Tuesday, June 5, 2018
Equity Market Recap
· U.S. stock markets ended mixed as technology stocks once again paced the advance, with the Nasdaq Composite touching as fresh intraday record high (7,644) and closed at a new all-time high, while Small Caps (Russell 2000) also posted a fresh intraday record high. However, the S&P 500 index and Dow Industrials lagged (as did Transports) amid weakness in financials and energy shares. Oil prices gained for the first time in four sessions while Treasuries rallied as trade war concerns swirl. Retailers extended gains with shares of M, KSS, TJX, RL, and TIF among those in the S&P 500 index trading at 52-week highs. The dollar dipped mid-session vs. the euro on reports that the European Central Bank would use its next policy meeting to discuss an exit from its quantitative easing program, but the dollar gained vs. the Peso and Canadian dollar. A strong ISM services report early kept expectations high that the FOMC will indeed raise interest rates when the convene next week. FAANG stocks once again pacing gains, with record highs for AAPL, AMZN, NFLX (FB and GOOGL not far from their highs). On a side note, CNBC noted that stock buybacks up 83% YTD and dividend up 9.6% – total buybacks announced $374B (technology $232M of it and healthcare $62B). While the Nasdaq and Russell are at all-time highs, the S&P 500 is less than 5% away and the Dow Industrials roughly 7% away.
· ISM Non-Manufacturing index for May rises to 58.6 from 56.8 last month and topped the 57.6 estimate; backlog of orders rose to 60.5 from 52 and marked the highest level on record. Business activity rose to 61.3 vs 59.1 prior month while new orders rose to 60.5 vs 60.0 and employment rose to 54.1 vs 53.6; prices paid rose to 64.3 vs 61.8
· Markit May composite purchasing managers’ index rises to 56.6 from 54.9 in April (and compared to 55.7 flash reading) and vs. year ago 53.6; Employment rises to 54.7 vs 54.4 in April (highest reading since May 2015) while new Orders fall vs prior month (lowest since March)
· U.S. job openings rose to 6.698M in April from 6.633M in the prior month; April pace of hiring 3.8% vs 3.7% prior month; 3.351M people quit a job in April; layoffs and discharges at 1.2% in 2018 vs 1.0% in March; 1,710,000 people were fired or laid off in April vs 1,687,000 YoY
· Oil prices reversed off the lows, with WTI crude rising 77c or 1.2% to settle at $65.52 per barrel, near its best levels of the day ahead of the API inventory report tonight and EIA tomorrow morning. It was the first gain for WTI crude in four sessions, bouncing off 2-month lows and off earlier lows of $64.22 per barrel. Prices had declined earlier amid reports the U.S. government has asked Saudi Arabia and other members of OPEC to increase oil output by around 1 million barrels a day to help cap rising oil prices, Bloomberg reported https://on.mktw.net/2Jtb33I
· Gold prices reversed off the lows, snapping a 2-session decline and rising $4.90 or 0.4% to settle at $1,302.20 an ounce, getting a lift late day as the dollar erased gains. The dollar has slumped of late ahead of the FOMC meeting next week where a rate hike is widely expected.
· The dollar fell midday as the euro did an about face, rising to afternoon highs up 0.25% at 1.1731 (off earlier lows 1.1653) following reports that the European Central Bank would use its next policy meeting to discuss an exit from its quantitative easing program, Bloomberg reported. Expectations for the ECB to normalize its monetary policy had waned in recent months amid sluggish European economic data and the political situations in Italy and Spain. The dollar had initially been higher (DXY highs 94.31 before slipping below 94) after the stronger services ISM, adding to the rising rate hike expectations by the Fed next week. The Canadian dollar and Mexican peso both fall vs. the dollar as suggestion for the U.S. to pursue separate trade deals with Mexico and Canada is becoming more serious. Each pared losses in the afternoon, but still ended lower, with the Peso off 15-month lows earlier.
