Wednesday, August 29, 2018
Equity Market Recap
· U.S. stocks continue to defy, with the S&P 500 Index and Nasdaq Composite posting record closing highs for a 4th consecutive session, putting last month’s turmoil and concerns behind it. After a brief pullback a few weeks ago on Turkey contagion fears (as the Lira plunged), drama in Washington (Manafort and Cohen convictions), and the trade dispute fears (between China, EU, Mexico and Canada), markets have since pushed onward and upward, focusing on the strong corporate earnings from Q2 and the positive economic outlook expressed by the Fed Reserve (confirmed by today’s upwardly revised Q2 GDP reading). Tech paced today’s gains as the Nasdaq Comp jumped as much as 1%, topping the 8,100 level (just a few days after topping 8K for the first time), led by gains in software (52-week highs for MSFT, CRM, TTWO, ADBE) and Internet stocks (all-time highs AMZN). Energy stocks were among the top sector outperformers after WTI crude prices jumped on bullish weekly inventory data, while retailers were among the hardest hit after DKS, AEO, MOV shares fell on earnings and guidance results. Biotech (IBB) traded to fresh 52-week highs as that group surged, while materials advanced on hopes of further positive trade negotiations with Canada this week.
· Stocks have also been boosted by trade this week after the U.S. agreed to a new deal with Mexico and hopes that a deal with Canada will happen by Friday. Economic data showed strength in the American economy as GDP was revised higher for Q2 to 4.2%, lifting the dollar early before paring gains, while Treasuries roll sending yields higher. Justin Trudeau, Canada’s prime minister, said there was a possibility that Canada and the US would reach a deal on revamping Nafta by Friday, striking a cautious tone as talks intensify. The Argentine peso tumbled after President Mauricio Macri announced Argentina reached an agreement with IMF to speed up disbursements from its $50 billion credit line (shares of stocks leveraged to Argentina such as YPF, AGRO, TX were under pressure).
· Gross domestic product expanded at a 4.2% annual pace in Q2, up from a preliminary estimate of 4.1%, the government said (GDP rose 2.2% in prior quarter); personal consumption rose 3.8% in 2Q (vs. est. 3.9%) after rising 0.5% prior quarter, GDP price index rose 3.0% in 2Q (in-line w/est.) after rising 2.0% prior quarter and core PCE q/q rose 2.0% in 2Q after rising 2.2% prior quarter and was in-line with estimates. Nonresidential fixed investment, or spending on equipment, structures and intellectual property rose 8.5% in 2Q after rising 11.5% prior quarter
· Pending Home Sales for July fell (-0.7%) MoM, missing the up 0.3% estimate; sales were up in the Northeast and Midwest but fell in the South and West; unadjusted pending homes fell 0.5% y/y after falling 4% y/y in June
· Oil prices climbed 98c or 1.4% to settle at $69.51 per barrel following bullish weekly inventory data as the EIA data showed weekly domestic stockpiles fell -2.6M barrels, more than the -1.5M expected drawdown, while gasoline and distillates also posted unexpected draws. With today’s close, WTI crude finished at its best levels since July. Iran’s crude oil and condensate exports in August are set to drop below 70 million barrels for the first time since April 2017, well ahead of the November 4 start date for a second round of US economic sanctions, preliminary trade flows data according to Reuters (showing sanctions may be having an effect).
· Gold prices slipped -$2.90 to settle at $1,211.50 an ounce, posting back-to-back declines while the dollar held lower (still down about 0.4% week to date, but has gained 0.3% so far in August). The dollar has been the primary driver for gold action in 2018, with the precious metal down about 8% this year through August as the dollar had advanced on rising rate hikes. However, gold had largely stabilized above $1,200 since touching 18-month lows in the middle of August.
· The U.S. dollar was mixed following the stronger than expected Q2 GDP report; the British Pound moved to 3-week highs, topping the 1.302 level after the EU’s chief Brexit negotiator Michel Barnier indicated that he was close to offering the UK a deal. In emerging markets, the Argentine Peso fell as much as 7.8% to a new record low vs. the dollar at 33.8. The Euro was little changed holding around the 1.17 level while the greenback rose vs. the Japanese yen. Bitcoin prices slid back below $7,000 after jumping more than 5% the day prior.
