Monday, December 10, 2018
Equity Market Recap
· Volatility has become the norm! It was another extremely volatile trading day for U.S. stocks, with major averages closing well off its session lows in an impressive rally (though settled mixed), as the NASDAQ outperformed led by a gain in FAANG and software stocks as investors scoop up beaten up favorites. Financials and Energy were the biggest drags in the S&P as crude oil prices settled near their lows of the day and as Treasury yields remain depressed. Several macro factors have wreaked havoc on global stock markets over the last few weeks with today being no different. Weaker China trade data overnight (imports/exports) and UK Brexit fears grabbed the headlines today, sending Dow Industrials down as much as 500 points (moving below the 24K level briefly for the first time since late June) before rebounding, while the S&P 500 index sunk below 2,600 to its lowest levels in 8-months (May 3rd) also before recovering. The NASDAQ outperformed, rising back above 7,000 late day after touching earlier lows of 6,878.98.
· Early on, it was European headlines that shook market confidence after U.K. Prime Minister Theresa May delayed a key vote on Brexit that had been set for Tuesday, without offering a new date vs. risking a defeat. May told her Cabinet she will travel to Brussels for talks with EU leaders on Thursday and ask for better terms on the most controversial part of the withdrawal agreement — the plan for the Irish border. The European Union won’t allow May to reopen negotiations over the Brexit divorce deal, officials said while the U.K. government will step up no-deal Brexit preparations, May said.
· Dow Transports slide, falling to lows below 9,700 (down 3%) as component FDX drops sharply on an analyst downgrade. Dow component AAPL was a big drag on the index, S&P and Nasdaq after QCOM won a ruling in China against the company that bans the sale of some iPhone models in that country (shares hit a low of $163.33 before rebounding). Bank shares fell a fourth day in early Monday trading, with the KBW index sliding to its lowest level since September 2017. Not even a slowing rate hike outlook from the Fed (note Goldman Sachs today reduced its outlook that the central bank will back off from its once-per-quarter interest rate hike path as they feel the Fed will refrain from raising interest rates in March, and will only boost three times next year) was enough to help markets – ahead of the FOMC meeting next week (rate hike is expected).
· Oil prices slumped late day, failing to rally with the broader stock market rebound, as WTI crude settled at $51.00, down -$1.61 and just off its intraday lows of $50.85 per barrel (off earlier highs $52.81). Gold prices slipped -$3.20 to settle at $1,249.40 an ounce as the dollar rallies while gold prices fall from Friday highs which were their best levels since July. A combination of weaker China trade data overnight and a stronger dollar weighed on commodity prices.
· The U.S. dollar was broadly higher, gaining ground the most vs. Sterling, as the pound slid to the lowest mark since April 2017 (as low as 1.2507 vs. the dollar, down over 1.5%) after U.K. Prime Minister Theresa May delayed a key vote on Brexit that had been set for Tuesday, without offering a new date vs. risking a defeat tomorrow. The euro extended its losses earlier amid a dive in the UK pound and wider dip in European stocks, but rebounded to close higher vs. the greenback. The dollar bounced back around the 113 level despite the “risk-off” market temperament today, while also extended gains vs. emerging markets (dollar rises above 1.34 against the Canadian dollar as oil prices dropped again).
· U.S. Treasury prices gained early, with the 10-year yield slipping to around last week lows of 2.83% after U.K. Prime Minister Theresa May said she would delay a vote on her Brexit plan in Parliament. The 10-year Treasury note yield fell to 2.836% before reversing higher, back above the 2.86% level as US stocks bounced sharply off their lows. The 30-year bond slipped over 3 bps to 3.11% before paring its losses as well. Brexit uncertainty, trade concerns with China and a more dovish outlook from the Fed has pushed Treasury prices higher and yields well off October highs (10-yr was up at 3.25%, 2-yr above 2.90% in October).
