Wednesday, September 26, 2018
Equity Market Recap
· U.S. stock markets closed on the lows, losing steam late day as the Nasdaq Composite turned negative in the final minutes of trading, and the S&P 500 and Dow finishing well off their session highs as markets digested today’s FOMC rate hike (expected) and commentary from Fed Chairman Powell at his press conference. Stock selling seemed to pick up steam in the final 30-minutes after Fed Chairman Powell, although didn’t say directly that stocks are expensive (tried to dodge question earlier in Q&A) – did say by some valuation measures stocks high historically. That may have been the trigger for the market pullback. Markets are also still dealing with trade concerns between the U.S. and China/Canada and now going to negotiations with Japan. Financials paced afternoon declines while healthcare stocks outperformed early before rolling late afternoon. Commodity prices ended lower with oil pulling back from 4-year highs, while Treasury yields slipped and the dollar ended mixed.
· The FOMC, as widely expected, boosted its target range for benchmark rates 25 bps to 2%-2.25%, as Fed dots show 12 of 16 officials favor four rate hikes in 2018 (one more this year); the Fed said inflation remains nears 2%, expectations little changed and the Fed repeats risks to outlook ‘appear roughly balanced while removes accommodative commentary. Today’s vote was unanimous 9-0. The Fed sees 2018 economic growth at 3.1%, a noticeable upgrade from the 2.8% it saw in June, without any expected breakout in inflation while sees jobless rate 3.7% in 4q 2018, 3.5% in 2019. Fed median estimates still show four 2018 hikes, three in 2019. Fed sees longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%. Powell did say at press conference that change in statement language does not indicate change in Fed policy
· Regarding trade, China said this morning it will cut import tariffs on 1,585 tax items of goods from November 1, Bloomberg reported, citing a State Council meeting chaired by Premier Li Keqiang. The tariff cuts involve textile, building material, paper products and electromechanical device. Overall tariff rate will be lowered to 7.5% from 9.8% last year. Donald Trump accused China of attempting to meddle in the upcoming US midterm elections as retaliation for his tough stance on trade, in his address to the UN Security Council (increasing tensions). Also today, President Trump and Japanese Minister Abe agree to start trade negotiations today.
· New home sales for August rose 3.5% to 629K annual rate, in line with the 630K estimate; previous three months’ new home sales data revised down by 40K; median new home price rose 1.9% y/y to $320,200; average selling price at $388,400; 20% of new homes sold in Aug. cost more than $500K, up from 17% MoM; months’ supply at 6.1 in Aug. compared to 6.2 prior month
· Oil prices drop, with WTI crude falling 71c to settle at $71.57 per barrel after the EIA posted bearish weekly data as crude inventories rose an unexpected 1.85M barrels in latest week vs. an expected decline of -1.5M barrels (marked the first time in six weeks that supplies rose) with gasoline stockpiles rising 1,53M barrels, though distillates fell -2,241M. Prices briefly pared some of their losses after President Donald Trump ratcheted up pressure on allies to adhere to coming U.S. sanctions on Iranian crude during a United Nations Security Council meeting. Natural gas prices slumped, falling over 8c to below $3.00 mln btu’s
· Gold prices ended lower, spending most of the day below the $1,200 an ounce before getting a relief rally (settled just below, down about $6.00) after the FOMC followed through with its 25 bps rate hike and upgraded its assessment of the economy.
· The U.S. dollar was volatile following the expected 25 bps rate hike by the Federal Reserve, as the dollar trades to 2-month high vs. the Japanese yen, topping the 113 level before slipping while the greenback slipped vs. the euro and pound (despite an initial spike after the initial hike news). Market expectations were for a third rate hike and still one more for later this year (which was confirmed by the Fed dot plots).
· Treasury yields dropped late afternoon as the 10-year yield fell nearly 5bps to 3.05% before paring losses (10-year yield had hit 3.1% the day prior in run-up into Fed meeting results). The rate hike was expected and signaled that the central bank intended to remain on a gradual path toward normalizing monetary policy. Removing key language that policy was “accommodative was seen as giving the Fed more flexibility on the pace of rate hikes next year. The 2-year yield fell to 2.81% after touching fresh 10-year highs yesterday above 2.84%.
