Wednesday, January 9, 2019
Equity Market Recap
· U.S. stocks extend their winning streak, now up four straight days for the major averages (longest streak since November), while the Nasdaq Composite and Russell 2000 rise for the ninth time in the last ten sessions. Stocks surged amid progress (but no deal) following the three-day trade talks between Chinese and American officials where China agreed to buying more U.S. agricultural goods, energy and manufactured products, helping boost sentiment for industrials and materials. The US dollar fell on the day, with some citing the dovish commentary by Fed speakers this morning (Evans, Bostic) which also helped commodities while the minutes from the December FOMC meeting showed the extent and timing of future hikes as less clear. Stocks took a turn lower later afternoon after reports Senator Scott, leaving Trump chat today, suggested shutdown will drag on – the headlines took a little steam out of the stock market mid-afternoon.
· Sector movers included: semiconductor chip stocks among the top gainers despite SWKS EPS/rev warning last night, coming in not as severe as expected given recent warnings from Apple and Samsung. Financials gained as a few analysts turn positive on the sector following sell-off. Energy shares rise as oil prices climb for an 8th straight day on bullish Saudi comments, with WTI crude rising over 5% and now more than 23% off its December lows.
· Federal Reserve Bank of Chicago President Charles Evans said the central bank can take some time before it raises rates again amid an uncertain economic outlook. Federal Reserve Bank of Atlanta President Raphael Bostic, a non-voting member, said the Fed has short-term interest rates about where they need to be right now amid uncertainty over the economic outlook. Not much reaction from President Trump’s plea last night on the border wall with Mexico, as the partial government shutdown rolls into day-19
· The Nasdaq Comp rose over 1% or 70 points, as it approaches the 7,000 level (last above that levels Dec 14th) – also of note, the 50-day MA for Nasdaq stands at 7,013 (hasn’t been above its 50-day MA level since the end of November). The VIX dropped to 19.89 this morning as market fear subsides into earnings next week. Note the S&P 500 Index is up almost 10% in the two weeks since the Christmas Eve massacre…but remains 12% below the all-time high in Sept.
· Oil prices rise again as WTI crude gains for an 8th straight day, up $2.58, or 5.18% to settle at $52.36 and closes now 23% off its December lows while Brent above $60 after bottoming at 18-month lows recently. Prices were helped today by positive Saudi Arabia comments and a pullback in the dollar. Inventory data was mostly bearish as U.S. gasoline inventories rose by 8.1M barrels last week to 248.1M barrels, the largest weekly rise since December of 2016, according to data from the EIA earlier. U.S. Gulf Coast gasoline inventories rose to 89.37 million barrels last week, hitting fresh record highs, EIA data showed. Still, commentary from Saudi Arabia helped propel prices higher after oil minister Khalid al-Falih said the kingdom would cut its exports to 7.2M barrels per day in January, down from 8.0M bpd in November. He also announced a further 100,000 bpd cut in February. Gold prices rise $6.10 or 0.5% to settle at $1,292 an ounce (closed prior to the FOMC minutes release) and prices remains steady following the minutes.
Currencies & Treasuries
· The U.S. dollar fell, under pressure all day and moved to the lows late afternoon as the dollar index (DXY) dropped -0.75% to around 95.20. The greenback slid to 3-month lows after comments from Federal Reserve Bank of Chicago President Charles Evans said the central bank can take some time before it raises rates again amid an uncertain economic outlook. Federal Reserve Bank of Atlanta President Raphael Bostic, a non-voting member, said the Fed has short-term interest rates about where they need to be right now amid uncertainty over the economic outlook. Both comments came earlier in the day, prior to the FOMC Meeting Minutes. The euro rises above the $1.155 level (best levels since October), dropped vs. the Canadian dollar as oil prices extend recent gains, and the British Pound gained ahead of Brexit vote next week.
