Friday, January 4, 2019
Equity Market Recap
· U.S. stocks in all out rally mode, erasing all of yesterday’s losses, with more than 3% moves higher across the board for major averages after strong jobs data, better China PMI data, dovish Fed comments and hopes for a trade deal next week with China. The benchmark S&P 500 index posted gains across the board with only a handful of stocks in the index ending lower, as leaders included tech (rebound after yesterday drop), materials (after trade talks between the U.S. and China were set to resume and Caixin China December PMI readings were better than expected) and energy as oil rises for a 5th straight session, closing out the week higher more than 5%. The Nasdaq Composite posts its 6th positive day in last 7 days – up over 8% during that stretch and off the 12/24 low 6,190.16 (crosses above 6,750 – up as much as 4.5% today alone). The Dow Industrials rose as much as 800 points or 3.6% topping the 23,500 level briefly. The lone black eye today, top Democrats and President Donald Trump failed to come up with a deal to end the partial government shutdown. Treasury yields rebounded after yesterday’s swift move lower, with yields on the 2 and 10-yr up more than 10bps today on the jobs report. Stocks futures were higher overnight led by a gain in commodity stocks after trade talks between the U.S. and China were set to resume and Caixin China December PMI readings were better than expected. China’s surprise reserve ratio cut added to the positive sentiment.
· Federal Reserve Chairman Jerome Powell said today at the American Economic Association conference panel that the central bank decided some years ago that rate policy was going to be the active policy tool and the balance sheet would shrink gradually and predictably in the background, but the Fed would be prepared to adjust “as appropriate to achieve our goals.” “We wouldn’t hesitate to change it” if it conflicts with the Fed’s goals, Powell said Friday. Powell added that Fed officials don’t believe the balance sheet normalization is a factor behind recent financial market turbulence.
· Nonfarm Payrolls for December rose a stronger than expected 312K, topping the 184K economist estimate while private payrolls rose 301K vs. prior 173K and above the 185K estimate; the unemployment rate rose to 3.9% from 3.7% as the participation rate 63.1% vs prior 62.9%; nonfarm payrolls, net revisions, 58K from prior two months. Manufacturing payrolls rose 32k after rising 27k in the prior month. Wages strong as average hourly earnings rose 0.4% MoM topping the 0.3% estimate and prior 0.2% while YoY, wages jumped 3.2% topping the 3% estimate
· WTI crude prices rise, up 87c or 1.85% to settle at $47.96 per barrel (rising about 5.8% for the week), paring gains after weekly inventory data came in overly bearish. WTI crude rose to highs of $48.80 before slipping, helped after China said it would hold trade talks with the U.S., also helped by signs of lower crude supply and strong economic data. Inventory data not having an impact on energy markets early. Prices however slipped after the EAI reported weekly crude inventories rose an unexpected 7M barrels in the latest week, well off the expected 3M barrel decline forecast. Natural gas data bearish after EIA posting smaller than expected weekly draw (-20 bcf vs. est. -45 bcf). Brent crude rose $1.11 or 1.98% to settle at $57.06 per barrel.
· Gold prices fell on the day, but posted gains for the week; gold futures fell -$9.00 or 0.7% to settle at $1,285.50 an ounce as investors rotated back into riskier assets (stocks) and out of defensive safe havens that had rallied earlier this week as a strong jobs report boosted sentiment on the economy. For the week though, gold rose more than 4% while palladium prices touched fresh record highs today above $1,300 for the first time.
· The U.S. dollar was mixed on the day as the dollar index actually closed slightly lower after spiking initially following the better jobs report (DXY touched highs of 96.61 before falling to lows 96.04). The dollar gained vs. the Japanese which pared recent gains after rising to lowest levels since March yesterday. The dollar fell however vs. the euro and pound and slipped against the Canadian dollar which got a boost as oil prices climbed further off 18-month lows this week, trading higher for a 5th straight session
· Treasury market’s in full reversal from yesterday, moving lower after the strong jobs report and bouncing yields off lows. The 10-year yield with a 10-bps bounce to 2.65% after hitting its lowest since Jan. 16, 2018, and marked its biggest one-day decline since May. Meanwhile the 2-year yield also up about 10 bps to 2.5% after falling 11.1 bps yesterday to 2.391%, lowest since May 29. Treasury yields rose after stocks jumped and after Fed Reserve Chair Jerome Powell struck a dovish tone when speaking on an American Economic Association conference panel on Friday. Powell’s remark that the Fed would adjust its rate-hiking policy if economic conditions demanded it sent investors into riskier assets, benefiting stocks and lowering Treasury prices.
