Tuesday, November 27, 2018
Equity Market Recap
· U.S. stocks end mixed as the Dow Industrial Average closed higher for a second day despite weakness in Dow component UTX following news its was breaking into three companies, while trade concerns with China ramp up ahead of this week’s G20 meeting between Trump and Xi. Stock averages were broadly lower this morning with reduced optimism about a trade deal being reached with China after President Trump said that if a deal isn’t reached soon he expects the U.S. will impose a 25% tariff on all Chinese imports, in addition to potentially taxing iPhones and other Apple (AAPL) products. Trump said in a WSJ interview that it is “highly unlikely” he will refrain from raising a 10% tariff on $200B of Chinese goods to 25% effective Jan. 1, and that he would move ahead with a 10%-25% tariff on an additional $267B of imported Chinese goods. Stocks pared some earlier losses after news the White House and China are holding trade talks at “all levels” ahead of Trump and Xi meeting. The trade concerns overshadowed what has been strong Black Friday and Cyber Monday sales in the retail space. The 10-year Treasury yield declined, while the dollar gained for a second day after Fed Vice Chairman Richard Clarida backed gradual rate hikes before a speech by chair Jerome Powell on Wednesday.
· Fed Vice Chairman Richard Clarida said the central bank’s gradual approach to interest-rate hikes is appropriate as U.S. monetary policy gets closer to its optimal longer-run setting. “As the economy has moved to a neighborhood consistent with the Fed’s dual-mandate objectives, risks have become more symmetric and less skewed to the downside than when the current rate cycle began three years ago,’’ Clarida said. Fed members George, Evans and Bostic also spoke today. Note tomorrow Fed Chairman Powell to speak to the Economic Club of New York.
· European stocks ended lower after President Donald Trump talked up tariffs against China, saying it was “highly unlikely” that he would place looming tariffs on hold, speaking ahead of a meeting with Xi Jinping. Separately, auto shares after a German media report said Trump may impose duties on imported cars next week, after the G20 meeting.
· Consumer confidence for November falls to 135.7 from 137.9 prior month, but in-line with estimates; Present situation confidence rose to 172.7 vs 171.9 last month while consumer confidence expectations fell to 111.0 vs 115.1 last month
· S&P CoreLogic Case-Shiller 20-City Index up 5.15% Y/Y, in-line with estimates and after rising 5.69% in prior month; S&P/Case-Shiller 20-city NSA index at 213.76 after 213.8 in Aug.; the 20-city SA index rose 0.33% m/m in Sept. after rising 0.09% the prior month
· The FHFA said U.S. 3Q Home Price Index rises 1.3% as third-quarter home prices rose 6.3% y/y; home prices rose to 5.03% on an annualized basis vs. 5.05% a quarter earlier; new loans were 61.5% of total loans; cash-out refinances were 27.7% of total loans
· Oil prices reversed lower early afternoon, with Brent crude slipping back below $60 a barrel, while WTI crude gave up early gains, falling back to recent lows just above $50 per barrel. However, WTI crude settled well off its lows, falling 7c at $51.56 per barrel. A combination of increasing expectations for a slowdown in global economic growth that may lead to lower energy demand, as well as strength in the U.S. dollar contributed to oil’s prices losses. Fears of the trade impact with China, which gets tenser by the day also playing a roll. Markets also concerned ahead of weekly inventory data tonight (API) and tomorrow (EIA) which have shown continued inventory builds over the last few months. Note oil has tumbled sharply from nearly four-year highs seen in early October on fears of a global glut and concerns about world economic growth, leaving both grades off more than 30% from their peaks. Recall WTI futures plunged 7.7% on Friday for the biggest one-day percentage loss since July 2015 before bouncing 2.4% higher yesterday, for its biggest one-day gain in eight weeks. December gold fell -$9.00 or 0.7% to settle at $$1,213.40 an ounce, weighed down heavily by the advance in the US dollar.
