Wednesday, July 18, 2018
Equity Market Recap
· U.S. stocks pushed higher in afternoon trade, as the Dow Jones Industrial Averages advanced for a 5th consecutive session and the Nasdaq Composite recorded another fresh intraday high. Financials and industrials (transports) paced the gains in the S&P and Dow, while defensive Consumer Staples (food) and Utilities were the biggest laggards. Shares of Warren Buffet’s Berkshire Hathaway jumped after the company signaled it will lift a cap on stock buybacks (also boosting broader market sentiment). The Dow Transports rose as much as 2.5%, topping the 10,750 level, led by gains in airlines and rails after UAL and CSX quarterly results and guidance boosted the industry (UNP reports tomorrow). Fed Chairman Jerome Powell’s 2nd day of testimony on Capitol Hill didn’t influence markets, echoing yesterday’s remarks in delivering an upbeat assessment on the U.S. economy. The dollar pared gains and emerging markets pared losses after President Donald Trump suggested he may do a separate trade deal with Mexico. Energy stocks rebounded from earlier losses as WTI crude managed to rise 1% after touching lows around $67 per barrel following bearish inventory data. Housing starts a negative data point this morning, plunging over 12% in June to 9-month lows and hitting homebuilders. The benchmark S&P 500 holding a few points above its 2,800 level, remaining at 5-month highs as earnings season continues to ramp.
Fed’s Powell & Fed Beige Book
· The Fed Beige Book, or periodic review of the economy in regions, showed the rapidly expanding U.S. economy is running out of room to grow any faster as shortages of skilled workers and rising costs of raw materials handcuff businesses, the Federal Reserve said. The Fed found that 11 of 12 regions of the country were growing at a “modest” pace or even faster. Only the states around St. Louis reported “slight” growth. “Economic activity continued to expand across the United States,” the Fed said. Many companies can’t find enough skilled workers and in some cases they are turning aside new business. Others say they have to pay more for critical raw materials such as steel and lumber, a problem exacerbated by recent tariff.
· Crude oil prices end higher, with WTI crude rising 68c or 1% to settle at $68.76 per barrel, well off its earlier lows of $67.04 as oil was weak initially, falling near 1-month lows after bearish inventory data out of the EIA and API but reversed. Brent oil prices had fallen to a three-month low earlier before rebounding as well. Traders also awaited news from a reported conference call among members of the joint OPEC and non-OPEC ministerial monitoring committee which showed compliance with oil cuts at 121% in June.
· August gold futures bounced off fresh 1-year lows, rising 60c to settle at $1,227.90 an ounce; gold prices have now tumbled around 10% since its peak on Jan. 15 at $1,362.90 an ounce. Gold prices have plunged the last few weeks, casting aside concerns tied to trade wars that should have provided some support for the asset widely viewed as a flight to safety. The more hawkish Fed, with expectations of four rate hikes in total this year, has providing support for the U.S. dollar, which in turn has pressured commodity prices.
· The U.S. dollar reversed earlier gains, sliding to lows of the session midday, as the dollar index (DXY) fell back to the 95 level (earlier touched near 2018 highs up around 95.40). The dollar decent came at the same time President Donald Trump said he may prioritize a trade deal with Mexico instead of Canada, lifting the peso against the buck. Though the Canadian dollar also strengthened along with a bounce in emerging-market currencies in general. Meanwhile, the pound also weakened against greenback, with sterling slipping to lows of $1.3010 before paring losses (down from $1.3116 late Tuesday) amid signs that inflationary pressures in the U.K. are easing (UK CPI was unchanged last night at 2.4% and core dipped to 1.9% from 2% BOE target), which may make the Bank of England think twice about raising its key rate by 25 basis points. The dollar also posted small declines vs. the euro and yen after rallying in recent weeks.
· Bond markets remain quiet, though slipped late afternoon as yields moved to the highs of the day following a release of the Fed Beige Book and as markets digest the second day of testimony from Fed Chairman Powell on Capitol Hill; the yield on the 10-yr inched above 2.87%, while the 2-yr yield remains near 10-yr highs around 2.61%; the 30-yr still unable to top the 3% level.
· Housing starts for June fell to 9-month lows, falling -12.3% to 1,173M, well below the 1,320M estimate (after rising 4.8% the prior month); single family starts fell to 858K; multifamily starts fell to 315K in June. Building permits fell to 1,273M vs. 1,301M in May, also lowest level in nine months and well below the est. 1,330M; Permits fell 2.2% in June after falling 4.6% the prior month; Single family completions fell to 862k; multifamily completions rose to 399k in June.
