Tuesday, January 8, 2019
Equity Market Recap
· U.S. stocks surged for a third straight session, posting solid gains in nearly all sectors (other than financials weakness) as the US and China will extend their trade talks by another day, boosting hopes that the two countries are making progress in their attempts to work out trade differences. Energy stocks rose as WTI crude extended its longest run of daily gains in a year-and-a-half (7-straight days) on expectations of tighter supply and renewed efforts by the U.S. and China to reach a trade deal. Treasuries dipped after a soft auction of three-year notes saw a weak bid-to-cover. Tech space got another big profit warning, this time from Samsung (after AAPL lower revenue view last week), but failed to hurt the sector (Semi’s did fall on news). Next up, President Trump will deliver a prime-time televised address tonight (9:00 PM) concerning his demand for a wall along the Mexican border, which is at the heart of the ongoing government shut down. Overall, the NASDAQ posted its 8th day of gains out of last nine, while the Russell 2000 also advanced for the 8th time in nine days, moving further out of correction territory.
· Oil prices rise, making it a 7th straight day of gains, extending its run higher off 18-month lows to start the New Year, helped by expectations of tighter supply and renewed efforts by the U.S. and China to reach a trade deal. Brent crude rise $1.39 or 2.42% to settle at $58.72 while WTI crude rose $1.26, or 2.6% to finish at $49.78 per barrel. API weekly inventory data expected tonight after the close, with EIA data tomorrow morning (after bearish reports last Friday).
· Gold prices dropped, falling -$4.00 or 0.3% to settle at $1,285.90 an ounce, pulling back from recent 6-month highs as the dollar rebounded and investors pulled back on safe-haven assets with US stocks on track for their third straight day of gains. Palladium was up nearly 1% at $1,311.60 per ounce, after hitting a record high of $1,328.62 earlier in the session. Silver rose 0.1% to $15.66 per ounce, while platinum fell -0.9% to $814.90, after hitting its highest in more than a month at $831.10 on Monday.
Currencies & Treasuries
· The U.S. dollar rebounded after yesterday’s pullback, rising against most major currencies on hopes of a trade deal with China to materialize. The dollar index (DXY) rose about 0.25% to just under the 96 level. The Pound was down around -0.5% at 1.272 ahead of the expected Brexit vote next week. Treasury markets were down slightly as stocks rally and markets await details of the trade negotiations between the U.S. and China, which is moving into day-3. No major economic data today in the U.S., as yields end little changed on the day, off recent multi-month lows. The U.S. Treasury sold $38B in 3-year notes at a yield of 2.559% vs. 2.555% pre-sale when issued, with a bid-to-cover (demand) at 2.44 vs. 2.59 in prior auction and indirect bidders awarded 41.9% of the auction and 17.7% to direct (which marked the highest share since Dec 2015). The 10-year yield inched higher to 2.71%, highest in about a week while the 2-year rose to 2.58% and the 30-year 2.99%.
Sector News Breakdown
· Retailers; JWN was upgraded to equal-weight at Morgan Stanley saying after underperforming in 2018, JWN now sits 4% below our $50 PT. Additionally, they see upside to the current stock price if JWN’s strategic initiatives succeed, allowing the stock to move toward our Bull case value; toy retailer MAT rises early after announcement of Barbie movie franchise; HELE shares fell following mixed 2019 guidance and lower margins
· Consumer Staples; MNST upgraded to buy at SunTrust as think concerns about its partnership with KO and growth potential in China are overblown, raise tgt to $65 from $50; WTW tgt cut to $80 from $120 at Craig Hallum saying preliminary Google trends data for Diet Season, with searches down sharply in December and the first days of January
· Restaurants; CMG tgt raised to $525 at KeyBanc and our comp/EPS estimates based on our analysis of Key First Look Data, which implies a sequential improvement in indexed spending since 3Q; BLMN upgraded to overweight from neutral at JPMorgan saying the stock has remained below $20/share and trades at a discount to casual dining peers; EAT and CAKE both upgraded to outperform at Raymond James which they now view as contrarian long ideas (very high short interest and few buy ratings on the Street)
· Casino & Leisure movers; in lodging, Hyatt (H) downgraded at Raymond James prompted by defensive stance towards the broader markets and expectations for an economic slowing; in leisure, NCLH shares upgraded by Bernstein in the cruise sector; TSLA shares active after ORCL founder Larry Ellison has emerged as the second-biggest individual investor in Tesla Inc. with a holding worth $1 billion in the electric carmaker
· Energy stocks buoyed by better oil prices again; NFX updated its 4Q outlook to include its view of daily net liquids production in the Anadarko Basin coming in above the high end of its 80-86 Mbbls/D view; preliminary FY proved reserves seen increasing more than 100 MMBOE (or 15%) y/y to over 780 MMBOE; OAS upgraded to buy from hold @ Stifel and raise tgt to $14 as the stock lost its premium valuation in 4Q 2018, though Stifel sees for the gap to narrow this year
· Utilities & Solar; PCG adds to yesterday’s 20% decline as it lost its investment-grade credit rating and remains under review by S&P Global Ratings for a further downgrade citing political and regulatory pressure and uncertainty as the utility faces massive claims stemming from deadly wildfires.
