Tuesday, July 10, 2018
Equity Market Recap
· U.S. stocks end mostly higher on Tuesday, as the Dow Industrials and S&P 500 each extended their winning streaks to four days, with the S&P rising to 4-month highs led again by defensive sectors (Utilities, REITs, Healthcare) after selling pressure in the same groups yesterday. The tech heavy Nasdaq Composite failed to rally despite outperformance in the semiconductor industry (SOX up 1% amid ongoing Semicon West conference). Stocks started their push early last week, with another jump last Friday on the solid jobs headline report (though unemployment ticked higher on slowing wage growth) which has thus far offset the recent trade-related fears/tariffs between the U.S. and its trading partners (China, EU, Canada, and Mexico). Consumers got a boost after strong results from PepsiCo boosted optimism about the earnings season. After a rotation into financials yesterday helped spur markets higher, the sector was lower today as investors eagerly await the results from large caps C, JPM, WFC this Friday). Oil rose, while bonds and gold prices dropped and the dollar was mixed.
· Energy futures advance, as WTI rises 25c to settle at $74.11 per barrel as U.S. stockpiles are pressured at a time when supply disruptions in Libya and Iran are straining global markets. Brent crude topped $79 per barrel early after its recent downturn on increased Saudi production fears, but slipped later. Weekly API inventory data tonight after the close and EIA data tomorrow morning. Oil prices dipped midday after Secretary of State Mike Pompeo said earlier U.S. will consider some Iran oil-sanctions waivers.
· The U.S. Energy Information Administration (EIA) raised its 2019 forecast on U.S. crude-oil production, but left its view on output for this year unchanged. The EIA sees 2019 domestic crude production at 11.8M barrels per day, up 0.3% from the June forecast and also raised its 2018 view on West Texas Intermediate crude prices by 2.2% to $69.95 a barrel.
· Gold prices dropped -$4.20 or 0.3% to settle at $1,255.40 an ounce on Tuesday (after modest gains on Monday), slipping as the dollar rebounded and as expectations of tightening monetary policy in the U.S. gains momentum following strong jobs data last week. Copper prices extend declines, down now roughly 14% over the last 30-days, seen as casualty of the China/US trade wars as copper trades to lowest levels in about a year
· The U.S. dollar was mixed, losing ground late day vs. the euro which traded back near break-even levels of 1.175 (off lows 1.169 earlier), while the greenback advanced against the safe-haven yen, topping the 111.25 level. The British pound briefly rose above $1.33 (1.3301), but pared gains around $1.327, but up from $1.3258 late Monday. The move comes as sterling rallied to a two-week high Monday before dropping more than a 1c below $1.32 following political cabinet changes over Brexit. In emerging markets, the Mexican peso resumed its rally versus the dollar after a short-lived correction as USD/MXN heads for the lowest close since April below the 19-level (1.3% move today). The Argentine peso also big jump vs. the dollar, more than 2%. Bitcoin prices fall over 4% after Bloomberg article noted that roughly 56% of crypto startups die within four months after finalizing their initial coin offerings, citing a study by Boston College which examined tweets from the startups’ Twitter accounts.
· Treasury markets were little changed most of the session after sliding yesterday but bounced after a weak 3-year auction; the 10-year yield edged higher 3 bps on Monday to 2.86% as investors rotated out of defensive sectors, but yields held those levels today; the 30-yr holding below 3% and the 2-yr inching higher around 2.58%. The U.S. Treasury sold $33B in 3-year notes at a yield of 2.685% (vs. 2.679% when issued) with the bid-to-cover at 2.51 (lowest since April 2009) vs. 2.83 in prior auction and indirect bidders awarded 39.6% of auction and 51.3% to primary dealers (most in 4-years). No major economic data to shake up bonds today.
