Monday, August 6, 2018
Equity Market Recap
· U.S. stocks continue their push higher, with the S&P 500 index rising a third straight session, trading now less than 1% of its all-time highs in January (2,872.87 on 1/26) in a broad based rally. Until today, the S&P 500 index had only closed above the 2,850 two other times, both in January, but extended gains on positive momentum (both the S&P 500 and Dow Industrials rose for a 5th straight week last Friday). Markets have edged higher the last few trading sessions, led by Consumer Staples, Technology, Consumer Discretionary and Financials as earnings season begins to slow (still one busy week upcoming). The Nasdaq Composite extended last week’s late upward momentum after Apple earnings/guidance topped street views on Wednesday, sending shares to record highs and the first trillion dollar valuation for a company. Today was slow on the macro front, with no Fed speakers or economic data and tweets from President Trump regarding trade disputes with other countries quiet. The dollar pushed near 2018 highs on Monday, weighing on gold prices (falling to 1-yr lows), while oil prices advanced. Sanctions played a part in markets (and currencies) action today as the Trump administration reimpose some sanctions on Iran seeking behavior changes, while sanctions on Turkey officials sends the Lira to record lows vs. the dollar. The U.K.’s main equity gauge finishes slightly higher Monday, getting a boost from the pound’s drop after fresh Brexit posturing.
· Oil prices trade higher; as WTI crude moved back above $69 per barrel (off 6-week lows mid-last week of around $67 per barrel), but off earlier highs of $69.92 per barrel, failing around the $70 level. The early rally was driven by news that Saudi Arabia July production fell about 200k bpd versus June. Expectations has been for an increase in July production. Meanwhile, with U.S. sanctions on Iran being ramped up, and exports there expected to fall, which could cut 1 million barrels a day in global exports from Tehran.
· Gold futures declined on Monday, falling $5.50, or 0.5%, lower at $1,217.70 an ounce, extending last week’s decline as the dollar advanced to around 2018 highs. Gold prices have been in a tail spin, closing at fresh 1-year lows on rising rate hike fears, a stronger dollar, and trade fears between the U.S. and other nations such as China. The slide today follows a roughly 0.8% decline last week, its fourth straight weekly loss for the metal.
· The U.S. dollar ended higher, with the dollar index (DXY) rising as high as 95.515, shy of its its 2018 high of 95.65 from July 19th, rising against the British Pound, while little changed vs. the euro and yen. The British Pound fell as much as -0.56 vs. the dollar to lows of 1.292 before paring losses, falling to an 11-month low after UK trade secretary Liam Fox said that the UK was now more likely than not to crash out of the EU without a deal next March. The Turkish Lira drops to fresh record lows vs. the dollar as sanction fears gain; Bitcoin prices drop over 6%, falling back below the $7,000 level. Turkey’s central bank on Monday said it would make an adjustment to its reserve policies aimed at bolstering the country’s banking sector. The euro bounced off early lows of 1.153 before ending little changed at 1.156.
· Treasury market’s rise as yields fall with the 10-yr yield down roughly 1 bps at 2.9363%, while the 2-yr slips to 2.64% (down about 4 bps from 10-year highs a week ago); no major economic data to move bond markets today of FOMC speakers on a relatively quiet news day. Focus on macro remains on trade issues between the US and trading partners and the FOMC rate hikes.
