11% on EBITDA), highlighted by a significant step-up in gross margin; IART 5.25M share Spot Secondary priced at $58.50; AXDX shares dropped as sales and quarterly loss worse than ests;
· Services and facilities; QHC shares dropped sharply after cutting its adjusted Ebitda for the year, adjusted for divestitures to $145M-$165M from $160M-$180M (est. $169M)
· Health care supply chain stock that have recently been under the most pressure outperformed the broader market ahead of President Donald Trump’s speech on his plans to address drug pricing Friday. Notable gainers today included DPLO (also analyst upgrade), OMI (earnings) as well as recently beat up CAH, MCK
Industrials & Materials
· AG & Machinery; the monthly WASDE report came out today and was bullish for corn and ag related names (DE, MOS, etc.) as WASDE shows world 2018-19 corn reserves below all estimates according to Bloomberg with corn World 2018-19 reserves 159.15M tons below its survey range 165M-193.8M
· Transports; overall index rises more than 100 points midday, trading back to its 100-day moving average of 10,604; JBLU April traffic rose 5.7% and capacity up 5.3% while saying its April load factor, or percentage of seats filled, improved to 85.7% from 85.3% a year ago/still expects 2Q revenue per available seat mile to range between unchanged and a decline of 3%
Technology, Media & Telecom
· Internet; after advancing yesterday on TRIP quarterly results, the online travel space a little pullback after BKNG reported a mixed quarter highlighted by softer growth (bookings up 12% constant currency), but better EBITDA margins/room night growth guidance of 11% at the high-end was below consensus of 15%; TTGT better than expected quarter and raised guidance for 2018 for both revenues and EBITDA; GRPN was upgraded to neutral at UBS
· Semiconductors; NVDA to report earnings after the close tonight; QCOM announces a $10B stock buyback; SYNA results roughly in line and guidance below on DDIC/TDDI shortages due to a stronger than expected rebound in China; the Philly semi index (SOX) back up around the 1,350 level, higher by 1% ahead of NVDA earnings tonight (52-week for the stock), as the index has bounced sharply from its April lows of 1,223 on 4/25
· Software movers; SAIL shares fall despite earnings beat as analysts said valuation concerns overshadows the company’s earnings beat; UPLD beat and raise quarter, particularly strong organic growth which was up 6%; NUAN slides as reported a mostly in-line quarter last night, with soft bookings while forward guidance was lowered; OTEX falls after Q3 EPS missed the lowest Street estimate
· Hardware movers; AAPL rises for 9th straight day of gains, 5th straight record high after soaring 15.4% the past 8 sessions; ROKU posted a beat-and-raise quarterly results as active accounts grew 47% YoY and its average revenue per user (ARPU) increased 50%; INFN shares drop despite better than expected Q1 results as analysts expressed possible pricing pressure fears
· Telecom and cable movers; RNG beat and raise in 1Q18 with core sub revenue growth accelerating to 37%; CTL rises on in-line quarter, with revenue/EBITDA trends stabilizing and management upbeat on its improved overall service offering and synergies; ATUS reported mixed 1Q18 results with softer revenue and EBITDA, but in-line to better subs
· Media movers; FOXA posted quarterly results, but ongoing battle for its assets between DIS and CMCSA remains the story; MDCA shares plunge after cutting 2018 organic revenue growth outlook to 1%-3% from 4%; NWSA to report earnings tonight; MTCH was upgraded to buy at UBS; other movers after earnings included AMCX, IAC