Thursday, September 27, 2018
Equity Market Recap
· U.S. stocks posted solid gains on Thursday, led by shares of technology giants such as Apple and Amazon, providing a boost the Nasdaq Composite. Healthcare stocks got a lift as well, along with energy stocks as WTI crude moved back above $72 per barrel. It wasn’t all positive, with retailer BBBY, food company CAG and cruise line CCL all falling after disappointing earnings and/or guidance. Volumes were lighter than usual as markets were fixed on testimony in Washington regarding Supreme Court nominee Kavanaugh. Treasuries steadied while the dollar surged vs. most counterparts, led by a decline in the euro as Italian leaders focus on an agreement on fiscal targets. However, much like yesterday, stocks lost steam in the final 30-minutes of trading, ending near afternoon lows (though hung on to gains today). Markets still remain focused on the Fed after Chairman Powell sent a message of a strong growth and stable inflation, while raising interest rates for the 3rd time in 2018 yesterday, along with trade concerns with China/Canada, and the drama in Washington. Economic data was mixed with Q2 GDP unrevised at 4.2%, while jobless claims rose and pending home sales fell.
· U.S. Q4 GDP growth unrevised at 4.2% rate, in-line with expectations and compared to the second est. of 4.2%; note GDP rose 2.2% in prior quarter. Personal consumption rose 3.8% in 2Q after rising 0.5% prior quarter while GDP price index rose 3.0% in 2Q after rising 2.0% prior quarter. Core PCE q/q rose 2.1% in 2Q (vs. est. 2%) after rising 2.2% prior quarter
· Weekly jobless claims rise 12K to 214K in the latest week and was above the 210K estimate, highest level since early August; the 4-week moving average rose 250 to 206,250; number of people already collecting unemployment benefits rose 16,000 to 1.66 million
· Durable Goods Orders for August rise 4.5% to a 6-month highs, topping the 2.0% estimate as durable goods new orders revised up to -1.2% for July from -1.7%; new orders ex-trans. rose 0.1% in Aug. after 0.2% rise and new orders ex-defense rose 2.6% in Aug. after 0.6% fall; Orders for core capital goods fell 0.5% in August; shipments of these goods rose a slim 0.1%
· Advanced goods trade deficit for August widened to (-$75.8B) from (-$72.0B) in prior month and above the est. (-$70.6B); imports rose 0.7% in Aug. to $213.742B from $212.246B in July, while exports fell 1.6% in Aug. to $137.912B from $140.199B in July
· Pending home sales for August fell (-1.8%) MoM vs. est. down (-0.5%) as the Northeast fell 1.3%, Midwest fell 0.5%; West fell 5.9%; marked 4th monthly decline in the last five
· The 30-year fixed mortgage rate for week rose to 4.72% from 4.65%, Freddie Mac said; the 15-year rate avg 4.16%, up from 4.11% a week earlier; the 30-year rate highest since April 2011
· Oil prices rise, with WTI crude up 55c or 0.8% to settle at $72.12 per barrel, while nat gas big spike today on bullish inventory data (touched 8-month high $3.11 mln btu’s earlier) – before paring gains. U.S. Energy Secretary Rick Perry said the country wouldn’t tap emergency supplies, raising further supply concerns in the face of the loss of Iranian production.
· Gold prices slipped to 6-week lows, dropping back below the $1,290 an ounce level, falling -$11.70, or 1% to settle at $1,187.40 an ounce after the Federal Reserve raised interest rates, as expected, for a third time this year, boosting the dollar as the Fed portrayed a very positive outlook on the economy, lessening the demand for safe haven assets.
· The U.S. dollar climbed against most currencies, getting a boost yesterday from the Fed interest rate hike and positive outlook on the economy. The euro dropped as traders fretted about renewed woes surrounding Italy’s budget proposal (nearly 2-week lows). The dollar traded to a new 2018 high against the Japanese yen, rising above 113.40. The dollar advanced vs. the euro and British pound, moving to the best levels late day. Argentina’s peso neared record lows again, finding little support despite the IMF agreeing late last night to lend the country an extra $7.1B. The Turkish lira climbed to its strongest level against the dollar since mid-August.
