Tuesday, August 28, 2018
Equity Market Recap
· U.S. stocks finish higher, as the S&P 500 topped 2,900 for the first time to settle at fresh record highs just below that level (intraday high was 2,903.77) while the Nasdaq Composite and Dow Transports also touched intraday record highs (Russell 2000 fell short of all-time bests). Stocks rallied as Treasuries fell, sending yields higher and the dollar recovered from its recent pullback to end mixed (rallied vs. emerging market currencies) as investors assessed the latest developments from the Trump administration’s trade policies. Optimism around the U.S.-Mexico deal helped shift attention away from the White House legal issues last week (Manafort and Cohen) while the Federal Reserve’s latest outlook has also boosted sentiment. Regarding trade, attention has turned to talks with Canada later this week, while President Donald Trump said that it’s not the right time for bilateral trade negotiations between the U.S. and China. Economic data came in better as consumer confidence data came in at the highest level in over 18-years in August, while the U.S. trade deficit widens in July to highest level in five months (details below). Markets were quiet, light volumes, but holding near its best levels on positive earnings.
· Advanced Goods Trade deficit for July widened to (-$72.2B) from (-$67.9B) prior and above the (-$69.0B) estimate; imports rose 0.9% in July to $212.218B from $210.401B in June, while exports fell 1.7% in July to $140.020B from $142.481B in June; the government’s advanced report on wholesale inventories found a 0.7% increase in July; and advanced retail inventories rose 0.4%
· Consumer Confidence for August rose to 133.4 from 127.9 prior month and above the 126.6 estimate; the present situation confidence rose to 172.2 vs. 166.1 last month and consumer confidence expectations rose to 107.6 vs. 102.4 last month
· S&P CoreLogic Case-Shiller National Home Price index rose 6.24% y/y in June after rising 6.38% in prior month and compared to the 6.4% estimate; S&P/Case-Shiller 20-city NSA index at 213.07 after 212 in May; the 20-city SA index rose 0.11% m/m in June after rising 0.21% the prior month; national home price index rose 0.31% m/m in June after rising 0.31% the prior month
· Richmond Fed’s Aug. Manufacturing survey rises to 24 from 20 last month and above the 17 estimate; shipments rose to 23 after 16 the prior month, with new order volume increased to 25 after 22 the prior month and order backlogs rose to 15 after 4 the prior month
· Oil prices fell, falling 34c to settle $68.43 per barrel and snapping its modest 2-day win streak (had snapped streak of 7-straight weekly declines last Friday), as markets await weekly inventory data tonight in the form of API and tomorrow morning’s EIA report (both of which were bullish last week for oil). A recent bout of weakness in the dollar also has helped to lift dollar-pegged commodities in recent trade, but as the dollar bounced off lows (turning positive late day), commodity prices slipped. Renewed U.S. sanctions on Iran and supply disruptions in Libya and Venezuela have supported oil prices lately, as oil has bounced off multi-month lows.
· Gold prices slipped late day, reversing early gains, falling -$1.60 to settle at $1,214.40 an ounce and pulling back from 3-week closing highs as the dollar rebounded off its lows. Gold prices snapped their 7-week losing streak on Friday after Federal Reserve Chairman Jerome Powell said last Friday that gradual U.S. interest-rate hikes remain appropriate and there was no risk to the economy overheating. Trade disputes between the US and counterparts have also moved the dollar, and in turn gold prices.
· The US dollar recovers after the dollar index (DXY) dropped to lows below 94.50 (94.43), a more than 250 bps off 2018 highs of 96.98 on 8/15), and adding to last week’s 1% decline as rival currencies rebound amid abating trade fear concerns. In emerging markets, Turkey’s lira fell over 2% as Moody’s downgraded several Turkish banks, while the Brazil real dropped to its lowest level since January 2016, along with losses in the Argentine Peso. The Mexican peso reversed Monday’s gains after the trade deal between the US and Mexico sent the currency higher initially. Bitcoin prices gained as much as 5%, holding above $7,000 and posted its fifth winning session over the last six.