Sector News Breakdown
· Auto sector; Wells Fargo upgraded BWA and downgrades ALV, VC in the supplier sector saying they expect a mixed quarter with f/x dampening earnings upside or driving misses in some cases and see the most upside potential for APTV, and BWA; TEN’s Q2/full year has risk while customer (VW) and trim mix could be a risk for GNTX in 2H. Auto retailers weak as SAH guides Q2 and year EPS below estimates saying 2Q earnings hurt by lower than anticipated new vehicle gross profit/unit in certain key brands (shares of GPI, LAD, PAG among movers in sympathy)
· Consumer Staples; CLX downgraded to sell at Goldman Sachs and reduced estimates to reflect a combination of a lower volume forecast, lower gross margin expectation and renewed currency headwinds; AVP was upgraded to hold at Jefferies following pullback in shares; INGR was downgraded at Credit Suisse after recent profit warnings; PZZA founder and recently ousted chairman John Schnatter held talks to merge the pizza company with WEN, the WSJ reported, noting the talks were preliminary and began before he stepped down as chairman last week over the use of a racial slur https://on.wsj.com/2JwbVQN
· Housing & Building Products; Homebuilders under pressure after Housing starts a negative data point this morning, plunging over 12% in June to 9-month lows; declines for TOL, PHM, KBH; NCS shares active after news to acquire privately held Ply Gem in stock deal, issuing 58.7M shares to Ply Gem shareholders, and NCI shareholders will own 53% of equity upon closing of transaction; lumber futures fell by $15 exchange limit down to 16-week lows
· Casino, Lodging & Leisure; Deutsche Bank said they remain largely bullish on slot equipment as we expect continued solid, though decelerating growth rates in domestic replacement activity as we move through 2018 (as reaffirm buys on value play IGT & growth play AGS); SEAS tgt raised to $27 at Stifel citing 4 catalysts: 1.) 2Q18 EBITDA beat, 2.) John Reilly named permanent CEO, 3.) Long-range EBITDA target established, and 4.) Refinancing of the Term B-2 Loans due May 2020; in cruise lines, NCLH announced that it expects to raise its full year 2018 Adjusted EPS guidance despite headwinds from higher fuel prices (positive for RCL, CCL)
· Inventory data was bearish, weighing on prices initially before recovering: API reported that U.S. crude supplies rose by 629,000 barrels for the week ended July 13, showed supplies of gasoline also climbed by 425,000 barrels, while distillate stockpiles added 1.7 million barrels. This morning, the EIA said weekly crude inventories rose an unexpected +5,836M barrels vs. est. draw of -4,100M barrels, while Cushing crude fell -860K barrels and gasoline a bigger drawdown of -3,165M barrels vs. est. draw -700K barrels
· E&P sector; NFX downgraded to neutral at Goldman Sachs as see more modest upside to our target price following the recent rally in both NFX shares and the broader sector; meanwhile, Goldman upgraded CXO to buy with 18% upside to our $174 tgt noting shares have underperformed the XOP by around 15% YTD primarily due to investor concerns around the benefits of the RSPP acquisition and the company’s exposure to local Permian bottlenecks.
· Equipment and Services; BHGE agrees to sell its Natural Gas Solutions business to two separate entities for a combined $375M; NOG to acquire production asset consisting of large package of producing wells from Tailwater Capital’s Pivotal Petroleum Partners for $68.4M in cash and 25.75M shares.
· MLPs, Pipelines; Jefferies added WMB to its Franchise Pick List as remove and downgrade OKE (notes stock up 27% last 4-months) saying shareholders will vote on the merger on August 9 and soon after that, they believe the WPZ deal will close. Jefferies also upgraded SUN to hold as units are off >10% since early April, close to 52W lows while downgraded MMP to hold as units are up 18% over the last three months; at Bank America, PAA was upgraded to buy saying the company has emerged as a winner capturing growth in the Permian Basin, while downgrades ANDX to underperform from neutral; sees the partnership’s growth options being limited going forward
· Large Cap banks active on earnings: MS reported better-than estimated Q2 results as FICC and equities sales and trading revenue, along with better-than-expected investment banking revenue all topped views – as net income rose 33% to $2.4B; FNF 4c EPS beat with strong title pretax margin (+90bps YOY); LTXB jumps as one analyst notes elevated LLP expense drove EPS miss (expected) 59c vs c/e 68c but strong NII/NIM (upgraded at Raymond James); USB Q2 beat driven by higher fee income, lower exp & loan provisions; ZION rises as the Treasury Department announced that Financial Stability Oversight Council is proposing to accept the bank’s request for it not to be regulated as a systemically important financial institution; other movers on earnings: FULT, HOPE, PNFP, UBNK, WTFC
· Insurance; BRK/A shares jumped after the company announced it is changing the share repurchase policy as they can now repurchase stock when it views the price to be conservatively below Buffett and Munger’s estimate of intrinsic value (vs the prior policy where the price paid for buybacks could not exceed 1.2x book value).
