Thursday, December 13, 2018
Equity Market Recap
· U.S. stocks dropped from the highs for a fifth straight session, starting its slide late morning into early afternoon as markets continue to monitor headlines surrounding the potential for a U.S.-China trade deal, plans out of Washington to avoid a government shutdown and UK Brexit headlines. Trade tensions (for now) appear to be easing somewhat after reports Chinese importers resumed buying U.S. soybeans and reiterated that its officials were in close contact with Washington counterparts. However, comments late day from Commerce Secretary Wilbur Ross saying China will need to do more than what it’s promised so far to ease trade tensions with the U.S. didn’t help sentiment. The dollar was little changed as the euro bounced off lows after the ECB halted asset purchases and President Mario Draghi said the balance of risks to the euro area had moved to the downside. WTI crude oil ended near the highs, rising nearly 3% after reports Saudi Arabia plans to slash exports. Sector moves to the downside included transports, with weakness in FDX again and airlines, financials (lower rates) while retailers were pummeled following softer earnings results and trade concerns. To the upside, strength in interest rate sensitive/defensive names as utilities, REITs and healthcare climbed. Brexit tensions remain in the UK: Despite U.K. Prime Minister Theresa May winning the vote of no-confidence the Conservative Party, leaving her untouchable by her party for another such vote for the next 12 months, the options for Brexit remain the same as before: going with May’s deal or a slightly amended version if the EU allows for it, hold a second referendum, walk back on the decision to exit, or allow for a hard Brexit.
· Weekly jobless claims fell 27K to 206K to 2 ½ month lows, well below the 226K estimate while prior week claims revised up to 233K from 231K; the 4-week moving avg. declines 3,750 to 224,750; continuing claims rose 25k to 1.661m in the week ending Dec. 1
· Import Prices for November fell (-1.6%), after rising 0.5% in October and was greater than the expected (-1%) decline; it was the biggest decline in the import price index in more than three years as oil prices sank 12%. Even if fuel is excluded, however, import prices slipped (-0.3%). The increase in import prices over the past 12 months fell to 0.7% from 3.3%; U.S. export prices, meanwhile, declined by 0.9% in November.
· WTI crude oil ends higher, near the best levels up $1.43 or roughly 3% at $52.58 per barrel, helped by late day headlines that Saudi Arabia plans to slash shipments to U.S. refiners within weeks to help prevent a buildup of American crude stockpiles (according to a Bloomberg report). Saudi Aramco warned U.S. refiners to brace for a steep drop in cargoes next month. Gold prices fell, trading in a narrow range and ending lower by $2.60 or 0.2% to settle at $1,247.40, falling back from last week highs above $1,250 (which were 5-month highs).
Currencies & Treasuries
· The U.S. dollar was mixed as the dollar index (DXY) ends little changed around the 97 level. The euro fell off overnight highs of 1.1393 to lows of 1.1331 before settling little changed around 1.1363, active after ECB President Mario Draghi said the balance of risks is moving to the downside, and after the ECB confirmed it’s ending its bond-buying program at the end of the month. The dollar was higher against the Japanese yen above 113.50 while the pound extended its gains from yesterday (up over 1% last 2-days) after UK Prime Minister May won her confidence vote yesterday and now Europe awaits the results of the Brexit vote.
· Treasury yields were slightly lower with the 10-year yield down at 2.90%, the 30-yr 3.15% and the 2-year 2.75%, off best levels of the day – but also off monthly lows just last week. The U.S. Treasury sold $16B in 30-year notes at a yield of 3.165% vs. 3.167% pre-sale W/I with a bid to cover at 2.31 vs. 2.06 in prior auction and indirect bidders awarded 66,4% of auction and directs 11.5%. Treasury prices have slipped as investors have rotated back into safe-haven assets amid stock market uncertainty the last few weeks on China trade, UK Brexit and slowing growth fears.