Sector News Breakdown
· Retailers; Dow component NKE reports mostly in-line Q1 results as EPS 4c beat on slightly better revs, though margins slightly disappoint Street at 44.2%/Q1 showed sustained top-line growth in both North America (up 6% FX) and international markets (up 20% FX in Greater China)
· Consumer Staples; SJM downgraded to underperform at Wolfe Research as believe the pricing environment at retail, driven by WMT, is continuing to deteriorate which will likely pressure suppliers, especially smaller co’s w/ exposure to more commoditized categories; in tobacco, Imperial Brands CEO Alison Cooper calls the cannabis industry an “interesting” space to explore
· Restaurants; CHEF was downgraded to hold at Jefferies noting shares are up 80% YTD and +250% over the last 2Y driven by beats/raises and evidence of better execution in organic sales growth and solid EBITDA% expansion; PZZA shares spiked mid-day after CNBC reported company founder John Schnatter, is reaching out to private equity firms as he eyes buying back his company (late afternoon, a Schnatter spokesperson says he hasn’t reached out to PE firms (refutes earlier story by CNBC) according to Bloomberg initially
· Housing & Building Products; in homebuilders, KBH posted better-than-expected Q3 earnings, orders and gross margins, but note the sector has fallen in recent weeks amid concerns of a market slowdown and rising rates; in home furnishing, BBBY expected to report earnings tonight after the close
· Auto’s; DDAIF CEO Dieter Zetsche will step down next year from the post he’s held since 2006, handing the reins to Ola Kaellenius; auto dealers active after KMX posted Q2 results above views for EPS (2c beat), revs and comp sales (up 2.1% vs. est. 1%) – shares of LAD, PAG, AN also active; Ford (F) CEO said metals tariffs were “very negative” for Ford; Beaten European autos been on a steady climb since the lows early this morning (fell yesterday on BMW warning)
· Inventory reports: the API reported that U.S. crude supplies rose by 2.9M barrels for the week ended Sept. 21, showed supplies of gasoline up 949,000M barrels, but distillates fell by -944,000 million barrels. The EIA with weekly bearish data as reported crude inventories rose an unexpected 1.85M barrels in latest week vs. an expected decline of -1.5M barrels with gasoline stockpiles rising 1,53M barrels, though distillates fell -2,241M
· E&P sector; KOS was downgraded to outperform at Raymond James as shares are close to a five-year high (dating back to the days of $100+ Brent) and close to our target price; COG was downgraded to equal-weight at Morgan Stanley and tgt cut to $23 from $29) as firm lowers its long-term (2022+) natural gas price deck to $2.50 from $2.75 (remains underweight on RRC, GPOR, SWN and lowers Marcellus-Utica PTs by 23%); HCLP announced that it has temporarily idled dry plant operations at its Whitehall facility; PES lowered its Q3 production services revs to down 5%-7% vs 2Q, compared to a prior est. of down 3%-5% sequentially
· Gas related news; Morgan Stanley says market entering into a new cycle of even lower nat gas due to oversupply and demand stagnation as the firm cuts long-term price deck to $2.50 from $2.75, slash estimates on gassy E&Ps (downgraded COG and upgraded LNG); Cowen shifts ratings on LNG-related companies to favor those with existing operations, upgraded LNG to outperform while downgraded NEXT and TELL; UPL shares slipped after the company said that talks with senior secured loan holders ended without an agreement
· Bank movers; banks moved lower in reaction to Fed and rates; MTB was upgraded to buy at Goldman Sachs after the firm’s economist is calling for six more rate hikes, two in the second half of 2018 and four more through the end of 2020 which will help MTB benefit on higher rates exceed market expectations; VOYA was fined $1M by the SEC for weak cybersecurity protections that left thousands of its customers vulnerable to a cyber intrusion that compromised their personal information; CONE 8M share Spot Secondary priced at $62.00
· Consumer finance and lending; SYF was downgraded to neutral at Bank America saying there is limited near-term upside in the stock, remains a controversial stock, given the recent loss of the Walmart partnership; SQ tgt raised to $105 at Buckingham today following the FinTech firm’s app launch and an 11% gain in the stock on Sept. 25 (Nomura raised tgt to $125 yesterday); WU shares moved late morning after Bloomberg reported the company is weighing a sale of its business-payments arm, which could fetch at least $500M
· Pharma movers; LOXO active after the response rate for its targeted lung cancer drug, LOXO-292, dropped, but Leerink does not see the change as material (note BPMC BLU-667 which, like Loxo’s drug, targets RET-fusion tumors); ETTX 5M share IPO priced at $15.00; VNDA to replace INGN in the S&P SmallCap 600 index; in cannabis sector; TLRY shares active again after Supreme Cannabis signs C$12M supply pact to provide dried cannabis to Tilray Canada Ltd., a subsidiary of Tilray.
