Tuesday, May 22, 2018
Equity Market Recap
· U.S. stocks started the day positively, getting a boost on reports the Chinese government will cut import duties on passenger cars as of July 1 to 15% from the current 25%, giving a lift to auto stocks and adding to the easing trade concerns with the U.S. However, President Donald Trump said today that his administration had not yet reached a deal with China to save telecom company ZTE, and said he envisions very large fine for ZTE, could be $1.3 billion, turning sentiment cautious again. Other geopolitical tensions also remain with uncertainty over a historic meeting between U.S. President Donald Trump and North Korea’s dictator Kim Jong Un. The tech heavy Nasdaq was little changed, as semiconductors got a boost from Micron as shares jumped over 8% on a $10B stock buyback and follow through optimism following its analyst day yesterday. On the negative side, homebuilders the biggest drag in the S&P after TOL earnings miss/slower orders, while retail declined as comments about weather and traffic on upcoming quarters overshadowed KSS beat and raise quarter, and defense stocks declined as Credit Suisse downgraded RTN and cut targets across the board. The late day slide took the Dow and S&P 500 back below their best closing levels in two months, while the Small Cap Russell 2000 finished lower, snapping its string of four straight record closing highs. Bonds were little changed as was the dollar, while oil pulled back from multi-year highs.
· Oil prices end lower, as expiring June WTI crude futures slip 11c to finish at $72.13 per barrel, while July WTI fell -15c to $72.20 per barrel. June futures had hit an earlier high of $72.83, a new 3 ½ year high before reversing late day. Crude oil prices settled at their highest levels since November 2014 on Monday as the U.S. imposes new sanctions on Venezuela following what it called the “sham” re-election of President Maduro. Markets fear global oil prices will remain elevated as long as the market thinks sanctions could be imposed on Venezuela and Iran. Natural gas prices rise, among top gainers in commodity complex, up over 3.3% topping the $2.90 mln btu level (near highs of day) and best levels since late January
· Much like the broader markets, gold prices trade in a narrow range, rising by $1.10 to settle at $1,292 an ounce, getting a small lift as the dollar slipped for a second day off its best levels of the year late last week. Abating fears of trade issues with China and rising rate hike expectations given better economic data has weighed on the precious metal.
· The U.S. dollar index (DXY) ended little changed, finishing back around yesterday’s close of 93.67, and off earlier lows of 93.29. The dollar closed at 6-month highs late last week, advancing for its 5th straight weekly gain, but taking a breather to start the week. The dollar held steady vs. the yen most of the session around the 111 level, while the euro dipped under 1.775 vs. the dollar. Bitcoin prices have been quiet, but slipped 2% today, holding around $8,200. Rising rate expectations and a stronger economy has bolstered the dollar.
· Treasury markets slipped as yields inched higher; the 10-year yield jumped over 10 bps last week trading to 7-year highs above 3.11%, but have since pared gains, sliding back to 3.07% where it has held the last few days. No major economic data or Fed speakers the last few days to move bonds. The U.S. Treasury sold $33B in 2-year notes a t a yield of 2.59% (vs. 2.595% w/I prior to auction) with a stronger bid-to-cover (demand) of 2.88 vs. 2.65 prior and indirect bidders awarded 39.3% of auction and directs 15.3%.
· Richmond Fed Manufacturing index reported at 16, topping the economist estimate of 10 (and above last month’s -3 reading). Shipments rose to 15 after -8 the prior month, new order volume increased to 16 after -9 the prior month and order backlogs rose to 7 after -4 the prior month
Sector News Breakdown
· Auto movers; FCAU along with gains in GM and F after China was said to have decided to cut import tariffs on passenger vehicles to 15% from 25% effective July 1st; in auto parts retailers, AZO shares fall as the company blew past profit estimates for Q1 EPS, but sales and comps missed, while AAP reported a surprise drop in Q1 comp sales of (-0.8%) vs. est. +0.3% on mixed EPS (beat) and sales (missed); CRMT also advances on earnings
· Retailers; KSS shares fall despite Q1 beat & raise quarter similar to Macy’s report last week (recall JWN disappointed last week) – slipping on commentary about headwinds in Q3 and Q4 citing weather; Macy’s (M) was upgraded to positive at Susquehanna; TJX Q1 EPS, revs and comp sales all beat though guided Q2 EPS 87c-89c, below the $1.10 estimate, but raised its full-year view; JCP announces resignation of CEO Marvin Ellison (leaves for LOW)
· Consumer Staples & Restaurants; ADRNY downgraded to Outperform at Raymond James after KR announced an exclusive deal for the U.S. with U.K. home delivery technology provider Ocado; CBRL Q3 EPS and revs top views while raises quarterly dividend and announces special dividend of $3.75, though full-year EPS view just below estimates ($9.30-$9.40 vs. est. $9.45)
· Homebuilder and Construction; in homebuilders, TOL shares slumped after Q2 results fell short of analyst estimates, with EPS of 72c missing by 4c amid higher impairment costs, and posted gross margins slightly below expectations while MKM noted order growth of 6% missed its est. 8% (shares of LEN, MTH, KBH, PHM all active on earnings)
· Casino, Lodging & Leisure; IGT major shareholder files to sell 18M ordinary shares, while 1Q18 adjusted EBITDA of $436M, was ahead of Street $405M and 2018 guidance was reiterated
· Energy sector continues upward momentum as inventory data (tonight API tomorrow morning EIA), Iran sanctions and possible sanctions on Venezuela which could add to further supply issues all providing strength to oil prices
· Some top news; BP said that its BP Ventures business has invested $20 million in StoreDot Ltd., a company developing technology for ultra-fast charging batteries; also said it will cut its global upstream workforce by approximately 3%, resulting in around 540 job losses; PES said it expects G&A expense to exceed guidance “due to the recent increase in stock price, and the impact of our improving operating results on performance-based compensation.”
