Wednesday, November 28, 2018
Equity Market Recap
· U.S. stocks enjoyed an all-out broad based rally, pushing some major averages back above key technical levels, getting a big boost from Fed Chairman Jerome Powell after his speech today to the Economic Club of New York. Following another round of sharp criticism from President Trump overnight (he had reiterated his displeasure with the Fed and its interest-rate policy saying in an interview with the Washington Post, he is “not even a little bit happy” with his choice to lead the central bank), Powell came through more dovish that markets expected, especially ahead of its FOMC policy meeting in a few weeks. The Fed chairman said US monetary policy was not on a “preset” path and defended the central bank’s approach to gradually raising amid political pressures. The market took the commentary to imply fewer interest-rate increases ahead, which was music to stocks ears. With today’s stock surge, the Dow Industrials rose as much as 600 points (2.4% gain), pushing it back above the 200-day MA resistance (which was 25,101). The tech heavy Nasdaq Composite outperformed as well, trading up over 2.9%, led by gains in software after better Salesforce.com earnings/guidance results last night. Stocks have also managed to rally this week despite renewed trade concerns with China and President Trump comments about tariffs heading into the G20 meeting this week in Buenos Aires.
· Economic data today was in-line to mixed, as the second reading of Q3 GDP rose 3.5%, in-line with forecasts while inflation data mostly in-line for Core PCE. Markets also keeping a keen eye on the UK as the Pound remains active with investors watching if Parliament rejects the current Brexit deal. The Federal Reserve has flagged a hard Brexit and Italian sovereign debt sell-off as near-term risks to the US financial system.
· Fed Chairman Jerome Powell said in prepared text for the Economic Club of New York event that “there is no preset policy path” and “we will be paying very close attention to what incoming economic and financial data are telling us.” “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.” Powell said moving too fast would risk shortening U.S. expansion, while going too slowly could risk “other distortions in the form of higher inflation or destabilizing financial imbalances.” Powell also said “effects of gradual hikes uncertain, may take a year or more to realize.” The comments boosted stocks.
· The Bank of England warned in its analysis on what the proposed Brexit deal will mean for the U.K. economy saying the U.K. could suffer the worst economic slump since at least World War II if Prime Minister Theresa May fails to get her Brexit plan past lawmakers and the country crashes out of the European Union without a deal. The BOE said it sees the economy shrinking by 8% within a year and property prices plunging almost a third under a worst-case scenario. BOE said commercial property prices likely to plunge 48%, Sterling falls 25% to below parity with the dollar, unemployment rises to 7.5% and inflation accelerates to 6.5% in its assessment
· The U.S. economy grew 3.5% in third quarter, pushes corporate profits to 6-year high, GDP data showed, and was in-line with consensus estimates (GDP rose 4.2% in prior quarter). Personal consumption rose 3.6% in 3Q after rising 3.8% prior quarter while GDP price index rose 1.7% in 3Q after rising 3.0% prior quarter; the core PCE q/q rose 1.5% in 3Q after rising 2.1% prior quarter. Business profits, meanwhile, surged to new heights as adjusted corporate earnings before taxes rose 3.4% in the third quarter
· Advanced Goods Trade Deficit for Oct was (-$77.2B), in-line with the economist estimates while widened from $76.3B in the prior month; imports rose 0.1% in Oct. to $217.764B from $217.554B in Sept. while exports fell 0.6% in Oct. to $140.517B from $141.303B in Sept.
· New home sales for Oct fell an unexpected (-8.9%) to 544K annual rate, below the 575K economist estimate, though the previous three months’ new home sales data revised up by 53K; median new home price fell 3.1% y/y to $309,700; average selling price at $395,000; 16% of new homes sold in Oct. cost more than $500,000, unchanged from 16% prior month
· Richmond Fed’s Nov. Manufacturing Survey stood at 14, slightly below the 15 est.; shipments rose to 12 after 7 the prior month while new order volume slowed to 17 after 20 the prior month; order backlogs rose to 15 after 13 the prior month
· Oil prices plunged late day, ending near the lows of the session, with WTI slipping -$1.27 or 2.5% to settle at $50.29 per barrel. Oil prices moved lower late morning following another week of bearish inventory data (build reported by the API overnight and the EIA today – both with weekly stockpile builds of over 3M barrels), but the selling got aggressive late day, taking WTI back near $50 per barrel. Earlier, the Financial Times reported Saudi Arabia’s energy minister said the kingdom would not cut its oil output alone, as ministers from producer countries prepare to gather in Vienna next week.
· Gold prices posted a late day rally, as gold for December delivery rose $10.20, or 0.8%, to settle at $1,223.60 an ounce after earlier tapping a low of $1,210.50 while gold for February delivery added $9.90, or 0.8%, to finish at $1,229.80 an ounce. The reversal higher followed Fed Chair Powell’s remarks that came across dovish and that rate hikes are no on a predetermined course.