· Treasury prices end little changed, with yields inching higher as investors continue to pull out of safe-havens (bonds) and into stocks for a 4th straight day. The U.S. Treasury sold $24B in 1-year Treasury notes at a yield of 2.728% vs. 2.736% when issued pre-sale (lowest yield in a year) with a bid-to-cover (demand) at 2.51 vs. 2.35% prior auction and indirect bidders awarded 56.9% of auction, while directs get 20.8%.
Sector News Breakdown
· Retailers; URBN was upgraded to overweight at Morgan Stanley with $44 tgt, saying that the stock’s recent pullback is a good entry point; RL was upgraded to buy and $157 tgt at Buckingham saying while trade and tariff legislation and central bank uncertainty remain, a recent sharp share retrenchment across the Global Branded Apparel, Footwear and Retail Coverage largely bakes in these risks; NKE was downgraded to neutral at Baird while upgraded FL to outperform and raised its tgt to $65 from $60; GCO downgraded to hold at Pivotal; FIVE downgraded to hold at Loop Capital whileJCP 9-week comp store sales fell 3.5% on shifted basis
· Consumer Staples; STZ falls as trimmed FY19 EPS guidance for as much as 7% growth, down from 10%, primarily reflects its acknowledgement of higher net interest costs tied to its investment in Canopy Growth. Beer segment depletion growth in 3Q was a bit slower than expected; Goldman Sachs with several changes in the consumer staples sector: EL was downgraded to sell from buy as expects EL’s organic sales to decelerate amid a slowdown in China, while firm upgraded CL to buy based on view that the worst is behind the company; BF/B downgraded to sell at Goldman while KDP was upgraded to buy in the beverages sector
· Auto sector; Morgan Stanley noted auto-supplier stocks’ (BWA, ADNT, LEA) have risen over 12% the last three day, likely been driven by short covering amid optimism for stimulus in China; AAP was upgraded to buy at Bank America saying the recent pullback in the stock presents a particularly attractive opportunity, while GPC was raised to neutral from underperform saying while the company’s auto segment is expected to see accelerating growth trends, GPC’s other business segments are likely to decelerate, mitigating the auto cycle benefit
· Housing & Building Products; LEN reported lower-than-expected quarterly home sales and orders on while also put off giving a forecast for 2019 citing “continued softness and uncertainty” in the housing market – group got a boost after LEN talks about uptick in traffic on its conference call (TOL, KBH, PHM move); DHI was upgraded at Keefe Bruyette & Woods, more positive sentiment and a 43 basis-point decline in mortgage rates may drive a rally in homebuilder stocks soon as firm likes DHI and LEN due to product segmentation, geographic footprint, and product segmentation; LOW was upgraded to overweight at Barclay’s saying it should trade at a discount to HD until it can sustain comparable sales of a similar, or even a slightly lower level than HD
· Casino & Leisure movers; in lodging, JPMorgan cut their 2019 and 2020 estimates for RevPAR, or revenue per available room, by ~100 basis points due to expectations of slowing corporate transient travel in the U.S. and weaker growth abroad. CPLG upgraded to neutral from underweight, PT $14 from $16, seeing a more balanced risk-reward at current valuation; raises WYND PT to $45 from $43; stays positive on HGV while cutting PT to $36 from $38; gaming stocks IGT and MGP upgraded to buy at SunTrust as still expects “solid” earnings and outlooks for U.S. gaming stocks
· Energy stocks benefit from another bounce in WTI crude, rising for an 8th straight day sending energy stocks higher despite mixed inventory data. On the bullish side, overnight the API reported that U.S. crude supplies fell by -6.1M barrels for the week ended Jan. 4, showed that gasoline stockpiles climbed by 5.5M barrels, while distillate inventories surged higher by 10.2M barrels. However, a much different picture this morning from the EIA which showed a smaller than expected draw of -1.68M barrels vs. the est. -2.7M barrels while Cushing rose 330K barrels; Gasoline inventories surged +8,066M vs est. +3,300M while distillates +10,611M vs. est. +1,400M