· MLPs; strength in the sector today with the Alerian MLP Index (AMZ) up as much as 2% intraday, as 2019 has yet to see a down day for the index, with gains in DCP, SMLP, NS, ANDX among them; in research, Bernstein upgraded WMB while downgraded OKE, while JPMorgan raised OKE and TRGP ratings; RBC said the midstream sector is better positioned to weather some commodity price volatility
· Bank movers; banks JPM, USB and STI all downgraded to hold at Jefferies saying their new ’20 numbers for all of them are below consensus as they remove rate hikes; Morgan Stanley reduced price targets for big banks including JPM, C, SIVB, and COF and cutting estimates citing lower market-based revenue; slower net interest margin growth, with just one rate hike likely in 2019; risks to luxury consumer spending and a drop in M&A. In trust banks, Jefferies downgraded NTRS to hold with their ’20 EPS estimate now 7% below consensus
· Insurance; Goldman Sachs said the set-up for life insurance in 2019 is mixed, upgrading VOYA to buy from neutral and downgrading PFG to a neutral from buy as believes life insurance companies “will need to prove their durability in the face of unfavorable markets,” while organic growth is improving and valuations are well below the 5-year average; Goldman also upgraded WLTW to buy and downgraded AON
· Asset managers; Evercore ISI upgraded STT to outperform and downgrade IVZ to in-line and BEN to underperform saying high single/low double-digit earnings growth should be something at least a little interesting to PMs at these lower valuation levels as they feel many investors are underweight and not overly interested in financials right now
· Consumer finance and lending; GPN upgraded to buy at Goldman Sachs as GPN has “transformed its business with software technology in recent years,” and may sustain ~18% EPS growth, even as stock has declined 25% from 2018 peak; Bank of America is still bullish on payments companies as the sector may manage to sidestep the issues recently triggering financial market volatility, including questions about Federal Reserve policy, tariffs and the Chinese economy – firm downgrade MA to neutral while PYPL is top payments pick, with “secular tailwinds, margin expansion and balance sheet deployment potential while also positive on V/WP; AXP suspended a director in its for-ex department as part of its ongoing probe into pricing practices, the WSJ
· Pharma and Biotech movers; after the biotech ETF (IBB) jumped over 8% the last 2-days and up 5-straight sessions coming into the day on M&A activity (BMY/CELG and LLY/LOXO deals), the sector pared gains early before bouncing late; MRNA said it has 21 mRNA development candidates in its pipeline with 11 programs now in clinical development.
· Medical equipment and devices; TCMD surges after prelim Q4 revs $45.5M-$46M topped the $40.5M estimate and said is confident about 20% plus revenue growth in 2019; ILMN falls after prelim guidance outlook, seeing year revs $3.76B-$3.8B vs. est. $3.81B; BSX issues in-line prelim Q4 sales view of $2.65B; DHR said Q4 2018 core revenue growth should be above guidance while non-GAAP EPS should be at or near the high end of guidance; DVAwas upgraded to neutral at UBS saying that the risk/reward is more balanced after the stock’s recent pullback.
· Healthcare services and providers; MOH upgraded at JPMorgan to overweight and $150 tgt while MUFG also raised its rating to overweight saying the margin recovery and sustainability story continues to gain steam; ICLR issues FY2019 guidance and reaffirms FY2018 guidance
Industrials & Materials
· Chemicals; BMO Capital upgraded NTR to outperform saying in a dynamic in which all core fertilizer names are atypically trading at similar multiples, NTR seems relatively safer with its diversified portfolio, stable Canadian investor base, lower commodity price sensitivity; CE was downgraded as believe the weaker macro backdrop, falling commodity price environment, and concerns around China may make it hard for the stock to outperform the broader group; Bank America/Merrill double upgrade WLK to Buy, upgrade AXTA to Buy, and downgrade APD to Underperform saying preference is to gain increased cyclical exposure to stocks that have had large pullbacks and where the second derivative of industry profitability is positive.