Currencies & Treasuries
· The U.S. dollar sunk midday as other currencies spiked after Fed Chairman Powell said in his prepared text at the Economic Club of New York that the economic effects of gradual rate increases are “uncertain.” The comments from Powell were taken as “dovish” by markets and that the course of future rate hikes have not yet been determined. The Canadian dollar dropped late day against the US greenback after oil prices closed near their worst levels in a late day slide. The Pound and Euro with strong moves on the day (euro 100 bps move off lows of 1.1267 to highs of 1.1388) while the buck gave up gains vs. the Japanese yen. Bitcoin with a big bounce after its recent tumble rising over 14% above $4,300 (off recent lows around $3,400). Treasury prices also edged higher, sending yields lower after the Powell comments. Separately, the U.S. Treasury sold $32B in 7-year notes at a yield of 2.974% compared to 2.98% when issued prior, with the bid-to-cover (demand) up at 2.55 vs. 2.39 prior auction and indirect bidders awarded 56.6% of the auction and 27% to direct bidders.
Sector News Breakdown
· Retailers; TIF shares fell as Q3 comp sales trailed estimates in total (up 3%, missing the 5.6% Bloomberg estimate) and in all reported regions except Asia Pacific/noted lower-than-expected spending in Q3 to Chinese tourists in the U.S. and Hong Kong; CHS plunges after the retailer posts weak Q3 sales, falling 6% during the quarter, while comparable sales were off 6.8% vs. -2.1% consensus expectation and gross margin fell 130 bps to 36.2% during the quarter; Wayfair, Inc. (W) reported a 58% increase YoY in direct retail gross sales, defined as dollars of order intake, for the five-day peak shopping period of Thanksgiving Day through Cyber Monday; JILL rises after citing some sales momentum into the holiday quarter, saying comparable sales increased 1% during the quarter to top the consensus estimate for a 2.4% drop/total sales were up 7.5% to $174M; BURL rises following a quarterly beat and raise quarterly report (helping other discount peers TJX, ROST)/BURL’s adjusted EBIT increased 29% y/y to $115M
· Sporting goods retailers active on earnings; DKS 3Q total revs miss the street estimate ($1.86B vs. est. $1.88B though one analysts (Susquehanna) noted many analysts did not account properly for the shift of sales from 3Q18 to 2Q18 due to the calendar shift caused by the 53rd week; SPWH reported Q3 EPS 26c in-line on slightly weaker sales and comps that fell (-0.5%)
· Consumer Staples; PZZA shares fell after Stifel said earlier assuming no M&A deal, then investors should brace for a pullback in the stock (low-$40s); SJMshares fell as Q2 EPS and sales fell short of consensus views and cut FY19 adjusted EPS view to $8.00-$8.20 from $8.40-$8.65 – the miss and lower guidance weighed on food stocks GIS, CPB); UN is in talks to acquire GSK’s nutrition business according to reports
· Housing & Building Products; homebuilders fell (LEN, TOL, PHM, KBH) after weaker than expected monthly new home sales data; ZG said expects mortgage rates to continue to rise, putting a pinch on affordability, particularly in already expensive markets/some buyers may be pushed back toward the rental market, reversing the recent slowdown in rents; BECN was downgraded to neutral at Longbow as shares hit their tgt price of $34 though see more upside than downside to numbers; WHR cut to neutral at CSFB saying pricing captures valuation
· Energy new; Saudi Arabia’s energy minister said the kingdom would not cut its oil output alone, as ministers from producer countries prepare to gather in Vienna next week to discuss curbs; Lukoil (LUKOY), Russia’s second-largest oil producer, reported an 89% leap in third-quarter net profit citing rising sales, higher oil and gas prices and a weaker rouble
· Weekly inventory data was bearish again as the EIA reported weekly crude stockpiles rose 3.5M barrels, more than the 1M build estimate while Cushing crude rose +1,177M barrels; gasoline stockpiles fell an unexpected -764K vs. est. +1,000k and distillates an unexpected build of 2.6M barrels vs. the -750K draw forecasts. Overnight, the API reported U.S. crude supplies rose by nearly 3.5M barrels for the week ended Nov. 23, showed gasoline supplies declined by -2.6M barrels, but distillate stockpiles rose by 1.2M barrels
· Bank movers; bank stocks, both large cap and regional, saw a boost as well following the Powell comments that interest rates are “just below” the so-called neutral range, spurring speculation about a pause in rate hikes and sending stocks higher across the board. Although lower rates tend to have weaker effect on banks (lending margins), it was a broad “risk-on” day for stocks overall; in consumer finance and lending; ONDK was upgraded to buy at UBS on improved outlook due to higher-than-previously estimated revenue and reduced concern about OnDeck’s ability to turn originations into asset growth; in exchanges, CME shares fell after being downgraded to neutral at UBS but raised tgt to $204 from $185
