Thursday, May 24, 2018
Equity Market Recap
· U.S. stocks close the day mostly lower but finishes well off its worst levels after the Dow Industrials declined more than -200 points at one juncture following news President Trump cancelled his June summit with the North Korean leader. The news sent markets lower and given the lighter than normal volume ahead of the upcoming Memorial Day holiday this weekend, the move came quickly. Stocks rebounded in the afternoon, with the NASDAQ turning positive (more than 70 points off its lows), as NFLX traded to record highs. Energy stocks were among the biggest decliners today as oil retreated to 2-week lows (XOM and CVX biggest drags on the Dow). Gold managed to hang onto its gains rising 1% while bond advanced, sending the 10-year yield back below 3% as investors rotated into defensive assets. Back to Trump, he cited North Korea’s “tremendous anger and open hostility” in recent statements as part of his decision to call off the summit. The news added to geopolitical risks after the administration on Wednesday threatened to impose tariffs on imported cars and trucks for “national security” purposes. Market concerns related to trade with China and emerging markets Canada and Mexico related to NAFTA remains a market factor. Weaker housing data and jobless claims also spurred on bond buying. Dow Transports were exceptionally strong the entire day, led by gains in rails and airlines sending the index higher by more than 1%. Bloomberg noted with over 90% of S&P 500 companies reporting, the index is on pace for y/y 1Q EPS growth of 23.5%, well above expectations and the best performance since 4Q10.
· Weekly Jobless claims rose 234K in early May to a seven-week high, topping the 220K estimate, while the prior week was slightly revised higher to 22K from 222K; the more stable 4-week moving average rose by 6,250 to 219,750; continuing claims rose 29K to 1.74M
· The 30-year fixed mortgage rate for week ended today rose to 4.66% from 4.61%, Freddie Mac said while the 15-year rate avg 4.15%, up from 4.08% a week earlier.
· Existing-home sales for April fell (-2.5%) to 5.46M from 5.6M prior and below the est. of 5.55M; there were 4.0 months’ supply in April vs. 3.5 in March and 3.8 months’ supply seasonally adjusted in April vs. 3.7 in March seasonally adjusted; inventory rose 9.8% to 1.8M homes
· Oil prices end lower, with WTI crude sliding -$1.13 to settle at $70.71 per barrel to close near its lowest levels in roughly two-weeks, adding to yesterday’s drop following bearish inventory data. June gold futures rose $14.80, or 1.2% to settle at $1,304.40 an ounce, settling back above the $1,300 an ounce level for the first time in over a week as Trump’s decision to decision to cancel the nuclear summit with North Korea led to a rotation into defensive assets. Note gold futures were below $1,290 just a few days ago.
· The U.S. dollar ends lower vs. most counterparts, with the dollar index (DXY) down around -0.3% at 93.75 after rising to its highest level since mid-December on Wednesday at 94.18. The dollar slipped after a weak reading on existing home sales, as President Trump canceled next month’s North Korea summit and potential import tariffs on cars brought up renewed fears. The British pound bounced of 2018 lows to move back near 1.34 while the euro also recovered. The Turkish lira resumed its selloff against the dollar, falling more than 4% before paring losses. Safe haven currencies such as the yen and franc outperformed.
· Bonds bounce as yields decline after news of the summit cancellation with North Korea sent investors scrambling for the safety of bonds. A surprise drop in existing home sales for April also provided a reason to rotate back into bonds as the yield on the benchmark 10-year dropped back under 3% (lows of 2.96% after trading above 3.11% late last week). Yields sank across the board with the 2-yr back under 2.5% (was around 2.6% last week) and the 30-yr down at 3.12% (was above 3.22% last week). In the afternoon, the U.S. Treasury sold $30B in 7-year notes at a yield of 2.93% vs. 2.935% when issued prior, with a bid to cover at 2.62 vs. 2.56 prior and indirect bidders awarded 65.5% of auction and directs with 12.9%.
Sector News Breakdown
· Retailers; LB Q1 results were mostly in-line, but guided Q2 EPS below views and lowered its year earnings and comp sales view as concerns around the Victoria’s Secret and PINK brands remain; BBY shares fell despite Q1 comp sales beat of 7.1% vs. est. around 3% as spending increased and the company only maintained its year guidance despite Q1 beat; shares of SMRT and SSI also movers on earnings; in sporting goods retailers, SPWH rises on results and credit agreement
· Auto sector; active as foreign auto makers (TM, NSANY, HMC) slip initially after the WSJ reported the Trump administration is using national-security laws to consider imposing new tariffs on vehicle and auto-parts imports, and is asking for new tariffs of as much as 25% on automobile imports https://on.wsj.com/2J2oeIn; in auto parts, CPRT reported a 3Q18 EPS beat driven by stronger sales performance as sales grew 28% y/y, ~9% above the Street, likely driven by strong volume and pricing (margins weak)
· Consumer Staples; CLX reports new $2B stock buyback plan; in protein space, SAFM falls after Q2 results fall short of estimates even as sales and net income improved from a year ago/positive factors were offset by weak food service demand and lower selling prices; in food, HRL Q2 EPS and sales came in just shy of consensus views while maintains year views; KR announced its intention to with Home Chef, the largest privately held meal kit company in the U.S https://on.mktw.net/2kjuopC
· Housing & Building Products; in home furnishing, WSM shares rise on Q1 earnings beat, as the quarter’s strong comps of 5.5% were above 4.1% expected and helped to drive its expense leverage/raises FY18 EPS view to $4.15-$4.25 from $4.12-$4.22; FND 10M share Spot Secondary priced at $45.00; WHR slides after saying about 7.19M shares tendered in modified Dutch auction/says shares represent about 8.8% of its outstanding shares
