Tuesday, July 24, 2018
Equity Market Recap
· U.S. stocks end mixed as the Dow Jones Industrial Average rises as much as 200 points before paring gains, led by gains in UTX, and Verizon after earnings and a jump in energy stocks (CVX, XOM) ahead of earnings this week and a rebound in oil prices. The Nasdaq Composite touched a fresh intraday record high of 7,928.79 early, getting a lift after GOOGL earnings topped consensus views, but a pullback in biotech stocks weighed on the index (NASDAQ fell more than 100-points from the highs before rebounding). U.S. equities overall joined a global rally as Asia and Europe also posted solid gains (FTSE 100 closed at 6-week highs) as China’s State Council announced new stimulus plans, outlining measures aimed at bolstering domestic consumption, such as corporate tax cuts and support for small businesses. Bonds and the dollar were steady. While large cap stocks advanced, the SmallCap Russell 2000 underperformed falling around 1%.
· Sector movers: material stocks outperformed on earnings (STLD, CSTM, and KALU) and as China unveiled new measures to increase infrastructure spending to bolster growth, lifting copper, aluminum, iron ore stocks. Transport stocks were under pressure after a lower growth forecast from JBLU in airlines and as WERN slumps despite its earnings beat (hitting truckers). Large cap Pharma names jumped behind better LLY results while biotech slumped as renewed concerns in gene editing stocks (EDIT, CRSP, and NTLA) overshadowed a better earnings result from BIIB. Defensive stocks slipped (utilities and real-estate) were weak as yields remain elevated, which is helping lift financials for a third straight session. This week also marks the second-busiest IPO week of the year coming up with 11-expected deals to price.
· Earnings results for Dow components mixed as: VZ posted Q2 earnings beat and saying total monthly subscribers including for phones, tablets and watches grew by 531K in Q2, topping the Bloomberg est. 436K; UTX mixed results as Q2 EPS and sales beat along with full-year outlook above consensus as 2Q margins at its Otis business missed expectations and MMM reported record sales for Q2, but downgraded its outlook for 2018 for the second time this year. Quiet early related to trade and macro topics, as markets focus on the earnings onslaught.
· Oil prices close higher, as WTI crude rises 63c or 0.9% to settle at $68.52 per barrel, rising from recent one-month lows ahead of weekly inventory data tonight (API) and tomorrow (DOE) while it was also supported by a slide in the dollar early. Reports that China unveiled new measures to increase infrastructure spending to bolster growth also bolstered commodity prices. At the same time, markets remain wary of the tensions between the U.S. and Iran after President Trump on Sunday tweeted an all-caps message to his Iranian counterpart, Hassan Rouhani, warning that threats against the U.S. will be met with “consequences…few in history have suffered before.”
· Gold futures inched lower, slipping a dime to $1,225.50 an ounce as a rise in global stocks, perceived as risk assets, offset a weaker dollar. Gold prices are now up around $15 from 1-year lows of $1,210 last week, getting a lift early as the dollar slides. September silver added 9 cents, or 0.6%, to $15.52 an ounce. Silver is off 9.5% so far this year, while gold futures are down about 6.4% in 2018 amid a stronger dollar in 2018 on rising rate hike expectations.
· The U.S. dollar bounced between gains and losses to end the day little changed, with the dollar index (DXY) around 94.60 (has advanced roughly 2.7% in the first seven months of the year). The Pound rises to highs of 1.3159 following comments by UK PM May related to Brexit before paring gains while the euro slipped vs. the greenback back below the 1.17 level. Bitcoin surge continues, as prices rise more than 7%, topping the $8,200 level (first time above 8K since May) and now up over 35% from its June lows of $5,791. The Turkish Central Bank unexpectedly kept interest rates unchanged, the lira plunging; the Japanese yen inched up vs. the dollar.