Sector News Breakdown
· Consumer Staples; TSN quarterly profit beats estimates, but trade spats threaten sales (notes profit boosted by beef sales while chicken and pork sales lag); PEP CEO ends 12-year run by stepping down as company replaces with internal hire
· Housing & Building Products; NWL shares fell as much as 10% after cuts full-year forecast as it divests brands/has been selling assets as part of plans to raise $10 billion following pressure from activist investors Carl Icahn and Starboard Value LP.; CBPX upgraded to Strong Buy at Raymond James saying both pricing and volume have set encouraging trends going into 2H18
· Casino, Lodging & Leisure; in theme parks, SEAS shares jump as 2Q adjusted Ebitda and revenue beat even the most optimistic estimates, while Q2 attendance rose 5% YoY (30% Ebitda margin and its newly established 2020 Ebitda goal of $475M-$500M) – shares of SIX, FUN move in reaction; auction house BID shares slide after miss on Q2 results amid large margins miss
· Auto’s; CTB shares rise after Q2 EPS beat by 4c on higher revs; AAP positive mention at UBS today as they raise tgt to $165 from $160 as believe AAP saw improvement in its SSS in 2Q as its execution has been better & industry demand accelerated; GPI shares jump on upgrade at Stephens
· Utilities; CTWS and SJW Group announced an amendment to their merger agreement to an all-cash deal from all stock, and the in which the buyout bid increased to $70 a share. The amended agreement has a value of $1.1 billion, compared with the value of the equity purchase deal of $843 million. The per-share bid is 11% above Monday’s closing price for Connecticut Water’s stock of $62.85, is 10% above ES’ per-share bid of $63.50 and 13% above the per-share value of the original Connecticut-SJW merger agreement in March ; SRE slides early following mixed Q2 results that saw better than expected earnings and slightly lower than forecast revenues; PCG and PNW both upgraded to outperform at Wells Fargo
· E&P sector; WPX upgraded to strong buy at Raymond James saying it remains a high quality operator with significant exposure to top tier assets in the Delaware and Williston basins, a projected oil/EBITDA CAGR of ~30/40% through 2020, and a conservative leverage profile; DVN was upgraded to buy at UBS as it continues to take positive steps, focusing its inventory on its highest return assets, divesting ENLK/ENLC at a better than expected price, and having a material repurchase plan; KOS agreed to acquire Deep Gulf Energy from its private equity owner for $1.23B, expanding the deepwater oil and gas firm’s operations into the Gulf of Mexico
· Banks and insurance; financials were early leaders despite the pullback in Treasury yields; European banks (UBS, CS) underperformed US banks (C, BAC, JPM); HSBC posts small rise in H1 profit, as expenses, U.S. settlement weigh; BRK/A shares outperformed after reporting late Friday that Q2 operating income rose to $6.89B from $4.12B a year ago
· REITs: Bank America with a recap of REIT quarterly results thus far in quarter: So far, 32% of REITs met Street estimates, 55% beat & 13% missed. 52% raised ’18 guidance, 38% maintained & 10% lowered – said apartments, data centers & industrials all beat expectations and raised guidance; retail had a good 2Q but we continue to view earnings risks as weighted toward 2H18
· Large Cap Pharma; 52-week highs for big pharma, with PFE, LLY and MRK all achieving new year highs; ATRS entered into an agreement with PFE to develop a combination drug device rescue pen, which will utilize the Antares QuickShot auto injector and an undisclosed Pfizer drug; ACAD cut to neutral at Piper as sees safety concerns on the company’s Nuplazid, a treatment for hallucinations and psychosis associated with Parkinson’s disease, continuing to weigh on shares; PCRX was downgraded to neutral at Goldman Sachs on valuation while downgraded TSRO to neutral following 2Q results which included lowering sales guidance
· Biotech movers; Goldman Sachs upgraded ICPT to buy from sell and tgt to $157 from $46 ahead of late-stage results for Ocaliva in the liver disease known as non-alcoholic steatohepatitis or NASH saying the drug maker will likely meet one or both of the late-stage study’s main goals when results reported early next year; MDGL was downgraded to neutral at MDGL while keeping $314 tgt saying the share climb in Phase 2 liver biopsy results have left the company with limited catalysts as investors await a Phase study to start; BLUE and REGN plan a five-year collaboration to develop new cell therapies for cancer/REGN to invest $100M in BLUE; OVID shares fall in apparent response to its announcement of “positive” efficacy results from a Phase 2 clinical trial assessing lead drug OV1010 in patients with Angelman syndrome
