Wednesday, May 16, 2018
Equity Market Recap
· U.S. stocks end the day higher, but off its best levels despite the 10-year Treasury yield pushing toward 3.1%, as strong earnings results in the retail space (Macy’s) and solid economic data boosted investor confidence. The better earnings from Macy’s lifted retail, and comes ahead of WMT earnings tomorrow morning, but not before Dow component CSCO reports after the close tonight. The U.S. dollar hit fresh 2018 highs before paring gains, as the euro fell amid political uncertainty in Italy. Investors also keeping a close eye amid events in Asia, with North Korea’s threat to pull out of a summit planned for next month and as U.S. lawmakers pressed Chinese President Xi Jinping’s top economic adviser to stop unfair trading practices as the two nations try and avoid a further trade conflict. Small Caps once again leading the gains, as both the Russell 2000 and the S&P SmallCap 600 indexes each trade to all-time intraday highs in early afternoon trading. Given the macro trade fears that have plagued markets the last few weeks, small caps are thought of as having relatively more domestically-driven revenue than their mid- and large-cap peers and are less susceptible to currency fluctuations in the dollar. Interest rate sensitive sectors such as utilities, telecom and REITs once again underperformed broader markets.
· Housing Starts for April fell (-3.7%) to 1,287M annualized rate, below the est. of 1,310M and down from 1,336M in the prior month; single family starts rose to 894k; multifamily starts fell to 393k in April; building permits fell to 1,352M vs 1,377M in March (est. 1,350M); permits fell 1.8% in April after rising 4.1% the prior month
· Industrial production for April rose 0.7% MoM after rising 0.7% in March and came in slightly above the 0.6% economist estimate. Industrial Production revised up to 0.7% from 0.5% in March. Capacity utilization rose to 78% from 77.6% in March, revised down from 78%
· Oil prices rebound, with WTI crude rising 18c or 0.3% to settle at $71.49 per barrel, bouncing off earlier lows of $70.66 per barrel. Oil prices spent most of the day in negative territory after the IEA said commercial oil inventories for OPEC countries declined in March by 26.8M barrels to 62.819B barrels month-on-month. That’s 1 million barrels below the latest five-year average metric widely used by oil market participants to assess the rebalancing process. Weekly inventory data was also bearish with a large 4.9M barrel build reported by API overnight, while the EIA drawdown of -1.4M barrels was smaller than expected, though gasoline stockpiles fell sharply.
· Gold prices were little changed most of the session, ending higher by $1.20 as June gold settles at $1,291.50 an ounce. Yesterday, gold prices fell over 2% to settle at $1,290.30 an ounce, its lowest levels since the end of 2017. Despite the small bounce today, gold prices have ended lower for six of the last eight sessions, having fallen more than 6% since its recent peak of $1,322.30 last week.
· The U.S. dollar ends mostly higher, but pulls back off 5-month highs. The euro pared losses vs. the USD, bounces back to back above the 1.18 level (off lows 1.1764), while the dollar pares recent gains vs. the yen, but still holding above the 110 level (recently touched best levels since mid-January). The British pound was little changed most of the day, holding around the 1.35 level after its recent pullback vs. the buck. The Turkish lira reversed a drop after the central bank said it was monitoring markets and would take necessary steps
· After extreme volatility yesterday, after bonds plunged and yields surged, today was a quiet day, with yields holding their extended levels from yesterday. On Tuesday, the yield on the 10-yr jumped more than 8 bps, topping highs of 3.08% before settling at 3.07% late yesterday. The 2-yr yield remains at 2.58% as mixed economic data and Fed speakers have little impact today. Rising rate hike expectations given improving economic conditions and Fed speakers noting inflation has picked up, has caused the selling in bonds and subsequent spike in yields.
Sector News Breakdown
· Retailers; Macy’s (M) leads department stores higher (KSS, JCP) after the company’s 1Q results beat estimates across the board and boosted its year adjusted EPS and sales views; URBN was upgraded to neutral from sell at MKM Partners (tgt up to $41) citing expectations of a sales and margin recovery in the second half, with Q4 commentary suggesting improving trends; GME active after CNBC reported Tiger Management sent a letter to GameStop board urging the company to start a strategic review; BOOT shares rally as comp sales for Q1 of 12.1% easily topped the 5.3% estimate; PRTY 12M share Spot Secondary priced at $15.15; Wolfe Research downgraded DLTR to neutral, while upgraded TGT to outperform
· Restaurants; CMG upgraded to buy with $540 tgt at Argus as have favorable view of new CEO Brian Niccol (previously CEO of Taco Bell) and expect him to strengthen the company’s menu offerings and marketing program; RRGB was upgraded to buy at Maxim and raise tgt to $71 as well as up estimates ahead of earnings on May 22nd as expect multiple catalysts to contribute to annualize EPS growth of 20% in the next two years
· Housing & Building Products; homebuilders were among the worst decliners yesterday, falling in reaction to the surge in Treasury yields (and subsequent move in mortgage rates); today group gets negative housing starts report for April, falling (-3.7%); KBH, PHM, MTH, TOL shares active; rising lumber futures (up to record $629 today on the CME) also a concern
· The International Energy Agency cut forecasts for global oil demand this year, saying that the highest prices in three years will reduce consumption. The IEA said commercial oil inventories for OPEC countries declined in March by 26.8 million barrels to 62.819 billion barrels month-on-month. That’s 1 million barrels below the latest five-year average metric. Energy stocks were among the biggest drags in the S&P as oil pulled back from multi-year highs
