***The “Mid-Morning Look” will resume next Wednesday June 26^th

***No notes next Monday and Tuesday (6/24, 6/25)

Mid-Morning Look

Friday, June 21, 2019

U.S. equities are little changed, taking a breather after jumping this week on lower interest rate outlook from the Federal Reserve, a recovery in energy stocks as oil prices on track for big weekly gains, and as investors remain optimistic ahead of President Trump/Chinese leader Xi meeting next week at the G20 summit in Osaka. Treasury yields are rebounding after hitting their lowest levels in years this week (10-year fell below 2% and the 2-yr below 1.7% yesterday), while gold on track for its best close in over 5 years again as tensions between the U.S. and Iran intensified overnight. Weak manufacturing data (Markit data) disappoints investors this morning, as both the manufacturing and service sector surveys fell short of views (and posted new yearly lows), adding to already weak sentiment in manufacturing after both the Empire and Philly data earlier this week missed bigly. President Donald Trump said he called off retaliatory strikes on three Iranian sites overnight following the downing of a U.S. Navy drone because the action would not have been “proportionate.”

Also very dovish comments this morning from Fed members Clarida, Bullard and Kashkari. St. Louis Federal Reserve bank president James Bullard said he dissented at this week’s FOMC meeting because he felt weak inflation and uncertainties about the outlook for economic growth warranted an interest rate cut. Federal Reserve Vice Chairman Richard Clarida said this morning that “the case for providing accommodation has increased,” in an interview on Bloomberg Television. “Especially in the last six or eight weeks, there has been elevated uncertainty about the outlook.” Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said in an essay he advocated for a 50-basis-point rate cut and a commitment not to raise rates again until core inflation reaches their 2% target on a sustained basis.

Treasuries, Currencies and Commodities

·     In currency markets, the dollar slips, but overall little changed after declining this week amid prospects of lower interest rates by the Fed next month. The euro rallies vs. the dollar, though the buck bounces off multi-month lows vs. the Japanese yen. Bitcoin prices quietly to their best levels since May 2018, off earlier highs of $9,922 (note Bitcoin has not been above the $10,000 level since March 2018 – and all-time highs $19,511 in December 2017). Treasury yields recover off multi-year lows yesterday for the 10-year and 2-year.

·     Commodity prices strong this week, with WTI crude oil prices on track for their best weekly return (possibly) since December 2016, jumping to a three-week high amid escalating military tensions in the Gulf region and the threat of potential U.S. airstrikes on Iran. Weekly inventory data this week was also bullish, while markets await upcoming OPEC meeting early July. Gold prices topped the $1,400 an ounce level overnight on Iran/U.S. tensions heating up.

Economic Data

·     Weak manufacturing data: the June U.S. PMI Composite Flash: 50.6 (lowest reading since Sept 2009) vs. 50.9 consensus 50.9 prior; Manufacturing PMI 50.1 vs. 50.4 consensus, 50.6 prior and services PMI 50.7 (lowest since February 2016) vs. 50.9 consensus, 50.9 prior.

·     Existing home sales rise 2.5% to 5.34M vs. est. 5.3M (prior month revised to 5.21M from 5.19M); there was 4.3 months’ supply in May vs. 4.2 in April; median home price rose 4.8% from last year to $277,700 (biggest gain since August of last year); Inventory rose 4.9% to 1.92M homes

Sector Movers Today

·     Refiners PBF, VLO, HFC, DK, MPC, PSX) active as the refinery fire the top story in the energy complex today (taking some attention away from Iran tensions with US), as gasoline prices jumped following an explosion and massive fire at the Philadelphia Energy Solutions refinery, the largest gas refinery on the east coast. The crude section at the Girard Point portion of the 335K bbl/day refinery reportedly was shut down due to the fire. A fire broke out on June 10 at the same refinery, which is believed to have affected a 50K bbl/day catalytic cracking unit

·     Consumer finance and lending; PYPL said that current Chief Operating Officer and EVP, Bill Ready, will step down from his current role in order to pursue other entrepreneurial interests; QD shares rise after raising its adjusted net income forecast for FY 2019 to be greater than 4.5 bln yuan ($654.72M) from prior expectations of greater than 3.5 bln yuan; Susquehanna said Visa’s (V) stock is poised to outperform MA as it now trades at a 4X premium to Visa in terms of P/E, an all-time high. Visa used to trade at a significant premium to MA, but that has reversed

