Monday, July 30, 2018
Equity Market Recap
· Major U.S. stocks averages ended lower, with the Nasdaq Composite adding to last week’s losses and posting a decline of more than 1% for a third consecutive trading session. According to Bespoke, February 2002 was the last time we saw the Nasdaq 100 drop 1%+ 3 days in a row while the S&P 500 didn’t drop 1%+ on any of those days. Declines were led by Internet and social media stocks as FB, NFLX, and TWTR all add to recent earnings related losses. The NASDAQ also dropped below its 50-day moving average support of 7,650 (lows 7,604) ahead of AAPL earnings results Tuesday night. Gains were led by energy as oil prices climbed over 2%, back above $70 per barrel, while industrials got a solid earnings beat from Dow component CAT (and raised guidance), and financials were mixed as banks edged higher but cards/payment names fell across the board (V, AXP, SQ, MA, PYPL). But macro news upcoming this week could move the needle.
· On Monday, President Trump repeated a threat to shut down the US federal government unless Congress works with his administration to pass legislation to support funding plans for his wall along the border with Mexico (the news weighed on the dollar). Meanwhile the focus this week outside of the earnings barrage will be on trade and central banks, with the Bank of Japan, the Bank of England and the FOMC are all expected to announce policy changes this week. As for the FOMC, the two day policy meeting begins tomorrow and ends Wednesday, though isn’t expected to yield major changes to policy, but may underscore the central bank’s intent to lift rates twice more in 2018. Note coming into today, with 2-days left, the S&P was up 3.7% for the month to date, representing its largest such rise since January, while the Dow and NASDAQ are higher by 4.9% and 3%, respectively – those numbers come down after today’s performances.
· Oil prices finish higher, as WTI crude rises $1.44, or 2.1% to settle at $70.13 per barrel (high $70.43 and low $68.80). The jump in crude helped lift energy stocks as traders focus on supply risks from Canada to the Middle East. Speculation that a Canadian oil-sands facility that supplies U.S. refineries won’t return to full production as quickly as expected helped keep prices higher according to Bloomberg. Meanwhile focus remains on Saudi oil shipments as well.
· December gold prices slipped -$1.20 to settle at $1,231.50 an ounce, marking its 3rd straight decline ahead of the FOMC monetary policy meeting this week. The decline in gold came despite weakness in the U.S. dollar as investors remain concerned about “hawkish” rhetoric by central banks this week and the potential impact of rising rates.
· The U.S. dollar was lower, falling vs. most counterparts ahead of a very busy week for central banks, with the FOMC, Bank of Japan and Bank of England all weighing in. Also adding to currency concerns, President Trump said he would be willing to ‘shut down’ the government if Democrats do not support funding plans for his wall along the border with Mexico. The euro moved back above the 1.17 level from 1.1656 late Friday vs. the greenback, while the dollar fell below 1.30 against the Canadian dollar before paring losses (a jump in oil also helping emerging market currencies leveraged to oil). The dollar slipped vs. the yen ahead of the Bank of Japan monetary policy meeting tomorrow, as they are expected to hold rates unchanged, but there is increasing speculation that it may change its policy on equity purchases. The Pound rose vs. the buck as the Bank of England policy meeting will also be closely watched.
· Treasury markets end lower, as yields advance, but finish off their best levels; the 10-year yield topped 2.98% early on before settling around 2.97% (up over 1 bps), while the 2-yr steady at 2.67% (just off decade high levels ahead of the FOMC). Central bank news this week a likely market catalyst for currency and bond markets as yields have been creeping up over the last 2-weeks on expectations of further rate hikes (though none expected for the FOMC this week).