· Bonds rose and yields dropped as Italian concerns offset better-than-expected ISM services data, with the 10-year yield sliding around 4 bps to 2.90%. Treasuries followed the rally in German bonds after Italian Prime Minister Giuseppe Conte outlined aggressive spending plans in his initial speech in power, without details. The 10-year Italian government bond yield jumped 25 bps to above 2.8%. But with stocks pulling back from recent highs, and money rotating back into bonds, yields ended slipping across the board. The FOMC rate decision next week is expected to end with a 25 basis point hike, which could pressure bonds at that point.
Sector News Breakdown
· Retailers; broad strength again as the sector plays catch-up: 52-week highs for M, KSS, TJX, RL, TIF in the S&P 500 index; ASNA posts same-store sales and revenue declines/Maurice’s and Dressbarn, reported a 5% decline and a 14% decline respectively; GIII rises as full-year guidance also came in ahead of expectations after the improvement shown in FQ1 as sees FY18 revs of $2.97B vs. $2.96B consensus and EPS of $2.27-$2.37 vs. est. $2.07; NKE, ADDYY, UAA shares strong recently amid momentum into World Cup jersey sales; FRAN falls as Q1 EPS loss (11c) in-line on lighter sales, but Q2 EPS below consensus; GCO posted narrower Q1 EPS loss on better sales of $645M, though comp sales posted an unexpected comp decline (-1%)
· Consumer Staples; GIS cautious mention at Piper saying they see risk from lapping tougher comps, rising input costs, modest pricing momentum, and planned re-investments as they lower tgt to $45; WTW initiated buy at Bank America with $95 tgt saying it is in the early stages of a multi-year expansion cycle; Tobacco stocks mixed with PM shares hitting a 52-week low today, while MO advanced to session highs late afternoon
· Restaurants; SBUX shares active after surprise announcement that CEO Howard Schultz will be stepping down as exec. Chairman, effective June 26, 2018/Mike Ullman next chair and Mellody Hobson vice-chair (Schultz hinting about political career)
· Housing & Building Products; CSS upgraded to buy at DA Davidson saying FCF was strong in FY18 and it should remain strong in FY19–we project $20M or $2.18/share; HDS posted Q1 sales beat of $1.39B and higher adjusted Ebitda with guidance mid-point beating estimates
· Casino, Lodging & Leisure; in cruise line space, Morgan Stanley notes concern about a possible slowdown in the cruises sector in 4Q18 amid hurricane worries in the Caribbean, higher fuel prices and a risk of overcapacity (shares of CCL, RCL, NCLH were weak); in gaming, WYNN shares fall for a 3rd session (along with weakness in LVS, MGM, MLCO) – comes ahead of World Cup, as Deutsche Bank noted yesterday it could cause some VIP softness in June
· Solar sector falls again; FSLR was downgraded to neutral from buy at Bank America and tgt cut to $63 from $83 in the face of margin deterioration risk from China’s policy shift; said pricing pressure could lead to substantial margin deterioration, and estimates FSLR’s margins will decline to 20% by 2022 from 35% in 2019 to ensure product competitiveness (recall Roth cautious on the group yesterday on same reasoning and downgraded a few names – JKS, ASYS)
· Top movers; OXY was upgraded to buy at Citigroup citing the midstream benefit of wider midland-MEH differentials (tgt up to $97); in marine sector, ANW shares plunge after the company disclosed last night that approximately $200MM of accounts receivable owed to Aegean will need to be written off; in services, NE was upgraded to market perform at Bernstein, while WFT rises after noting has two potential buyers for land rig assets at RBC conference yesterday/RBC said WFT remains on track regarding $1b transformation plan
· Utility sector; a few research analyst calls; SCG shares higher on hopes of regulatory compromise on South Carolina’s Base Load Review Act (BLRA) to Dominion Energy’s bid for SCG; PNM reaffirmed its 2018-2022 capital plan forecast; NJR was downgraded to underperform at Bank America citing the recent run up in the stock price stretches valuation metrics.
