Wednesday, August 1, 2018
Equity Market Recap
· U.S. stocks end mixed on a day with lots of moving parts. First, the Nasdaq Composite outperformed, led by gains in tech bellwether Apple which topped quarterly estimates and provided upbeat guidance. Healthy corporate earnings and a strong economic backdrop have helped propel major averages higher in recent weeks despite trade and tariff concerns…today was no different. On the trade front, markets were apprehensive amid reports some advisers are urging President Donald Trump to hike planned tariffs on $200 billion in Chinese imports to 25%, from the 10% originally proposed – with news possibly today (note the U.S. has already imposed 25% tariffs on $34 billion worth of Chinese imports and is on schedule to levy similar duties on an additional $16 billion of goods). Also throw into the mix an FOMC meeting with in-line results as rates remained unchanged while they noted the improvement in the US economy. Speaking of, economic data was mixed as private payroll data from ADP was strong (ahead of the nonfarm payroll report on Friday), though a report on manufacturing and confidence fell short of economist estimates.
· High dividend-yielding sectors such as utilities and real estate fell as the 10-year Treasury yield pushed through 3%. Oil prices extend losses after weekly bearish inventory data from both the API and EIA. Gold slipped, the dollar was steady and investors prepare for another onslaught of earnings tonight and tomorrow. Financials were higher given the rally in Treasury yields, while industrials gave up yesterday gains on the trade/tariff concerns.
· As expected, the FOMC kept the target range for the federal funds rate at 1.75%-2% with no economic projections or post-meeting press conference today. The Fed reiterated their plan to gradually lift borrowing costs to keep the economy expanding at a healthy pace. Economic activity has been “rising at a strong rate,” and the unemployment rate “has stayed low,” the FOMC said and “household spending and business fixed investment have grown strongly.” The committee described risks to the outlook as “roughly balanced,” and restated that “monetary policy remains accommodative” while leaving the target range in place. Fed Chair Powell isn’t next planned media briefing to follow the FOMC’s gathering on Sept. 25-26.
· ADP reported private payrolls increased 219K in July, topping the 186K economist estimates and above the 181K May gain (revised up from 177K). Small businesses created 52,000 jobs in July, ADP estimated. Medium-sized firms added 119,000 and large corporations’ filled 48,000 positions. Employment in the goods producing sector rose 42K, manufacturing was up 23K and construction increased 17K
· ISM Manufacturing for July falls to 58.1 from 60.2 last month and was below the 59.4 estimate; new orders fell to 60.2 vs 63.5 (lowest level since May 2017), while employment rose to 56.5 vs 56.0; inventories rose to 53.3 vs 50.8; prices paid fell to 73.2 vs 76.8 and backlog of orders fell to 54.7 vs 60.1
· June Construction Spending fell (-1.1%) vs. expected rise of 0.3%; the May reading was revised to 1.3% increase from 0.4% gain, and April revised to 1.7% increase from 0.9% gain; Private construction fell 0.4% in June and Private residential construction fell 0.5%
· U.S. July Manufacturing PMI 55.3 vs. Flash Reading 55.5; the index falls to 55.3 from 55.4 in June; Year ago 53.3; suppliers’ delivery times fall to 39.5 vs 39.6 in June
· Oil prices close lower, extending yesterday’s declines following bearish weekly inventory data. WTI crude fell -$1.10, or 1.6% to settle at $67.66 per barrel, while Brent crude slumped to $72.39 per barrel Prices declined after official U.S. data revealed an unexpected climb of nearly 4 million barrels in domestic crude supplies, along with a drop in weekly production (estimates were for a weekly drawdown of 3M barrels). Meanwhile overnight, the industry group the American Petroleum Institute had reported a climb of 5.59 million barrels. Total domestic crude production for the week, however, fell by 100,000 barrels a day to 10.9 million barrels a day.
· Gold futures fell by -$6.00, or 0.5% at $1,227.60 an ounce, closing before the Fed policy statement. Gold futures edged higher in electronic trading as the benchmark U.S. dollar index held onto a modest gain after the Federal Reserve left a key U.S. interest rate unchanged, as expected, and hinted at the potential for another rate hike as soon as September.
