Wednesday, August 22, 2018
Equity Market Recap
· U.S. stocks end mixed as the Nasdaq Composite outperformed broader averages, while the Small Cap Russell 2000 moved back near yesterday’s intraday record highs on a busy day of trade talk, monetary policy and political turmoil in Washington. Stocks started the day weak after former Trump campaign chairman Paul Manafort late Tuesday was found guilty on eight charges including tax fraud, and the president’s former lawyer Michael Cohen said he violated campaign-finance law at President Donald Trump’s direction. Stocks quickly bounced on strong earnings in retail (TGT, LOW) showing health in the consumer segment and on trade talk hopes as reports indicated that the U.S. and Mexico are moving closer to a deal despite key sticking points.
· The dollar fell in tandem with Treasury yields after the FOMC minutes, with trade and tariffs being mentioned as points of uncertainty going forward. Dow Transports pull back from all-time highs yesterday, down over 100 points today, led by a decline in airline stocks as oil prices jump a 5th straight day. Still a few data points this week with the Jackson Hole central bank meeting this week, with Fed Chair Powell speaking on Friday and U.S.-China trade talks still expected this week. Overall, despite markets holding near record highs, while volumes were broadly lower as the “dog-days” of summer hit trading desks.
· Minutes from the August FOMC meeting showed that many Fed officials saw another hike likely appropriate soon. “Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation.” It also showed that officials discussed what to do if they are forced to push interest rates back down to zero in the next recession. Officials said there was a “meaningful risk” rates could go back to zero during the next decade.
· Existing-Home Sales for July fell (-0.7%) to 5.34M rate, missing the 5.4M estimate while June at 5.38M was unrevised; existing-home sales fell 0.7% after falling 0.6% prior month; there was 4.3 months’ supply in July vs. 4.3 in June; Inventory fell 0.5% to 1.92M homes; median home price rose 4.5% from last year to $269,600
· Oil prices advance for a fifth straight session, rising $2.02 to $67.86 per barrel following the bullish inventory data today, just off earlier highs $68.08. Overnight, API data lifted prices after saying U.S. crude supplies fell by -5.2M barrels for the week. EIA this morning followed up with a weekly draw of -5.8M barrels, helping lift prices. December gold advanced $3.30, or 0.3%, to settle at $1,203.30 an ounce, its highest settlement in about a week and half, marking its 3rd straight day of gains helped by the pullback in the dollar.
Currencies & Treasuries
· The U.S. dollar slid for a 6th day in a row (its longest losing streak since 2016) following Fed commentary, political turmoil, trade issues and economic data. The dollar index (DXY) fell to lows of 94.93 (lowest since early August) before bouncing back above the 95 level, rising vs. the Russian ruble amid concern that the US president’s former attorney Cohen may reveal new claims related to Russian interference into the 2016 US elections. British Pound rises slightly vs. US dollar as investors are awaiting the U.K. government’s release of the first round of documents detailing the expected impact of a “no-deal” Brexit on Thursday. The euro hovered around the 1.16 level. Note the dollar has slipped this week amid President Donald Trump’s renewed criticism of the Federal Reserve’s hawkish rate cycle. Treasury prices were little changed, with the 10-year yield at 2.82% (about 20 bps off highs 3-weeks ago), the 20yr yield under 2.6% and the 30-yr under 3% as markets await central bank speakers later this week at Jackson Hole
Sector News Breakdown
· Retailers; TGT trades to record highs after Q2 EPS, sales, margins and comp sales (6.5% vs. 3.9% est.) all top consensus along with upbeat guidance (EPS $5.30-$5.50 vs. est. $5.29); URBN reported Q2 comp of +13% vs +11.6% est. EPS beat by 7c as each brand grew comps at a double digit rate/gross margin beat of 35.4% by 40 bps and increased 180 bps YoY driven by reduced markdowns across all brands and fixed cost leverage; TIF was downgraded to neutral at Bank America as thinks share valuation prices in sales acceleration and upward estimate; NWY said it is partnering with film actress Kate Hudson in a multi-year deal that will make her Brand Ambassador of its $200 million “Soho Jeans” collection; earnings tonight from LB; 52-week highs for LOW, TSCO, DG, BBY, KORS, AAP, TJX, NKE, COST, KSS, TGT in retail today
· Restaurants; SBUX was downgraded to neutral at Piper citing another month of U.S. checks that suggest a lack of comp performance, while Piper also raised its tgt on CMG to $550 from $530 as first month of Q3 checks suggest a positive 3% comp for July for Chipotle; RRGB posted Q2 EPS and sales below consensus and backed recently lowered yearly outlook
· Housing & Building Products; in home improvement retail, LOW erased pre-market declines (fell nearly 5%) despite the company lowering its year EPS/rev/comp sales views, which reflect the closure of all Orchard Supply Hardware stores – shares helped after conference call as said free cash flow about $5.8B (had seen $4.8B) and cash flow from ops about $7B (had seen $6.5B); furniture stocks get a boost after LZB posted strong quarterly results as Q1 sales of $384.7M topped the $370M est. on better comps (shares of ETH, PIR, WSM, BBBY, BSET among movers); WSM expected to report tonight after the close; housing stocks pare yesterday gains (after better TOL earnings) after softer than expected monthly existing home sales data (as data showed 2 ½ year lows as buyers give up)