· Top stories; PBR shares dropped after several analyst downgrades (at least three) as the company announced the decision to reduce domestic diesel prices by 10% and maintain them unchanged for the next 15 days
· Oil services & Equipment: RDC upgraded to outperform and OII upgraded to market perform at Wells Fargo as increasing offshore macro assumptions (spending, rig count, trees, etc.), increasing estimates, net asset values, and raising PTs for our large cap service; on earnings, BRS falls as reported mixed Q4 results as EPS beat but revs missed
· E&P sector; APA has agreed to sell all of its NGL production from its Alpine High acreage in the Delaware Basin in Texas to Enterprise Products Partners; NOG was upgraded to buy at SunTrust with Street high $4 tgt as believe Northern is an ideal non-Permian name to consider
· Power & Utility; PJM auction (NRG, EXC, PEG) – Payouts to U.S. power generators climb in annual PJM auction as capacity price for largest U.S. power grid $140/megawatt-day; BW shares rise on reports Steel Holdings proposes to buy company for $3.00-$3.50 per share https://bit.ly/2IHb0xo ; DQ tgt raised to $75 at Roth and reiterate buy on DQ’s mono-grade mix, leading cost structure, and attractive valuation
· Large Cap banks; DB top story after saying it will cut 25% of equities jobs and reduce overall positions by at least 7,000 as its CEO Sewing seeks to slash costs and boost profitability; Jefferies Financial Group Inc. (JEF), formerly known as Leucadia National said shareholders voted in favor of changing Leucadia National’s name to Jefferies Financial Group Inc.; banks overall again started the day weaker as treasury yields slip further from recent highs, but pare losses
· REIT’s; Baird positive on shopping-center REITs, saying they have been oversold, and the end of April signaled a near-term bottom for the group, as raises the sector to overweight (REG, KIM) – notes 1Q earnings showed that fundamentals are still challenged, but are stable; overall REITs were lower on the day despite the pullback in yields.
· Pharma movers; ABBV was removed from the Goldman Sachs conviction buy list; REPH shares cut in half after the FDA rejects its new drug application for a non-opioid pain medicine as company receives complete response letter; EIGR 3.2M share Spot Secondary priced at $12.50; MLNT 22M share Secondary priced at $5.00; SRKK 5.36M share IPO priced at $14.00; KNSA 8.5M share IPO priced at $18.00
· Biotech; CELG authorizes $3B buy back of additional stock; IDRA announced clinical trial collaboration and supply agreement with BMY related to a Phase 3 clinical trial, ILLUMINATE-301; PRTA said it would lay off about 57% of its workforce as part of a reorganization resulting from the discontinuation of its NEOD001 monoclonal antibody program; KPTI was downgraded to neutral at Wedbush calling shares fully valued
· Healthcare services; Elliott Associates writes in a letter to the ATHN board that the $160 per share all-cash offer provides compelling, premium value for shareholders; in distributors, MCK Q4 EPS missed by 6c on slightly better revs of $51.63B and said to buy back up to $4B in stock
· Medical equipment; shares of ALGN active after analyst day yesterday where Piper noted the company provided long-term revenue guidance of 20%-30%, which was above expectations; MDT shares advanced after Q4 earnings beat, while guidance midpoint for year below voews
Industrials & Materials
· Industrials & Machinery; Dow component GE partially rebounds after yesterday’s decline, getting a lift after CNBC’s David Faber said the company has no plans to cut dividend (shares dropped yesterday when the CEO didn’t answer questions related to dividend); DEshares upgraded to buy at UBS saying the slow recovery in Deere’s large agriculture business could accelerate in fiscal 2019 with higher grain prices
· Transports; while major US averages were down most of the session, the Dow Transports index is advanced more than 1% midday, with nearly all components higher (FDX, UPS lagged), as rails led higher by KSU (positive Stifel initiation today) up over 3%, followed by airline strength AAL, ALK, DAL; truckers also stronger
· Chemicals; LYB has valued Brazilian petrochemical company Braskem SA at 41.5 billion reais ($11.4B) in an offer to Brazilian conglomerate Odebrecht SA months ago, Reuters https://reut.rs/2IMOOlD; lithium stocks weak after SQM Q1 results missed estimates on weaker revs of $518.7M vs. est. $528M (ALB shares slumped in sympathy)
Technology, Media & Telecom
· Internet; BABA tgt raised to $300 at Raymond James and reiterate as top large cap pick as expect continued robust China eCommerce growth with Alibaba as the biggest winner (~70% market share) and take rate upside is underappreciated; NFLX on no specific news traded to new all-time highs around 4350, as its market cap surpassed that of DIS today; WUBA shares fell after Q1 revs topped estimates but margins disappoint
· Semiconductors; AVGO initiated outperform and $300 tgt at Evercore ISI as believe the core franchise is under-appreciated, offering a long-term organic growth of at least 6+% with FCF growing at least 15% each year with a stretch goal of $25 by 2020; semi’s bounced back into positive territory midday as the Philly semi index (SOX) rises off lows 1,362; MU up another 2% today and up 15% this week since raising guidance at analyst day
· Software & Hardware; NTAP reported upside to F4Q-18 expectations and guided F1Q-19 in line, reiterating FY-19 sales expectations of mid-single-digit growth; SNPS results were slightly ahead of expectations while guidance came in well ahead (FY18 guidance implies 2H18 rev growth of 11% y/y vs. prior guidance of flat y/y); LASR rises on first earnings report as public company; EA among top declines in software space, down over 3% after insider sales yesterday; SAIL 17.808M share Secondary priced at $22.50