· Pending Home Sales for June rises 0.9% MoM, above the 0.1% estimate with gains in the Northeast up 1.4%, Midwest up 0.5%, South up 1.1% and West up 0.7%; unadjusted pending homes fell 4% y/y after falling 2.8% y/y in May
· U.S. July Dallas Fed Manufacturing at 32.3, above est. 31.0 but below 36.5 in the prior month; the six-month outlook at 36.2 vs 35.9 prior month
Sector News Breakdown
· Retailers; ROST tgt raised to $101 at Cowen saying comp and EPS estimates are above consensus through FY20 as merch margin and operating leverage can offset investments in wages/mkt share oppty and recent highs in sales per sq. foot, inventory turn and ROIC suggest productivity can go higher; ULTA was removed from Franchise Pick List at Jefferies but maintained buy
· Consumer Staples; protein stocks slide after TSN cuts year adjusted earnings forecast on uncertainty in trade policies and increased tariffs negatively affecting domestic and export prices and increased volatility in commodity markets/sees year adjusted EPS $5.70-$6.00, down from prior view of $6.55-$6.70, est. $6.56 (SAFM, PPC also active on guidance); food space weak after USFD Q2 EPS and sales both fell short of consensus and announced deal to acquire SGA Food Group for $1.8B; CL downgraded to neutral at Macquarie as does not expect growth to accelerate over the next several quarters
· Restaurants; HABT upgraded to outperform at Wedbush and raise tgt to $15 from $10 as Q2 checks suggest SSS growth above expectations and believe 2H:18 comp sales growth expectations could prove conservative; BLMN mixed Q2 as EPS beats while comp and total sales just below views but raises year comp sales view to 1.5%-2.5% from 1%-2% and reaffirms EPS
· Casino, Lodging & Leisure; in gaming; British betting group GVC Holdings Plc, which owns the Coral, Ladbrokes and Sporting bet brands, said it was in advanced talks about a joint venture with U.S. hotel and casino operator MGM ; CZR announces that it will introduce sports betting into its Atlantic City, Gulf Coast and Tunica properties in July and August.
· Energy stocks outperform on Monday as crude rose by the most in a month as traders focus on supply risks from Canada to the Middle East. In the E&P sector, COG upgraded to Positive from Neutral at Susquehanna saying with the recent weakness in shares, we think the risk/reward balance is attractive
· Equipment and service movers; HP was upgraded to overweight at Stephens saying given robust commodity environment, believe the divergence in business fundamentals vs. stock performance provides an opportunity to buy largest and best-in-class drilling fleet, w the cleanest balance sheet, and highest dividend; frac sand sector at Cowen: remain cautious on the group as valuations are rich and think investors will find better entry in late 4Q18/early 2019, as 2019 consensus EBITDA estimates will likely have come down by then (downgrade HCLP); DO Q2 loss comes in lighter than expected, but missing expectations for revenues, which fell by a third from the prior-year quarter
· MLP movers; WMB and KKR agree to form a joint venture to acquire DJ Basin oil and gas services provider Discovery Midstream from privately-held TPG Growth for ~$1.17B; EQM downgraded to market perform at Wells Fargo to reflect simplification risk, uncertainty on the in-service date of the Mountain Valley Pipeline; AMID falls after SXE terminates its merger with the company due to AMID’s failure to achieve conditions required under the merger agreement
· Utilities; SWX was downgraded to underperform at Bank America and tgt cut to $74 based on valuation and recent regulatory uncertainty; NRG was downgraded to neutral at Citigroup
· Consumer finance and cards were weak; Visa (V) shares slipped as Kroger aid a California subsidiary will stop accepting Visa (V) credit cards beginning next month in a dispute over swipe fees, according to Bloomberg; AXP shares fell after WSJ reported its FX international payments department routinely raised conversion rates without notifying customers in an effort to increase revenue and employee commission since at least 2004; SYF downgraded to equal-weight and removing from Top Pick at Barclay’s as WMT was the first of five major contracts up for renewal over the next five years for SYF; ALLY was upgraded to buy at Bank America as think the estimated 20% EPS growth will increasingly attract investors into ALLY, thus driving attractive upside in the stock; FDC Q2 EPS/rev results beat and raised its annual guidance
