Friday, November 30, 2018
Equity Market Recap
· U.S. stocks jumped Friday, surging into the close and adding to already strong gains for the week, as the Dow and S&P ended around 5% on the week (best weekly return for S&P since 2011) while the Nasdaq Composite gained slightly more, helping major averages end November with small gains. U.S. stocks pushed higher as attention turned to trade ahead of a meeting between Trump and Chinese president Xi this weekend at the G20 in Buenos Aires. Stocks adding to recent gains, boosted Wednesday by a dovish turn from the Federal Reserve after Powell comments on interest rates (ahead of his testimony on Capitol Hill next week). Energy still failing to rally, as a bounce in the dollar once again weighed on gold and oil prices, with WTI dropping below $50 per barrel earlier ahead of next week’s OPEC meeting in Vienna. Bonds also rise alongside stocks, as the yield on the benchmark 10-year slipped to 3%, its lowest levels since September. Helping today, Trade Representative Robert Lighthizer said he would be surprised if Saturday’s dinner between Trump and Jinping “wasn’t a success.” Also helping lift market sentiment, businesses in Chicago region grow at fastest pace in 4 1/2 years, according to today’s Chicago PMI survey. Software sector moves higher after mostly positive reactions to earnings results/guidance in the space, especially for VMware, Workday, and Splunk. Also today, the leaders of the US, Canada and Mexico on Friday formally signed the agreement to replace Nafta on the sidelines of the G20 summit in Argentina. The Chicago Purchasing Managers index rises to 66.4 from 58.4 in the prior month and well above the 58.5 estimate as Prices paid rose at a slower pace, while both New orders and Employment rose at a faster pace, signaling expansion.
· Oil prices ended Friday lower, falling 52c, or 1% to settle at $50.93 per barrel, closing off its lows of $49.65 per barrel, and posting a 1% gain for the week…but posts a whopping 22% decline for the month of November. Prices remain pressured despite hopes for OPEC output reduction at next week’s OPEC meeting in Vienna. Russia’s energy minister said Russia was comfortable with current crude prices. On a bearish note, the U.S. Energy Information Administration said that the crude oil production in the U.S. rose 129,000 barrels per day in September to a new record high of 11.475 million barrels per day.
· Gold prices for February settlement fell -$4.40, or 0.4% to settle at $1,226 an ounce, losing about -0.3% for the week but rose roughly 1% for the month as precious metals once again moved in conjunction with the dollar. As the dollar rebounded today, gold prices gave back its recent gains. Gold had recently bounced on dovish Fed Chair Powell comments on Wednesday, implying a potential slowdown in the pace of interest rate hikes. Palladium touched a record level above $1,200 a troy ounce on Friday, putting it within striking distance of the price of gold.
· The U.S. dollar pushed higher all day, gaining back most of Thursday’s declines on the back of dovish Fed speak from Fed Chairman Powell, on lower expectations of aggressive rate hikes in 2019 while attention turned to the G-20 summit kicking off in Buenos Aires. The dollar index (DXY) rallied off yesterday lows of 96.62 to highs around 97.30 today (52-week highs 97.69 on 11/12), getting a boost today following a strong Chicago manufacturing data point for November, handily topping estimates and ahead of the G20 meeting, with attention firmly on Trump and Chinese XI prospects for a trade deal with China. The euro dropped to lows around 1.13, while the pound slides to 1.2750 ahead of Brexit vote in next 2-weeks while buck rises above 113.60. Bitcoin dropped as much as 7.6% on Friday and is down about 37% in November.
· Treasury markets end the week strong, as yields fell with markets bracing for President Donald Trump set to meet his Chinese leader Xi Jinping on the sidelines of the Group of 20 summit in Buenos Aires. The 10-year Treasury note yield fell 2 bps to 3.015% around its September lows. Markets are hopeful the meeting could yield a deal defusing trade tensions between Washington and China. Several reports today noted both sides have held talks to ratchet down tensions but it’s unclear whether they have yielded progress. The 10-year yield down over 25 bps from its 52-week highs just a few weeks ago. A softening tone by Fed Chairman Powell this week has also helped push down Treasury yields.