· Aerospace & Defense; HXL was upgraded to outperform at BMO with a solid outlook for top-line growth, a number of cost issues behind it, and an inexpensive valuation for this long-term growth story; TXT was removed from Jefferies franchise picks list; GD was downgraded to hold at Jefferies citing a lack of earnings momentum despite a host of marquee assets (cut tgt to $164); BA reported Q4 deliveries of 238 commercial airplanes, up 14% from 209 reported a year ago and beating analyst consensus of 235 deliveries
· Industrial & Machinery; GE shares moved above the $9 level (first time above since mid-November), rising for a 7th straight day; LNN said total irrigation equipment revenues decreased 15% to $87.6M from the same quarter a year ago
· Transports; index rose as much as 2.5% to start the day, led behind gains in UNP, with the index touching highs of 9,544.44 before paring gains; UNPupgraded by several analysts (RBC, Cowen, Seaport) following the hiring of 40-year veteran at Canadian National Mr. Jim Vena as COO (had since retired); airlines the biggest drag today, with declines in AAL, DAL, UAL, LUV
· Metals & Materials; Steel sector active after Credit Suisse downgraded US Steel (X) to neutral from outperform, while upgraded STLD and NUE to outperform saying the near-term outlook for the US steel industry actually looks constructive in their view as seasonal weakness and aggressive destocking should fade by early 1Q-19
Technology, Media & Telecom
· Samsung preliminary results announced last night were below Street expectations, another blow to chip makers after AAPL’s revenue waring last week. Samsung Electronics Co. said it expects Q4 operating profit will decline 29%, well below analysts’ estimates “amid mounting macro uncertainties” and pointed to “lackluster demand” for memory chips and “intensifying competition” in its handsets business – semiconductor stocks fell on the Samsung warning; SIMO said it expects revenues to be within the lower half of their original guided range of $120.5-$127.5M and GMs to also be in the lower half of their original guidance of 50-52%; Semi equipment names the biggest declines in the Philly semi index (SOX) (AMAT ENTG, LRCX, KLAC); CREE rises after reporting a supply agreement for SiC wafers with STM
· Internet; FB strong after JPMorgan called it top Internet pick; MEET rises after giving prelim Q4 rev guidance above views; China ADRs active after Morgan Stanley downgraded BIDU and WB as they face slimmer margins, amid heavier investment and competition from smaller providers
· Software movers; TWLO target raised to $114 at KeyBanc and maintains an Overweight rating on strong fundamentals but thinks further multiple expansion is less likely this year; TTWO positive mention at RW Baird saying seeing sustained strength in sales and engagement for its Red Dead Redemption 2 video game, which lifted its estimates on the company (OP and $145 tgt)
· Media & Telecom movers; Wells Fargo downgraded the RLEC subsector to Underweight from Market Weight and downgraded shares of both CNSL and FTR (tgt cut to $1.75 from $5) saying FTR debt seems to be pricing in a looming restructuring – which we believe could cause a scar on the RLEC industry; MAXR downgraded by at least 4 brokers as one of its imaging satellites failed Monday; AT&S lowers FY revenue growth to around 3% for the financial year 2018/19 compared with 6%-8% previously on weaker Smartphone demand; VZ posted 1.2M retail postpaid net additions in fourth-quarter 2018, of which approximately 650,000 were phone net additions, with details coming from the Citigroup conference, sending shares higher
· Hardware & Component news; NOK upgraded at Raymond James because they envision improving trends led by wireless spending that we believe will aid Nokia’s other segment; IBM signs a $540M managed services agreement with Nordea Bank for the outsourcing of IBM Z operations to IBM; ROKUpares some of yesterday gains after Citron Research said in tweet “We initially went long $ROKU at $35. However, have to recognize when the story has changed. APPLE TEAMING UP WITH SAMSUNG., ROKU CEO selling last week, and short interest at lows. Risk/reward no longer there. Expect big retracement. ROKU stock is uninvestable now”