· Treasury markets were little changed most of the day, as yields pulled back about 4 bps on the 10-year to 3.06% after yesterday’s FOMC meeting results (pullback came after surge into rate hike increase expectations – likely profit taking); the 10-year yield stood at 3.06% today (off recent highs above 3.11%), while the 2-yr yield rose to around 2.83%. The U.S. Treasury sold $31B in 7-year notes at a yield of 3.034%, compared to 3.025% prior, with a weaker bid-to-cover (demand) of 2.45 vs. 2.65 last auction and indirect bidders awarded 62% of auction vs. 12.8% going to direct bidders
Sector News Breakdown
· Retailers; BJ 28M share Secondary priced at $26.00; LULU tgt raised to $190 from $180 at Oppenheimer as conclude that LULU is now capitalizing meaningfully following a period of significant reinvestment and repositioning; PETQ 5M share Secondary priced at $39.00; ELY tgt raised to $27 at JPMorgan after positive commentary following mgmt meetings
· Consumer Staples; in food, CAG shares dropped after earnings/sales miss estimates, as organic sales only increased 1.2% in FQ1 off of flat volume/guides Q2 EPS below views; in grocers, Morgan Stanley said incrementally more cautious on KR as meaningfully lower their EBIT and EPS forecasts, which are now well below consensus and include ~50 bps of cumulative EBIT margin contraction from ’19-’23e; KDP to buy enhanced water company CORE Nutrition for $525M ; MKC mixed Q3 results as EPS beat by a penny while sales just shy of estimates while slightly boosted its year EPS view; in tobacco, PM said it sees IQos in-market-sales almost doubling in 2018
· Housing & Building Products; in home furnishing, BBBY shares dropped to lowest levels since 2008 after reported another disappointing quarter as Q2 was well below expectations and included its weakest GM in years, while comp sales fell -0.6%, tracked in line with past quarter trends but worse than expected (shares of WSM moved in sympathy); homebuilders (XHB) fell for a seventh straight day on rising rates and slowing economic data (KBH, TOL, PHM)
· Casino & Leisure movers; cruise lines weakened after CCL Q3 earnings and revs topped estimates but guided Q4 EPS 65c-69c, below 73c estimate (shares of NCLH, RCL moved in sympathy); in gaming, Nomura initiated VICI buy and $29 tgt and named top pick with a buy on MGP and $37 tgt and neutral on GLPI;casino stocks were weaker as well in leisure
· Energy stocks inched higher with oil and natural gas; natural gas prices touched best levels in 8-months, rising above $3.10 mln btu after the bullish inventory report earlier as the EIA posted a smaller weekly build in stockpiles of 46 bcf vs. est. 61 bcf
· Some top stories; PBR settled charges with the SEC for allegedly misleading U.S. investors by filing false financial statements that concealed a massive bribery and bid-rigging scheme at the company/paid $933M in settlement; CVE signed three-year deals with major rail companies to transport about 100,000 barrels per day of heavy crude oil from northern Alberta to various destinations on the U.S. Gulf Coast; HCLP downgraded at Raymond James to market perform after the company idled a dry plant at its Whitehall mine in Wisconsin and expects further idling
· Utilities & Solar; PEG proposes a $4B investment to lower the state’s energy consumption and carbon emissions while driving down electric power costs; FGP posted Q4 Ebitda well below consensus estimates; utility stocks rebounded from recent declines after Treasury yields have risen, making defensive, high dividend paying stocks less appealing
· Bank movers; banks were mixed after recently bouncing out of 6-month tight trading range for BKX; GS remains in downward trend, coming into today with 4-day losing streak; Euro banks mostly weaker as Italian banks drag the sector lower; rising yields seen as beneficial for group as helps lending margins, but still not helping lead markets
· Brokers and Exchanges; Raymond James defended exchanges (CBOE, NDAQ, ICE) saying investor concerns about the impact to exchange operators from an upcoming SEC roundtable are overblown, noting the stocks have been selling off this week after the SEC released the agenda for its October meeting on market data and access.