· E&P sector; CHK topped estimates for Q4 output saying it expected total production to have been between 46K-464K barrels of oil equivalent (boe) per day in the three months to Dec. 31, above the 447K estimates; CXO was upgraded at Morgan Stanley as sees a quality stock on sale versus peers; in refiner sector, Morgan Stanley said they see an attractive entry point into US Refining with compelling valuation, supported margins, and continued rising cash returns with IMO 2020 around the corner (upgraded PBF while downgraded DK)
· Oil services; Susquehanna lowered their 2019 and 2020 estimates for several companies in light of their tempered outlook for spending in this lower crude price environment…think the larger-cap, more diversified services companies have a greater ability to manage through the uncertainty, and we therefore prefer Positive-rated SLB, HAL, HP and PTEN heading into earnings season and downgraded NBR to Neutral from Positive. Piper transfers coverage in space as reiterate our Overweight ratings for PDS and PTEN as both seem poised to generate FCF in 2019 and 2020/remain Neutral on HPand NBR partially due to our expectation for both to generate negative FCF post-dividend in 2019
· Utilities & Solar; DUK was downgraded to neutral at Bank America citing valuation along with concerns about Atlantic Coast Pipeline delays and cost overruns; PCG shares rebound after falling nearly 30% the last 2-sessions on bankruptcy fears and a credit downgrade
· Bank movers; lots of analysts weighing in on banks today given pullback in sector: 1) UBS upgraded banks BAC to buy and is recommending adding exposure to large-cap bank shares as sentiment on stocks “has come full circle” after a dismal 2018 (also upgraded regional banks RF and MTB); 2) Citigroup upgraded CFG and MS to Buy, downgrades BK to Neutral and reassumes coverage on FITB with a Buy as see ~15% upside on average for their universe from here as expect bank valuation multiples to re-rate higher as risk sentiment improves;
· Insurance sector; in the P&C space, Barclays upgraded TRV, ACGL and PGR to overweight saying they are among the best-managed companies in the P&C Insurance sector with sustainably robust earning power, strong balance sheets, and increasingly attractive valuations, while they downgraded RNRto underweight. Meanwhile, Barclay’s lowered their Life Insurance sector view to Neutral from Positive because they doubt valuations will improve in a volatile environment (they did upgraded AMP to overweight)
· Consumer finance, lending and services; MA was upgraded to buy at UBS as increased his 2019-2021 volume and revenue forecasts primarily to reflect the company’s strategic initiatives to expand into the enterprise business-to-business payments space; DBD and NCR both upgraded to buy at Davidson as sees a modest recovery in unit shipments in 2019 following three years of declines; SQ is rolling out a feature that allows developers and sellers to process payments within mobile apps
· Pharma movers; AKRX received warning letter dated Jan. 4 related to inspection of its Decatur, Illinois manufacturing facility in April and May 2018/to respond to FDA within required 15 working days; in cannabis sector, TLRY initiated overweight and $90 tgt at Piper as expect strong industry growth long-term, and Tilray looks well positioned and CGC init overweight and $40 tgt; ABBV said sees Non-Humira sales growth to over $35B in 2025 and expects to “drive top-tier industry performance again in 2019,” with double-digit adjusted EPS growth
· Democratic Reps. Elijah Cummings, Ro Khanna, Peter Welch, Joe Neguse, independent Sen. Bernie Sanders, and other cosponsors in the House and Senate will hold a press conference tomorrow morning to announce a legislative package “that would drastically reduce prescription drug prices in the United States,” according to statement released on Wednesday
· Medical equipment and devices; ISRG said prelim Q4 revs $1.0B vs. est. $1.03B as da Vinci procedures growth powered instrument and accessory revenue gains/4Q da Vinci procedures up about 19% to about 1.04 million, topping the million mark for the first time; GMED rises as announced preliminary 4Q18 revenue of $196M topping consensus by more than $7M while US Core Spine grew >9% (~7.5% adj for days) during the quarter
Industrials & Materials
· Transports; index traded up as much as 1.25%, trading above yesterday highs, led by broad rally (airlines, car rental); CNHI downgraded to sell at Deutsche Bank saying slowing global growth begins to bite” as modeling indicates machinery sales to non-U.S. markets will turn negative in mid-2019;TOO cuts its quarterly unit cash distributions to zero, from $0.01/unit, to reinvest and strengthen balance sheet; GBX shares fell after earnings/guidance