· Large Cap banks were among the top gainers on the day, led by banks JPM, MS as yields inch higher and banks continue to benefit from tax cuts; 52-week highs today for financials: TROW, RJF, AXP, ZION, NDAQ in the S&P 500 index; SQ reports $750M convertible notes offering; FITB upgraded to neutral at Baird after sell-off yesterday following deal to acquire MBFI; BOFI was downgraded to neutral at Compass Point
· Bank net income increased 27.5% in Q1 compared to last year, the Federal Deposit Insurance Corp. said in its quarterly update on the state of the industry. Aggregate net income for the industry totaled $56 billion in the quarter, the FDIC said. If the effects of the tax bill were taken out, the increase would have been less than half that amount – 12.6%, or a total of $49.4 billion – according to latest FDIC report https://on.mktw.net/2ICPSfW
· Managed care; CNC shares active as the Iowa Department of Human Services announced its intent to award contracts in connection with its Iowa Health Link Request For Proposal. CNC was added as a plan, and the new contract is expected to begin in July 2019, while incumbents – UNH (70% share of Medicaid MCO lives) and ANTM (30%) – have experienced large losses in this mkt
· Several companies announced offerings: CHRS files to sell $75M in common stock; MYOK files to sell 3.75M shares of common stock; MLNT files to sell $75M in common stock; ARDX files to sell $50M in common stock
· Medical devices and equipment; ILMN gets street high price target of $315 at Evercore ISI saying there is much more demand for clinical sequencing than there is supply currently in the market; the FDA said ABT is recalling the HeartMate 3 left ventricular assist system because a malfunction may cause the outflow graft to twist and close up over time; ALGN tgt upped to $350 at Stifel
· Pharma and Biotech movers; BMRN shares slumped following the presentation of longer-term data at the World Federation of Hemophilia/several analysts positive on the data despite shares falling on the updated data from the Phase 1/2 study of ValRox; CELG rebound after falling to fresh 52-week lows yesterday; shares of BLUE, QURE, FWP, ONCE among names that bounced as new therapies that may cure diseases caused by defective genes will get a faster path to approval by U.S. regulators, part of an effort by the FDA
Industrials & Materials
· Aerospace & Defense; Credit Suisse lowers defense sector outlook to neutral from bullish as reiterates a Neutral rating on LMT and cut tgt $335 from $380 and downgraded RTN to neutral as lowered PT to $219 from $250…maintains OP on LLL (tgt cut to $218 from $244), neutral on HII (cut tgt to $259 from $301) and reiterated OP on GD but lowers tgt to $234 from $263; AIR lowers Q4 outlook, sees similar or slight improvement over Q3
· Industrial & Machinery; NDSN 3Q earnings guidance missed analyst estimates, despite an earnings beat for 2Q; DY shares tumble after Q1 miss, big guidance cuts as reported Q1 revenue and EPS of 65c/$731M below the 69c/$735M view, but Q2 below views and cuts full-year outlook; JPM remains negative on GE and reiterates UW rating and $11 PT as greater-than-expected dilutive de-leveraging has yet to occur and they don’t see how mgmt. doesn’t seriously consider at least a dividend cut and/or more aggressive approach to reinforce the capital base
· Metals & Mining; tariffs and steel names; copper prices gain (FCX), touching best levels in over 3-weeks as China’s cut to car tariffs seen spurring demand; steel stocks remain active, with AKS, X, NUE among gainers early after Treasury Secretary Steven Mnuchin said the steel and aluminum tariffs still apply to China. On Monday, President Donald Trump said $150 billion worth of tariffs on Chinese imports would be suspended. US Steel shares fell in anticipation the steel and aluminum tariffs were included.
Technology, Media & Telecom
· Semiconductors; MU announces $10B share buyback, while several analyst reiterating positive stance on stock following analyst day yesterday where the company raised guidance; PLAB shares rally behind Q1 EPS and rev beat, while guidance midpoint for Q3 beat the highest analyst estimate (sees Q3 12c-18c on revs $128M-$136M vs. est. 9c/$128.3M)
· Software & Storage movers; ADBE active as agreed to acquire Magento Commerce, a commerce platform, for $1.68B, subject to customary purchase price adjustments and also authorizes $8B share repurchase https://on.mktw.net/2Izz9da (shares of SHOP declined in reaction to acquisition as gives ADBE greater exposure to the digital commerce industry); PSTG reported modest upside in Q1 and guided slightly above consensus, though expectations were high heading into the report; upcoming earnings: HPE, CTRP tonight, SNPS 5/23, ADSK, NTNX, SPLK, VEEV 5/24