Sector News Breakdown
· Retailers; PVH Q3’s results show an EPS beat & full-year raise as underperformance of Calvin Klein is the culprit (jeans & Collection); UAA was upgraded to outperform at Wells Fargo saying the worst is over and its analyst day, which he said is scheduled for Dec. 12, should be a more positive catalyst than a negative one; retailers were generally one of the bright spots today
· Non-apparel retail; GME lowered its full-year profit view to $2.55-$2.75 from $3.00-$3.35 prior and $3.05 consensus, despite a strong performance during Black Friday and Cyber Monday/said anticipate that Q4 sales will skew more towards hardware than initially planned; ELY shares slipped after agrees to buy outdoor apparel brand Jack Wolfskin for €418M
· Consumer Staples & Restaurants; SFM plunges on double downgrade to underperform from buy at Bank America and cut tgt to $21 from $35 after Thursday’s news that CEO Maredia will leave to company on Dec. 30th; CMG shares slip as Cleveland Research said 4Q comps seem to be running below consensus as modest traffic improvement is likely offset by less menu pricing
· Casino & Leisure movers; MAR disclosed a “data security incident” of its Starwood guest reservation database that contains information for 327M of the guests, the information includes some combination of name, phone number, passport number email address, mailing address, date of birth and gender; in gaming, Macau casino revenue is expected to increase 4% in November and 6% in December, according to estimates by Bloomberg (WYNN, MLCO, LVS)
· Energy stocks lagged the broader market as oil prices extend recent declines, as oil posts its biggest monthly decline in a decade, while natural gas prices rise for its best monthly total on record. In its recently published monthly report, the U.S. Energy Information Administration said that the crude oil production in the U.S. rose 129,000 barrels per day in September to a new record high of 11.475 million barrels per day. Energy fails to join the S&P 500 rally as oil headed plunged this month after Russia reiterated it’s comfortable with current prices, just a week before it meets with OPEC in Vienna to discuss possible production curbs.
· Stocks news; the weekly Baker Hughes Rig (BHGE) showed the total rig count fell 3 rigs to 1,076, with oil rigs up 2 to 887 and gas rigs down -5 to 189; RDS/Asaid that it has completed the sale of upstream interests in Ireland for up to $1.3 billion as part of its 2016-2018 divestment program; Citi cut its EPS estimates and tgt for HAL, citing risk for a “sluggish” 1Q
· E&P sector; Cowen launched coverage on E&P sector with NBL, PXD, PE and WPX as Top Picks and outperform ratings on APC, CDEV, CPE and FANG as well saying constructive on the group with a real pivot to FCF generation. Oppenheimer said a perfect storm of negative data points emerging quarter to date has dented their bullish thesis on oil prices such as resurgent US oil production, global economic growth concerns and uncertainty on OPEC production cuts weigh on prices (downgrades DNR and trim 2019/20E WTI by 15%/3% to $61/$65/b and lower earnings estimates accordingly in the sector)
· In Pipelines and MLPs; ETRN entered into definitive purchase agreements with certain unitholders of EQGP to acquire limited partner interests in EQGP for $20.00 per unit in cash, which is a 17.5% premium to yesterday price
· Bank movers; GS falls as the Federal Reserve is ramping up its probe into how Goldman Sachs executives eluded the bank’s internal controls as it helped Malaysian authorities raise billions of dollars that later went missing, Bloomberg reports (GS was also downgrade by Banc America to neutral); DB falls again (down 50% YTD) as German authorities continued searching its headquarters for evidence of money laundering; shares fell over 4% yesterday amid the initial reports of the raids
· Brokers and Asset managers; Goldman Sachs initiated ETFC and SCHW with buys flagging conservative NIM ests., providing a tailwind to earnings revisions, and believes the group isn’t getting credit for the defensibility of earnings as higher cash balances may offer a strong offset in a major downturn; RJF announced a new $500M share buyback authorization; UBS lowered estimates for the asset managers by roughly 7% on average, driven by negative market beta, along with weaker expected flows given a prolonged risk-off backdrop (BEN, TROW)
· Business Services; Barclay’s upgraded FICO to overweight from equal-weight following the recent pullback in shares & looking into 2019 while remain believers in TRU’s ability to grow through the cycle and stay on the sidelines on EFX until we get more comfortable with its technology-led turnaround plans; in finance, PAGS shares fell after Q3 results beat but issued conservative forward earnings guidance for 2019