· Large Cap banks; banks lagged (and have been so) the last 2-weeks as bond yields have pulled back from 7-year highs; despite macros concerns (North Korea/Europe politics) subsiding recently, bond yields still haven’t bounced back near those highs (10-yr 2.90% vs. 3.11% highs 2-weeks ago) – leading banks lower; WFC announced it has struck a deal to sell 52 retail branches to Flagstar Bank, which is a subsidiary of FBC; BNS was downgraded to neutral at Bank America as reduced capital flexibility and our incrementally more cautious view on LatAm exposure lead to a more balanced risk/reward
· Pharma and Managed Care; in generic space, MYL shares rise as received FDA approval of a drug biosimilar to AMGN’s Neulasta; Mylan’s version, called Fulphila, is approved to treat chemotherapy patients with low white-blood-cell counts (product’s price and relative discount are currently unknown); HQY advanced after Q1 quarterly results topped views; several 52-week highs in the equipment space today: SYK, ABMD, IDXX, RMD, ISRG, ALGN
· Biotech movers; AMGN falls as MYL receives FDA approval for biosimilar to its Neulasta; VSTM rises after establishing an exclusive licensing agreement with Japan’s Yakult Honsha to develop and commercialize duvelisib for the treatment, prevention or diagnosis of all oncology indications in Japan; ECYT enrolls first patient in its global phase 3 VISION trial of Lu-PSMA-617 in prostate cancer by Dr. Luke Nordquist at Urology Cancer Center in Omaha, NE; NDRA rises as the USPTO issued patent for non-invasive fat assessment system in its Thermo-Acoustic Enhanced Ultrasound clinical products
Industrials & Materials
· Heavy duty machinery/trucking; active space as NAV reported Q2 EBITDA ahead of expectations, while sales were slightly below and the company raised FY EBITDA guidance by slightly more than the 2Q EBITDA; monthly Class-8 truck data out as well (CMI, PCAR, NAV, ALSN leveraged to data) as preliminary net orders of heavy trucks (Class 8) in May at 35,600 units – up 110% y/y and YTD, orders booked at a record level. Lastly, in research, PCAR was upgraded at Macquarie saying its used-truck-value analysis shows PCAR-branded trucks continue to increase in value
· Transports; Transports bouncing off lows, but group underperforms, led by declines in airlines with LUV, AAL, DAL and UAL falling (airlines outperformed Monday); few positive bright spots in the sector today with truckers and rails also sliding; ODFL said May LTL tons per day rise 15.3%, citing 11% increase in LTL shipments per day and a 3.9% increase in LTL weight per shipment
Technology, Media & Telecom
· Internet; TWTR replacing MON in the S&P 500 index after deal with Bayer closes (TWTR rose for a 9th straight session and best levels in 3-years); NFLX replacing MON in the S&P 100 index; SFLY tgt raised to $111 at SunTrust to reflect sustained improvement in core Consumer segment, LT accretion from Lifetouch and tweaks to our model; SABR 16M share secondary offering priced at $24.55; NFLX, AMZN, GRUB, BABA record highs
· Semiconductors; QCOM unveiled a new chip, said Samsung Electronics Co. is already on board as a customer, and offered free wireless data for devices based on the processor; MCHP resumed overweight and $125 tgt at JP Morgan; NTAP reinstated buy and $80 tgt at Stifel
· Software & Hardware; video game maker TTWO was downgraded to market perform at BMO Capital on concerns that Red Dead Redemption 2 could fall short of lofty expectations; COUP posted Q1 beat and 10% revenue upside and FY19 guidance was raised; SMAR key financial metrics showed upside, Q1 revenue grew 63% YoY, and guidance for Q2 was solidly ahead of expectations – a solid first quarter out of the gate; AAPL trades record high today amid ongoing worldwide developers conference this week
· Media movers; DISCA was upgraded to buy at MKM Partners (raised at Pivotal yesterday) as attractive growth opportunities, a deleveraging balance sheet and a low valuation make for an appealing risk/reward; DISH rises after Co-founder Ergen buys 100K shares