Friday, July 13, 2018
Equity Market Recap
· There was no scaring U.S. equity markets on this Friday the 13th as global markets closed higher in week that saw rising inflation (CPI, PPI), additional trade tariffs from the U.S. against China, tough talk from world leaders, and hawkish commentary out of Fed officials. Also today, weaker than expected quarterly results from big bank today as quarterly earnings season got underway today (WFC and Citi results disappoint, while JPM topped views), which weighed on banks. But with all that, U.S. stocks still pushed higher all week long! The S&P 500 index hit 5-month highs, topping the 2,800 level, led by energy and consumer sectors, while financials faltered. Major averages also held gains after news 12 Russian intelligence officers were indicted for hacking into the Democratic National Committee’s server. The Nasdaq Composite touched fresh all-time intraday highs (7,843.52) before slipping late day (led by switch, networking stocks CSCO, JNPR, ANET on report AMZN may enter market). The Dow Industrials topped the 25,000 level for the first time in about a month. Energy stocks led gains as WTI crude climbed back above $70 a barrel, while the dollar slipped midday. AT&T shares fell after the U.S. Justice Department said it’s appealing a judge’s decision allowing the company’s takeover of Time Warner, weighing on telecom. Economic data this morning a drag on markets as consumer sentiment (UoM data) falls to six-month low on tariff concerns, while import prices for June posted an unexpected decline of (-0.4%), though the prior month was upwardly revised to 0.9% from 0.6%. Fed Chairman Jerome Powell presented the Monetary Policy Report to Congress today, ahead of his scheduled semi-annual testimony next week. Details of the report showed: Further gradual rate hikes are called for; the stance of monetary policy remains accommodative and noted the labor market has continued to strengthen.
· The preliminary University of Michigan consumer sentiment survey for July fell to 97.1 vs. 98.2 prior month and slightly below the 98 estimate and at its lowest level since January; the current economic conditions index fell to 113.9 vs. 116.5 last month while the expectations index rose to 86.4 vs. 86.3 last month.
· Import Prices for June fell (-0.4%) MoM well below the expected rise of 0.1% and after rising 0.9% in May; Import prices rose 4.3% y/y in June; Import prices ex-fuels fell 0.3% after rising 0.2% in May while Import prices ex-petroleum fell 0.3% after rising 0.1% in May. Export prices rose 0.3% after rising 0.6% in May while export prices ex-agriculture rose 0.4% after rising 0.6% in May
· Oil prices advanced Friday, as WTI crude rose 68c, or 1% to settle at $71.01 per barrel, but still end the week with a -3.8% decline amid concerns over resurgent Libyan supply and global trade disputes, which offset a bullish week of inventory data. On Wednesday, the Energy Information Administration said domestic crude supplies plunged by -12.6M barrels for the week, well above the expected -3.7M barrel draw. Oil prices bounced off yesterday’s close of $70.33, its lowest since June 25, and also briefly touched under $70 a barrel for the first time in over two weeks.
· Gold futures end lower, falling -$5.40, or 0.4% to settle at $1,241.20 an ounce, ending their lowest settlement in nearly a year (and down about 1.2% for the week). Gold prices have failed to find refuge in its safe-haven status from U.S.-China trade tensions amid overall strength in the U.S. dollar this week (and fears tariffs on China would reduce demand for commodities).
· The U.S. dollar slipped mid-afternoon to end lower, snapping its 4-day win streak as the beaten up yen, euro and pound rallied from recent declines. For the week, the dollar index (DXY) gained a little less than 1%, aided by a 1.5% rally vs. the yen (6-month highs). The euro rallied off lows to turn positive mid-afternoon, bouncing off the 1.1613 lows to end at highs above 1.168, but for the week down about -0.5%. After touching morning lows of 1.3101 vs. the dollar on harsh comments from President Trump on UK PM May regarding Brexit/trade, the Sterling bounced to afternoon highs around 1.3230 after their speech midday, as Trump backed off a little. Emerging market currencies (Mexico, Argentina) rebounded off recent lows this week. Bitcoin prices rose 2% on Friday topping $6,300, but still posted a decline of roughly 4% for the week.
· Bonds gains as yields slipped to end the week, as ongoing trade tensions and commentary from the Federal Reserve helped lift defensive bonds. The yield on the 10-year ended near weekly lows around 2.82%, while the 2-yr dipped slightly to 2.57%. Yield held in a fairly narrow trading range this week (10-yr lows around 2.82% with highs just shy of 2.87%) as markets digest the mixed economic data (higher inflation readings, softer confidence), the ongoing trade issues with the US and rival countries, and surging stocks. Several speeches by senior Fed officials confirmed this week the central bank’s intent to maintain its rate-hike path, helping to flatten the yield curve by pushing up short-term rates faster than longer-term rates.
