Wednesday, June 27, 2018
Equity Market Recap
· U.S. stocks were turbulent once again, as the trade issue between the U.S. and China continues to create market volatility amid conflicting views from the White House. U.S. stocks initially rallied after Treasury Secretary Mnuchin stated the White House had embraced legislation under consideration in Congress to strengthen Committee on Foreign Investment in the U.S. or CFIUS, instead of executive law. That lifted major averages broadly, with the Dow Industrials rising more than 250 points and the S&P rose nearly 1%. However, markets did an “about-face” turning sharply lower early afternoon after White House economic advisor Larry Kudlow said a less confrontational approach toward trade did not amount to a retreat from the administration’s hard line on punishing China over trade imbalances. Federal Reserve Bank of Atlanta President Raphael Bostic yesterday warned that disruption to trade could increase risk to the economy. The one sector unaffected from the trade concerns was energy, with stocks broadly higher given another 3% gain for WTI crude, trading to its highest level since late 2014 (just shy of $73per barrel) after the U.S. asked allies to halt imports of Iranian oil late yesterday and following bullish inventory data earlier today. In the end, it was a 400-point swing from high to low in the Dow Industrials (moving back below its 200-day moving average of 24,302), while the Nasdaq Composite falling more than -135 points from high (7,610) to lows. Economic data was favorable again with a smaller than expected drop in durable goods orders while the trade deficit narrowed. Bonds gains as yields fell, while the dollar resumes its upward push just shy of 2018 highs. Tech underperformance continued, with the falling the most on the ongoing China fears. Recall Monday, stocks came under pressure after reports that President Donald Trump was expected to announce further restrictions on Chinese investment in U.S. tech companies.
· Durable goods orders for May fell (-0.6%) vs. the est. down (-1%) while Durable goods new orders revised up to (-1%) for April from (-1.6%). The biggest drop in new orders for cars and trucks since 2015 spurred the second straight decline in demand for durable goods. Orders for autos and parts shrank 4.2% in May, while new orders ex-trans. fell 0.3% in May after 1.9% rise
· The trade deficit in goods narrowed 3.7% to (-$64.8B) in May, well below the (-$69.0B) estimate, while the government’s advanced report on wholesale inventories showed a 0.5% gain in May and advanced retail inventories rose 0.4%. Both imports and exports rose in May but exports rose at a faster pace.
· Pending Home Sales for May fell (-0.5%) MoM, missing the expected 0.5% increase by economists; the Northeast up 2%; April unchanged…Midwest up 2.9%; April fell 3.2%…South fell 3.5%; April fell 1%…West up 0.6%; April fell 0.7%
· Oil prices end sharply higher for a 2nd consecutive day as WTI crude traded to its best levels since November 2014, rising $2.26 or another 3% to settle at $72.76 per barrel (follows yesterday’s 3.6% advance), led higher today amid several stories: 1) bullish inventory data out of both the API and EIA as each reported weekly drawdowns in crude of around -10M barrels, more than the estimated, with Cushing stockpiles falling -2.7M according to the EIA; 2) extending gains from yesterday on reports the US wants to cut Iran oil imports to zero (renewed sanctions), as well as 3) uncertainty related to Nigeria exports amid turmoil in the region. The bullish news offsetting recent news that Saudi Arabia is said to plan ramping up production.
· Gold prices slipped by -$3.80, or 0.3% to settle at $1,256.10 an ounce, its lowest finish in 2018, falling again amid a surging dollar; gold prices down roughly -0.8% so far this week and on pace for a monthly decline of -3.4% on rising rate hike expectations, stronger economy and a rising dollar. The decline has occurred despite intensifying fears around global trade.
· Very strong showing for the U.S. dollar, rising vs. most counterparts despite mixed trading tensions with China and others. The dollar index (DXY) moved back above the 95 level (off last week’s 2018 high of 95.52) to highs around 95.25, up 0.5% amid stronger economic data as durable goods orders contracted less than expected in May and the trade deficit narrowed. The euro dropped back below the 1.16 level (to lows 1.1562 and off overnight highs 1.1672), while rising vs. Pound and yen. Bitcoin prices dropped below the $6,000 level late morning to $5,988), first break below since February and bringing the loss for 2018 to almost 60%.
· Bonds rise and yields decline; the market continues to get mixed messages out of Washington regarding trade and tariffs with China, with Trump, Kudlow, Mnuchin all speaking in some capacity, and all painting slightly different views. The impact is uncertainty, which stocks do not like, as investors rotated into bonds and sending yields down. The 30-yr back under 3% and 2-yr 2.51% while the 10-yr falls to 2.82%, down 5 bps. The U.S. Treasury sold $26B in 5-year notes at a yield of 2.719% compared to 2.715% when issued prior to auction; the bid-to-cover (demand) was 2.55 vs. 2.52 in previous auction and indirect bidders were awarded 62% of paper.