· The U.S. dollar retraced some gains following the FOMC announcement, where they left rates unchanged (as expected) despite the statement saying the economy has been rising at a “strong” rate (up from prior language of “solid”). The FOMC also kept another 2 hikes this year on the table, which should have been perceived as bullish for the dollar, but perhaps a case of sell the news after rising earlier on a better ADP private payrolls data reading. The dollar gained against the euro and Canadian dollar but slipped vs. the yen. Bitcoin prices down another 1%, falling a 3rd straight session to $7,600. The Turkish Lira fell to a record lows vs. the U.S. dollar on reports the U.S. has prepared a list of entities/persons it will target should it decide to impose sanctions on its government for imprisoning U.S. citizens and employees of its diplomatic mission
· Treasury markets end lower as yields rise, but pullback from intraday highs above the 3% level for the 10-year (after the FOMC statement); bonds sank initially following a strong ADP private payrolls jobs as well as reacting to a selloff in Japanese bonds in Asian hours. The Japanese 10-year note surged to 0.126% from 0.044% late Tuesday, marking the biggest yield jump in 2 years, a day after the biggest yield drop in the same period. The moves in so-called JGBs, may have been exacerbated by the unwind of bearish JGB bets, according to Bloomberg. At day’s end, the 10-yr yield finished above 2.99%, with the 30-yr 3.12% and the 2-yr 2.67%.
· The Treasury Department announced it will begin to sell a new 2-month bill starting in October. Unlike the Treasury’s traditional bill settlement day of Thursday, the new 2-month bill will settle on Tuesdays. The first auction of 2-month bills will be announced on Oct. 15. Treasury also announced it will sell $78 billion in notes and bonds next week at its quarterly refunding auction. This is $5 billion larger than the package announced last quarter.
Sector News Breakdown
· Auto’s; monthly auto sales data for July released: 1) Ford (F) US light vehicle sales down (-3.3%) to 194,026 vs. est. (-2.5%); 2) FCAU July U.S. auto sales up 5.9% to 170,970, above the 2.4% estimate; 3) HMC July U.S. auto sales fell (-8.2%) vs. est. (-5.6%); 4) TM July U.S. auto sales fell (-6%) vs. est. (-7.8%); 5) NSANY July U.S. auto sales fall (-15.2%) vs. est. (-6.7%)
· Retailers; BGFV shares dropped as Q2 comp sales decreased 2.1% for Q2, compared to a 0.9% increase in same store sales for Q2 2017/said 2Q same-store sales slid 2.1% amid weak sales of camping and water sports products; HBI shares slide after Q2 EPS miss and TGT deal not renewed; GOOS was downgraded to neutral at Baird
· Consumer Staples; CPB shares active after the Wall Street Journal reported last night that Third Point has a stake of at least $300M in the company; SODA shares surge as reported Q2 earnings that beat the highest analyst estimate (Q2 EPS $1.14/$171.5M vs. est. 73c/$149.0M) and boosted its year guidance; TAP Q2 revenue and EBITDA falls short of estimates as reports brand volume fell 2.4% to 25.7M hectoliters during the quarter
· Restaurants; CAKE falls after Q2 EPS missed the lowest street estimate by 12c, and reducing its year EPS projection/cuts FY18 EPS view to $2.40-$2.48 from $2.62-$2.74; PZZA was upgraded to buy at Jefferies saying given recent events, they review the potential path to recovery and explore alternative strategic actions that might create shareholder value
· Housing & Building Products; homebuilder DHI was upgraded to strong buy at Raymond James following a review of last week’s upside surprise and bolstered FY18 guidance; SUM shares fall more than -14% in building materials sector, falling to a 52-week low after reporting a wide Q2 earnings miss and reducing full-year EBITDA guidance; TCS shares jumped over 30% after its earnings beat, pushing shares to 52-week highs
· Casino, Lodging & Leisure; in casinos/gaming (WYNN, LVS, MGM), Bernstein noted Macau July GGR was MOP 25.33bn (~US$3.13bn), +10.3% y/y, below Bloomberg consensus of 12% and was at lower end of their estimate (10%-12%). Average daily revenue (ADR) for July was MOP 817mm (+9% vs. June, -1% vs. May); GLPI trimmed its year guidance for revenue, adjusted EBITDA, and net income; CZR shares plunged mid-afternoon as weak Q3 RevPAR guidance offset better Q2
· Other auto news; TSLA (also reports tonight) will look to China to at least partially fund the cost of building its first factory in the world’s fastest-growing auto market as they consider raising some of the $5 billion it intends to invest in the plant near Shanghai from local partners – Bloomberg; RACE reported earnings and new CEO kept the full-year financial goals at the supercar maker after profit jumped 7%, but shares slipped after new CEO called Marchionne targets aspirational”; auto dealer AN posted mixed Q2 as revs missed estimates but comp sales of 3.7% gain topped the 2.4% estimate
· Inventory data: the API reported U.S. crude supplies rose by 5.6M barrels for the week ended July 27, showed supplies of gasoline fell by 791,000 barrels, while distillate stockpiles added 2.9M barrels. The EIA also with bearish data as weekly inventory build rises 3.8M vs. the expected drawdown of -3M barrels (though Cushing crude fell-1,338M barrels) with slightly bigger draw of -2.536M barrels of gasoline but larger build of 2.983M barrels of distillates