· Inventory data: overnight, the API reported that U.S. crude supplies rose by nearly 4.9M barrels for the week ended May 11; showed a decline of -3.4M barrels in gasoline stockpiles, while inventories of distillates edged down by -768,000 barrels. This morning, the EIA said weekly crude stockpiles fell a smaller-than-expected -1.4M barrels (est. -2M, while gasoline fell a greater -3.8M barrels vs. est. drawdown -1,436M and distillates fell slightly
· E&P sector; Wolfe Research upgraded APC to outperform as they still like the set up as they hit all the key touch points investors want from an E&P in the current environment; GPOR was downgraded at Wolfe with a $9 target; FANG tgt cut to $168 at Jefferies as reduce ’18/’19 regional price realizations due to the anticipated tight infrastructure environment over the next ~18 months
· Utility and Solar sector CSIQ with better than expected Q1 earnings as revenues more than doubled from the year-ago quarter, but guidance for Q2 revenues of $690M-$730M is well below the $1.04B analyst consensus estimate; AES was downgraded to neutral at Bank America saying shares have substantially closed the valuation gap, trading closer to historical norms. Overall utility stocks fell a second day as higher Treasury yields (10-yr topped 3.09% today), makes high dividend paying sectors less appealing
· Large Cap banks and brokers were mostly lower after outperforming yesterday as rising Treasury yields helped support the sector; banks and insurance names among the decliners today; Goldman Sachs upgraded RJF in broker space to buy while downgraded LPLA to neutral
· Asset managers; several analyst calls today as Deutsche Bank upgraded TROW to buy from hold while cut its rating on WETF to hold as firm says the pace of passive share gains has slowed dramatically in 2018 so far upon more sustained alpha generation in many active mutual fund categories vs. comparable ETFs; TROW also upgraded to outperform at Credit Suisse as believe two key trends will drive stock outperformance into 2019-20 (accelerating organic growth and decelerating expense growth); in alternative asset managers, KKR was upgraded to buy and up tgt to $27 at Citigroup as believe KKR’s C-Corp conversion will: increase relevance of the sector and drive further positive revaluation among Alternatives and raise absolute upside for KKR
· Pharma and Medical equipment; one deal in the space as ZTS agreed to acquire ABAX $83 per share in cash, or approximately $1.9B https://reut.rs/2Ks63Jd ; TEVA rises after Warren Buffett’s Berkshire Hathaway doubles its stake during Q1; AGN shares benefit from news FDA declines to approve EOLS rival wrinkle treatment DWP-450 vs. its Botox; ALKS was upgraded to buy at Citigroup driven by pipeline optionality and near-term catalyst flow, as well as increased conviction around the ALKS 3831 value proposition; VSTM 7.7M share secondary priced at $4.50
· Healthcare services and facilities; IQV 10M share Spot Secondary priced at $101.85 overnight– later in the morning though, IQV shares dropped further after the FDA reports quality problems for data provided by the firm IQVIA that were used to inform estimates for some controlled substances; EOLS shares weak after its experimental wrinkle treatment DWP-450 received a complete response letter (CRL) from the FDA, as deficiencies cited by the FDA isolated to items related to Chemistry, Manufacturing, and Controls (CMC) processes while no deficiencies related on clinical matters
Industrials & Materials
· Industrials and Materials; Metals and materials were among some of the top sector performers today, led by strength in steel (X, AKS), iron ore (CLF), and copper (FCX); in industrials, MMM was downgraded at Jefferies to hold, sending the Dow component lower; GE shares are trading back above the $15 level (off March 26 lows of $12.73) – GE 100-day moving average is $15.08
· Chemicals; LYB was upgraded to buy at Jefferies as believe current valuations do not capture the tailwinds from a potential rise in oil prices in 2H18-19 and favorable demand trends; GRA also upgraded to buy at Jefferies as find shares under-valued relative to non-cyclical peers and believe structural headwinds from the transition from ICEs to EVs are now priced in; lastly, Jefferies downgraded OMN and PPG to hold as believe these companies lack structural tailwinds in the near-medium term and risk-reward looks increasingly challenging for these name
Technology, Media & Telecom
· Internet; in online travel, TRIP was downgraded to sell at Guggenheim saying OTA’s are moving from room night growth towards profitability, which is undermining metasearch channel growth, and led to declines in hotel CPC revenue for TripAdvisor; however, TRIP was upgraded to outperform at Macquarie with Street high $60 tgt as believes Ebitda could grow above 20% in 2018, with a margin rise for the first time since 2011; FB CEO Zuckerberg has accepted the European Parliament’s invitation to “clarify” issues related to the use of personal data,
· Semiconductors; MU more positive analyst commentary as RBC initiates with outperform and $80 tgt while Mizuho said believes analyst day could be a catalyst as it may reinforce a positive 2H outlook with iPhone/holiday build season, and as NAND/DRAM pricing exiting the JunQ remains stable; AMD shares jump as Susquehanna raised rating to neutral from negative
· Software movers; Mizuho positive on SPLK ahead of earnings saying checks indicate strength in spending as customer become more comfortable with recent pricing initiatives and begin to standardize on the Splunk platform; SYMC was downgraded to neutral at Goldman Sachs; TTWO shares up 3.3% YTD ahead of earnings tonight, but off April lows of $92.81 as gamers ATVI and EA have posted better results this quarter despite the “Fortnite” impact
· Telecom movers; CTL downgraded to underperform at Macquarie saying catalysts including new management, synergies and benefits of tax reform are already priced in the stock