Sector News Breakdown
· Consumer Discretionary and Staples; TVTY is buying diet plan company NTRI for $1.3B in cash and stock deal valuing shares at $47 as TVTY expects double digit accretion to adjusted EPS in 2020 and beyond ; FIVE was upgraded to buy at Loop Capital; UNFI slides a 6th straight day after BMO cut its target in half to $14 from $28
· Housing & Building Products; building product changes at Goldman Sachs as upgrade FBHS to Buy and downgrade JELD to Neutral partly on our preference for RnR. While they expect housing macro to remain muted, expectation is for price/cost to be less of a headwind. This combined with depressed valuations across the sector (sector trading 15%/8% below 5/10yr averages), creates an opportunity to be selective and generate alpha
· Casino & Leisure movers WYNN, LVS, MLCO, MGM move higher initially after channel checks by Bernstein and JPMorgan show strength as Macau gross gaming revenue (GGR) for the Dec. 1-9 period is estimated to reach about 7.9B patacas (up 6%), or an average daily rate of 877B patacas, with month-to-date VIP volume and Mass GGR estimated to rise low- to mid-single digits, Bernstein said/VIP hold rate for the month-to-date period is projected to reach ~3.1%, “slightly higher than normal range”
· Auto movers; Goldman Sachs downgraded auto supplier VC to sell on concerns that the company’s upcoming business update will be a negative catalyst for shares; Volkswagen denied allegations that Chairman Poetsch knew about the carmaker’s emissions test cheating almost three months before U.S. authorities made it public in September 2015, according to Reuters; overall auto stocks fell early (F, GM, FCAU) but rebounded with markets)
· Energy stocks; COP said plans to spend $6.1 billion in cap-ex for 2019, or roughly the same as will be spent by end 2018 and that it its increasing its target payout to shareholders to more than 30% of cash from operations, up from 20% to 30%/expects 2019 production to range from 1,300 thousand barrels of oil equivalent per day (MBOED) to $1,350 MBOED; HES raised its cap-ex target by 38% to $2.9 billion, citing high-stakes projects in Guyana and U.S. shale fields; Bernstein upgraded FTI to market perform from underperform and Subsea as see limited downside
· E&P sector; lots of analyst rating changes today in the group following re-rating after oil pullback: 1) Seaport Global upgraded APA, CXO, CPE, PXD, SM while downgrades: CRZO, HK, NFX saying: (1) US production is the real deal, but OPEC isn’t going to fight us on it; (2) the fundamentals of the US E&P industry are actually quite strong at $55 oil; (3) the investment approach applied by Wall St. toward valuing US E&P companies truly has shifted; 2) Evercore/ISI downgraded seven E&Ps (BRY, CLR, DVN, JAG, MRO, NBL, PE to in-line from outperform) as the firm is narrowing its focus on less higher conviction outperform-rated stocks; 3) Wolfe Research said they think the sector is set to recover in 2019 as crude oil bounces back to $60/bbl, but from there, they think the large-cap E&Ps will emerge as the subgroup to own driven by their broader leverage to Brent, stronger balance sheets, and ability to generate FCF at lower prices – firm downgrades DVN, CDEV and PDCE while upgrade COP and MUR
· Refiners; JPMorgan said 2018 was a tale of two halves for refining stocks, with 1H +22% on tax reform and IMO 2020 hype and 2HTD –21% on building macro concerns, gasoline margin softness and overextended valuation. For 2019, they see a mirror image year, with 1H19 softer on gasoline margin led estimate reductions, followed by a better 2H (JPM downgraded DK to Neutral on fair relative valuation and likely Permian diff contraction/remain Neutral on VLO (crack spread exposure)/remain Underweight on HFC (valuation) and PBF
· Banks; large cap bank JPM dropped below the $100 level for the first time since November of 2017 as financials fall on lower Treasury yields (hitting lending margins) and after weak trading commentary from Citi and JPM last week at a conference; Regional banks KEY and RF downgraded to reduce from neutral at Nomura saying outsized recent growth in commercial and industrial lending has been of low quality, likely speeding increasing losses; banks are taking share in C&I lending as underwriting standards are loosening and demand weakens/KEY, RF, FITB, HBAN may face greatest EPS growth headwinds from decelerating C&I loan growth
· Consumer finance and lending; TVPT to be acquired by affiliates of Siris Capital Group and Evergreen Coast Capital in deal valued at about $4.4 billion with Travelport holders to get $15.75 per share in cash; Travelport reaffirms 2018 financial guidance ranges ; COF was upgraded to outperform at Baird saying valuation is too compelling to ignore for this quality franchise (seventh largest U.S. bank, top-5 U.S. credit card issuer)
· REITs; data center REITs DLR and EQIX both upgraded to buy from hold at Jefferies as group has sold off partly on tech fears and the group now trades at a 2x AFFO multiple discount vs. a slight premium over the past few years/downgraded COR to hold from buy; SLG was upgraded to buy at Deutsche Bank and raise tgt to $118 as management delivered a detailed update of the leasing environment and investment markets at their investor day, while highlighting future investment projects
· Pharma movers; healthcare weak as defensive names fall early; TEVA shares fell after Bloomberg reported an anti-trust investigator tells Washington Post that probe of generic drug makers, opened in 2016, may have uncovered largest cartel in U.S. history (Teva is one of 16 companies in probe, newspaper says); RARX shares rise as reports primary and key secondary endpoints were met in Phase 2 trial of Zilucoplan in patients with generalized myasthenia gravis; specialty pharma underperformed after the Washington Post reported an antitrust suit over two drugs has expanded to probe of at least 16 companies and 300 drugs (BHC, ENDP, TEVA, MYL, MNK were weak) while large cap also slipped
· Biotech movers; MGNX shares fall after the FDA placed a partial hold on two studies involving MGD009 (was downgraded at Raymond James following the news); AXON shares slide after its 34-subject Phase 2 pilot study evaluating nelotanserin for the treatment of REM sleep behavior disorder failed to achieve the primary endpoint of a statistically significant reduction in RBD events; MRNS said data showed the drug was safe and well tolerated and supported IV to oral administration of the medicine (note shares of rival SAGE active on the news as well)
· Medical equipment and devices; QDEL extends last week losses after company said Beckman has prevailed in a lawsuit related to the sale of test called B-type natriuretic peptide (BNP).