· E&P sector; APC reported Q2 EPS 54c, slightly under consensus primarily on higher non cash exploration offset by higher oil realizations/capex ex WES capex of~$1.5B was at the high end of $1.3B-$1.5B guidance; NFX reported a strong 2Q with EPS of $1.87 beating by 9c as production of 195 MBOED exceeded estimates by 6% and FY guidance was raised by 3%; WLL shares fell after Q2 earnings miss and update; DVN shares fell on results as capital budget was maintained at $2.2-$2.4Bn of upstream spend, indicating continued capital constraint, and US oil production beat the top end of guidance; CHK missed production estimates even as spending on new wells exceeded expectations as pumped the equivalent of 530,000 barrels of oil a day
· Utilities; sector slides given the jump in Treasury yields and subsequent pullback in interest rate sensitive stocks; D shares down slide after reporting better than expected Q2 earnings, but guides Q3 earnings below analyst consensus. PCG shares fell as Reuters reports the utility had hired lawyers to explore debt restructuring options, as it copes with liabilities stemming from last year’s northern California wildfires that analysts say could exceed $8B; ENPH shares dropped after quarterly sales miss
· Frac sand sector weak after EMES cut its 2018 Ebitda guidance to $110M from $120M given a construction delay at San Antonio facility and says frac sand demand remains “healthy”, though EMES experienced a “minor slowdown” to finish 2Q, partially continued into early 3Q (shares of HCLP, SLCA also active)
· Large Cap and regional banks among top gainers given the spike ion Treasury yields. Meanwhile asset managers and brokers dropped sharply after Fidelity Investments said it plans to offer new index mutual funds with zero fees while reducing costs on its existing funds. “We are charting a new course in index investing that benefits investors of all ages,” the company said Wednesday (shares of TROW, BEN, AB, BLK, WDR, IVZ, FII, WETF, SCHW, ETFC, AMTD among names moving on headlines); JHG shares fell as Deutsche Bank downgraded after Q2 miss
· Insurance; ACGL 2Q EPS beat, helped by better than expected net investment income; AFL traded to record highs after Sandler O’Neil upgraded to buy saying Q2 results showed there’s pent-up demand for the firm’s products; GNW Q2 operating EPS topped views
· Payment systems, finance and services; DBD shares plunged more than 35% after posting an unexpected Q2 loss and cutting annual guidance; CACC surges to a 52-week intraday high after Q2 adjusted EPS of $6.95 a share blew past the consensus by 43 cents.
· Large Cap Pharma/Managed care; MOH shares surge on Q2 beat and raised guidance by $3, driven by an improved MLR outlook vs previous expectations/capital strategy appears on track; AET and CI to report earnings tomorrow morning; HUM reported a Q2 EPS and revenue beat while continues to see favorable medical utilization trends and higher guidance
· Biotech movers; SRPT was upgraded to overweight at Morgan Stanley with $163 tgt saying the market is missing near-term catalysts that could drive Sarepta shares higher, including a clear path to approval from the FDA by yearend; FATE initiated buy and $20 tgt at Citigroup saying off-the-shelf NK cells based on disruptive iPSC tech could be a game changer in allogeneic therapy; TBPH rises as TD-9855 shows positive effect in low blood pressure disorder study; NBIX outperforms with quarterly results higher as the company’s Ingrezza topped analyst expectations, reported at $13M; NLNK slips on revenue miss and said its organizational realignment completed, including 30% headcount reduction
· Healthcare services; HIIQ rises after HHS ruling, expanding the duration of short-term medical plans to a maximum term of one year. Craig Hallum says the ruling is set to go into effect in October, ahead of the 2019 annual enrollment period and believes this is a significant positive catalyst for HIIQ, which will benefit from lower churn and a significant expansion of the population of STM buyers; ESRX shares fell late day after the WSJ reported Carl Icahn has built a sizable stake in CIand plans to vote against the health insurer’s $54 billion planned purchase of Express Scripts Holding Co. https://on.wsj.com/2AuPSuB
· Healthcare providers and facilities; psychiatric care providers UHS and ACHC downgraded at BMO Capital saying they are facing pressures from managed care organizations on using services in the U.S., as well as a shortage of workers and increasing labor costs; CSU downgraded at Bank America after earnings given the risk to estimates from the continued pricing, labor cost pressures and high leverage
· Medical devices and equipment; HOLX Q3 better than expected, as organic growth (ex-blood screening) was ahead of ests and raised its outlook (noted CFO was leaving for Agilent) but shares fell as organic growth trending in the low-single-digits; NUVA shares jumped initially on mixed results/one analyst noted (RBC) company’s gross margin appears to have bottomed out after lowered outlook; QGEN, IDXX also active on results
· Skilled nursing facilities (operators including BKD, DVCR, ENSG, GEN, NHC and REITs like CTRE, OHI, SBRA) share active today after the Centers for Medicare & Medicaid Services released its final rates and rules for 2019 that were consistent with the agency’s initial proposals.