Sector News Breakdown
· Retailers; VFC was upgraded to buy at Bank America and raise tgt to $96 ahead of the company’s earnings report on July 20, as believes Vans momentum is sustainable and will be a “go-to-brand” for the back-to-school selling season; BBW shares rebound after the company extended its offer to customers the chance to buy any bear for the price of their child’s age.
· Auto movers; Goldman Sachs downgraded auto supplier VC to neutral citing the company’s high exposure to Ford, elevated 2019 consensus revenue growth expectations and risk associated with VC’s AV/ADAS platform/product offering, while firm upgraded MNRO to buy and raised price target to $71 from $58 citing promising unit growth; boutique firm M Science said TLSA Model 3 conversion rate appeared to be soft through the first week of July, as per Bloomberg
· Consumer Staples; INGR shares fall as lowered its 2Q and 2018 EPS forecast by -27c (vs consensus), and -40c (versus prior mgmt. guidance), respectively and lowers full year 2018 EPS citing sharply lower sweetener demand in North America; in protein sector, Goldman Sachs lowered estimates on SAFM on softer summer pricing; APRN estimates raised at KeyBanc today citing the expansion of on-demand meal kits offered by COST
· Restaurants; MCD shares pressured after late Thursday, two states said they were investigating whether the fast-food chain’s salads were linked to dozens of cases of foodborne illness (MCD said it would voluntarily stop selling salads in those restaurants); YUMC was downgraded to mixed from positive at OTR Global; DPZ tgt raised to $305 at Oppenheimer
· Housing & Building Products; JPMorgan with comments on builders, positive on LEN and PHM among large-caps and BZH, CCS, MTH, and WLH among smaller-caps; JPM upgraded MDC to neutral from underweight while cutting NWHM to underweight; within building products, JPM top picks are SWK and FBHS; RH provides clarification on product sourcing from China saying imports from China will be approximately 25% to 30% in FY19
· Casino, Lodging & Leisure; in lodging, JPMorgan said HGV shares looks attractive at current levels, as believes the market underappreciates the “relative resiliency” of timeshare sales growth; FUN downgraded by another analyst (Macquarie) after recent weak sales figures
· News flow in energy sector was very quiet today, and earnings do not pick up for group until mid Q2, as the volatility in oil prices this week (falling around 4%), provided weakness; Baker Hughes (BHGE) weekly rig count showed the total rig count rose 2 rigs to 1,054, with oil rigs steady at 863, gas rigs up 2 to 189, and miscellaneous rigs unchanged at 2; in stock news today; CRK to offer $850M senior unsecured notes due 2026
· Large Cap banks active on earnings: financial earnings early next week: BAC BLK on Monday…CMA GS PGR SCHWTuesday…MS MTB MTG NTRS UBSH USB Wednesday
· 1) JPM reported better-than-estimated FICC sales and trading revenue; EPS of $2.29 beats consensus of $2.22 after a miss in Q1, which was its first in two years
· 2) WFC shares fell after missing quarterly profit expectations, posting declines in mortgage banking, loans and deposits/provision for loan losses of $452M, down 19% Y/Y with net charge-offs of $602M, down $53M Y/Y/Q2 revs fell to $21.6B from $22.2b YoY;
· 3) Citigroup (C) shares dipped after Q2 revenue missed estimates as Q2 consumer banking and institutional clients net income fell from Q1 levels, while Q2 net income growth was primarily driven by higher revenue and lower effective tax rate (tax rate was 24% vs 32% Y/Y)/global consumer banking net income of $1.28B fell 8% from Q1 and rose 14% from a year ago. Institutional clients group net income of $3.23B declined 3% from Q1, but was up 17% YoY
· 4) PNC Q2 margin expands on higher fee income and net interest income, while managing expenses; Q2 net interest income up by 2% to $2.4B vs. Q1 on higher loan and securities yields and additional day in Q2 partly offset by increased funding costs; Q2 Net interest margin (NIM) increased to 2.96% vs. 2.91% in Q1 and 2.84% a year ago.
· 5) FRC Q2 EPS of $1.20 beats by 3 cents, bolstered by strong loan originations and continued expansion of its wealth management business.