Sector News Breakdown
· Consumer Staples; in food space, PF to be acquired by CAG in $10.9 billion cash and stock deal; PF holders will receive $43.11 per share in cash and 0.6494 shares of CAG common stock for each share of Pinnacle Foods held for a total price of $68. https://on.mktw.net/2Kmclup ; GIS Q4 EPS beat by 7c on in-line sales of $3.89B while sees FY19 EPS flat to down 3% and organic sales flat to up 1% and said working on additional cost cuts
· Auto’s; Global automakers warned that President Donald Trump’s plans to impose a 25% tariff on auto imports could raise prices of imported vehicles by as much as $6000 per car; in auto retailers, AZO tgt raised to $740 at Wedbush as belie; CVNA tgt raised to Street high $45 at Bank America as think CVNA has significant runway for growth and can sustain 50%+ revenue growth through 2020; global tariff wars remain an overhang for sector (GM, F, VLKAY, FCAU, DDAIF)
· Consumer related/Restaurants; SONC shares fell after Q3 sales missed estimates and lower implied EPS guidance below consensus; YUM was upgraded to buy wit $92 tgt at BTIG; LOVE 3.3M share IPO priced at $16.00; UNF shares reversed off earlier highs following earnings
· Energy complex extended rally following the sharp spike in oil prices (WTI moved back above $70 yesterday for first time in 3-weeks) on bullish inventory data overnight and reports late yesterday that the US wants to cut Iran oil imports to zero; shares of BHGE, HP, CXO, HES, FTI, PXD, EOG, NOV all up over 3% in the S&P
· Inventory data: The API reported U.S. crude supplies dropped by -9.2M barrels for the week ended June 22, while showed a rise of nearly 1.2M barrels in gasoline stockpiles, while inventories of distillates rose by 1.8M barrels. This morning, the EIA also bullish data, reporting a weekly drawdown of -9.89M barrels (vs. est. -3M barrels) with Cushing stockpiles down -2.713M barrels, while gasoline and distillates posted weekly builds
· E&P and equipment movers; SWN sees 2Q pretax charge on roughly 200 job cuts at $18M-$19M; KeyBanc with a few previews as expects OAS to deliver on one of the best unhedged oil differentials in the industry of ($1.00) to ($2.00) and for WPX says they are expecting 15% sequential growth for oil and overall volumes to the mid-point of guidance; RRC was upgraded to peer perform at Wolfe Research as see risk/reward more balanced in the near term; TUSK 4M share Spot Secondary priced at $38.20
· MLPs & Pipelines; DCP was upgraded to neutral from buy at Goldman Sach’s and tgt to $48 on more positive outlook and stock is a solid investment for growth- and income-oriented investors, while the firm downgraded CEQP to neutral citing recent outperformance; CNXM 6.5M share Spot Secondary priced at $18.30; BWP cut to neutral at JPM following the class-action litigation filed in connection with the potential exercise of the call right for Boardwalk common units
· Utilities; The Utility index (UTY) on track for its 10th straight daily gain, topping its 200-day resistance of 659.50 earlier; sector strong overall as investors rotated into defensive/dividend paying names; SCG shares dropped after South Carolina lawmakers reach a deal to temporarily lower electric rates by nearly 15% at its SCE&G unit, virtually wiping out the portion of the utility’s power bills that customers now pay for the abandoned construction of two unfinished nuclear reactors
· Large Cap banks trying to bounce as the Financial sector ETF XLF came into the day riding a 12-day losing streak ahead of round two of Fed stress tests tomorrow night; Bernstein upgraded STI and MTB to outperform as they think the recent pullbacks have created attractive entry points for both and regard both banks as quality franchises with solid management teams that are trading at discounts to history and fit the broader themes of rising rates, a strong US economy, and an improving regulatory backdrop for smaller banks.