· Auto movers; Auto suppliers dropped after Germany’s Continental AG slashed its guidance for the second time this year, citing disappointing sales in China and Europe, and increased spending on new technologies to keep pace with an industry that is rapidly moving toward electric and self-driving cars (shares of BWA, LEA, DLPH, AXL fell early); Ford (F) said it was recalling about 500K Focus electric charge cords
· Energy stocks got a boost following back to back bullish inventory data reports; the EIA said weekly crude stockpiles fell -5.8M barrels, topping the -2M estimate and echoes last night API -5.M barrel draw – giving oil prices and energy stocks a big jump. Oil prices advanced for a 5th consecutive session. CVX and XOM were among the top gainers in the Dow Industrials, while E&P, equipment and oil drillers outperformed as well. One big piece of news came from Reuters midday, reporting that Saudi Arabia is said to call off its Aramco IPO both domestic and international listings
· Top movers; SCHW, ETFC, AMTD partial rebound after falling sharply yesterday on news JPM will introduce a digital investing service next week that includes free or discounted trades; in REITs, PSA was downgraded to sell at Goldman Sachs, dropping shares below the 100-day MA support)
· Insurance; HIG agrees to acquire NAVG for about $2.1 billion in cash to expand product offerings and geographic reach; NAVG holders to receive $70 per share, about a 9% premium to yesterday’s closing price
· Consumer finance and lending; Federal loans account for about $1.4 trillion of the student debt total, which rose by more than $500B over the past six years, S&P Global Ratings said. Rise in debt, decrease in originations indicate loans aren’t being paid down in a timely manner
· Pharma movers; ABBV elagolix shows positive effect in late-stage extension study in uterine fibroids; MNK received a CRL from the FDA regarding its marketing application seeking approval for stannsoporfin for the treatment of severe jaundice in at-risk neonates; BHC tgt was raised to $35 at Mizuho citing improving margins; ZTS downgraded to hold at Stifel on valuation
· Medical equipment and devices; EXAS rises as announced a co-promotion agreement with PFE starting in Q4 and running through 2021 which expands Cologuard’s reach both with physicians and health systems/EXAS now says it sees $700M in revs next year, above the consensus $611M; DXCM rises to a fresh all-time high for a 4th straight day after its tgt raised to $170 at Leerink ahead of 2018 sales upside and a significant growth opportunity in the long-term; MYGN 52-week highs after the company reported Q4 above expectations
Industrials & Materials
· Industrial & Machinery; TTEK gets $650 million five-year Strengthening Tenure and Resource Rights II contract from USAID for land tenure and natural resource management services; ITRI was upgraded to buy at Argus saying it should benefit from current low penetration of automated meter infrastructure in the gas, electric and water meter market next five years
· Airlines; UAL names Gerry Laderman as its new chief financial officer after conducting an internal and external search to fill the role; Imperial raised tgts on airlines, DAL tgt raised to $71 from $65 and LUV to $60 from $54; LUV tgt raised to $70 at Evercore/ISI citing the company’s decision to raise prices on its Early Bird priority boarding option
· In truckers and freight, LSTR upgraded to outperform at Wells Fargo as have become more positive on the brokers into ’19; on revised ‘19 ests and ~19x target multiples, increase PTs to $133/ believe the truckload rate environment has seen a top and brokerage players will be less susceptible to gross margin pressure; YRCW upgraded to buy at Deutsche Bank as gained greater appreciation for company-specific drivers of equity value improvement, including continued pricing/yield improvement, renewal of YRCW’s aging fleet
Technology, Media & Telecom
· Semiconductors; ADI Q3 results beat estimates with an 8% Y/Y revenue growth and reported mostly in-line Q4 guidance with gross margin of about 71% (weakness in industrial revs $793.3M was highlighted as reason for slide); AAPL supplier AACAY posts Q2 net income miss (2Q net income 653 million yuan, vs. Bloomberg estimate 1.09 billion yuan); NVDA among the top gainers early in semi-space, now bouncing 6% after earnings related decline last week on new performance specs for gaming GPU
· Software mover; ZNGA announced that it had inked a deal with DIS for the rights to develop and publish a new “Star Wars” mobile game under its NaturalMotion studio; MOMO Q2 results beat estimates with a 58% Y/Y revenue growth with upside Q3 guidance of $525M-$540M (vs. est. $516.61M)/monthly active users were 108M, up from 91.3M in last year’s quarter
· Media & Telecom movers; AT&T (T) was downgraded at Wells Fargo citing pressure from a rapidly-changing entertainment landscape, new WarnerMedia assets to manage and a near-term focus on deleveraging that could be a drain on resources; Macquarie raised tgt on LBRDA to $91 from $84 as sees options for the cable provider to combine with GCI Liberty, or sell to Charter or another strategic buyer; CTL downgraded to sell at MoffettNathanson with $19 tgt; CMCSA offer for Sky PLC is being extended until September 12th
· Hardware & Component news; PSTG shares rise as reported results that exceeded expectations across the board, as success with larger customers and cloud players continues to play out, and win rates are impressive/also raised its full-year guidance; SMCI shares fall despite better guidance as fails to meet Nasdaq compliance deadline; KEYS reported strong results and guidance as KEY’s Ixia business unit performed well; FNSR downgraded to market perform at Raymond James saying it will face challenges pressuring its data center transceiver business