· After two days of selling pressure, Treasury declines took a break as yields dipped. Yields jumped to their highest levels in over a month on Monday as the economy strengthens and boosts expectations the FOMC will get more aggressive with rate hikes to stave off inflation; the 10-yr yield dipped below 2.95% (after rising 7 bps yesterday to 2.96%), while the 30-yr fell 2 bps to 3.07% (after rising about 15 bps in last 2-days); the 2-yr yield up at 2.635%, back near decade highs ahead of GDP data on Friday. The U.S. Treasury sold $35B in 2-year noted at a yield of 2.657% vs. 2.656% when issued prior to auction, with a bid-to-cover of 2.92 vs. 2.73 prior and indirect bidders awarded 45% of auction and directs 14.3%
· U.S. FHFA home price index rose 0.2% to 263.3 in May, after rising 0.2% to 262.6 in April (revised form 262.5). The index is up 6.4% y/y compared to last year. Seven of the nine regions surveyed posted gains on the month,
· IHS Markit flash U.S. services PMI drops to 56.2 in July from 56.5
· IHS Markit flash U.S. manufacturing PMI rises to 55.5 in July from 55.4
· Richmond Fed’s July Manufacturing survey at 20, topping the est. 18 while shipments fell to 16 after 17 the prior month and new order volume were unchanged at 22 after 22 the prior month
Sector News Breakdown
· Retailers; overall group lagged broader markets; GIL was downgraded two notches to underperform at Bank America because of intensified civil unrest in Nicaragua, where GIL operates three of its 13 sewing facilities; COLMtgt was raised to $105 from $95 at Baird ahead of earnings; HNI shares rises as much as 10% after results, lifting furniture makers MLHR, SCS, KNL
· Auto related; HOG shares rallied on better Q2 results though they cut its forecast for profit margin this year, saying operating margin will drop to between 9%-10% due to the expected impact of tariffs (had seen as much as 10.5%); GM, FCAU, F and DDAIF earnings this week
· Consumer Staples; Household products stocks get negative earnings results from KMB after the company cut its year EPS view to $6.60-$6.80 from $6.90-$7.20 to reflect significantly higher commodity costs and a worse currency outlook (PG, CL, CLX, ENR, CHD move in sympathy); COTY falls after Bloomberg reported data show that Coty and Revlon lost a combined 240bps of U.S. in-store cosmetics market share in the 13-weeks ended July 15, 215bps of which went to L’Oreal; PEP replaces KO at Madison Square Garden (KO reports earnings tomorrow)
· Housing & Building Products; WHR shares plunged to 52-week lows after quarter was disappointing across most dimensions of the business including NA, EMEA and LA with substantially reduced 2018 guidance
· Casino, Lodging & Leisure; in casino, MLCO reported Q2 EPS and revenue that fell short of consensus views; Morgan Stanley said get more bullish on the Gaming REITs as they raise GLPI price target to $41 (and upgrade shares), MGP to $32, VICI to $23; in lodging, Morgan downgraded MAR to Equal-weight to reflect a more balanced risk-reward and some caution around the Lodging space
· Weekly inventory data tonight (API) and tomorrow morning (DOE) which could move the needle for oil prices and impact stocks; big week for large cap integrated oil names with CVX, COP and XOM all expected to report this week. Utilities still end the day lower but finishes near its best levels (up about 8 points off the lows) as yields slip from earlier highs, taking some pressure off interest rate sensitive names.