· Metals & Materials; were mostly higher on optimism about the potential for progress in trade talks between China and the U.S. BMO sees base metal prices improving in 2019, while Cowen initiated on steel sector with a cautious stance. The following may affect N.A. Material shares today; US Steel (X)downgraded to neutral at Citigroup as more cautious on integrateds which seem likely to lose market share and become increasingly reliant on a single customer base
· Packaging stocks; Wells Fargo downgraded IP and PKG to market perform from outperform saying headline risk of falling containerboard prices, incremental capacity, and trade uncertainty could render containerboard stocks range bound (at very least) for the next six-twelve months. Should domestic containerboard prices erode beyond our current $50/ton assumption, they see potential downside risk of 15-20% across the containerboard complex. Goldman Sachs said that when the packagers report in upcoming earnings season, initial 2019 guidance likely to disappoint the market; recommends buying BERY, SEE as resin and freight costs are subsiding
· Aerospace and defense; UBS said top picks for 2019 are BA and TDG in commercial aerospace and LMT, RTN and HII in defense. 4Q earnings season always offers extra volatility with initial guidance offered up by many, but most of stocks look like they have expectations well aligned. Firm lowered most of the price targets under coverage to accommodate the 4Q market correction and now reflect ~50bps lower medium/long-term growth in DCFs
· Industrial; MSM forecast Q2 profit below analysts’ estimates, while the midpoint of net sales outlook also missed saying that while the industrial economy remained strong in MSM’s Q1, there is more uncertainty than a few months ago due to potential economic and trade overhangs and the government shut-down (shares of GWW, FAST also moved in reaction)
Technology, Media & Telecom
· Internet; AMZN CEO Jeff Bezos announced he would be getting a divorce; AKAM was upgraded to overweight at KeyBanc; Jefferies sector view is selective and we would be buying AMZN, GOOGL, and INTU in large cap, MTCH, IAC, GDDY in mid cap, and WIX and TTD in small cap; lowers tgts and estimates for FB, SNAP and TWTR in social media sector; in online real estate, RDFN cut to hold at Jefferies based on its exposure to the housing market
· Online travel weak; BKNG and EXPE both downgraded to equal weight from overweight at Morgan Stanley which forecast slowing room night growth, higher spend on new initiatives and execution uncertainty. Jefferies said turning incrementally more cautious on the travel space given the highly discretionary nature of travel spend and expectations for a slowdown (lowers estimates for EXPE and BKNG (which it also downgraded to hold)
· Semiconductors; MU was upgraded to outperform citing a more positive risk/reward for Micron in 2019 after the sharp correction in memory names (cut tgt to $52 from $60); SWKS lowered its F1Q19 outlook citing lower-than- expected demand in the smartphone market/cut the revenue guidance to $970M from the previous outlook of $1.00B-$1.02B and reduced the EPS forecast to $1.81-$1.84 from $1.91; SGH shares plunge after its Q2 revs, adj profit forecast falls largely below estimates as one analyst noted the Brazilian government’s decision on Dec. 7 not to increase its mobile phone local content manufacturing rules by 10% led to weaker guidance; WDC shares jumped after launching various storage products a the ongoing CES conference
· Hardware and Software movers; TLND shares fell after guided Q4 revenue $55.4M-$55.8M below prior guidance of $56.6M-$57.4M (est. $56.7M);ORCL was downgraded at Barclay’s saying the competitive situation in the company’s core database market and cloud is not getting easier; AAPL will cut production of its three new iPhone models by 10% in the January-March quarter, the Nikkei Asian Review reported
· Media & Telecom movers; GOGO said they didn’t incur certain forecast costs associated with further de-icing efforts in Q4, raising its Adj. Ebitda forecast to the high end of its previous range of $45M-$60M for year; SIRI said sees 2019 total revenue approximately $6.1B vs. est. $6.07B; SiriusXM self-pay net additions approaching