Sector News Breakdown
· Retailers; sector crushed on trade fears and weaker earnings results with shares of M, KSS, JWN, KSS down sharply; OXM shares drop after Q3 earnings miss by 3c on lower than expected revs of $233.7M while guided Q4 below views as well (4Q adjusted EPS 96c-$1.11 below estimate $1.33); TLRD another retailer falling on earnings as cuts FY18 adjusted EPS view to $2.30-$2.35 from $2.35-$2.50; FIVE was upgraded to buy at Goldman Sachs with tgt of $122 noting the 18% decline in the stock price over the past month is disconnected from the company’s robust fundamentals; LB signed deal to transfer ownership and operating control of La Senza to an affiliate of private equity firm Regent LP; VNCE shares surged after earnings results
· Consumer Staples; PG was upgraded to buy at Goldman Sachs and raised tgt to Street-high $108 from $95 citing increased confidence that early momentum in FQ119 can be sustained returning the company to consistent sales and earnings beats; NBEV shares rose early after the House of Representatives passed a $867B measure reauthorizing farm programs and sent it to President Donald Trump (the farm bill also legalizes hemp production); in beverages, UBS initiates sector with buy ratings on TAP, KDP as have a track record of execution and trade at meaningful growth-adjusted discounts with sells on MNST, FIZZ, and SAM calling them expensive and should see meaningful growth decelerating near-term (also downgrade KO to neutral)
· Housing/builders; ZG shares fell with Deutsche Bank saying they come away moderately more negative on near-term revenue trends given the hurdles associated with power agents spending back to their previous levels; homebuilders were lower, but have held up well as rate hike expectations from the Fed have eased, helping boost sentiment for housing stocks as it could keep mortgage rates lower (PHM, KBH, TOL, LEN)
· Energy stocks were mixed with majors (XOM, COP, HES) holding higher though E&P (EOG, PXD, NFX) and drillers (DO, ESV, NE) lower. Earlier reports showed Saudi Arabia plans to slash exports to the world’s largest oil market in the coming weeks in an effort to dampen visible build-ups in crude inventories. Also earlier today, the IEA said crude output in the OPEC rose by 100,000 barrels a day on month to reach 33.03 million barrels a day in November. Saudi Arabia churned out a surge of 410,000 barrels a day to a historic high of 11.06M barrels a day ahead of an agreement with non-OPEC nations to reduce output from next year. Overall OPEC output rose by 100K b/d to 33.03M b/d m/m in November.
· Oil services and equipment; FTI shares slip as guided Subsea margins significantly worse than expected as sees 11%, vs. 16% long run average and 13.5% in Bernstein forecast/Seaport noted Implied EBITDA at the midpoint of $1.445B is modestly below current consensus of $1.485B. Raymond James downgraded 8-stocks in the service sector (CCLP, NBR, NCSM, RES, SPN, TTI, UNT, and WFT) as detailed why we think oil prices are likely to remain at today’s lower levels through early 2019. Unfortunately, since these lower oil price assumptions coincide with E&P budget season, they will likely have a greater than normal negative impact upon 2019 activity
· Utilities & Solar; Utilities move to the highs as the UTY rises over 1.2% to 720, trading at new 52-week highs, as nearly all 20 components in the UTY higher (ED, SO, CNP, DUK top gainers); interest rate sensitive sectors (such as utilities) outperformed as stocks were sluggish midday and as Treasury yields pullback further
· Bank movers; sector continues to fade, led by a decline in regional banks as the KRE Regional bank index falls over 1% as tries to hold the 50-level (12/11 low 49.96), led by top decliners CMA, WBS, PB, VLY, SIVB as lower Treasury yields, softening tone by Fed on rates and slowing growth all meaningfully hurting banks; 52-week lows for banks C, CFG, RF, HBAN
· Insurance & Services; AFL shares active as Reuters reported Japan Post Holdings Co is planning to invest about $2.6B in the insurer, aiming to become the largest shareholder ; OMAD said it has reached a deal to combine with privately held Ranpak to create a company with an enterprise value of about $1.09 billion.
· Asset managers; WDC reported preliminary assets under management of $72.0 billion for the month ended November 30, 2018, compared to $72.2 billion on October 31, 2018; AB said preliminary assets under management increased to $533 billion during November 2018 from $530 billion at the end of October.