· E&P space; PVAC announced that its Board of Directors intends to evaluate a range of strategic alternatives to enhance shareholder value, including without limitation, a corporate sale, merger or other business combination, one or more strategic acquisitions, or other transactions; EOG outperforms as initiated with a buy at Mizuho with $173 target, while overall E&P space trading higher as oil prices rebound along with broader commodities (form also buy rated on: PXD and APC and underperform on MUR); Goldman Sachs said U.S. pressure pumping activity/margin may be entering an “air pocket”, as they lower Ebitda estimates and PTs for the group, while reiterating a positive stance on SLB and OII
· Banks; the BKX is now up >5% since JPM kicked off earnings for the group over a week ago, far outpacing the S&P 500 on rising rates; UBS reported a stronger than expected 12% rise in pre-tax Q2 profits boosted by its investment bank, but its core wealth management operations; SNV agreed to buy FCB in all-stock transaction valued at about $58.15 per share, or about $2.9B, and reported better-than-expected Q2 EPS ; ZION slips as Q2 EPS missed by 3c due mainly to higher expenses and a larger provision, while its loan growth came in a bit light due to fairly material CRE headwinds (did post better NIM); CITQ2 EPS and revenue beat estimates on lower operating expenses, higher non-interest income and lower effective tax rate offset a decline in net finance revenue and a higher provision for credit losses; HTLF was downgraded at Raymond James given premium valuation levels, which we think are reflective of the company’s ability to post improving profitability levels; other bank movers on earnings: WASH, BKU, FNB, PEBO, BRO
· Brokers; last of the online brokers reported as AMTD Q2 EPS beat by about 10c on better than expected revenues & core expenses, while core trends were robust, with strong rev growth, DARTs at 784K, NNA at $20B, higher NIM, & well managed exp w/ synergies
· Consumer lending and finance; V and MGI announced a strategic agreement that will modernize and digitize the process of sending and receiving money overseas; SQ expands business-lending program through EBAYpartnership as sellers will be able to apply for $500 to $100,000 to help grow various aspects of their businesses, eBay said; Visa and MA earnings coming later this week
· REITs; ACC 2Q FFO was in-line with estimates with modest comp NOI growth (0.1%) as expected, while it cut its ’18 FFO guidance 7c/sh (2c below St), lowering ’18 SS revenues; ELS reported normalized 2Q18 FFO of 89c vs. prior 85c-91c view and bumps 2018 guidance by 1c
· Large Cap Pharma; LLY posted better Q2 results while raised guidance and announced a planned spin-off of its Elanco animal-drugs unit; ABBV active after the FDA approves its ORILISSA (elagolix) for the treatment of women with moderate-to-severe pain related to endometriosis; ORMP active after the Japanese Intellectual Property Office has published its intent to grant ORMP a patent covering its proprietary invention of an oral glucagon-like peptide-1 (GLP-1) analog
· Biotech movers; BIIB shares lift biotech sector after beats Q2 estimates on Spinraza sales (also a positive for IONS), raises forecast for the year/also announced a deal with AliveGen for the rights to Phase 1-stage ALG-801 (now BIIB110) and preclinical-stage ALG-802 (while investors eagerly awaited the results of its Alzheimer’s trial); GILD said a 5-year retrospective analysis showed the highest utilization of Truvada for pre-exposure prophylaxis had significant declines in the average number of HIV diagnoses, while there was an average increase for the states with the lowest use
· Gene editing stocks have remained lower since 7/16 report from STAT news that CRISPR-Cas9, a therapy from Crispr Therapeutics, can cause significantly greater genetic damage than experts previously thought, citing a study published on Monday in Natural Biotechnology; shares of CRSP, NTLA and EDIT all leveraged to news (sector dragged down biotech)
· Medical equipment and devices; MMSI posted strong Q2 results as revenue growth and gross margin both exceeded estimates; Lab companies pressured early after DGX Q2 results trailed estimates and the pure-play lab company lowered the high end of its forecast for 2018 earnings (LH another lab company); SYK reports after the close; VCYT shares jump after Q2 rev beat and revised outlook; NVRO shares plunged as much as 40% late day after Bloomberg reported a judge sided with BSX in patent fight against the company
· Healthcare services and suppliers; NEO shares plunged initially after cutting its 2018 EPS view to 12c-17c from 16c-20c to reflect a preferred stock redemption in June (but rebounded to close higher); TDOC 5.264M share Spot Secondary priced at $67.00; IQV record highs after Q2 results and raised its year outlook; CNC shares dropped in managed care space after earnings results