· Treasury market’s slide as yields jump across the board; the 10-yr yield moved back above 2.89%, the 2-yr at 2.675% and the 30-yr yield edges higher at 3.04%; mixed economic data as GDP for Q2 came in above expectations, though markets received another negative housing report. The U.S. Treasury sold $31B in 7-year notes at a yield of 2.844% vs. 2.85% prior to the auction with the bid-to-cover (demand) at 2.65 vs. 2.49 prior auction and indirect bidders awarded 59.5%, directs 19% and primary dealers 21.5% of auction.
Sector News Breakdown
· Retailers; in apparel, AEO shares fell on mixed results as a softer Q3 EPS outlook (45c-47c vs. est. 49) and a miss in Aerie total brand comp sales for Q2 (27% vs. 29.9%) overshadowed a Q2 revs, margin and overall comp beat; EXPR posted Q2 beat & raise 2Q report while CHS Q2 sales of $544.7M slightly beat estimates and Q2 comp sales of (-3.2%) fell less than the (-4.7% est.); TLRD announced its President and COO Bruce Thorn resigns as becomes CEO of BIG; SCVL 2Q report beats on both earnings and revenue while raises its year outlook to $2.07-$2.15 from $1.90-$2.05 (est. $2.05) and ups year rev view as well
· Non-apparel retail; sporting goods stores active after DKS Q2 net sales of $2.18B missed the $2.23B estimate and comp sales fell (-1.9%), more than expected, though year EPS view of $3.02-$3.20 mid-point beat the $3.09 est.); UAA shares dropped after DKS said in Q2 commentary that it “experienced continued significant declines in Under Armour sales as a result of their decision to expand distribution”; watch maker MOV shares fell on earnings (hit shares of FOSL)
· Auto sector; Morgan Stanley positive on KMX calling it top pick for dealers (OW and $89 tgt) as the directionality of numbers to improve on easier comps; Longbow said they are incrementally more bullish on LEA and APTV’s electrification content per vehicle (CPV) growth opportunities and see future backlog announcements as a positive catalyst for each stock; group has bounced this week on trade deal between Mexico/US and hopes that Canada deal will be reworked
· Casino & Leisure movers; in leisure, cruise line RCL was upgraded to buy at Deutsche Bank citing the potential for more inflows into cruise stocks for the balance of 2018 as comps get tougher across sectors like lodging, retail, and Macau; MGM outperformed in the casino sector
· Energy stocks rally on bullish inventory data, impact of supply on Russia and Iran sanctions and a continued pullback in the dollar. Earlier today, WTI crude oil prices hit a seven-week high after bullish prints in the EIA data as weekly domestic stockpiles fell -2.6M barrels, more than the -1.5M expected drawdown, while gasoline and distillates also posted unexpected draws. Also bullish is a rebound in U.S. crude exports from the lowest since January. The data helped propel energy stocks higher, led by gains in E&P, equipment and services; some E&P stocks (APC, SRCI, PDCE, XOG) shares fell after Reuters report that Colorado voters to decide in November on new oil and gas drilling restrictions
· Utilities & Solar; BLDP signed a deal with China’s auto engine maker Weichai Power where Weichai to make an equity investment of $163M, or about a 20% stake in BLDP; in solar space, CSIQ shares outperform after its second-biggest stakeholder (Lion Point Capital) disclosed that it offered to help finance an effort to take the company private, offering up to $250M in funding (other solar stocks FSLR, SPWR, JKS also rallied)
· Financials; JPM officially introduces its commission-free online trading platform You Invest, which offers $0 account minimums, $0 minimums on JPMorgan funds and commission-free online stock and ETF trading (affects AMTD, ETFC, SCHW); HRB Q1 revenue of $145.2M topped estimates and reaffirmed its outlook for the year; SWNB Bancorp failed to obtain the requisite vote of shareholders to approve the merger plan with HAFC (which was announced on May 21st for deal valued at $76.6M); in consumer finance and lending; SQ tgt was raised to $100 from $75 at Guggenheim and added it to its best idea list following a meeting with the CFO saying the optimism is on Cash App’s future revenue potential, which is underappreciated; PYPL tgt raised to $110 from $100 at Jefferies saying that Venmo monetization is not the only important growth driver for the company as believe core P2P and mobile trends – which have been impressive – should be followed more closely alongside the Venmo success
· Pharma movers; in cannabis space, TLRY shares jumped after earnings as Q2 revenue topped estimates as production doubled; AFMD adds to yesterday’s 246% spike after announced a collaboration with Genentech to develop novel NK cell engager-based immunotherapeutics for multiple cancer targets (gets $96M upfront and up to an additional $5.0B including milestone payments); XENE drug XEN1101 showed statistically significant cut in corticospinal and cortical excitability in Phase 1b transcranial magnetic stimulation study; SPHS rallied after investigation conclusion of its Phase 2B trial for Topsalysin that the cause of death was determined to be Sudden Cardiac Death most likely due to an arrhythmia, not related to treatment
· Biotech movers; the IBB biotech ETF traded to 52-week highs as group gets a strong bounce over the last few days; RARE rises after saying the FDA accepted its UX007 new drug application for treatment of long-chain fatty acid oxidation disorders.
