Mid-Morning Look

Monday, June 17, 2019

U.S. equities start the week in positive territory, building on its current two-week-long advance ahead of several key upcoming catalysts the next two weeks, with investors awaiting the two-day FOMC policy meeting (stars Tuesday and concludes Wednesday), and next week’s G20 meeting where hopes are for trade talk between President Trump and Chinese leader XI. Technology stocks pacing early gains, with the Nasdaq Composite rising above 7,850 (currently just above its 50-day MA resistance which stands at 7,856), while energy remains weak. It was a very busy morning of M&A activity with a large deal in the Pharma space (PFE/ARRY), the oil sector (CJ/FRAC), the banking sector (LTXB/PB), and a PE deal (for BID). The US dollar slipped along with Treasury yields after weaker than expected economic data, as housing data missed views and manufacturing in New York fell into negative territory for the first time since 2016. Stocks have rallied this month after Chairman Powell said the Fed would act to sustain U.S. economic expansion amid growing geopolitical and trade tensions, but expectations are low for a rate cut Wednesday despite weaker economic data (though a high probability of a rate cut at the July meeting). Commerce Secretary Wilbur Ross played down the likelihood of a major deal at the Group of 20 summit later this month, if President Donald Trump and China President Xi Jinping meet, but markets hopes remain high.

Treasuries, Currencies and Commodities

·     In currency markets, the U.S. dollar slides following the weaker Empire manufacturing data raised concerns on the economy and boosts expectations the FOMC will be more aggressive on easing rates to help stimulate growth. Treasury yields edge only slightly higher as the 10-year yield remains around 2.10% after Friday’s close around 2.08%. Expect sideways trading into the FOMC meeting this week. Commodity prices are lower to start the week, with gold prices down a few dollar despite the dollar dip and oil prices adding to last week’s losses.

Economic Data

·     The New York Fed’s Empire State manufacturing unexpectedly fell in June, moving into negative territory for the first time in more than two years, plunging 26.4 points to negative -8.6 in June, well below the expected reading of +11.0. The last time the index was negative was in October 2016. New-orders index, sank 21.7 points to -12 in June, while shipments fell -6.6 points to 9.7 and unfilled orders also fell sharply and inventories sank into negative territory

·     U.S. Home Builders’ Confidence index (NAHB) in June falls to 64 vs 66 last month, and came in below the economist estimate of 67; the present single family sales falls to 71 vs 72 last month, while future single family sales falls to 70 vs 72 last month

Sector Movers Today

·     Materials & Chemicals; CTVA upgraded to buy at Deutsche Bank as sees Corteva well positioned to benefit from higher corn prices and the expected increase in U.S. corn acres in 2020; MOS was upgraded to buy at Bank America with $30 tgt citing recent decline in the stock price, along with the company’s significant growth expansion potential in Brazil; DOW was downgraded at BMO Capital and reduced estimates, taking into account current commodity fundamentals including weakness in Silicons, MDI/TDI, and PE and assuming limited recovery through the bulk of 2019

·     Hardware & Component news; Raymond James reduced estimates in their more cyclical industrial technology names including IPGP, APTV, CGNX, LASR, TRMB and VC and are now materially below consensus and at Street lows across most of the names; sensor stocks APH, ST and TEL were downgraded to neutral from buy at Longbow; hard disk drive stock tgts cut at Susquehanna as STX tgt cut to $36 from $40 and WDC tgt cut to $35 from $44

·     Restaurants; SBUX tgt raised to $96 at Jefferies as analysis of Questmobile’s China mobile app data suggest concerns around negative impact to SBUX from any potential souring toward US brands in China are overdone; PZZA said current board member Shaquille O’Neal has closed on an investment in nine Atlanta-based Papa John’s restaurants; DNKN announced a partnership with GRUB for a new Dunkin’ Delivers service, with first step in the rollout is the launch of delivery at more than 400 Dunkin’ restaurants throughout New York City’s

·     Monthly Master Trust credit card data showed: 1) SYF May charge-offs for May of 4.91% vs. 5.26% YoY while May delinquencies +2.24% vs. +2.73% YoY; 2) COF May charge-offs 4.89% vs. 5.15% last month while 30-plus day performing delinquencies 3.29% vs. 3.42% last month; 3) ADS May net charge offs 6.3% vs. 6.4% last month and delinquency rate 5.0% vs. 4.9% last month; 4) JPM May credit card delinquency rate of 1.14% improves from 1.18% in April and 1.23% in March while charge-off rate of 2.46% falls from 2.51% in April and 2.55% in March; 5) DFS May net charge-offs 3.48% vs. 3.4% YoY and delinquency rate 2.33% vs. 2.2% YoY

Stock GAINERS

·     ARRY +59%; to be acquired by PFE in a deal worth $10.64B ($11.4B including debt), as the company looks to expand its pipeline of cancer therapies; ARRY holders to receive $48 for each of its shares outstanding in cash. https://on.mktw.net/2RjAUfF

·     BID +57%; to be acquired by BidFair USA for $57 per share, an entity wholly owned by media and telecom entrepreneur as well as art collector, Patrick Drahi https://on.mktw.net/2Ko0y2c

·     CJ +15%; and FRAC announce a merger of equals, creating a well completion and production services company worth ~$1.5B. In the all-stock deal, C&J shareholders will receive 1.6149 shares of Keane common stock for each common share of C&J owned https://on.mktw.net/2KljRJH

·     CTRV +75%; jumped after compelling positive results reported from human liver experiments with its NASH drug candidate CRV431

·     INCY +5%; as its ruxolitinib cream met the primary goal of a mid-stage study in vitiligo, a chronic autoimmune disease that causes patches of skin to lose their pigment

·     LTXB +4%; to be acquired by PB in a cash and stock deal valued at $2.1B where LTXB holders to receive 0.5280 Prosperity shares and $6.28 in cash ($41.78 per share), a 9.3% premium https://on.mktw.net/2MRMG2s 

·     QURE +8%; on reports it is exploring options including a potential sale amid interest from pharmaceutical companies looking to expand in gene therapy; QURE is working with advisers as it weighs options including a sale or partnerships – Bloomberg https://yhoo.it/2FdbL1w

·     SYMC +3%; upgraded to buy at Mizuho citing the positive risk/reward and tgt upped to $23

Stock LAGGARDS

·     CPB -2%; seeing weakness in food related names (CPB, CAG, MKC) after recent strength

·     DLAKY -10%; warned 2019 EBIT margin will be 5.5% and 6.5% vs. a prior forecast of +6.5% to +8.0% as the European market remains challenging

·     DOW -3%; downgraded at BMO Capital and reduced estimates, taking into account current commodity fundamentals including weakness in Silicons, MDI/TDI, and PE

·     ENDP -3%; downgraded to neutral at Citigroup and slashes its tgt to $5 citing the ongoing lawsuits in industry related to the U.S. opioid epidemic

·     LEN 2%; homebuilders weak following softer NAHB housing market index data

·     NUE -1%; as the steel producer guides Q2 EPS $1.20-$1.25, below consensus of $1.49 (watch steel producers on guidance as performance of the steel mills segment expected to decrease vs. Q1