Industrials & Materials
· Industrial & Machinery; Dow component UTX mixed results as Q2 EPS and sales beat along with full-year outlook above consensus as 2Q margins at its Otis business missed expectations (which was 230 bps lower y/y and 100 bps lower vs RBC estimate); another Dow component MMM reported record sales for Q2, but downgraded its outlook for 2018 for the second time this year; in heavy duty trucks, PCAR EPS beat on mostly in-line revenue; DE, AGCO, CNHI shares jumped on reports the White House readies plan to give $12B in aid to US farmers, Reuters reported; ASTE shares fell over 15% following earnings results as Bloomberg notes infrastructure orders slow which could temper growth (downgraded at Baird)
· Transports; in rails, WAB Q2 EPS beat on better revs, though year profit outlook misses estimates by 2c; in trucking, WERN shares fell despite being upgraded to neutral at Bank America as posts biggest price gains in 20 years with EPS jumps 90% y-y to 61c above street at 50c; airline stocks slipped after JBLU said growth for the full year will be no more than 7.5%, down from an earlier plan of as much as 8.5%, which weighed on transports
· Metals & Mining; industry strong on earnings and as China unveiled new measures to increase infrastructure spending to bolster growth; VALE was raised to investment grade by Moody’s; steel stocks active as STLD Q2 EPS beat by 5c and topped prior guidance while Ebitda topped views driven by an 8% q/q increase in Steel shipments (vs. our flattish view), and stronger Fabrication profitability against weaker Recycling; NUE was upgraded to Overweight at KeyBanc with an increase to our “normalized” 2019 EPS power view to $5.40 (from $4.68) given better appreciation of self-help growth initiatives in Fabrication and Raw Materials; in aluminum, CSTM and KALUQ2 EPS and sales beat (following recently lowered outlook from AA in space)
· Chemicals; AVY among top S&P gainers early following its earnings results; in coatings, SHW Q2 EPS and sales topped consensus primarily to the addition of Valspar sales, higher paint sales volume in The Americas Group and selling price increases while raised its year guidance; MOS double upgraded to buy from underperform at Bank America on potential for multi-year recovery in phosphate as global utilization rates bottoms in 2018
· Containers & Packaging; OI posted a headline EPS beat for 2Q which was more or less led by a favorable tax rate, though 3Q guidance lower than consensus; GPK Q2 EPS and sales both fell short of consensus along with lower Ebitda (WRK, PKG, IP other paper names)
· Aerospace & Defense; LMT posted stronger Q2 results and raised its year guidance, but shares slipped early as Sikorsky sales drop in second quarter on Black Hawk; note shares of NOC and GD due to report tomorrow morning; aerospace suppliers active (ARNC, CRS, HAYN) after ATI earnings beat by 8c as results in High Performance Materials and Components (HPMC) segment improved at a faster pace than expected; HXL reported in-line Q2 EPS of 7c on slightly better revs, upped its dividend and guides year EPS $2.96-$3.10 vs. est. $3.02
Technology, Media & Telecom
· Internet; GOOGL shares rally to new record highs after 2Q results were led by another strong quarter of topline growth from Google Properties (Search, YouTube), growing 26% y/y, as well as continued momentum in Cloud, Play, Hardware and progress at Waymo/meanwhile Q2 paid clicks on Google properties up 58% year-over-year
· Semiconductors; QCOM’s $44 billion deal for NXPI could become one of the biggest casualties in the global trade battle if it doesn’t get approved by Chinese regulators by the deadline this week; TXN reports earnings later tonight; big earnings week for semi space towards tail end of the week (INTC, MXIM, LRCX, LSCC, CY)
· Software & Hardware movers; CVLT Q1 revenue of $176M was slightly below consensus $178M, while adj EPS was nicely ahead on lower operating expenses; all-time highs today for ADBE, CRM; INFN was downgraded at Raymond James after acquired Coriant as they see the transaction as good news for the optical systems market, but not for Infinera as it added risks (integration, synergies, balance sheet) justify a more cautious stance on the stock; 3D stocks SSYS, DDD fell
· Telecom & Media; Dow component VZ posted Q2 earnings beat and saying total monthly subscribers including for phones, tablets and watches grew by 531K in Q2, topping the Bloomberg est. 436K (5th straight quarter of growth); GOGO was downgraded at Raymond James as they see several more quarters of turbulence