Sector News Breakdown
· Retailers; GME rises after the WSJ reported a buyout deal could be announced by the middle part of February/Sycamore Partners and Apollo Global Management are two of the PE firms bidding for gaming retailer ; Cleveland Research lowered Q4 comp estimates for M, KSSsaying sales appeared to slow in December vs. November and were mixed vs. channel expectations due to weather-related headwinds
· Consumer Staples; COTY was upgraded to neutral at JPMorgan following Coty Inc.’s 67% drop in 2018, earning it the title of the worst performer in the S&P 500; LW tops estimates after posting double-digit growth in FQ2 and expects full-year sales growth in a mid-to-high single digits range vs. the prior estimate of mid-single digits growth
· Housing & Building Products; building products MAS, AWI and FBHS upgraded at Bank America saying exposure to repair and remodeling should be attractive to investors concerned about a cyclical peak in homebuilding/favors MAS’s product mix, heavy exposure to the U.S. repair and remodel industry and its “options value” among smaller segments. In homebuilding, Bank America names DHI top pick while cuts tgt on LEN to $60 from $64
· Autos; UBS upgraded auto suppliers DAN to buy on compelling valuation and LEA to buy as sees less risk to the company’s 2019 guidance since it already provided segment margin guidance; auto supplier VC downgraded to Neutral from Outperform at Baird while the firm also cut ALV, VNE and ADNT to Underperform from Neutral
· Energy stocks jumped with oil spike (up a 5th straight day despite bearish inventory data) – and helped by broader bounce in U.S. stocks after yesterday’s dreadful mkt action. Inventory data mixed: Bearish data from EIA after saying rose an unexpected 7M barrels vs. est. draw of -3M barrels while gasoline a bigger build at 6.89M barrels vs. est. 2.4M barrels. Data pushed out to Friday due to New Year’s Day holiday: last night, the API reported that U.S. crude supplies fell by -4.5M barrels for the week ended Dec. 28, showed that gasoline stockpiles climbed by 8M barrels, while distillate inventories rose by 4M barrels. Weekly Baker Hughes (BHGE) rig count fell -8 to 1,075, with oil rigs falling -8 to 877 and gas rigs steady at 198
· E&P sector; ratings were adjusted at Bank America/Merrill saying the start of 2019 has been “déjà vu all over again: energy is oversold.” XOM is the firm’s top major pick while OXY and APC preferred among yield plays and sees greatest see greatest value at HES and NBL – however, gas-levered CHK, RRC, SWNdowngraded to underperform from neutral; FANG top pick among SMid-cap E&P, while downgrades CDEV and PDCE to neutral and HK to underperform
· Other movers; FTSI and RES downgraded at Bank America saying pressure pumping demand will likely weaken considerably this year in a $45-$50/bbl WTI environment; KOS was upgraded at Bernstein saying great entry point for new strategy and deep pool of free cash flow; AMID shares rise after an affiliate of private-equity firm ArcLight Capital Partners LLC has cut its proposed buyout offer for American Midstream Partners LP/ArcLight has offered to buy in the partnership that it and its affiliates don’t own already for $4.50 a unit.
· Utilities & Solar; Goldman Sachs upgraded EIX to buy from neutral citing view of deep value in California while is also incrementally more positive on PCG’slonger term prospects, and continues to view SRE (buy, on Conviction List) as a top pick.