· Consumer finance and lending; Deutsche Bank said FLT may be a potential buyer of WU’s business-payments arm, after Bloomberg reported that Western Union is said to weigh a sale of the unit; BMO Capital initiated spend-centric payment stocks with Visa (V) and WP top picks as recommend buying stocks that 1) offer upside potential for respective valuation multiples as determined by expected revenue growth, and 2) have the potential to surprise positively relative to revenue growth forecasts; WIX trades to record highs after SunTrust raised its tgt to $145 as firm survey showed that many website designers/creators have heard of and like the company’s Wix Code product
· Pharma movers; DOVA entered into an exclusive agreement to co-promote Dova’s DOPTELET (avatrombopag) in the United States with Salix Pharma; STRO 5.667M share IPO priced at $15.00; after shares fell over 8% yesterday, Stifel said HRTX sell-off on lack of CMS pass through payment extension in final Opioid Bill seems unwarranted; AET said it plans to sell its Medicare prescription-drug business to WCG, a key step toward completing its $67.5B merger with CVS; GWPH rises early after its Epidiolex gets schedule V from DEA; TEVA shares remain volatile, falling 13% the last week as markets await a decision on LLY’s migraine therapy Galcanezumab
· Biotech movers; GERN shares plunge as JNJ said it will end a licensing partnership and return rights to the biotech company’s sole product candidate; ARVN 7.5M share IPO priced at $16.00; CBMG signs licensing and collaboration agreement with NVS in China; UROV 10M share IPO priced at $14.00; ACHV rises after the clinical-stage pharmaceutical company announced positive results from a study of its smoking cessation drug
· Healthcare services, devices and providers; ATHN shares active after CNBC reported that the company has received multiple bids and the bids are not seen as being far above the current stock price of $131 ; Baird noted the House and Senate negotiators recently announced compromise legislation to address the nation’s opioid epidemic and firm feels the final legislation includes a number of provisions that they believe will be positive for several of our covered companies over time, including TRHC, MDRX, UHS, ACHC, TDOC, and HMSY; RMED 3.9M share IPO priced at $17.00; ANGO falls on missed Q1 results
Industrials & Materials
· Industrial & Machinery; AYR upgraded to outperform at Cowen and raised its tgt to $26; GTLS agreed to acquire Italian-based engineering and design firm VRV for ~$230M, including debt; machinery stocks ETN and PH had their tgts raised at Wells Fargo; LMT boosted its dividend and raised share buyback plan by $1B; Volvo said it will unveil an all-electric truck in California next year, with an expectation to commercialize them in North American in 202
· Chemicals; FUL shares slipped early after Q3 adjusted EPS 86c/$770.1M vs. est. 90c/$784.84M; lowers FY18 EPS to $3.05-$3.20 from $3.15-$3.40 vs. est. $3.23; Bernstein defended chemical stocks (DWDP, WLK, LYB) after recent pullback on rising ethane costs, prompting several analysts over the last week to lower estimates
· Metals & Materials; CCJ shares jumped after Tax Court of Canada has ruled in favor of the company in its dispute of the reassessments issued by Canada Revenue Agency (CRA) for the 2003, 2005 and 2006 tax years (upgraded at BMO on news); SCHN guided Q4 prelim EPS 93c-98c vs. est. 97c; X estimates lowered after oil country tubular goods (OCTG) survey showed some weakness in the market; ThyssenKrupp (TKA.GY) said it plans to split into two companies
· Tanker sector; BTIG initiates group with cautious near-term outlook, but the negative rate view is “already in the stocks” – says OPEC’s decision to boost production is positive and should aid rates during winter, but BTIG’s concern is these cargoes are “more replacement than growth (top picks EURN and STNGand neutral on FRO and NAT)
Technology, Media & Telecom
· Internet; AMZN tgt raised to Street-high $2,525 from $2,020 by Stifel and also increases its near- and long-term revenue estimates for AMZN’s advertising, AWS and retail businesses; there wasn’t much company specific news in the Internet space, but the group was another standout winner, helping push the Nasdaq Comp higher all day, with gains in GOOGL, TWTR, NFLX, FB
· Semiconductors; AMD was downgraded at Northland saying that sentiment is somewhere between “optimistic and euphoric” as investors overestimate the rate of change in the company’s financial performance; XLNX initiated buy and Street high $100 tgt at Needham saying it is accelerating the way to 5G and poised for share gains in the data center market;
· Software mover; in security software, CYBR was upgraded to overweight at Morgan Stanley and raised tgt to $92 from $71 stating that near-term demand is strong as Privileged Access Management, or PAM, becomes more broadly adopted; CRM tgt was raised by several analysts after management provided an upbeat set of presentations at yesterday’s analyst meeting; LAIX 5.75M share IPO priced at $12.50; ATVI said Candy Crush Friends Saga will be launching worldwide on October 11th
· Hardware & Component news; AAPL initiated overweight and $272 tgt at JPMorgan as still see considerable upside to the stock from current levels led by a combination of: faster-than-expected transformation to a services business; stronger-than-expected price increases in the core iPhone business among other reasons; AAOI was downgraded to sell from hold at Loop Capital and cut tgt to $20 from $45 as industry checks suggest the company is having product quality issues in 100G CWDM4 transceivers and that the pricing environment for 100G data center optics remains very tough