· Brokers & Asset managers; IVZ, WETF downgraded to market perform and BLK upgraded to outperform at KBW Inc.; Citigroup upgrades RJF to buy while downgrades WETF to neutral from buy and cut tgt to $10 from $12.75 as close the AB/APAM Pair Trade reflecting AB’s 3,100 Bps YTD outperformance and APAM’s building yield (and remain bullish AB)
· Consumer finance; MA and Visa (V) shares fall from all-time highs yesterday after card volume trends from JPM, WFCand C were generally in-line with expectations of a modest deceleration; SYF adds to yesterday losses of over 5% after Bloomberg reported yesterday that COF is bidding to issue WMT’s private-label card and replace incumbent SYF
· Large Cap Pharma; JNJ shares pressured after the pharma company was ordered to pay $4.69 billion in damages to 22-women in a lawsuit linking baby powder to cancer; AERI tgt raised to $86 at Needham citing strong initial Rhopressa launch, w/ physicians reporting efficacy levels superior to clinical trials, & incidences of hyperemia lower in practice; GLMD initiated with a buy and $35 tgt at Stifel citing the company’s clearly active late-stage NASH asset that could be a player in the multi-billion dollar market; JAZZ lost an appeals court bid to revive seven patents on its narcolepsy drug Xyrem/the Patent Trial and Appeal Board was correct to rule that the patents didn’t cover new inventions; Biotech (IBB) little move on day but is up 9.5% MTD
· Other movers; ADXS shares jump after the FDA lifted a clinical hold on the company’s phase 1/2 study for a cancer drug combination; Medical devices and equipment; NVRO shares dropped more than 10% after announcing it terminated the employment of Vice President Worldwide Sales on July 9th; CTMX 5.102M share Secondary priced at $24.50; MYOV3.3M share Secondary priced at $22.50; SPRO 3.78M share Secondary priced at $12.50
· Healthcare services, Morgan Stanley noted AMZN’s reported talks with Xealth speak to its continued healthcare focus, now attacking the $10bn gross profit B2B medical supply space. Importantly, Xealth + PillPack would enable AMZN to better build a recurring RX, medical supply and private label business (shares of CVS, ESRX, CAH, MCK leveraged to news); BKD shares fell over 4% after RBC said the senior housing market continues to see soft fundamental performance as Q2 occupancy comparisons with year-ago–down 80 bps to 87.9%
Industrials & Materials
· Transports; in trucking, Susquehanna upgraded CHRW to positive from neutral and downgraded LSTR to neutral, as the defensive characteristics of CHRW make it appealing late in the truckload rate cycle; transports steadily higher, still trying to recover from Wednesday’s downdraft in airlines space after AAL lowered its TRASM data…though the group bounced yesterday on mixed DAL results (but lower guidance); rails leading higher today (NSC, KSU)
· Metals & Mining sector; FCX shares underperformed amid concern that its agreement with Indonesia announced Thursday still leaves plenty of hurdles before it can secure a deal to continue operating its flagship mine; China’s iron ore imports fell 11.6% last month, as the country intensifies its push to clean up its environment and by rising stockpiles at ports. Iron ore imports reached 83.2M metric tons in June
Technology, Media & Telecom
· Internet; NFLX slumps after Deutsche Bank said WW 2Q net adds will be in the range of 1M below consensus (of 6.3M), to 500K above it and think 3Q guidance is likely to be in the range of in line to 250K higher than consensus of 6.24M (ahead of earnings Monday); new record highs for AMZN (tops $1,800 for the first time), FB also record highs topping $207 per share
· Tech services and components; INFY shares pull back from 52-week highs as Q1 net income fell short of consensus views, while revenue topped estimates and said op margins of 23.7% was at “the upper quartile of the guidance,” while fiscal 2019 guidance was maintained at 22% to 24%; optical stocks (ACIA, LITE, AAOI) moved on a Reuters report that the U.S. lifts ban on American companies selling parts to ZTE Corp.; AAPL supplier Dialog Semi (DLGNF) said midday it expects higher than anticipated profitability in Q2 and gross margin slightly up from Q1
· IT Hardware: Gartner reported that total worldwide PC shipments reached 62.1M units in June-qtr (among major regions, the US came in at ~14.5M, EMEA at ~17.4M, and 21.3M for Asia/Pacific), rising by 1.4% YoY showing positive trends following 15-straight quarters of declines; networking stocks (CSCO, JNPR, ANET, HPE) shares slipped midday after the information reported that AMZN is eyeing a part of the cloud business it doesn’t already control: the $14 billion global market for data center switches
· Telecom movers; AT&T (T) shares slip after the Department of Justice late Thursday filed for an appeal of a ruling allowing the telecoms major to acquire Time Warner Inc. CEO Randall Stephenson expects the DOJ appeal of the Time Warner case may take five or six months; ZTE Corp. said it expects to lose 7 billion to 9 billion yuan during the first six months of the year, which is the equivalent of about $1.04 billion to $1.34 billion at current exchange rates, hurt after the Commerce Department issued a trade ban earlier this year; GOGO slides as said it is reviewing a range of attractive strategic alternatives, including opportunities suggested by various strategic and financial parties, with the goal of maximizing holder value
· Media movers; WWE tgt raised to $100 and overweight rated at Morgan Stanley saying it may be the strongest example of the rapid appreciation in content “value” in the public markets; DIS outperforms other media companies, up around 1% and trading back near best levels since late February