· Pharma movers; strength in large cap Pharma early with 52-week highs for PFE, LLY, ANTM (along with gains in other Pharma names); AZN said a Phase 2a clinical trial, INCONTRO, evaluating its Z second-generation inhalable TLR9 agonist AZD1419 failed to achieve the primary endpoint of time to loss of asthma control up to week 52; ANTM reaffirmed all 2018 guidance metrics other than membership saying YE18 membership is expected to be about 39.5M due to the delayed start of BCBSMN Medicaid partnership; IQV 6M share secondary priced at $124.25
· Medical devices; ABT was upgraded to buy at Goldman Sachs as sees a tangible path to revenue upside from products such as MitraClip, Libre and HeartMate 3; overall, Goldman notes that market fundamentals in MedTech remain favorable, with innovation driving growth. However, in Life Science Tools & Diagnostics, stays neutral as forecast a top-line deceleration in 2019 and believe the current healthy operating backdrop is fully appreciated in valuations (firm downgraded DGX and WAT while upgraded MYGN to neutral)
· Lab stocks lower a second day as LH updated its FY 2018 guidance lower as total Revenue growth is revised to 9.9%-10.3% from 10.5%-11.0% prior and LabCorp Diagnostics Revenue growth of 2.1%-2.5% from 3.0%-3.5%; cuts year EPS from $11.25-11.45 to $10.95-11.05 (follows weak DGX guide Thursday)
Industrials & Materials
· Industrial & Machinery; GE shares fell after the WSJ reported former employees have told SEC investigators that certain insurance risks were ignored, leading the company to have less-than-sufficient reserves to cover losses ; E&Cs stocks DY, MTZ rally early from AT&T’s capital spend commentary on Thursday (both customers)
· Transports; Dow Transports rose over 1% to 10,800, topping its 200-day MA 10,737 earlier (100-day MA resistance higher at 10,900), led by airline boost (AAL, DAL, JBLU) today on oil drop, while rails rally again (NSC, UNP); airlines higher early as oil prices resume downward trend
· Metals & Materials; metals have been weak on the dollar rise, with disappointing China data overnight not helping steel, aluminum, iron ore names (China’s official PMI fell to 50 in November, missing market expectations and down from 50.2 in October and at lowest level in 15-months); KL said its Fosterville Mine in Australia is on track for record quarterly production in Q4, with full-year production now expected to exceed 330K oz. vs. current guidance of 300K-310K oz; gold and silver miners slipped on the dollar spike
Technology, Media & Telecom
· Semiconductors; the Philadelphia Semiconductor Index rises roughly 1.5% in November before vs NYSE FANG+ down over 5% while the S&P 500 Info Tech index is lower by over 3%; AMBA Q3 earnings topped expectations but guided F4Q easily below consensus, while announced 4 Auto CV “design wins”; Worldwide semiconductor industry revenue grew 7.4% Q/Q to a record $129.8B in Q3, according to IHS data as Samsung led the overall market with a 16.2% share followed by INTC at 14.5% and SK Hynix at 6.5%; CREE top decliner, falling after JPM downgrade
· Software movers; VMW shares rise following a solid F3Q19 beat and raise and strong FY20 guidance as revenue, license, and license billings all accelerated over F2Q, to 14%, 17%, and 22% respectively. Total billings growth eased slightly q/q to 11% from 13% but on a tough comp; SPLK strong quarter with all key financial metrics coming in ahead of guidance/consensus, and giving management the confidence to raise the company’s FY20 revenue target; WDAYquarterly results beat as all key financial metrics beating management’s guidance and consensus estimates – subscription revenue, operating margins, and billings came in above consensus/guidance and overall net new ACV growth accelerated vs. 1H19; COUP was upgraded to buy at Loop Capital citing improving fundamentals despite the recent selloff in shares; ZUO slides early despite better earnings and higher guidance
· Media & Telecom movers; AT&T (T) hosted investor day in New York on Thursday, updated its strategy following the acquisition of Time Warner as well as guidance for 2019 as sees FY19 adjusted EPS growth in the low single digits/sees FY19 free cash flow in the $26B range/sees FY19 gross capital investment in the $23B range; expects to use about $12B in free cash flow after dividends to pay down debt in ’19; IPG underperformed in the advertising sector, while media shares were weak, led by a drop in VIAB; WWE was upgraded at JPMorgan
· Hardware & Component news; HPQ Q4 beat on revenues and free cash flow, and the company guided Q1 in-line with the street and reaffirmed FY 19 EPS and FCF; SNE upgraded to buy at Citigroup based largely on a structural shift away from “electronics heavyweight” toward a content/platform company