· Medical devices and equipment and services; SRDX raised its 2018 rev view to $79M-$81M from $75M-$79M and above consensus $76.8M while also raising its year profit outlook; retail pharmacy names weak after RAD issued a profit warning thanks to generic drug “efficiencies” that will hurt the company by about $80 million; in distributors, CAH Q4 EPS and revenue topped consensus views, though year profit outlook $4.90-$5.15 fell short of the $5.14 estimate; in dental space, HSIC shares pushed higher after Q2 results and boosted the lower-end of its full-year adj. EPS guidance despite FX headwinds (PDCO, XRAY rise)
Industrials & Materials
· Engineering stocks get another solid report as JEC Q3 results beat estimates and the company forecast strong earnings for FY 2019; the positive results follow good numbers from FLR late last week as well (also active on report (KBR, MDR, GVA, ACM, PWR, MTZ)
· Industrial & Machinery; PH and PCAR both upgraded to outperform from in-line by Evercore ISI saying the overall strong results in the 2Q earnings season show that there’s much left to play for in “Act 2” of the machinery cycle (says new top 5 in the sector are CAT, CMI, URI, TKR, DE/PCAR)
· Transports; CAR announced a multi-year deal with Lyft, the fastest growing ride hailing company, in which Avis will add thousands of vehicles to the Lyft Express Drive program in cities across North America; not much news in the sector, though holds recent gains getting back near January highs (all-time high 11,423 on 1/16)
· Metals & Mining; in gold miners, Jefferies downgraded ABX to hold from buy and cut tgt to $11 to reflect operational risks, continued uncertainty at Acacia, and concerns about the strategic direction of the company following the abrupt departure of its President
· Paper & Packaging; Australian packaging company Amcor Ltd said it would acquire U.S. rival BMS in an all-stock deal valuing the U.S. company at $5.25 billion. Bemis shareholders would get 5.1 Amcor shares for each Bemis share, or $57.75, per share
· Chemicals; Linde and PX $42B merger is facing an unexpected hurdle from the U.S. antitrust regulator that could derail the deal, according to Bloomberg. The FTC indicated it wants the companies to sell more assets before it approves the deal ; MOS to report earnings in the potash space (better CF, NTR results last week, softer IPI results)
Technology, Media & Telecom
· Internet; FB shares continue recent rebound after earnings miss 2-weeks ago, with shares up $15 since that loss to around 200-day MA of $181.50; FB announces local-focused redesign of mobile pages (possible competition to YELP); WEB rises as Siris Capital to buy outstanding shares of Web.com for $28 per share in cash, up from a previous offer of $25, Web.com reports as the go-shop period of the previously-announced merger has expired ; IQ announced that it will partner with Super Sports Media, a subsidiary of DDMC Group, to set up a joint venture named Beijing Xin’ai Sport Media Technology
· Semiconductors; TSM reported that there was a virus outbreak on 08/03, which affected a number of computer systems and fab tools in Taiwan (Largest exposure to TSMC include: AAPL (~20%), NVDA (~8%), AVGO (~8%), QCOM (~6%), AMD (~5%), and MRVL (~3%)); INTC was downgraded at Barclays and cut tgt to $53 from $62 amid intensifying margin pressure; AMD tgt raised to $25 at Bank America while also raising FY19 EPS target to 75c vs. consensus view of 62c citing AMD’s “generational opportunity” to exploit Intel (INTC) 10nm delays to gain market share
· Hardware, Comm Equipment movers; ANET entered into a binding term sheet with CSCO which, upon execution of a final agreement, will result in the dismissal of all pending district court and ITC litigation between the parties. Under the binding term sheet, the Company will pay Cisco $400 million by August 20, 2018; in telco, TMUS and Sprint (S)shares jumped after a report suggesting the government’s stance favors a three-carrier market to ensure strong competition