Currencies & Treasuries
· The U.S. dollar was broadly higher vs. major currencies rising back above the $1.33 threshold against the Canadian dollar as oil prices reversed low in afternoon trading. The euro fell below the 1.13 level against the euro after a German magazine reported of possible U.S. auto tariffs. The dollar extended gains against the Japanese yen as also moves to around 2-week highs, while the Pound falls as much as -0.7% to around 1.2740 ahead of Brexit votes in the coming weeks. Treasury markets edged slightly higher, as the 10-year yield dipped 1 bps to under 3.05%, while the 2-year was around 2.82% and the 30-year 3.30%. The U.S. Treasury sold $40B in 5-year notes at a yield of 2.88%, in-line with the when-issued yield prior to auction with a bid-to-cover at 2.49, above the prior 2.30 auction and indirect bidders awarded 59.9%.
Sector News Breakdown
· Cyber Monday total U.S. online spend reached a record $7.9B, up 19% y/y, according to Adobe Analytics, which had predicted digital purchases of $7.79B. Top 5 selling products on Cyber Monday were: Fingerlings, L.O.L. Surprise, Nintendo Switch, laptops (Dell, Apple), LG TVs. In comparison, Thanksgiving Day and Black Friday brought in $3.7B (+28% y/y) and $6.2B (+23.6% y/y) in revenue, respectively; Saturday and Sunday (Nov. 24 and 25), set a new record as the biggest online shopping weekend in the U.S., with $6.4B in sales, growing faster than Black Friday and Cyber Monday with more than 25% on each day.
· Retailers; Baird removed positive Fresh Designation pick on UAA after recent outperformance; BKE shares fell after Q3 EPS and revenue missed consensus estimates; FRAN guides Q3 EPS loss (17c)-(19c) on revs $95M vs. est. loss (3c) and $106.4M saying boutique traffic declines persisted throughout the quarter; HIBB Q3 EPS 14c/$216.9M miss est. 16c/$217.28M and lowers year EPS view to $1.55-$1.65 from prior outlook $1.57-$1.75; 52-week lows for TPR
· Consumer Staples; HRL shares fell in food space after Jefferies downgraded to hold on valuation noting sector rotation into high-quality staples like HRL combined with significantly better pork margins have more than offset bottoming turkey margins, resulting in the stock significantly outperforming (up 34% vs -1% for S&P over last 9 months); in tobacco space, MO losing streak snapped after falling 11-straight days prior; PZZA fell after the WSJ reported Trian Fund Mgmt, which was evaluating a bid, has decided not to pursue it
· Casino & Leisure movers; Thomas Cook Group PLC suspended its final dividend for fiscal 2018 as it warned that underlying earnings before interest and taxes (Ebit) will be below last year’s figure; in lodging, WYND was downgraded to neutral at Goldman Sachs after the recent rally as key tenets of our thesis have unfolded (execution on faster sales growth while balancing margins) yet valuation remains suppressed; Goldman upgraded MAR and added to conviction buy list; SABR 23.39M share Spot Secondary priced at $24.95
· Auto’s; TSLA shares active after the electric car maker’s vehicle sales in China plunged 70% in Oct from a year ago, China Passenger Car Association told Reuters; European auto shares slipped early morning after a German Magazine said Trump may impose auto tariffs as early as next week post the G20 meeting (FCAU, DDAIF); GM shares slipped late day after President Trump said he was very disappointed with General Motors and their CEO, Mary Barra, for closing plants in Ohio, Michigan and Maryland and are now looking at cutting all GM subsidies
· Energy stocks were active as oil prices rebound further after falling the last 7-straight weeks on increased output by OPEC members, rising inventories in US and slowing demand; in the E&P sector; PE was upgraded to buy at Goldman Sachs saying a sell-off in E&P stocks creates an attractive entry point; says PE and FANG are well positioned to deliver attractive medium-term volume growth within cash flow; downgraded AMR to neutral from buy; FANG was added to the S&P 500 index, replacing SRCL prior to the open of trading on Monday, December 3; KOS 15M share Spot Secondary priced at $5.43
· Utilities & Solar; PCG shares active early after a bill to help the company absorb billions of dollars in potential liabilities from this month’s deadly wildfires will be introduced in January with the goal of passage in the first quarter, according to assemblyman Chris Holden. He is planning a bill that would extend legislation that lets PG&E issue bonds to pay off costs tied to the wildfires; OGE was downgraded to neutral at Bank America based solely on valuation as our sum-of-the-parts analysis yields minimal upside at current levels; SWX to acquire 80% ownership of Linetec Services for approximately $299M in cash; files to sell 3.1M shares of common stock