Industrials & Materials
· Industrial & Machinery; NAV and OSK downgraded to sell from Neutral at Goldman Sachs as part of broader research note on the Engineering & Construction sector; KTOS was upgraded to buy at Goldman Sachs as well citing very healthy revenue growth and a “long list” of programs; WBC announced a new share buyback program up to $600M; GVA downgraded at Goldman Sachs
· Transports; Dow Transports fell as much as 300 points low of 9,666.65 before paring losses, led by weakness in FDX after downgrade; FDX was downgraded to neutral from buy at Bank America and cut tgt to $220 from $304 saying the company made a surprising change to its Express CEO, which they believe could signal a reduction or delay in its profit improvement target.
· Metals & Materials; broad weakness as China export/import data weak; in steel sector, U.S. Steel (X) was upgraded to neutral from sell at UBS on valuation while lowered tgt to $22 from $28 as remains cautious on the sector, as expect steel prices to trade down to $660/st from $760/st spot; base metals declined after data showed a decrease in Chinese copper imports
· Defense sector; U.S. defense stocks rise early (LMT, NOC, GD, RTN) after a U.S. official said President Donald Trump backed plans to request $750B from Congress for defense spending next year. The $750B budget is higher than $733B request the Pentagon had been expected to make for fiscal year 2020 and well above a $700 bln figure Trump cited in October – Reuters
Technology, Media & Telecom
· Semiconductors; QCOM said it won a ruling in China against AAPL that bans the sale of some iPhone models in that country; KeyBanc said quarterly Asia supply chain findings and demand checks left them incrementally more cautious on the semiconductor space as they downgrade QRVO and SWKS to sector weight while lowering estimates on AMD, CY, MCHP, MXIM, MU (lower PT to $61), NXPI, ON, QRVO, SWKS, TXN and WDC; incrementally more cautious on CRUS, MPWR, NVDA, and SYNA; IDCC guides Q4 revs $70M-$76M vs. est. $72.1M and buys back stock; some Apple suppliers are dropping following the news that Qualcomm won a preliminary ban on certain iPhones in China (LITE, SWKS, QRVO, CRUS) – as many have recently cut their guidance on weak smartphone demand or lowered orders from a large customer; MU shares fell early as Citigroup cuts the FY19 revenue and EPS estimates as they expect lower DRAM and NAND ASPs due to overcapacity and inventory build
· Software movers; VERI rises after Apis Capital Management announced today that its private equity fund, Apis Ventures, has submitted an all-cash offer to acquire all of the outstanding shares of Veritone for $10.26 per share. ; MITK rises after Hedge fund Elliott Management Corp’s ASG Technologies Group Inc. raised its offer to buy the company to $11.50 per share from $10
· Media & Telecom movers; VZ said that approximately 10,400 employees have been accepted as part of a voluntary program to leave the business as the company better positions itself for future growth; Canadian telecoms (BCE, TU) weak as one analyst noted a ban on Huawei could lead to potentially replacing existing Huawei equipment in their networks (CIBC noted that Huawei is by far the biggest player in the telecom equipment market)
· Hardware & Component news; AAPL a drag on the Dow, S&P and NASDAQ early after The Fuzhou Intermediate People’s Court ruled that Apple is infringing two Qualcomm patents and issued injunctions against the sale of the iPhone 6S, iPhone 6S Plus, iPhone 7, iPhone 7 Plus, iPhone 8, iPhone 8 Plus and iPhone X (AAPL later bounced well off its lows); ATEN was upgraded to buy at Davidson citing new management, and significant operational improvements
· Internet; tech held up better than other sectors, with Internet names mixed; FB said late Friday it will buy back an additional $9 billion of its shares; toy makers MAT and HAS slide after Seeking Alpha notes, citing TJI > Insights, that AMZN is launching first Private Label Toys for toddlers and kids