Wednesday, December 19, 2018
Equity Market Recap
· Not the Christmas gift markets wanted! Even though markets had widely anticipated a rate hike increase, it appeared disappointed by the comments from Fed Chairman Powell, as major averages quickly reversed off intraday highs around 2:00 PM EST after the FOMC had boosted interest rates by 25 bps, though the median projection of next year’s rate increases was lowered to two from three. The fact the language about future rate hikes wasn’t softened more may have been responsible for the volatile pullback from the highs for U.S. stocks. Comments by Powell in his press conference also exacerbated the move lower, saying stock market volatility is not the only focus of the Fed when making interest rate decisions. The move was capped by a near 900 point reversal in the Dow Industrial Average (24,057.34 highs to 23,162.64) in about an hour, while the S&P 500 fell from high of 2,585 to lows below 2,490 along with sharp moves in the NASDAQ and SmallCap Russell 2000 index (now down over 20% from its August highs). The commentary, projections and press conference took the wind out of the sails for US markets which had been enjoying a strong session prior. The dollar bounced off lows, commodity prices reversed earlier gains and Treasury yields sunk to their lowest levels in months.
· So as expected, the Federal Reserve raised its target for the federal funds rate by 25bps (as expected) to a range between 2.25% and 2.5% in a unanimous decision while the median projection of next year’s rate increases was lowered to two from three. The Fed also reduced its longer-run estimate for the federal funds rate to 2.8% from 3%. The FOMC statement kept language saying “further gradual increases in the target range for the federal funds rate” will be consistent with sustained expansion of economic activity, strong labor market conditions, and targeted inflation, modifying it only to say “some” moves were anticipated. The FOMC statement also kept its assessment that the risks to the economic outlook were “roughly balanced” while introducing a clause about monitoring “global economic and financial developments.” Fed median shows funds rate 2.9% 2019, 3.1% 2020, 3.1% 2021 while the Fed’s range of neutral-rate estimates unchanged at 2.5% to 3.5%. The Fed median sees longer-run jobless rate 4.4% vs 4.5% prior est. and sees 2019 GDP growth 2.3% vs 2.5% in prior estimate.
· With the Fed behind us, next focus remains the potential partial government shutdown later this week if lawmakers and President Trump fail to resolve how much money to allocate for Trump’s wall along the Mexican border. Recall yesterday, markets sunk late on reports Democrats immediately rejected the follow-up offer from Republicans, leaving the two sides still at impasse. There are also two upcoming central bank meetings with the Bank of England and Japan. Meanwhile, Treasury Secretary Steven Mnuchin said America and China are planning to hold meetings in January to negotiate a broader trade truce.
· Current account deficit for Q3 widened to (-$124.8B) from (-$101.2B) in the prior quarter, but was mostly in-line with expectations of (-$125.0B); the balance of goods and services deficit widened to $158.7B compared to $134.6B prior quarter; the balance on primary income narrowed to $59.43B compared to $62.35B prior quarter
· Existing-home sales for November rose an unexpected 1.9% to 5.32M, topping the est. of 5.2M, while Oct. was unrevised at 5.22M; there was 3.9 month’s supply in Nov. vs. 4.3 in Oct. and 4.0 month’ supply seasonally adjusted in Nov. vs. 4.1 in Oct. seasonally adjusted; said inventory fell 5.9% to 1.74M homes and the median home price rose 4.2% from last year to $257,700
· Commodity prices rebounded overall with WTI crude rallying off 15-month lows as the dollar slumped. WTI crude crossed back above the $48 per barrel level after weekly inventories from the EIA showed a third weekly drawdown (though fell less than forecasts: -497K vs. est. draw -2.5M barrels). WTI crude settled at $48.17 per barrel, rising $1.57 or 3.4% following the mixed inventory data, weaker dollar and general bounce off yearly lows.
· Gold prices touched fresh 5-month highs above around $1,262 an ounce before paring gains ahead of the FOMC interest rate decision and press conference, settling at $1,256.40 an ounce, and rising $2.80 on the session. Gold prices have gained about 2.2% month to date, helped by a rotation into safe-haven investments amid volatile stock markets and easing Fed projections. Gold futures reversed lower following the Fed statement.
Currencies & Treasuries
· Volatility in the dollar and bonds an understatement following the release of the FOMC. The U.S. dollar, which had been trading just off the lows prior the Fed statement, knee-jerked higher following the commentary that had a little in it for everyone (note the dollar down yesterday from recent 18-month highs). Meanwhile. Treasury prices extended its weekly gains, pushing yields lower from the short end of the curve (2-yr 2.60%) to long-end (30-yr under 3%), while the benchmark 10-year slid below 2.75% to its lowest levels since April as stock selling intensified.