·     Managed Care; UNH has agreed to buy health-care payments firm Equian LLC from its private-equity owner for about $3.2B according to reports https://on.mktw.net/2FomrdJ ; Leerink said that if UNH does buy Equian, it is less likely to buy MGLN in the near-term, assuming an all-cash deal, and taking into account UNH’s recent $4.3B deal for DaVita Medical Group, the Equian buy would fully allocate the $6.5B-$8B of operating cash flow UNH earmarked for growth capital in 2019. In February, Reuters reported that Magellan was exploring selling itself after coming under pressure from Starboard Value LP; Bernstein said CVS could become the #2 to UNH in integrated MCO and care delivery, with a potential doubling of stock price in 3 years if the medium-term objective should be to shift the company from 25% to over 50% MCO and care delivery earnings

·     Healthcare Services; IQV was upgraded to buy at Mizuho and upped target to $175 from $150 saying after the investor day it became clear that IQV is not just differentiated from its peers, the company is actually light years ahead of its competitors; CTLT upgraded to buy at Jefferies saying its profile has been shifting to high-value, higher growth biologics, with the Paragon deal adding an exclamation point; LH upgraded to buy at Deutsche Bank which reflects an increasingly constructive view on the Covance contract research business

·     Semiconductors; MU tgt lowered by two analysts today as JPM reduced tgt by $14 to $50 citing U.S. curb on Huawei and tougher memory pricing environment, while Baird cut tgt o $28 from $32 saying that the downturn in NAND memory chips could extend well into 2020; European wafer maker IQE warned its 2019 revenue would miss forecasts, blaming a bigger than expected hit on the industry’s supply chain from U.S. restrictions on China’s Huawei

Stock GAINERS

·     AXGT +32%; rising for the 7th time in 8 days – initiated as a new outperform and $18 tgt at Leerink today follows recent earnings and strategic gene therapy development partnership

·     CLDR +2%; as announced a strategic partnership with IBM to develop joint go-to-market programs designed to bring advanced data and AI solutions to more organizations across the expansive Apache Hadoop ecosystem.

·     KMX +4%; record high after Q1 earnings and revenue topped consensus ($1.59/$5.37B vs. $1.49/$5.18B) while its Q1 total used vehicle unit sales up 13.0%, including a 9.5% increase in comparable store used unit sales (above est. 5.1%)

·     OCUL +6%; as the FDA approves a supplemental new drug application for Dextenza to treat swelling after ophthalmic surgery

·     PBF +6%; rises along with other oil refiners and gasoline prices after an explosion and massive fire at the Philadelphia Energy Solutions refinery, the largest gas refinery on the east coast

·     SEAS +4%; was upgraded to buy from neutral and raise tgt to $39 from $31 at Goldman Sachs

Stock LAGGARDS

·     ANAB 12%; after Credit Suisse slashed its tgt to $79 from $137 and downgraded to neutral as lowers assumed probability of success for the company’s experimental drug etokimab to 35% from 55% as a treatment for atopic dermatitis and to 40% from 45% as a treatment for asthma

·     CCL -4%; adds to yesterday’s 7.6% decline after analysts weigh in on yesterday co lowers year EPS outlook to $4.25-$4.35 from prior view $4.35-$4.55 as sees lower ticket prices in 2H of the year

·     CGC -7%; reported Q4 revenue C$94.1M vs. C$22.8M a year ago and were up sequentially from C$83M in Q3 (but below est. C$95.2M)

·     CXW -4%; after Elizabeth Warren said would announce a plan to end private prisons; shares of GEO also under pressure following Warren’s tweet

·     KFY 19%; guides Q1 EPS 73c-81c on revs $466M-$486M below est. 82c/$488.5M

·     LKSD -26%; after the U.S. Department of Justice filed a lawsuit to enjoin Quad’s proposed acquisition of LSC Communications

·     MU -2%; tgt lowered by two analysts today as JPM reduced tgt by $14 to $50 citing U.S. curb on Huawei and tougher memory pricing environment, while Baird cut tgt o $28 from $32 saying that the downturn in NAND memory chips could extend well into 2020

·     PYPL -2%; said that current Chief Operating Officer and EVP, Bill Ready, will step down from his current role in order to pursue other entrepreneurial interests

·     SEE -5%; said it terminated Chief Financial Officer for cause after an internal review, promoting a downgrade to underperform at Bank America