· Other movers; in lending, SC tgt raised to $25 from $21 at BTIG, saying that excess capital looms large ahead of the Fed’s CCAR stress test results to be announced tomorrow; in insurance, CB was upgraded to neutral at Atlantic Securities; 52-week lows for AMG, BHF, CINF, HRB, LNC, PFG, PRU, in the S&P 500
· Pharma movers; GBT were all over the place, ending higher, after the company reported results for a late-stage trial of sickle cell disease therapy, and said that it met with the U.S. FDA in June about a potential accelerated approval; CARA rises as said 1.0 mcg/kg dose of IV CR845 showed statistically significant reductions in pain intensity over 24-hour span in patients undergoing abdominal surgery; PTIE falls more than 70% as a joint FDA panel has voted against approval for its Remoxy ER treatment as the two committees voted 14-3 against approval of the drug (oxycodone extended-release CII) – sent shares of DRRX lower in sympathy; SMMT plunges as PhaseOut DMD Phase 2 has not met primary or secondary endpoints after 48 weeks of treatment of ezutromid in patients with DMD; AQXP sinks as Rosiptor (AQX-1125) failed to show a benefit over placebo in its Phase 3 study in interstitial cystitis/bladder pain syndrome
· Specialty Pharma; Citigroup with various changes in the generic and specialty pharma space as they add TEVA to the focus list, they downgraded HZNP to neutral (as see limited upside to valuation at current levels following the recent upward inflection in the share price), upgrade ENDP to buy as see potential for an inflection in revenues in 2019 and removed MYL from focus list though remain constructive following the recent FDA approval of Fulphila and slight delay to the approval of generic Advair. RBC Capital raised its tgt on VRX to $25 as see few negative catalysts over the next six months, with guidance increases likely
· Managed care; JPMorgan upgraded WCG to overweight and raised tgt to $287 saying they think WCG still has the opportunity to drive long-term investor value through organic growth, acquisitions and operational execution driving higher margins; MOH was downgraded at JPMorgan to neutral on valuation
· Medical devices and equipment; Lab companies DGX and LH downgraded to hold from buy at Deutsche Bank saying buy thesis that rested in part on strong organic growth driven by M&A for hospital labs has weakened; DGX, LH have not been able to snap up more lab targets as exposure to Medicare cuts wasn’t as great as expected and hasn’t increased targets’ willingness to sell. Bank America upgraded CSII to buy and tgt to $40 as think the upcoming analyst day may help convince investors in a more sustainable growth outlook; the firm downgraded NUVA and GMED to underperform as they have less conviction in the outlook for these names
· Biotech movers; REGN was upgraded to outperform at Oppenheimer as believes the company is now on the cusp of strong 2019/20 sales growth with increased Eylea penetration in DME in 2018/19; TSRO was upgraded to overweight at Barclay’s; shares of TSRO and CLVS both active (each market cancer drugs known as Parp inhibitors) after AZN and MRK said results from a late-stage study of Lynparza as a first line of treatment regardless of BRCA status are expected in 2019
Industrials & Materials
· Machinery movers; KeyBanc upgraded TKR to overweight with $54 tgt and downgraded WCC to sector weight saying while they remain positive on the group, given the environment, we favor names with some combination of pricing power, operating leverage, balance sheet optionality, and compelling valuation
· Industrials; CW was added as a Fresh Pick at RW Baird reflecting our view that the sell-off is overblown as growth and execution remains favorable, with incremental gains from M&A being over-shadowed with one-time costs; HEES upgraded to neutral at UBS on improving Gulf Coast activity and steady non-res spending growth; GE adds to yesterday 8% gains following news of spin-off of healthcare division
· Aerospace & Defense; AVAV shares dropped initially as reported Q4 results above expectations but its FY revenue guidance of $290M-$310M came in below the $336.8M estimate (but several analysts defended stocks after stronger quarter)
· Transports; Dow Transport index moved below its 200-day MA support of 10,382 (has held its 200-day three other times/tests since November, last breaking below last August), down over 100 points or 1% to 10,367 – top decliners CAR, FDX, DAL, UAL, AAL
· Chemicals; MOS was upgraded to positive at Susquehanna to reflect better than expected potash and phosphate pricing in 1H18 and a stable pricing forecast through 2018/19
Technology, Media & Telecom
· Internet; NFLX tgt raised to $460 at Bank America as continues to benefit from strong execution and favorable secular trends as the transition to internet video accelerates globally, and strong demand for premium on-demand content continues; Wayfair (W) tgt raised to $150 at Piper following recent industry work that suggests Wayfair is ramping a broad range of initiatives that should drive long-term growth; Chinese stocks remain weak on trade concerns with BIDU, BABA, JD and NTES among names down around 2% late day
· Media movers; WWE shares strong after announced the results of its negotiations for RAW and SmackDown. As expected, USA Network will retain the rights to Monday Night RAW, and FOX will get the rights to SmackDown Live each Friday – with the new 5year deals (effective 10/1/19) seeing a 3.6x increase over the prior NBCU deal, vs. the “up to 3x increase” reported prior
· Semiconductors; MRVL mentioned positive by two analysts as Evercore initiated outperform and $27 tgt as see the emergence of the third wave of compute led by AI/Big Data/Storage making data worth a lot more today, while Deutsche Bank upgraded to buy; RMBSrenews license with IBM; Raymond James said they have increased conviction for NVDA that Oct quarter will benefit from a new gaming product cycle, which likely to be a catalyst and potential source of upside
· Software movers; OKTA upgraded to buy at Needham after recently downgrading ahead of the FY1Q earnings release as the stock was at our $58 PT
· Telecom services industry view upgraded to in-line from cautious at Morgan Stanley as stock valuations hit their lowest in more than 10 years, and as the competitive and regulatory outlook becomes more balanced; resumes AT&T (T) at overweight, PT $37 and top picks: communication infrastructure assets that benefit from network investments to support more data traffic, like tower stocks (CCI, AMT, SBAC), data centers (DLR, CONE), fiber companies (ZAYO, CTL); for more defensive investors, recommends T, VZ, TU. Shares of Intelsat (I) gained after Kerrisdale Capital turned bullish saying “We are long shares of Intelsat and SES, two large satellite operators with significant and underappreciated 5G spectrum assets”