Sector News Breakdown
· Autos; RBC Capital positive on GM saying cruise autonomous driving unit could be worth about $43B as a standalone transportation network company, operating a fleet of about 800k robo-taxis by 2030, or could be valued at more than $100B if it licenses its technology to other operators; TSLA reached a preliminary agreement with the Shanghai government to build a factory that’ll rival production from its lone U.S. assembly plant; FCAU was upgraded to buy at UBS as expect the stock to deliver the best earnings momentum amongst EU OEMs in the coming quarters; BIDU and Hyundai Motor Group sign a memorandum of understanding to strengthen cooperation on next-gen connected car tech
· Auto suppliers/retail industry; Morgan Stanley said the auto retailer sector may see more consolidation on the road ahead as tech investments ramp up; firm sees increasing capital needs as the auto industry progresses toward a “nearly” 100% B2B model from B2C – Morgan upgraded KMX to Overweight from Underweight, while downgrading SAH and AN to Underweight from Overweight; ABG upgraded to an Equal-weight rating as part of the reset, while LAD and PAG kept at Overweight on M&A potential
· Retailers; GCO downgraded to hold at Jefferies saying while they see LT oppty, most of the central aspects of our Buy thesis have come to fruition and think catalysts are more limited NT; KeyBanc said believe CONN shares will prove undervalued, given the opportunity for store expansion; JWN (which also held investor day) and URBN both downgraded at KeyBanc on view of more balanced near-term risk reward prospects; IRBT downgraded at Raymond James after 40% rally since February; TPX shares active as Wedbush said based on checks across the U.S., we believe nationwide bricks and mortar retail mattress sales declined low-single digits for 2Q18, with sales growth early in the quarter giving way to declines in May and June
· Consumer Staples; PEP reported Q2 profit that topped analysts’ estimates helped by food brands and a diversification away from its iconic drink to drive growth among more health-conscious consumers while sticking with its full-year financial targets; Citigroup notes tobacco (MO, PM) Bulls say the tobacco share price falls are overdone because they have underperformed consumer staples by about 15% YTD and Nielsen data shows good absolute cigarette volumes in 2Q. We remain cautious, however, and think multiples will remain depressed.
· Restaurants; CMG was downgraded to underperform at Mizuho (but up tgt to $330 from $300) noting the +80% run since Niccol’s appointment as CEO, and believe the stock currently prices in an aggressive recovery in both comps and margins
· Housing & Building Products; KBH was upgraded to positive at Susquehanna and raise tgt to $36 saying sees a clear and visible path to gross margin expansion and that expects a rebound in community count and order growth into next year; BZH guides Q3 revs $507M vs. est. $517M, but sees FY19 EPS above $2.50 vs. est. $2.05 after acquires Venture Homes
· Casino, Lodging & Leisure; cruise lines pressured early after Goldman Sachs cut estimates and PTs on CCL, RCL and NCLHciting incremental fuel/FX headwinds offsetting ongoing demand strength – also says despite recent pullback in the stocks, stays neutral on CCL, RCL, NCLH on view that rising input costs likely cap upside optionality in near term; in casino, WYNN upgraded to buy at Stifel as believe the recent pullback has created a compelling risk/reward scenario; MLCO shares upgraded to outperform by Wolfe Research, while they downgrade WH to underperform
· Energy stocks opened strong with broader markets and oil spike, but as both pared gains, the energy complex followed suit, with pullbacks in E&P, integrated and equipment names ahead of weekly API inventory data tonight and EIA data tomorrow morning
· E&P space; QEP agrees to sell natural gas and oil producing properties, undeveloped acreage and related assets in the Uinta Basin to Middle Fork Energy Partners for $155M; XOG announced its anticipated midstream expansion plan along with a perpetual preferred stock placement, resulting in no upfront capital outlay and 100% retained common equity in the new “Elevation Midstream”/raised preferred equity through GSO partners up to a $500M commitment.
