Thursday, January 3, 2019
Equity Market Recap
· U.S. stocks plunged on Thursday led by weakness in tech after Apple issued a revenue warning for the upcoming quarter, a decline in transports on lower guidance from airline Delta, the partial government shutdown rolls into day 13 and weaker manufacturing data in the U.S. (lowest levels since Nov ’16) added to the slowing global growth fears. The Dow Industrials were down over 677 points at the low as safe haven assets surged, led by Treasury’s as the 10-year slipped over 10 bps to lows of 2.555% while the 2, 3 and 5-Year Treasury yields all drop below the effective Fed Funds rate. Regarding the gov’t shutdown, President Trump has invited leaders of both parties from Congress to the White House on Friday to resume talks over border security and potentially end the partial government shutdown. Meeting set for 11:30 AM EST, according to White House spokesman. All the bad news overshadowed the $74B M&A deal in healthcare as BMY agreed to acquire CELG. The dollar plunged while oil and gold prices rose.
· 1) The tech sector was crushed following the bombshell lower guidance for quarterly revs, EPS and margins out of Dow component AAPL, as many analysts re-adjust iPhone outlooks as the company cited weakness in China among the top reasons for the shortfall. The weakness carried over to the AAPL supply chain, as many suppliers in the semi/optical space under pressure (CRUS, SWKS, AVGO, TSM, LITE, SYNA). Apple blamed its decision to cut its revenue forecast on the trade conflict and weakness in China, lending weight to the soft Chinese PMI data
· 2) Transports slammed (Transport index fell 300 points late day or over 3%) following guidance and December metrics from DAL that disappointed investors (sending shares down over 10% and weighing on other airlines) – DAL warned Q4 unit revenue would be slightly below its prior forecast due to the lower-than-expected improvement in last-minute fares booked by travelers (guides 3% rise vs. prior view of up 3.5%)
· 3) Economic data in the U.S. was mixed, with a strong beat on private payroll data from ADP, adding 271K jobs for the month and topping the 180K estimate. However, ISM manufacturing data missed, falling to the lowest level since Nov. 2016, point drop largest since Oct. ’08. The weaker manufacturing in the U.S. follows a recent drop to contraction territory for China after yesterday China’s Caixin manufacturing purchasing managers index (PMI) fell to 49.7 in December, the weakest reading since 2017.
· Payroll data strong as ADP Private-sector employment jumped in December with 271,000 jobs added, easily topping the estimate of 180K by economists (it is also the most job gains since February 2017). The report showed that small firms added 89,000 jobs in December, medium-sized businesses added 129,000 to large companies added 54,000.
· Weekly Jobless Claims rose 10K to 231K, above the 220K estimate while the prior week claims revised up to 221K from 216K; the 4-week moving avg. slips by 500 to 218,750; continuing claims rose 32k to 1.740m in the week ending Dec. 22
· ISM Manufacturing for Dec falls to 54.1 from 59.3 last month and below the est. of 57.5; ISM data falls to the lowest level since Nov. 2016, point drop largest since Oct. 2008 as new orders fell to 51.1 vs. 62.1, employment fell to 56.2 vs 58.4 and prices paid fell to 54.9 vs 60.7; backlog of orders fell to 50.0 vs 56.4; new export orders rose to 52.8 vs 52.2
· Gold prices rise $10.70, or 0.8% to settle at $1,294.80 an ounce, its highest level since mid-June, as a combination of Apple’s bearish revenue outlook and weaker US manufacturing data sent the dollar and U.S. stocks lower, lifting demand once again for safe-haven bullion.
· WTI crude oil rose 55c, of 1.18% to settle at $47.09 per barrel, outperforming on a weaker dollar and investors looking to buy beaten down assets. The move in oil came after touching 18-month lows last week and ahead of inventory data tonight (API) and tomorrow morning (EIA) which was pushed out due to the New Year’s holiday. Today marked the 4th straight higher close for oil.
· The U.S. dollar declined vs. most rival currencies following weaker manufacturing data out of the ISM, overshadowing the better private payroll report. The safe-haven Japanese yen was the biggest gainer today rising across the board vs. the USD, EUR, GBP, AUD) amid a flight to safety given the global stock market pullback. Apple Inc.’s warning on weak sales in China sparked a haven-related surge into defensive assets. The euro rose above $1.14 up from $1.1344 late Wednesday while the British pound traded up at $1.2625 vs. the dollar.
· Treasury market’s jumped as yields fell to multi-month lows following a weaker-than-expected ISM Manufacturing reading in the U.S.; the 10-yr yield drops under 2.57% down over 9 bps (after hitting peak of 3.25% just a few months ago), the 30-yr yield down at 2.91% (lowest since last January and off 2018 highs above 3.4%) and the 2-year yield down at 2.40% (down over 55 bps from October highs) – but the shorter-term yields are moving above – the 1-yr yield 2.50% vs. 3-year yield 2.35% and 5-yr 2.38%. Overall, Treasuries rise as investors rotated back into the safe-haven instruments as US stocks markets drop again and data boosts outlook for Fed to ease on raising interest rates.