Sector News Breakdown
· Consumer Staples; HSY was double upgraded to buy from underperform at Bank America saying the company should generate improved organic sales and operating profit growth in FY19; GIS reported Q2 results that beat EPS estimates but missed on revenue despite a 5% Y/Y growth driven by the Blue Buffalo acquisition/FY19 guidance reaffirmed
· Restaurants; BLMN was upgraded to Equal-weight from Underweight on valuation at Morgan Stanley as see a more balanced risk/reward at current levels and maintain our PT of $19; RRGB was downgraded to hold at Jefferies saying while a return to positive comp. sales is possible, visibility is unclear – while the firm upgraded SHAK to hold after pullback in shares; Maxim upgraded DRI to buy following the release of better-than-expected and upgraded CAKE to buy as well in light of the DRI beat (DRI was also raised at BTIG)
· Consumer services/retail; RCII was upgraded at Raymond James as believe the pullback in RCII following the announcement or its terminated merger with Vintage will be short-lived as investors reflect on the improved prospects of Rent-A-Center’s business
· Casino & Leisure movers; WGO shares rise after its 1Q results topped estimates across the board as the company CEO said “We are very pleased with the strong start to our Fiscal Year 2019, resulting from our upward momentum within the North American RV business and the positive integration of our new marine division,” (shares of RV makers THO, LCII, FOXF, CWH active)
· Energy stocks have been crushed in recent weeks as oil prices slump; Credit Suisse cut its 2019-20 WTI/Brent oil price forecasts by $12-$13/bbl to $54/$63 and $57/$67, citing stronger-than-anticipated U.S. supply growth at end of 4Q, counter-seasonal inventory builds in 2H, and less severe impact to Iranian exports than initially feared (firm also made several rating changes in the E&P sector in conjunction with oil forecast changes downgrading CLB, CJ, PTEN, RDC, FTSI, SPN, HCLP, LPI, OAS and SLB – while upgraded BHGE) –
· Inventory data: overnight, the API reported that U.S. crude supplies rose by 3.5M barrels for the week ended Dec. 14, showed that gasoline stockpiles climbed by 1.8M barrels, while distillate inventories fell by -3.4M barrels. The EIA said weekly stockpiles fell -497K barrels, smaller than the expected -2.5M barrel draw while gasoline rose +1,766M barrels and distillates fell an unexpected -4,237M barrels vs. est. +750K
· E&P sector; FANG announced its FY19 plan, with oil production slightly below consensus estimates, but capex ~8%/~10% below estimates, highlighting the capital efficiency of FANG’s 2019 program/Seaport noted current plan calls for a total capex budget of $2.7B-$3.1B, 8%/19% below SGS/consensus estimates. However, production guidance of 275-290 Mboepd is largely in line with our estimate of 278 Mboepd and consensus of 288 Mboepd; AR was downgraded at Raymond James due to lower commodity price assumptions
· Bank movers; banking stocks sunk following the Fed Chairman Powell comments; prior to that, banking and financial related stocks had moved mostly higher throughout the session as the sector tries to recover from weakness the last month on slowing economic growth, lower rate hike expectations, weaker IPO activity in the final quarter; JPM was downgraded to neutral at Atlantic today saying the bank now offers the least upside to price targets among the majors, preferring BAC from a defensive perspective, while lowered tgts for many; before rebounding from morning lows, shares of HBAN, IVZ, BBT, JPM, STT, WFC, CFG and STI hit 52-week lows
· Consumer finance and lending; AXP was downgraded to neutral from buy at Bank America, saying it wouldn’t be surprised if investors sell the stock after recent out-performance; SQ said it will continue to work with the FDIC and the Utah DFI as the agencies review the applications for Square Financial Services; ONDK said it will start offering equipment finance loans to select U.S. small businesses next year
· REITs; more analysts adjusting ratings given recent volatility in the sector and interest rate trajectory: JPMorgan upgraded DRE, EQR, MPW, OFC, UDR, WELL, ACC, EPR, FR, and REXR while downgraded ARE, BRX, ESS, CBL, MAC, PEI, SKT, SLG, VNO, WRE
· Pharma movers; PFE and GSK announce plan to combine their consumer health-care units, and eventually spin the joint venture off, creating a global giant in the business of selling drugstore staples; LLY issued a 2019 forecast ahead of analysts’ estimates and boosted its dividend 15% as hosted its investor day today; AGN suspended sales of textured breast implants and tissue expanders in European markets and is withdrawing any remaining supply following a compulsory recall request from French regulatory authority; LGND issued 2019 financial guidance last night and raised its 2018 outlook; ALKS downgraded to sell at Goldman Sachs; JNJ shares fell midday after the NY Times reported lost its motion on Wednesday to reverse a jury verdict that awarded $4.69 billion to women who blamed their ovarian cancer on asbestos