· Pharma & Biotech movers; HUM raises 2019 Medicare Advantage membership estimate to 350K-400K from 250K-300K and announces $750 mln accelerated stock buyback program; RCKT 3.55M share Secondary priced at $15.50; ACAD 16.175M share Secondary priced at $17.00; CPRX FDA PDUFA date for Catalyst Pharmaceuticals Firdapse is November 28, 2018
· Leerink initiates coverage on 10 stocks in genetic medicine with six Outperform ratings (BLUE, DRNA, EIDX, NTLA, RCKT, WVE), three (ALNY, AVRO, IONS) with Market Perform ratings and one Underperform (RGNX) rating as are bullish on innovation velocity and increasing regulatory clarity in the sector
· Healthcare services and providers; PDCO rescheduled 2Q earnings results release and call to Dec.6, vs. original date of Nov.29, citing need for more time to evaluate impact on non-operating income; DVA was upgraded to outperform at Raymond James
Industrials & Materials
· Transports spike; Dow Transports up over 200 points, topping its 50-day MA resistance of 10,687 and nears the 200-day of 10,734 – ALK +4%, CAR over 3% and 2% gains for rails NSC, UNP, CSX
· Airlines; ALK raises Q4 RASM forecast, sees capacity up 1.1%; guided to Q4 revenue per ASM, or RASM, of 12.6c-12.8c, up from its prior view of 12.4c-12.6c; SAVE upgraded to overweight at JPMorgan saying they clearly misgauged the elasticity of Spirit’s passenger base, as evidenced by 4Q18’s TRASM surprise; Susquehanna initiated with Positive ratings on DAL and AAL, and Neutral ratings on UAL and LUV saying following the wave of mergers from 2005-2013, the industry today is exhibiting capacity discipline and growing its technology-driven merchandising efforts
· In rails, UNP was upgraded to buy at Deutsche Bank and up tgt to $175 saying it is now positioned for at least $3B in profit improvement; KSU disclosed that 4Q volumes are trending below expectations and revenue is expected to be down slightly sequentially in a presentation at the Credit Suisse Industrials Conference; CNI said at CSFB conference right in-line with Q4 guidance so far and operating metrics are better than year ago quarter
· Chemicals sector; Jefferies took down ’19 EPS estimates for DWDP, LYB, MEOH, BASF to reflect a flatter cost curve due to the recent fall in crude prices (targets for these four names get cut as well) but believe oil prices for ‘19 running $15-20/bbl lower than we had expected can offset the drag on demand from either a ~10% move in the dollar or 50-75bps higher interest rates; RPM said it is targeting FY21 Adj. EPS of $4.90 to $5.30 on revenue of $6.26 billion, up from earnings of $2.86 a share on revenue of $5.32 billion
Technology, Media & Telecom
· Internet; WB Q3 results that beat EPS and revenue estimates with a 44% Y/Y revenue growth though issued downside Q4 guidance for revs $480M to $490M (vs. est. $497.97M); SINA Q3 results that beat EPS estimates but missed on revenue with a reported $557.2M (+26% Y/Y) and issued downside FY18 revenue guidance of $2.09B to $2.12B (est. $2.17B); Morgan Stanley positive on GDDY saying they focus on GoDaddy’s strong track record of organic growth overlooks its potential as a consolidator in a fragmented market (bull case $112).
· Semiconductors; AMD and NVDA shares rebound after Mizuho says GPU pricing are starting to turn up 10% to 15% from the September lows and for the first time in eight months, pointing to a faster normalizing of channel inventories and demand elasticity; SWKS was upgraded to equal weight from underweight at Morgan Stanley saying the stock had priced in concerns about smartphone growth following what’s on track to be its largest monthly decline since Sept 2012.
· Software movers; CRM shares help push cloud, Saas software stocks higher as posted a very strong 3Q, with organic billings growth accelerating for the 3rd straight quarter and out-year guidance ahead of consensus/ revenue, margin and billings beating street forecasts as reported revenue grew 26% Y/Y, subscription revenue grew 26% Y/Y, and deferred revenue grew 26% Y/Y; CLDR rises after named long idea Hedgeye; general strength in cloud names on the CRM bear and raise (WDAY, DATA, GWRE among others)
· Media & Telecom movers; OOMA was upgraded at William Blair following Q3 results and guidance that were ahead of Street expectations across the board; WWE tgt was raised to $105 at Guggenheim as raising our outlook for WWE’s renewal in India from an AAV of $85Mto a $124M AAV; ZAYO was upgraded at JPMorgan after positive management meeting takeaways
· Hardware & Component news; NTNX shares rise as posted better-than-expected revenue, opex, and FCF (along with in-line gross margin and billings) and better-than-expected F2Q19 top-line guidance/analysts overall positive on shares