· Treasury yields bounced out of its tight range the last few days, with the 10-year yield moving up to 2.88%, while the 2-yr yield topped 2.66% (after lows 2.58% late last week) and the 30-yr moved up at 3.03%. Treasuries declined as investors rotated out of safe havens with major US stock markets moving to new all-time highs again. Also, the US Treasury sold $37B in 5-yr notes at a yield of 2.765% vs. 2.764% when issued prior to auction with the bid-to-cover at 2.49 vs. 2.61 prior auction (demand) and indirect bidders awarded 66.2%.
Sector News Breakdown
· Retailers; DSW surges in footwear space as Q2 earnings and comps (+9.7% vs. est. 2%) top the highest estimates and boosted its full-year forecast as now sees FY revs up 6%-9% (had seen down 1%-3%) and raised year comps and EPS as well; BBY posted Q2 EP, revs and comp sales beats, but guided Q3 below views (79c-84c on revs $9.4B-$9.5B vs. est. 91c/$9.49B); LULU tgt raised to $154 at Credit Suisse ahead of earnings this week
· In broadline retail; club stores active after BJ posted Q2 EPS, Ebitda and revs above consensus with comp sales up 5% vs. est. 2.8% though guides initial FY19 net sales view $12.6B-$12.7B vs. est. $13.04B and sees year merchandise comp. sales (ex-gas) up 1.8%-2.1%; SHLD said it has expanded its program to install and balance tires for customers who buy tires on AMZN sites
· Jewelry; TIF rises after posting soaring Q2 profit and sales as world-wide sales rose 12% from a year earlier to $1.1B, topping the $1.04B est. and same-store sales climbed 8% (up 7% ex-FX), ahead of the 5.6% analyst estimate; Citigroup cautious on SIG saying upcoming Q2 saying it will likely be a negative catalyst for the stock (sees Q2 miss), and may call into question whether SIG can hit its 4Q plans
· Consumer Staples; in food, CPB shares slipped after the New York Post reported that the company is expected to announce this week that it doesn’t plan to sell itself to a strategic buyer, a move that could provoke Dan Loeb into waging a nasty proxy fight ; HAIN Q4 EPS and Ebitda narrowly topped estimates but said it sees Q1 net sales flat to down slightly and guides year EPS $1.21-$1.38 vs. est. $1.32; in beauty, Morgan Stanley upgraded both EL and COTY to overweight saying for COTY the risk-reward profile on the stock is seen as compelling, while EL channel/geographic mix is expected to shift in the right direction
· Restaurants; YUMC shares jumped after the WSJ reported the company rejected a buyout offer of $46 per share made by a consortium led by Hillhouse Capital ; CMG launches delivery service with DoorDash
· Housing & Building Products; MKM Partners noted Q2 earnings season was a challenging one for most building products companies (BECN, BLDR, BLD), with the operating environment leaving little room for unexpected headwinds – lowers tgts for group; HD filed debt securities shelf
· Casino & Leisure movers; shares of PENN, BYD were pressured after reports that voters St. Charles County will be able to vote on two alternative indoor smoking bans in the Nov. 6 election – one that would continue to allow indoor smoking at cigar bars, tobacco stores and private clubs and another that would allow even more exceptions – while St. Louis County voters will only be voting on a strong indoor smoking ban with almost no exceptions except for private residences
· Energy stocks lag broader averages, with declines in E&P, equipment and drilling stocks; oil futures pulled back after two sessions of consecutive gains, as traders continue to worry over signs of receding output and brace for the latest weekly U.S. crude inventory data tonight (API) and tomorrow (EIA
· Refiners strong after Wells Fargo positive as they reiterate bullishness on the Independent Refiners, supported by favorable crude differentials, demand growth, product exports, cost structure, impending IMO 2020, and a solid record of shareholders returns. Top pick MPC; maintain OP on DK, PBF, PSX, VLO, and CLMT
· Utilities & Solar; in utilities, PCG shares advanced after one analyst (Wolfe Research) said California’s wildfire committee proposed draft legislation dealing with wildfire liabilities appears “utility friendly;” overall utility space spent most of the time lower ad Treasury yields advanced, making interest rate sensitive names less appealing