· Healthcare services and providers; GKOS shares surged after NVS said its Alcon unit decided to voluntarily withdraw its competing CyPass MIcro-Stent from the market due to lack of efficacy (GKOS markets its iStent for the same indication); Height Analytics said DVA’s operating income would be reduced by up to $95.5M per year if the California assembly approves a bill that would “drastically restrict third-party charitable premium assistance providers such as the American Kidney Fund
Industrials & Materials
· Industrial & Machinery; DY reported Q2 results of $799M and $1.05, in line with the company’s pre-release and also reiterated both its Q3 and FY19 guidance (recall shares plunged 24% on 8/13 after lowering its views); Reuters reported that the U.S. ITC review finds uncoated groundwood paper imports from Canada aren’t harming American industry as ruling ends tariffs on Canadian imports (the U.S. imported an estimated $1.2B worth of this uncoated groundwood paper from Canada in 2017, according to Commerce Dept); MTZ and PWR shares rallied after FERC authorized the Mountain Valley Pipeline to resume construction and restoration of roughly 200 miles of its project in Virginia and West Virginia.
· Transports; KSU was upgraded to outperform at Cowen, the transportation stock with the most exposure to Mexico, as remains well-positioned to benefit from Mexican energy reform and chemical growth; MRTN was upgraded to hold from sell at Stifel following sell-off as shares have fallen over 6.8% since the end of the second quarter (vs. the S&P 500 up 6.6 %), and earnings came in better than expected, so our estimates actually have increased; overall index failed to trade above yesterday’s intraday record highs; airlines got a lift after airline trade group said sees record US passenger volume this year (JBLU, AAL, DAL, LUV)
· Metals & Materials; in gold miner sector, Citigroup said they remain Neutral on the North America gold sector acknowledging that gold price risk is skewed to the upside, but still struggling to see compelling value. Gold miners are cheaper than they were a few weeks ago, but so is the entire mining sector – said they prefer copper miners which offer superior growth/FCF options, while they upgraded ABX to neutral given the ~30% fall YTD and no compelling bear case
Technology, Media & Telecom
· 52-week highs AMZN, TTWO, FFIV, ADVE, MSFT, ADBE, VRSK, NTAP, VRSN, ACN, CDNS, GRMN in the S&P 500 tech space
· Internet; AMZN rises as Morgan Stanley raises tgt to Street high $2,500 as see AMZN’s rapidly growing, high margin revs allowing it to continue to invest while also generating higher profits; Morgan Stanley also raised its tgt on GOOGL to $1,515 from $1,325 saying Alphabet is still just in the early stages of monetizing its seven 1billion+ user platforms, and the launch of Waymo’s ride-hailing service is also a potential catalyst
· Semiconductors; TSM shares benefitted after competitor Globalfoundries said it’s dropping development of 7-nanometer technology; TSMC is set to benefit from gaining share in AMD orders, Credit Suisse said; shares of AMD small pull in after setting best levels since 2006 yesterday; MRVL positive mention by analysts ahead of earnings next week
· Software mover; BOX shares drop as better revenue upside was marred by a slight guide down for 3Q and pushed out the $1 billion target (now $1+ billion in FY22) that now implies a high teens to low 20% CAGR through FY22; WK tgt raised to $39 at SunTrust as believe the potential for improved top-line growth has increased and the stock deserves premium valuation; COUP tgt raised to Street high $77 at Oppenheimer as expects solid Q2 results; HPE shares rise after quarterly results beat and boosted its year outlook
· Hardware & Component news; ROKU falls following a report by The Information that Amazon’s IMBD subsidiary is working on a free, ad-supported streaming service (possibly similar to The Roku Channel); AVT expands stock buyback plan by $500M and boosts dividend