· Bank movers; just a day after Treasury yields plunged across the board (more than 10 bps moves lower for 2,s, 10,s and 30,s) the bleeding stopped quickly today on the strong jobs report and dovish commentary from Fed Chairman Powell, helping reverse the losses in yields; large cap and regional banks among the biggest beneficiaries. Oppenheimer said while they continue to recommend BAC, C, CIT, GS, MS and USB but cut price targets of BAC/C/CIT/GS/MS/USBto $31, $49, $77, $257, $50 and $51 primarily driven by lower market multiples, the stocks are trading at just an average 61% relative P/E on 2019 earnings which in our view is a near distress valuation
· Alternative Asset managers: Goldman Sachs shifts ratings on capital markets stocks to reflect a “barbell” shape, favoring alternative asset managers and exchanges, while warning that traditional asset managers face risk this year: upgraded CBOE, VIRT, ARES and CG to buy while adds CBOE, VIRT, ARES to conviction list; downgraded TROW to neutral; removes KKR and ICE from Americas Conviction List, (keeps both buy): other top buy ideas for 2019: APO, LPLA, NTRS. Keeps BEN, APAM, WETF, MKTX sell, and sees potential downside risks to neutral-rated BK, AMG
· Consumer finance and lending; GDOT was upgraded to buy at BTIG as believe the recent pullback in GDOT shares amidst the broad market sell-off has created an attractive entry point; SQ announced that Amrita Ahuja will join the company as Chief Financial Officer (coming from ATVI)
· Pharma movers; FLXN reported preliminary 4Q18 revenue of approximately $9.5M, up 36% q/q, but slightly below consensus of $10.2M; MRKR reported updates for its T-cell immunotherapy programs across five studies; MRSN updates investors on XMT-1536 and XMT-1522; said for XMT-1536, expects to select a dose for its Phase 1 expansion studies and to initiate patient enrollment and report data in H1, while terminates development of XMT-1522 with Takeda
· Biotech movers; Biotech space a nice rebound today, rising over 5% as the IBB moves back above the 100 level and well off the 12/24 lows of 89.01; ESPR will get an upfront payment of $150M from a new licensing agreement with Daiichi Sankyo to commercialize bempedoic acid; CRSP and VRTX report FDA Fast Track Designation for CTX001 for the treatment of sickle cell disease; CELG rises a second day after BMY $75B takeover offer announced yesterday;REGN was upgraded to buy at Guggenheim; EPZM said based on FDA feedback, it expects to file its U.S. marketing application for tazemetostat for EZH2 mutation-positive and wild-type relapsed/refractory follicular lymphoma (FL) in Q4; NVAX announced positive results from a Phase II study of its flu vaccine, NanoFlu
· Medical equipment and devices; ANGO reported better than expected fiscal Q2 results; MYGN was upgraded to outperform at Cowen; VAR was upgraded to buy with $129 tgt at Goldman Sachs on the combination of upside to consensus EPS estimates, guidance that appears conservative, and low expectations, while the firm downgraded COO to sell
Industrials & Materials
· Industrial & Machinery; much like the rest of the market, industrials with a strong bounce across the board in industrials; RBC Capital with a few changes today upgrading HON to outperform while downgraded UTX and EMR to sector perform and FLOW to underperform
· Transports; Dow Transports erase yesterday’s losses (following DAL lower guidance) – trading at the highs up over 350 points or about 4% as broad sector rally lifts the group – all 20 components higher, led by DAL and followed by other airlines
· Metals & Materials; Most metals with a relief rally as trade talks are set to resume between U.S. and China, and China’s central bank freed up lenders to start pumping more cash into the economy. Aluminum, nickel and copper were among the best performers and the stocks exposed to these metals are likely to rise; shares of AA, CENX, STLD, NUE, X, FCX, CLF gained
· Chemicals: Citigroup upgraded SHW to buy as raw material cost headwinds ease and they expect the repair & remodel business to remain strong, while also like APD as a late-cycle play and upgrade CC as trough TiO2 conditions may be priced in and Opteon adoption continues. Overall, Citi reduced FY19 estimates by ~4% on average, mainly in commodity chemicals (-6%) as declining oil-to-gas spreads are likely to pressure US profitability; RPM shares fell after Q2 earnings and quarterly sales missed consensus views
Technology, Media & Telecom
· Internet; sector with a relief rally; Goldman Sachs with a handful of changes today: NFLX was added to the conviction list as pullback presents attractive buying opportunity; ETSY upgraded to buy as expect reinvestment to drive upside to growth; EXPE upgraded to buy as opportunity to improve competitive position at an attractive valuation; EBAY downgraded to neutral – with few catalysts and growth uncertainty, we see better opportunities elsewhere; SNAP downgrade to Neutral from Buy on user-growth uncertainty; CRTO downgrade to Sell from Neutral on recent outperformance despite secular headwinds – big gains across the board: GOOGL, AMZN, FB
· Semiconductors; after plunging and closing near the lows yesterday with the Philly semi index (SOX) falling near 6% after AAPL’s sales outlook struck fear of slowing growth in the supply chain – group gets rebound today – though several analysts weigh in: Bank America upgrade INTC to buy while downgrading TXN, ADI and MXIM; SWKS was downgraded at Nomura/Instinet; ADI was downgraded to sector perform at RBC Capital
· Software movers; software space among the biggest bounces in tech today (TWLO, SPLK, CRM); MDB named one of top picks for 2019 for Oppenheimer as see upside coming from share gains in a large and fragmented market as MongoDB leverages its land-and-expand approach; in Internet security; FTNT was downgraded by two notches to sell from buy at Goldman Sachs and tgt cut to street low $59 from $95 citing an elevated valuation and heightened cyclical risks; says remains positive on Fortinet’s “structural cost/performance advantage vs. peers,” and expects the company to report a strong fourth quarter (CYBR also downgraded to neutral from buy)