· Financials pulled back from strong gains yesterday after GS, JPM and AXP helped paces Monday’s Dow 200 plus point gains; in insurance; AHL agreed to be bought by private equity firm Apollo Funds in an all-cash deal valued at $2.6 billion, as Apollo will acquire all outstanding shares of the global insurer and reinsurer for $42.75 per share in cash ; in services, MCO settled regulator’s allegations that internal control shortcomings and issues with its models contributed to the company correcting the ratings on billions of dollars in mortgage-backed securities
· Pharma & Devices movers; AFMD shares soar as announces collaboration with Genentech to develop novel NK cell engager-based immunotherapeutics for multiple cancer targets; Affimed will receive $96Mupfront and committed funding and is eligible for up to an additional $5.0B including milestone payments; WMGI 18.249M share Spot Secondary priced at $24.60 (WMGI was also upgraded by two analysts today); Several MedTech S&P components also touching 52-week highs today: IQV, ABT, TMO, PKI, ILMN, ALGN, ISRG, BDX, RMD
· Biotech movers; the IBB erased early gains after touching 52-week highs of 120.11; AKCA shares fall along with weakness in IONS after the companies said they received a “complete response letter” from the FDA concerning their drug Waylivra, a medicine designed to treat a rare liver disorder; the companies said they would work with the FDA “to confirm the path forward; BIIB’s Alzheimer’s candidate aducanumab maintains risk-benefit profile in long-term extension study; EDIT said its chief Medical officer stepped down from his role
Industrials & Materials
· Industrial & Machinery; CAT received positive mention at Citigroup after meeting with CEO of Komatsu saying while growth in CAT’s E&T portfolio has created an earnings differentiator, the read-throughs to construction and mining were positive and help to support our view that CAT earnings/returns can remain higher for longer this cycle; HEI raised revenue growth guidance to 20%-21% (vs. 18%-20% previously) and now expects an operating margin of 28.5%-29.0% (vs. 28.0%-29.0% previously); overall reported solid Q3 results, and upward revisions to guidance
· Transports; Transports pulled back after briefly setting a new intraday record high of 11,475.74 earlier UPS has started a service that matches unused warehouse space with small companies looking to expand
Technology, Media & Telecom
· Internet; U.S. President Donald Trump accused GOOGL of rigging its search results to display only negative stories about him, calling it “a very serious situation” that “will be addressed.” GOOGL responded saying “search is not used to set a political agenda and we don’t bias our results toward any political ideology.”
· Semi equipment stocks AMAT and LRCX both downgraded to neutral from buy at Bank America as growth in the wafer fab equipment space may not accelerate until at least the second half of 2019/firm lowers outlook for industry-wide wafer fab equipment growth to 7% y/y from prior view for 10% growth and now sees a decline of 2.5% in 2019 and 2.5% growth in 2020, from 2% and 5% growth, respectively
· Semiconductors; XLNX was upgraded to outperform at Baird saying field research suggests a very recent and significant acceleration in 5G-related orders for FPGAs scheduled for the later part of this year, suggesting recently finalized design wins; AMD announced after the close the Company will be manufacturing all 7nm products at TSM and Mr. Jim Anderson will leave AMD to become the CEO of LSCC; IIVI trades to best levels since January after Deutsche Bank started with a buy
· Software mover; MITK shares fall as Benchmark downgraded shares due to recent management departures announced last night that leave uncertainty in key roles and will likely result in downward pressure on the stock during the next few months; BILI shares rise after Q2 revenue rose 76% YoY despite online content clean-up
· Hardware & Component news; LASR initiated at sell by Benchmark saying while LASR has executed well since its IPO, the stock trades at a significant premium to its peer group, trades nearly double the April IPO price , and we believe the shares may be priced for perfection; ARLO shares slide as analysts initiate coverage today, with concerns about a competitive market” and potential for “substantial” downside in consumer tech IPOs