· Biotech movers; ADRO shares rise as following its licensing deal with LLY for its cGAS-STING Pathway Inhibitor program for the potential treatment of autoimmune and inflammatory disorders/Aduro will receive $12M upfront, up to $620M in milestones per product; AVRO granted FDA orphan-drug designation for its investigational gene therapy, AVR-RD-01, for the treatment of Fabry disease; ZIOP announced joint venture with TriArm Therapeutics for the development and commercialization of Sleeping Beauty-generated CAR-T therapies in Asia; SURF shares fall as it said it would significantly reduce its investment in the SRF231 program
· Medical equipment and devices; MASI was upgraded to overweight at Piper as believe the long-term stability (with potential for upside) is a compelling story in a choppy market; JPMorgan upgraded MDT to overweight as believe Medtronic can grow at least in line with its end-markets at ~5% growth, plus we see a number of underappreciated data presentations and product launches; JPMorgan downgraded ZMH to neutral as see limited upside to current expectations
· Healthcare services and providers; CIVI rises after Centerbridge Partners L.P. signed a deal to buy the company for $1.4B, with holders getting $17.75 a share in cash ; 52-week lows today: in healthcare, PRGO, CAH, DVA, DGX, MCK, AGN
Industrials & Materials
· Industrial movers; GE was upgraded to buy at Vertical Research with an $11 tgt, the analysts first buy on company since 2008; Stifel said they expect growth in the global industrial economy to continue in 2019, with strength in the U.S. offset by softness in China and uncertainty around European growth, though still positive in our forecasts/taking a more defensive approach to our stock recommendations in 2019 (in conjunction with the call, they upgraded CW and XYL while downgrading shares of CIR and DNOW; ABM bounces off 52-week lows despite missing quarterly revenue and guidance midpoint for the year missing estimates as well; MMM agrees to buy the technology business of M*Modal for a total enterprise value of $1.0B
· E&C sector; Stifel added MTZ to its select list saying its oil and gas and communications businesses have an “extremely strong outlook for 2019” as demand for construction capacity outstrips supply and full-scale 5G rollout efforts get underway
· Chemical movers; CF was upgraded to overweight from equal-weight at Stephens and raise tgt $60 from $55 saying investors have two ways to win, and one to lose, depending on how macroeconomic trends develop; DWDP shares outperformed in the Dow, rising as much as 3%
· Transports; FDX shares fall after Q2 EPS/revs topped consensus but cut its year outlook to $15.50-$16.50 from $17.20-$17.80 (est. $17.33) citing European weakness and announced cost reduction actions that include a “voluntary buyout program for eligible employees, international network capacity reductions at FedEx Express”- the broader transport index lagged due to FDX
Technology, Media & Telecom
· Internet; FB shares fell after the NY Times reported that the social media company allowed more than 150 companies access to more users’ personal data than it had disclosed – shares fell further midday after the company was sued by the District of Columbia over a privacy breach in which personal information of millions of Americans was transferred by an app developer to Cambridge Analytica; NTES tgt raised to $300 at UBS citing a more positive view on the company’s mobile games division; other Internet stocks were broadly higher
· Semiconductors; MU shares weaker as reported Q1 sales that fell short of analysts’ estimates ($7.91B vs. est. $8.02B) and guides Q2 EPS $1.65-$1.85 on revs $5.7B-$6.3B well below the $2.39/$7.26B est./also lowering bit output for both DRAM and NAND; ADI was downgraded at Morgan Stanley as sees it hard to remain positive on the stock considering the ongoing risks to semis in 2019
· Software movers; QTWO was upgraded to buy at BTIG noting shares have declined by more than 28% since mid-September and now appear inexpensively valued, particularly in light of our expectation that the company’s revenue growth is set to reaccelerate during 2019
· Hardware & Component news; JBL shares advanced after Q1 results topped consensus estimates and a revenue forecast that beat at the midpoint, boosted by the company’s electronics manufacturing services unit, where sales grew 22% YoY