· Pharma movers; LLY and INCY said the FDA has granted Fast Track designation to baricitinib for treatment of systemic lupus erythematosus (SLE); ALKS was downgraded to neutral at Credit Suisse and tgt to $31 following a series of disappointing or underwhelming pipeline catalysts and what they see as limited drivers of upside as we move into 2019; ZTS authorized a $2 billion share repurchase and increased its quarterly dividend by 30%; TOCA 3M share Secondary priced at $10.00 per share; ABBV announced a $5B stock buyback plan
· Biotech movers; AGTC falls after its gene therapy showed no clinical activity in an eye disease and BIIB ended a three-year relationship for developing gene therapies; BHVN 3.3M share Secondary priced at $37.25 per share; MRNS 12M share Secondary priced at $3.75 per share; CLVS said the European Medicines Agency Committee for Medicinal Products for Human Use (CHMP) has adopted a positive opinion recommending an additional indication to include rucaparib
· Healthcare services and providers; MGLN shares active as activist fund Starboard Value has taken a stake and plans to push the health care provider to improve its performance or explore a potential sale ; HSIC announced a $400M share buyback plan
Industrials & Materials
· Industrial & Machinery; GE was upgraded by biggest bear on the Street JPM to neutral from underweight but maintained its $6 tgt as they now see a more event-driven, balanced risk reward at current levels; separately, GE said its digital unit would sell a majority stake in ServiceMax, a cloud-based provider of software used in inventory and workforce management, to technology-focused private equity firm Silver Lake; DY was upgraded to buy at Craig Hallum saying the 15% pullback makes current levels attractive again; CAT November rolling 3-month retail machine sales rose 16% vs Oct. 18% rise, Sept. up 21% while North America machine sales up 20% after rising 21% in Oct.
· Transports; sector in general slammed again, with the transport index down over 200 points and dropping to lows around 9,600 level (takes out Monday lows) as FDX shares fall to 52-week lows and down over 19% the last 7-days after analyst downgrade (into earnings 12/18); airlines biggest decliners today as oil rebounds (DAL, UAL, AAL all down over 3%) and DAL (hosts investor day) said it sees 2019 EPS of $6-$7 vs. est. $6.70 with pre-tax margin expansion of about 100 basis points at the midpoint/sees 2019 revenue growth 4%-6% on 3% capacity expansion; Logistics companies ARCB, ECHO, R, SAIA and XPO were initiated with buy ratings by SunTrust and hold on LSTR; XPO shares fell as much as 30% after Spruce Point Capital Management warned of XPO’s heavy debt burden and a “loss of confidence in management” on the part of investors
· Metals & Materials; RBC Capital said it maintains a cautious outlook heading into 2019 as economic data deteriorates globally. A moderate slowdown would remain constructive for mining stocks; however, negative sentiment could prevail into 2019 as the market looks for more clarity on the extent of the global slowdown firm downgraded HBM to Sector Perform due to uncertainty around upcoming catalysts while prefer Anglo American and Glencore); RS was upgraded to neutral at Bank America in steel sector
Technology, Media & Telecom
· Semiconductors; MRVL upgraded to buy at Citigroup as believe risk-reward looks attractive in next 12-18 months after YTD underperformance (MRVL down 28% vs SOX/SP500 down 5%/1%); NVDA was added to “shopping list” at Citigroup as think gaming expectations have been de-risked in the Jan-Q.
· Software movers; ADBE to report earnings tonight after the close; JPM with various rating changes in software sector as upgraded AVLR, NEWR, QTWO, while downgraded ADSK, FIVN, INTU, MDSO saying the 2019 outlook is incorporating a move toward companies that are demonstrating less cyclicality and capitalizing more on secular technology adoption, or have demonstrated noncyclical behavior or other company specific catalysts that we believe can drive shareholder performance; LLNW falls as cuts FY18 EPS view to 10c-11c from 14c-17c (est. 15c) and cuts FY18 revenue view to $195M-$196M from $200M-$203M
· Internet security active after Morgan Stanley upgraded FSCT to overweight with a view that current levels are oversold in light of its attractive secular positioning around IoT security and room for upside to estimates, while downgraded FEYE to equal-weight from overweight with $21 tgt as sees limited upside at current levels based on a sum-of-the-parts analysis. Morgan said they continue to like names in our universe where expects are very low (PANW, PFPT, FSCT) and/or estimates have room to move higher (CYBR) and await further pullback for the most secularly well positioned names in our universe – ZS, TENB & SAIL
· Hardware & Component news; optical sector mixed, with CIEN rising after reported Q4 results that easily beat consensus on better margins/revenue of $899.4M increased 21% y/y and 10% q/q driven by solid sequential growth across networking platforms, software, and services; shares of other opticals did not rally initially in sympathy (note CIEN less presence in China while AAOI, LITE, etc. concerns remain on trade tensions)