· Bank movers; financials again failing to lift the market, as lower yield prices weigh on stocks; several banks downgraded by analysts today with USB cut to hold at Deutsche Bank, while Macquarie cut its ratings on CMA and PNC while upgrading CFG; ADS shares sunk after reports its exploring strategic alternatives including a potential sale for its Epsilon business with its digital media arm Conversant
· Pharma movers; BMY shares slumped as announced that the Phase 3 CheckMate -451 study did not meet its primary endpoint of overall survival (OS) with Opdivo (nivolumab); AMRN 11.111M share Spot Secondary priced at $18.00; VRTX rises as its cystic fibrosis drug combination shows strong results in pivotal clinical trials; LOXO and partner Bayer’s approval of Vitrakvi was in line with expectations but pricing is well above expectations said Morgan Stanley
· Biotech movers; HALO shares slipped as the company said the FDA agreed to its request to change the primary endpoint of the HALO-301 study to a single primary endpoint of overall survival/as a result, the previously planned interim analysis will not be conducted; ABEO announced immediate termination of CEO Carsten Thiel following an independent investigation into allegations of professional misconduct; GTHX shares fell on mixed results from mid-stage study of trilaciclib
· Healthcare services and providers; healthcare distributors were strong with early gains in MCK and CAH; HIIQ shares were under pressure after noted short-seller Aurelius Value said it was shorting the company saying it sees “enormous downside potential in HIIQ shares”
Industrials & Materials
· Industrial & Machinery; UTX announced the closing of its COL M&A deal and its intention to separate into 3 individual companies; AOS was upgraded to overweight at KeyBanc as sees a greater likelihood for multiple expansion and says concerns over China are fair, but overstated
· Transports; airlines with a boost after SAVE issued a positive update ahead of investor conferences, raising its 4Q18 RASM outlook to up +11% from its prior guide of +6%, helped by lower fuel; truckers led the declines today in the index (LSTR, JBHT), while airlines benefitted from the SAVE guidance (and as oil prices remain lower)
· Metals & Materials; GSM shares plunged toward a record low after the silicon metal supplier reported Q3 earnings and revenue that were well below expectations saying market conditions in their main products deteriorated through Q3 (EBITDA of $45M vs. est. of $82.7M); CMP was upgraded to neutral at Credit Suisse on risk/reward noting the -29% move since February reflects investors’ frustration with its inability to execute in the Salt segment
· Steel stocks pressured amid a trio of negative news items as: 1) China/US tensions high into G20 meeting after Trump comments on tariffs again last night, 2) STLD said it plans to spend as much as $1.8 billion to build a new facility that will have annual output capacity of about 3 million tons (increase production), 3) research as KeyBanc said they think that U.S. carbon sheet-based stocks will likely be weaker on this supply addition while Longbow notes several factors have emerged that may prevent US Steel (X) from generating $2.4B of total EBITDA next year. Specifically, we see the recent weakness around the oil & gas sector, slowing carbon sheet demand growth and limited HRC spot price upside
Technology, Media & Telecom
· Apple (AAPL) – shares weak initially, falling back near its lowest levels since May after yesterday afternoon President Trump in a media interview suggested that he might consider tariffs on imported iPhones and laptops, citing 10% as possible
· Internet; FAANG stocks (FB, AAPL, AMZN, NFLX, GOOGL) mentioned positively at Bank America saying stocks underperform, but growth story far from over (notes FANG stocks, down 23% on average from Labor Day to Thanksgiving, vs the S&P500 down 9% & NASDAQ down 15%).
· Semiconductors; MXIM shares rallied as it will replace AET in the S&P 500 index prior to the open of trading on Monday, December 3; Bloomberg reported that AMZN unveiled its own server processors late Monday and said the Graviton chips will support new versions of its main EC2 cloud-computing service (reducing reliance on INTC)
· Media & Telecom movers; DIS was upgraded to outperform at Imperial Research; WWE was upgraded to outperform at FBN Securities; Nomura noted AT&T (T) is holding a sell-side Analyst Day this Thursday, November 29th at which it will provide its 2019 outlook and believe the levers are in place for significant FCF growth