· Utilities bounce after yesterday’s 3% decline in the move out of defensive sectors, as the UTY traded below its 200-day MA support of 658.73 (today low 651.28), first time below its key technical level since December
· Large Cap banks were market leaders yesterday, with strong gains in large cap, regionals, brokers and insurance ahead of this week’s earnings season start (JPM, WFC, C, and PNC on Friday) and bond yields bounced off lows yesterday in a rotation out of defensive assets. KBW Inc. said universal banks are set to post solid Q2 results, with fundamentals supporting outperformance once geopolitical risks dissipate and sees 2Q pick-up in C&I loan growth
· Consumer finance and lending; SQ assumed coverage with two neutrals by analysts saying they’re excited about its growth prospects but warn that the positives are already priced in
· Large Cap Pharma; RGNX tgt raised to $130 at Chardan on what is now clear visibility on REGENXBIO science as the leading driver of the emergence of AAV-based gene therapy; VVUS announces preliminary results from a Phase 1 clinical study evaluating the pharmacokinetic profile of its VI-0106
· Biotech movers; XLRN and CELG announced positive results from the phase 3 BELIEVE study of luspatercept in beta-thalassemia; BIIB was downgraded to neutral at Baird following a quick ~35% move since their April upgrade, taking gains off the table after BAN2401 results; LOXO 1.4M share Block Trade priced at $181.00; OCX rises after reports better-than-expected results from lung cancer liquid biopsy test
· Medical devices and equipment; VIVE guides Q2 revenue above estimates and also expands U.S. commercial footprint through partnership with Aesthetic Management Partners; INSP shares active after AET to cover its neurostimulation device for obstructive sleep apnea; DGX was upgraded to outperform at Evercore/ISI saying the company will likely be the beneficiary of improved volumes, stable pricing, heightened M&A and fund flows; GKOS was downgraded to market perform at BMO Capital, while firm downgraded WMGI as well (both on valuation)
· Healthcare services and suppliers; CERN downgraded to underperform at Evercore ISI (among top decliners in the S&P 500 index) while WBA also cut to in-line at Evercore
Industrials & Materials
· Industrial & Machinery; TEX was downgraded to underperform at Baird saying equipment demand likely to slow as signs of flattening rental growth are emerging/says rental markets remain strong but recent fleet growth is starting to become more apparent in flattening utilization and slower rental rates; CMI was upgraded to buy from hold at Stifel
· Transports; After rallying as much as 2% yesterday, the Dow Transport index falls around the 10,600 level (off earlier highs 10,721) – its 100 day MA 10,570…and 50 day MA 10,680; shares of CAR weighed; Stifel downgraded FWRD (to hold) and MRTN (to sell) on valuations
· Metals & Mining; in steel space, RS was upgraded to buy at Jefferies saying while US steel price momentum is likely to fade, RS’ track record of best-in class margin performance should continue to drive robust earnings and FCF generation in quarters ahead; FNV downgraded to neutral at Macquarie
Technology, Media & Telecom
· Internet; EBAY was downgraded to hold at SunTrust and cut tgt to $40 from $48 to reflect anticipated headwinds from on-going changes to tax laws in the US following SCOTUS’ decision to reverse a 1992 ecommerce precedent, and prospects for similar headwinds overseas; SFIX initiated overweight and $38 tgt at KeyBanc (despite shares up over 60% last 2-months)
· Semiconductors; Semicon West industry conference ongoing this week in San Francisco; FORM shares slumped after B Riley FBR raised concerns about customer demand uncertainty for DRAM and logic after its meeting with mgmt at Semicon West
· Hardware and Comm Equipment; AAPL tgt raised to $230 at Bank America citing revenue upside from augmented reality, which is very close to being the highest on the Street; CASA upgraded to overweight at Morgan Stanley saying sharp contraction over past couple of months has begun to overly discount not only expansion opportunities, but core cable business
· Software movers; CHKP was upgraded to buy at BTIG with $120 tgt saying this is an appropriate time to get more constructive on the stock following 3 quarters of underperformance; SPLK was downgraded to in-line at Evercore/ISI
· Telecom & Media sector; AMT receives second analyst downgrade in as many days as JPMorgan downgraded to neutral (Raymond James cut yesterday) citing the recent rebound in the shares and a somewhat slower ramp to domestic carrier spending this year; NOK announced a 1B EUR one-year frame agreement with China Mobile to provide end-to-end solutions for the carrier/Nokia will also provide elements of its mobile radio access and core portfolio; CBB shares slumped after UBS downgraded to neutral saying the integration of the HCOM acquisition will continue to pressure trends in the near term; MSG tgt raised to $385 at BTIG saying despite a 22% move since MSG announced it would spin its Sports assets, they believe there is still upside