· Brokers; online brokers active after peer IBKR posted 2Q net revenue that beat the highest analyst estimate, helping lift comps AMTD and SCHW (which reported better results yesterday)
· Mortgage insurers active after MTG posted Q2 net operating EPS and revenue that topped the highest estimates as new insurance written in the quarter rose to $13.2 billion vs $12.9 billion in the prior year period (ESNT, RDN also active on results)
· Large Cap Pharma; NVS has joined PFE in shelving price increases for medicines in the US after criticism from President Donald Trump over rising costs; NVS reported better than expected quarterly earnings; IRWD downgraded to MP at Cowen as believe fairly valued; CHRS rises after saying it expects the EU application for their biosimilar to AMGN’sNeulasta will be included in the July 2018 CHMP agenda next week; CRNX 6M share IPO priced at $17.00; generic drugmakers MYL, ENDP active after NVS cut its forecast for Sandoz
· Biotech movers; MESO announced a strategic alliance with Tasly Pharmaceutical Group for the Chinese rights to two of Mesoblast’s cell therapies: MPC-150-IM for congestive heart failure (CHF) and MPC-25-IC for acute myocardial infarction; RUBY 9.53M share IPO priced at $23.00; CTIC shares dropped more than 40% after saying it plans to run a Phase 3 study of lead product candidate pacritinib for myelofibrosis after meeting with the FDA (hopes were the FDA would consider approving)
· Healthcare services; HCSG shares fall after Q2 EPS miss and Management said bad debt was $1M higher sequentially and costs related to health/wellness plans increased $1.6M – shares were downgraded at Stifel to sell as deteriorating fundamentals in the skilled nursing end client increase bad debt expense and slow cash collections. In hospitals, UHSwas downgraded to neutral at Goldman Sachs saying growth from its acute hospital admissions may no longer be enough to offset the weakness in its behavioral health unit; NSTG 4M share Secondary priced at $12.50; ABT posts earnings beat for Q2 and raises low end of year organic sales view
· Dental industry under pressure after Goldman Sachs said guidance from XRAY and PDCO looks aggressive and the dental companies may lower outlooks this quarter, while neutral-rated HSIC may have “some EPS downside” in 2019; Goldman also raised tgt on ALGN to Street high $440
· 52-week highs for several in healthcare today: LLY, BDX, ABT, IDXX, RMD, ALGN
Industrials & Materials
· Industrial & Machinery; GWW lifts guidance on strong industrial parts demand after handily topping Q2 EPS estimates on better revs; PCAR was downgraded to Market Perform at BMO Capital ahead of 2Q results, cutting our price target to $65 from $80, and lowering our 2Q, 3Q, and 4Q estimates on concerns about a peaking Class 8 truck industry
· Transports; strongest sub-sector today for market as airlines strong after UAL Q2 EPS and revs topped consensus and raises FY18 EPS view to $7.25-$8.75 from $7.00-$8.50 (JBLU, AAL, LUV rallied); in rails, CSX handily topped Q2 EPS by 14c on higher revs of $3.1B with continued progress on the adoption of its scheduled operating model delivering an operating ratio of 59.8% and said it expects mid-single digit revenue growth in 2018; in trucking, MRTN Q2 upside surprise, that was driven by strong pricing in all divisions and solid cost control as posted its highest quarterly operating revenue and operating income in its history according to Seaport
· Metals & Mining; Credit Suisse remains bullish on the medium term fundamentals of the U.S. Steel sector and continue to view the thesis as underpinned by more than just Section 232 uplift. They raise steel price deck for HRC to $843/ton for 2018 (YTD avg is $830/ton) and $763/ton for 2019 and are raising estimates across coverage (AKS, STLD, NUE); BHPsaid its FY 2018 iron ore production hit a record, while full-year copper output jumped and petroleum production fell.
· Aerospace & Defense; TXT shares slipped despite quarterly profit and sales topping views and raised its forecast for the year for EPS from continuing operations and cash flow
Technology, Media & Telecom
· Internet; GOOGL said it would appeal the $5B EU record-breaking antitrust fine and crackdown on business practices over Android mobile system; TWTR downgraded to neutral at Macquarie as awaits proof that its product improvements can attract new users and amid a rally this year that may limit upside potential; Macquarie also said increasingly frustrated with the lack of visibility into the core revenue drivers for GOOGL and does not expect much from EBAY this quarter; AMZN says Prime Day sales surpassed Cyber Monday, Black Friday and the previous Prime Day, when comparing 36-hour periods, making it the biggest shopping event in Amazon history; EBAY reports earnings tonight after the close; 52-week highs FB GOOGL, AMZN
· Semiconductors; TXN announced that President and Chief Executive Brian Crutcher is out because of code of conduct violations; MLNX Q2 EPS and revenue topped consensus and raised its FY revenue guidance; semi-equipment stocks (LRCX, AMAT) benefit after ASML reported better-than-expected results and said it expected a stronger second half. ” NVDA at Citi: says recent supply chain checks indicate discrete graphics gaming demand is expected to remain sluggish thru the Sep-Q
· Optical and Software movers; SAP tgt raised to $130 at Oppenheimer on positive cloud business momentum AAOI shares fell after B Riley said that tariff-related uncertainty could impede the anticipated optical recovery in 2H; Piper however was positive on the optical sector; ADTN shares rallied following earnings and guidance the pleased Wall Street
· Telecom sector; Citigroup downgraded WIN and UNIT to sell saying while the market may be focused on debt exchanges and a lawsuit from a bondholder, they believe Windstream’s operating and financial performance pose substantial risk to the equities of both Windstream and Uniti.