Wednesday, January 2, 2019
Equity Market Recap
· Only one-day into the New Year and market volatility remains, similar to the end of 2018, as stocks and oil prices posted strong intraday spikes off the lows before paring those gains late. U.S. equities opened to the downside, amid various factors after China’s Caixin manufacturing purchasing managers index (PMI) fell to 49.7 in December, the weakest reading since 2017 and suggests the sector is contracting for the first time in 2½ years. The partial U.S. government shutdown moved into a 12th day with the hope of a breakthrough offered by both sides prepared to enter talks. President Trump had many comments today on China, the Wall funding, among other items, failing to move markets. Still, several factors remain for U.S. stocks including slowing growth fears, a U.S. political impasse, trade concerns with China, the current path of interest rates from the Federal Reserve and issues in Europe. Regarding Brexit: The Financial Times reported UK PM Theresa May is expected to speak this week to EU leaders including Germany’s Merkel, Dutch PM Rutte and EU Council President Tusk.
· SmallCaps started off strong (after dismal 2018s) as both the Russell 2000 and S&P SmallCap 600 turned slightly higher after opening almost 2% in the red. In the S&P 500, energy companies were rallying and financial and communications stocks were solidly in the green. The Nasdaq Comp topped last Friday’s high of 6,684.18, rising more than 170 points off its intraday lows of 6,506.88. In Emerging markets, Brazil’s Ibovespa rallied over 3.5% to its highest level on record. Oil prices with a 6% reversal from lows to highs, while gold prices touched 6-month highs despite a strong bounce in the dollar.
· Oil prices posted quite a turnaround as WTI oil rose $1.13 or 2.49% to settle at $46.54 per barrel – 2-week highs – and off earlier lows of $44.35 per barrel, dropping as much as 2.3% earlier. Saudi tanker data showed a drop in exports to the U.S. and China may be the cause of the oil pop earlier. Oil output from the OPEC countries fell 530,000 barrels a day to 32.6 million a day last month. It’s the sharpest pullback since January 2017 according to a Bloomberg report.
· Commodity prices were broadly lower (outside of defensive/safe haven precious metals as gold at 6-month highs) following fears of an economic slowdown in China following another round of weaker manufacturing data from the country
· In other commodities; Gold prices advanced $2.80, or 0.2%, to settle at $1,284.10 an ounce (despite a bounce in the dollar), its best close since June 14, but off earlier highs around $1,290 an ounce. Cotton prices fell around 1% to 13-month lows around 71.55c according to Bloomberg while orange juice futures fell to 21-month low, down over 2%. Copper prices hit 3-1/2 month lows as worries about economic and demand growth in top consumer China were reinforced by manufacturing data (copper prices sank 18% last year)
· The U.S. dollar kicked off the year higher, rising vs. most counterpart currencies and extending its strong gains across the board in 2018. The Japanese yen adds to recent gains as the buck slides vs. the safe haven instrument. Sterling falls to lows on day, down over 1.3% at $1.2582. The USD-CAD retraced after topping at 1.3663 early in the session, with the slide coming on the back of the surge in WTI crude prices. The Euro dropped the most, falling over 1% to more than a 2-week lows around $1.133 (off overnight highs $1.1497).
· Treasury market’s advanced as the yield on the benchmark 10-year yield fell as low as 2.64% (1-year lows) before rebounding back to around 2.67% (still down over 1 bps on the day), but still well below the 3.25% level in late September. The 2-year yield was down around 2.50%, touching lows below 2.48% while the 30-yr was under 3%. Lone piece of economic data today was disappointing in the US (PMI Manufacturing).
Sector News Breakdown
· Auto movers; TSLA shares fell as much as 10% after the company said to cut price of Model S, Model X and Model 3 by $2,000 and said deliveries increased 8% from a year ago to 90,700, below the FactSet consensus of 92,000 and Model 3 deliveries rose 15% to 61,394, missing the FactSet consensus of 64,900; ORLY and PAG on Stephens best ideas list saying recent strength in results can continue and the defensive, non-cyclical nature of its business should help sustain the multiple; Reuters reported GM reached 200,000 cumulative U.S. electric vehicle sales in 2018, triggering phase-out of federal tax credit by April 2020
· Retailers; in footwear, CROX and SCVL were both upgraded to Positive at Susquehanna: 1) for SCVL following a very strong 3Q18, where the company handily beat expectations and provided what we view as very conservative guidance, while CROX was upped saying the recent repurchase and conversion of Blackstone’s preferred stock position is a positive development
· Consumer Staples; CAG was removed from Goldman Sachs conviction buy list (though remains buy rated); Deutsche Bank said for STZ they see FY3Q19 results/guidance (on Wednesday, January 9th) as likely to reassure current/recently-lapsed owners of STZ, leading to a rapid re-rating higher as we progress into CY19; EL was upgraded to buy at Citigroup and raised tgt to $155 as sees upside to the company’s 2019 earnings forecast and believes its balance sheet is in terrific shape
· Casino & Leisure movers; WYNN, MLCO, MGM, LVS shares active after Macau gross gaming revenue increased 16.6% in December to 26.5B patacas, according to data from the Gaming Inspection and Coordination Bureau. The consensus estimate from analysts was for December gross gaming revenue growth of ~11%. Nomura noted that Macau gaming revenues accelerated for the second consecutive month to +16.6% YoY in Dec. from +8.5% in November;CZR was upgraded to neutral with $7 target at UBS; GOLF upgraded to buy at Compass Point