Sector News Breakdown
· Autos’ December monthly auto sales data was released: GM said new vehicle deliveries for the Q4 in the U.S. declined 2.7% year over year. Total deliveries for the quarter were 785,229. Deliveries for the full year were 2.9 million, down 1.6% from full-year 2017. Chevrolet, Cadillac and Buick brands all experienced declines for both periods; FCAU said U.S. auto sales rose 14%, missing the est. for an increase of 15% as Jeep brand sales rose 10% to 80,449 vehicles, Wrangler sales jumped 45% to 19,800 vehicles and Cherokee sales rose 7% to 20,800 vehicles; Ford (F) Dec. U.S. light-vehicles sales fell (-8.8%), vs. est. down (-6.2%) while Ford brand sales fell 9.6% to 209,248 vehicles, Focus sales dropped 67% to 3,661 vehicles, Mustang sales fell 43% to 4,392 vehicles and Lincoln brand sales rose 8.5% to 11,526 vehicles; HMC issues December US auto sales rose 3.9% vs. est. down (-2.8%); NSANY Dec US auto sales rose 7.6% vs. est. down (5.6%)
· Housing & Building Products; LL downgraded to hold at Loop Capital warning on the impact of heightened promotional activity on Lumber Liquidators’ margins; building products at Citigroup, saying top picks are VMC, EXP, and MLM as finally see momentum in infrastructure. Firm said material stocks correlate well to construction spending, and tend to peak after the builders – says EXP exhibited least downside risk while SUM/USCR had most downside/upside exposure
· Casino & Leisure mover; Bloomberg reported that Telsey Advisory said EXPE and MAR are negotiating out a new commission rate that could lead to discussions with other hotel operators; gaming stocks hold up well after outperformance Wednesday on better monthly Macau data for a second straight month (WYNN, MLCO, MGM)
· Business Services; Bank America named INFO, CTAS, ARMK, and TRU as their four best ideas for 2019 in the sector as they upgraded CTAS to buy while downgraded RHI to neutral/said INFO is a quality data business with a strong financial model and moat while ARMK has a recurring and fairly defensive business, and has compounded EPS at a 12.5% CAGR since its 2013 IPO.
· Energy stocks bounce as oil prices held up relatively well despite the broader sell-off in risk assets; inventory data coming tonight in the form of API after the close, with both weekly EIA natural gas and DOE inventory data tomorrow morning (all pushed due to New Year’s Holiday)
· Solar stocks FSLR and CSIQ both upgraded to buy from neutral at Goldman Sachs as their solar coverage view raised to neutral from cautious saying green shoots are emerging, with improving demand into 2019. Notes ASPs are stabilizing, and China is likely a positive catalyst regarding policy. Upgrades FSLR citing U.S. utility-scale momentum, expectations already reset; CSIQ raised to buy vs neutral; sees upside to consensus numbers
· MLPs; Goldman Sachs said an inflection appears ahead in the midstream sector with many companies becoming free cash flow positive and/or seeing an improvement in leverage metrics as major projects come online – firm names KMI top pick while upgraded LNG, PAA and PAGP to buy and raised SEMG and SUN to neutral while downgrade BPL and TRP
· Bank movers; the beaten up banking sector of 2018 was hoping for rising yields to help lift lending margins in 2019…but that does not appear to be the case…as a recent round of weaker economic data and a collapsing stock market has pushed Treasury prices higher over the last few weeks and in turn, sent yields back near multi-month lows; shares of regional and large cap banks among those falling during that stretch; Financial Tech names under pressure with big declines early in MA, V, PYPL, WP and SQ; CME reports 4Q and 2018 annual average daily volumes. 2018 average daily volume (ADV) reached a record 19.2m contracts, up 18 percent from 2017
· M&A news dominates healthcare space as BMY agreed to acquire CELG in a $74 billion cash-and-stock deal that unites two cancer-drug makers in one of the largest pharmaceutical-company mergers ever. Under the terms of the proposed deal, Celgene shareholders will receive one Bristol-Myers Squibb share and $50 in cash for each Celgene share held, which would value Celgene at $102.43 a share, a 54% premium to yesterday close
· Pharma movers; PCRX announced its highest quarterly revenue reported with 4Q preliminary Exparel net product sales of $94M, citing support from physicians, payers and patients in the expansion of non-opioid pain management strategies (prelim 2018 Exparel net product sales of $331M vs. prior view $325M-$330M; TEVA was upgraded two notches to buy from underperform at Bank America as view of pipeline optionality for Teva includes the “upside potential from exclusive launches of generic Forteo and biosimilar Rituxan
· Managed care; CI was upgraded to outperform at Raymond James as the combined Cigna/Express Scripts business is poised for above peer earnings growth yet trades at a substantial discount to both the peer group and the overall market; MOH has renewed its contract with CVS for pharmacy benefit management services through 2021, adding that the agreement is immediately accretive to earnings; Wolfe Research remain constructive but see risk/reward more balanced so downgrade our sector rating for Managed Care from Market Overweight to Mkt Weight (firm upgraded WCG to outperform but downgraded MOH); HUM estimates net membership for individual Medicare Advantage products increased by 375,000 to 400,000 members for 2019, based on final annual enrollment period results (prior estimate was for an increase of 350,000 to 400,000 members