Industrials & Materials
· Industrials & Machinery; a day after leading markets higher, industrial names moved to lower today, led by losses in CAT and MMM in the Dow on reports overnight some advisers are urging President Donald Trump to hike planned tariffs on $200 billion in Chinese imports to 25%, from the 10% originally proposed, raising the trade/tariff fears again; SITE shares dropped as Q2 earnings and sales fell short of consensus; FLOW falls despite quarterly beat as upgraded organic sales-growth guidance, up 300 bps, has yet to translate to higher EPS expectations
· Transports; trucker CHRW results were slightly better as gross revenue and margin upside were offset by higher personnel expense and below the line cost; overall, transports give back some of yesterday gains when all 20-Dow Transport components closed higher
· Chemicals; SMG reported F3Q results with both sales and EPS above expectations and also maintained its guidance for adj. EPS of $3.70-$3.90; VNTR was downgraded at both Nomura and Bank America saying TiO2 near peak and historical insurance non-recurring; NTR will cut operational capacity at the Vanscoy, Saskatchewan, mine by 400,000 metric tons as the company manages output; BG slides after surprise Q2 loss due to $125M hit from trade-related soybean hedges (follows better results from ADM yesterday)
Technology, Media & Telecom
· Apple – AAPL shares rise after solid Q3 results as iPhones unit sales were in-line, but ASPs were notably better (up 20% YoY), leading to a revenue and EPS beat. Services grow was strong (+28%) and Apple repurchased its own shares aggressively ($20B, or ~6% of traded volume) – company also guided Q4 revenues above street estimates ahead of new iPhone refresh
· Internet; BIDU shares fell after a report from the Intercept said that GOOGL plans to launch a censored search engine in China. Baidu also reported better-than-expected earnings results; Pandora (P) shares rise after CEO talks about partnerships, self-serve ad integration and better quarterly results as double-digit organic revenue growth and declining EBITDA losses drove improving execution (was upgraded at RBC); DBX was upgraded to buy at Jefferies saying that valuation has come full circle, creating an attractive entry point; AKAM 2Q earnings and 3Q guidance failed to meet estimates and was downgraded to hold at Deutsche Bank; PDD falls as State Administration for Market Regulation orders Shanghai government to investigate after media reported that counterfeit products were sold via PDD
· Telecom & Media; after falling -37% yesterday after Blue Orca Capital published short report, several analysts defend shares of GDS, with Credit Suisse upgrading to outperform as doesn’t see any near-term crash crunch, as well as no capital constraints on rapid Ebitda growth this year or next; CRTO shares dropped on Q2 results that beat EPS and revenue estimates while issues downside Q3 guidance revenue from $218M to $223M (consensus: $243.61M); BAND shares jump after the company posted better 2Q18 results yesterday, with non-GAAP EPS of $0.20 (consensus ($0.12)) on 22% y/y revenue growth (consensus 15%)
· Semiconductors and opticals; SYNA shares sunk after announcement that Dialog and SYNA have terminated deal discussions; COHR shares reverse early losses to trade higher (stock fell yesterday on weak IPGP outlook), as reduced expectations for FY19 reflect a delay in the ramp of OLED displays but outlook remains favorable according to one analyst
· Software movers; ULTI tgt raised by several analysts after solid 2Q18 print, headlined by record quarterly bookings activity in the enterprise and mid-market/strategic segments; GLUU reported a better than expected Q2 performance, with better than expected Q3 and year guide; KEYW plunges after the Q2 loss of 23c topped the 20c loss estimate on higher expenses; DATA was upgraded to buy from hold at Deutsche Bank on signs of overall demand strength; MB mixed results that reflect an in-line Q2 but a modest pullback in guidance for the balance of 2018; PAYC jumps to 52-week highs after solid quarterly beat; ZEN jumps as blew away the qtr with 47% billings growth vs. Street of 33%
· Other gainers on earnings: AAPL, BDC, COHR, GLUU, MRCY, NANO, PAYC, SSTK, SSYS, UIS, ZEN
· Decliners on earnings: BIDU, FTR, KEYW, QUOT, ZAGG