· Energy stocks rebounded nicely off initially weakness as oil prices found strength after slipping below $45 per barrel to start. The rally in energy prices (gasoline also jumped) was the reason for the turnaround in energy stocks. HAL shares were active after Dave Lesar handed off the role of chairman of Halliburton Co. to Chief Executive Officer Jeff Miller. Defensive utilities were lower, among the worst performing sectors on the day, and now down over 7% from the all-time highs of 720.60 for the UTY on December 13th
· Bank movers; WFC was upgraded at RBC Capital as WFC’s stock price is below our price target and we believe at current prices the stock fully discounts the company’s regulatory problems; Wells also upgraded CFG to outperform citing its low valuation; Baird upgraded STI to outperform as the firm maintains their even-weight portfolio positioning in banks, but start 2019 more bullish from a tactical perspective (says current valuations are not likely tenable – estimates need to be revised significantly lower or stock prices should rebound)
· Insurance; JPMorgan reduced EPS estimates for several insurers to reflect the recent equity market drop saying estimates for most companies are below consensus and we feel that street forecasts for VOYA, PFG, and BHF are especially high. Also, despite the steady drop in the past two years, consensus EPS forecasts for AIG remain too optimistic; TMK was upgraded to overweight at JPMorgan saying fundamental outlook for TMK is relatively unchanged, although they are incrementally upbeat on direct response margins and sales
· Business services, financing; Stifel lowered estimates on both MCO and SPGI based on poor 4Q18 issuance trends, consensus numbers seem too high; IBKRhighlights for the month included: 953,000 Daily Average Revenue Trades, 36% higher than prior year and 5% higher than prior month. Ending client equity of $128.4B, 3% higher than prior year
· Pharma movers; According to a Goldman Sachs analysis, prices were raised on about 27% of the top 500 branded drugs, down from 47% last year. The average list price increase was only 4 percent, half what it was in 2018; Generic/Specialty Pharma names broadly higher as BHC gains 7.5% after Piper upgrade; PTLA announced FDA approval of the Prior Approval Supplement (PAS) for its large-scale, 2nd-generation Andexxa, allowing for broad commercial launch in the US; MYOK shares fell after SNY ended its four-year collaboration with the company aimed at hypertrophic cardiomyopathy (HCM) and dilated cardiomyopathy (DCM)
· Biotech movers; Raymond James downgraded BMRN, RARE and VRTX to market perform as the firm remains cautious on biotech heading into 2019 – as they see the overall biotech sector at a critical juncture as we enter 2019. Although the regulatory environment remains as favorable as ever, and valuations have never been lower, we see a more cautious setup; PRQR received Fast Track designation from the FDA for QR-421a, an investigational RNA-based oligonucleotide
· Medical equipment and devices; Citigroup upgraded ZBH and BAX to buy from neutral and downgraded MDT from Buy to Neutral, and cut ABT from Neutral to Sell in re-weighting in the equipment sector while remain buy rated but relatively more cautious on higher-growth ISRG and BSX and remain Sell rated on EW. Morgan Stanley also with a few changes, downgrading HOLX and GMED on high expectations while upgrading BAX to overweight
· Healthcare services and providers; Baird comments on the Dental industry, as they downgraded HSIC to neutral and trim estimates/price targets across most of the group saying the combination of dental’s secular overhangs, softer 4Q patient volume checks, and accelerating equipment pricing pressures makes it one of the few MedTech areas where we’re they’re cautious
Industrials & Materials
· Industrial & Machinery; GE was among the top gainers in the S&P to start the day as investors look to heavily beaten up stocks from 2018; USCR shares slipped after DA Davidson cuts estimates amid difficult market conditions and lowers his stock price target to $70 from $82
· Transports; the Dow Transports initially dropped below the 9,000 level earlier, falling over 170 points on slowing global growth fears – but as broader stock averages rebounded, transports followed higher as well, turning positive late morning (though rails CSX, UNP, NSC lagged)
· Metals & Materials; metal and material stocks rebounded from early declines as weaker China PMI data raised demand concerns; CRS was named Longbow’s favorite investment idea for 2019 within their metals coverage group\
Technology, Media & Telecom
· Internet; group was mixed, with several names bouncing off the lows; AKAM was downgraded at Cowen saying 2019 growth set up more challenging and see risk guidance disappoints consensus ~8% revenue growth; NFLX tgt cut to $355 at SunTrust saying their Subscriber Tracker, through November, is pointing to 4Q sub adds slightly below consensus/guidance
· Media & Telecom movers; CBS was upgraded to overweight at Stephens while RBC Capital said it looks especially discounted, off ~20% in December as see a full-time CEO announcement paving the way to a Viacom merger at a more attractive exchange ratio + significant accretion; NLSN share active after Variety reported on Dec 31st that Nielsen’s contract with CBS estimated at over $100M has expired, while negotiations are ongoing; SIRI was upgraded to overweight at JPMorgan saying following a 25% pullback from 2018 highs, we view SIRI’s valuation as attractive at 12.9x 2020E EV/EBITDA ahead of initial 2019 guidance