· Biotech movers; ALDX shares rise after announced positive results from a phase 1/2 trial of its treatment for pleural malignant mesothelioma saying “the MESO-2 results are highly encouraging”; ANAB 2.2M share Secondary priced at $94.46; VSTM and CSPC Pharmaceutical Group announced their entry into an exclusive licensing agreement for CSPC to develop and commercialize Verastem Oncology’s COPIKTRA (duvelisib)
· Medical equipment and devices; Agilent (A) agreed to acquire privately-owned ACEA Biosciences Inc., a developer of instruments for life science research and clinical diagnostics, for $250M in cash; CGIX signed a non-exclusive supply agreement with Agilent Technologies; TTOO rises on positive data supporting T2Lyme Panel; OBLN rises early on FDA nod for automated gastric balloon inflator
· Healthcare services and providers; CYH to pay $260M to settle with DOJ investigation into Health Management Associates’ (HMA) Medicare, Medicaid and Tricare billing for inpatient admissions following emergency room visits between Jan. 2008 and Dec. 2012; HSIC was mentioned positively by SprucePoint Capital; INGN to replace ROL in the S&P Midcap 400 index
Industrials & Materials
· Industrial & Machinery; ATU shares slumped as Q4 results topped expectations, but guided Q1 EPS 20c-25c, below the 26c estimate and year guidance also below views; AIR shares outperformed, rising as much as 8% after earnings/rev beat earlier; AA shares trade to 52-week lows amid broad weakness in metals space on increasing trade tensions between US/China
· Metals & Materials; in steel sector, WOR Q1 EPS missed by 10c while revs of $988M missed the $1B Street estimate; CLF tgt raised to Street high $15 at B Riley on improved outlook for Atlantic Pellet Premiums for iron ore; sees iron ore suppliers into the Atlantic well positioned to capture an incremental $15-$20/Mt of premium (shares touched best levels since 2014 earlier); aluminum producer AA touches fresh 52-week lows earlier today
· Chemicals; Nomura the latest to lower estimates for chemical space (WLK, LYB, DWDP, OLN) due to surging ethane prices while firm also downgraded DWDP to neutral from buy as well; OMN Q3 EPS sales miss views (18c/$193.6M vs. est. 22c/$198.5M)
Technology, Media & Telecom
· Semiconductors; LRCX downgraded to neutral from buy at UBS citing ongoing delays in memory wafer capacity expansion/tgt cut to $170 from $200/says Samsung further delaying remaining ~30k DRAM wafer capacity in Pyeongtaek until mid-2019 at earliest, which is ~$750M to LRCX; despite the broader rally in tech with Nasdaq higher, the Philly semi index (SOX) declined again (follows several cautious analyst comments the last few days)
· Software mover; ARCE 11.111M share IPO priced at $17.50; SVMK 15M share IPO priced at $12.00; MANH downgraded to hold at SunTrust saying the stock’s risk/reward is much more balanced now though research continues to point to solid growth for the company’s cloud business and improving professional services
· Media & Telecom movers; NLSN has drawn interest from suitors including Blackstone Group LP and the Carlyle Group LP, Bloomberg reported. The two private equity firms are considering submitting bids for the company ; CMCSA defended at KeyBanc as raise tgt to $43 and up estimates as expect cable business to outperform expectations, which should drive improved sentiment and profitability; VIAB was upgraded to buy at B Riley; CBS named ex Time Warner CEO Parsons as interim Chairman, replacing Moonves
· Hardware & Component news; Dow component IBM was upgraded to buy at UBS saying that consensus revenue estimate of a 0.2% decline is beatable and a sum-of-the-parts analysis indicates the market isn’t applying any value to IBM’s hardware business; GPRO upgraded to outperform at Oppenheimer citing optimism surrounding new product launches and a new focused strategy; CIEN was downgraded to neutral at UBS in optical space