· Biotech movers; GILD was upgraded to outperform at Oppenheimer calling it among the cheapest in large-cap biotech and positive 2019 catalysts include recently named CEO, sales growth, and important mid/late-stage clinical readouts for budding franchises; SESN falls on late-stage Vicinium data; Guggenheim updated its biotech coverage, with highest conviction BUY for 2019 remains ARRY, which they designate as “Best Idea” while upgrading INCY to BUY with an $84 PT and downgrading PBYI to neutral from buy; shares of CLVS and SGEN shares dropped after Leerink suggested M&A chances diminished after BMY deal to buy CELG; GNMX plunges after saying its Ascend trial of AEVI-001 did meet its primary endpoint of cutting ADHD-RS after six weeks of treatment
· Medical equipment and devices; Bank America comments on Life Sciences & Diagnostic Tools stocks noting a strong 2018, though macro doubts are likely to persist and organic revenue growth is likely to slow – the firm named Agilent (A) its top Tools pick for 2019 while upgraded WAT to neutral from underperform and cuts MTD to neutral from buy; remains bullish on EXAS in diagnostics group coverage while downgraded LH and DGX to underperform; UBS upgraded ILMN to buy, bullish on its revenue growth opportunity, with our prior survey work analysis pointing to an accelerating revenue growth outlook for 2019; Barclay’s named TMO its top pick in Life Science while upgraded BIO to overweight and lower tgts for MYGN and SYNH
· Healthcare services and providers; in dental sector, HSIC was downgraded to underperform at ISI/Evercore saying the company faces a unique number of headwinds/tough equipment comps post a period of notable share gains vs. PDCO. Meanwhile, PDCO was upgraded to in-line saying the worst is likely over for PDCO post period of underperformance as new management team has made repairs (post ERP/XRAY/sales force disruptions) and comps get notably easier
Industrials & Materials
· Industrial & Machinery; Bloomberg reported Airbus (EADSY) fell just short of its 800-plane delivery target; broader industrial and machinery names like BA, CAT, UTX, MMM came under pressure today in a broader market rout
· Multi-industry; Credit Suisse named 2019 top picks: HON, EMR and IR, replacing MMM, ALLE and XYL, which all remain rated Outperform. CSFB upgradedEMR to Outperform on expectations for an oil price recovery in early Q2, strong E&C backlogs, and attractive FCF generation. HON was also upgraded to Outperform as the company benefits from each of our core themes (e.g. digital, simplification and FCF generation).
· Transports; DAL reported traffic for the December of +5.4% vs. -0.40% YoY while capacity +5.4% vs. +0.90% YoY and Dec load factor 84.2% vs. 84.2% YoY/sees Q4 EPS at high end of prior $1.25-$1.30 view – shares fell as the airline warned Q4 unit revenue would be slightly below its prior forecast due to the lower-than-expected improvement in last-minute fares booked by travelers (guides 3% rise vs. prior view of up 3.5%) – news hit airlines hard AAL, UAL, LUV, JBLU
· Chemical stocks; Stifel lowers tgts on ag chemicals as see greatest risk to CF and NTR, owing to the companies’ exposure to delayed U.S. ammonia applications/expect much of this is in share prices already, and earnings will include commentary pointing to a strong catch-up in 1Q19 demand. Lower CFfrom $50 to $45, MOS from $35 to $31 and NTR from $70 to $62; LNDC expected to report earnings tonight; ALB was downgraded to hold at Berenberg
Technology, Media & Telecom
· Large cap tech and semi’s plunge following a surprise profit warning from tech bellwether AAPL overnight, cutting its Q1 revenue view to about $84B below consensus $91.49B and said now sees gross margin of roughly 38%, operating expenses of approximately $8.7B, other income/(expense) of approximately $550M, and a tax rate of approximately 16.5% before discrete items – company also said “when we discussed our Q1 guidance with you about 60 days ago, we knew the first quarter would be impacted by both macroeconomic and Apple-specific factors”
· Apple Inc. suppliers tumbled in post-market trading after the iPhone maker cut its first-quarter revenue forecast with shares of SWKS, AVGO, CRUS, SYNA, STM, QRVO falling. Dow Jones noted over 80% of the Apple suppliers tracked by Barron’s are based in Asia. Opticals also fall, led by declines in LITE early (recall LITE already preannounced its Dec-18 quarter) – but fears of continued weakness in China may persist into this year is weighing on sector; also in semi space, where the Philly semi index (SOX) fell as much as 5% to around the 1,100 level, MLNX down with broader semi weakness as well as news the company named Doug Ahrens as new CFO (which Piper Jaffray said is a potential indicator that Mellanox is not selling itself)