· Large Cap Pharma; DRRX shares jumped in response to the FDA’s approval of Indivior PLC’s PERSERIS (risperidone) for schizophrenia/Indivior acquired the U.S. rights to risperidone from DURECT in September 2017 as DURECT received $12.5M upfront and $5M regulatory milestone; PRGO was downgraded to hold at Argus and lower estimates on challenging outlook; SNNAannounced pivotal acne drug fails two trials, but shares bounced off lows; LXRX shares fell after reporting $6M in 2Q sales of Xermelo, compared to consensus expectations for $6.7M in sales/2Q revs of $13.8M missed expectations for $15.9M; PGNX Azedra wins FDA approval
Industrials & Materials
· Machinery sector; group buoyed by better earnings and guidance from Dow component CAT this morning (followed strong machine sales on Friday); CAT reported strong 2Q results and raised outlook citing continued strength in many end markets, but also flagged high material costs and supply chain challenges. Also CAT North America machine sales up 22% after rising 20% in May and Asia/Pacific sales June up 37% after rising 36% in May (raised year EPS view to $11.00-$12.00 from prior view $10.25-$11.25) – DE, AGCO, CNHI, EMR, MTW among those active
· Industrials and multi-industry; WSO downgraded to neutral at Longbow on operating leverage and cost headwinds as well as high-3Q expectations; KBR shares rallied after Q2 results and raised its annual profit outlook; in building products, EXP reported Q1 EPS miss by 18c, while revs of $393.8M missed the $403M estimates
· Transports; car rental stocks rallied early after Northcoast upgraded CAR (HTZ also rallied in sympathy); overall transport index held up well relative to broader markets with airlines slipping as top decliners, while rails and package delivery gained with car rental
· Metals and Mining; gold miners active as RBC makes rating changes; AEM upgraded to outperform as forecast Agnico’s gold production to grow 32% over the 2018-2020 period, with a significant increase in free cash flow contributing to potential for a two-fold increase in the dividend back to the $0.88/sh level, while the firm downgraded ABX to sector perform as there is increased uncertainty, which has resulted in our more cautious outlook
Technology, Media & Telecom
· Internet; broad weakness in Internet space as selling pressure continues after quarterly results, guidance from NFLX, FB and TWTR continue to add fears in the group (though AMZN and GOOGLresults have been better); SPOT tgt raised to $230 at Bank America; NFLX also weak on reports over the weekend that WMT is exploring a subscription video streaming service that would seek to challenge the company and AMZN; SOHU shares fell after the Chinese Internet company’s 3Q revenue forecast fell short of the lowest analyst estimate
· Semiconductors; ON reported better than expected 2Q18 top-line results and guidance, ahead of Street estimates, driven in large part by Consumer and Communications; AMD strong as Cowen reiterates an Outperform rating and raises target to $25, citing the strong Q2 results, de-risked 2H18 outlook, and a meeting with CEO Lisa Su
· Software movers; HUBS tgt raised to $150 at Raymond James ahead of 2Q18 results out later this week, which they expect to come in broadly above consensus estimates; BILI said certain smartphone app stores notified Bilibili that the company’s mobile app would be removed from July 26 to August 25; SNCR drops as downgraded to sell at Stifel saying liquidity issues loom and the turnaround required to keep SNCR from another fundraising event is stacked against them
· Hardware and component movers; JNPR was upgraded to buy at Deutsche Bank; STX reported better Q4 results (revenue of $2.835B and $1.62 vs. Street consensus of $2.801B and $1.45) and also announced the resignation of the current CFO, David Morton, who is leaving for an opportunity outside the company
· Telecom movers; AT&T (T) upgraded to buy at Bank America, positive on AT&T’s 20-year low P/E multiple, Timer Warner merger benefits of earnings accretion and expanding cash, favorable emerging wireless business; tower stocks (AMT, CCI, SBAC) mentioned positively at Morgan Stanley after 75% of survey of 20 private tower owners surveyed say they’ve seen an increase in leasing activity in recent months, including ~25% who have seen a significant increase; NOK signed a multi-year 5G agreement with TMUS that’s valued at $3.5 billion/Nokia will provide T-Mobile with access to its 5G technology, software, and services
· Media movers; CBS extended losses from last week as the board of CBS Corp. discussed the future CEO Moonves during a regularly scheduled board meeting Monday, who was accused of sexual harassment by six women in a New Yorker article released Friday