Wednesday, June 13, 2018
Equity Market Recap
· U.S. stocks bounced around late afternoon (sliding initially before rebounding then falling again) after the Federal Reserve said it will raise interest rates by another quarter-percentage point and signaled it could lift them at a slightly faster pace this year (four times vs. prior view of three according to their dot-plots) to keep with the strengthening economy. The Fed move positively impacted banks and other financials while interest rate sensitive sectors such as utilities, homebuilders and REITS declined as did defensive assets (gold) as the yield on the 10-yr topped 3%. The tech heavy Nasdaq Composite posted intraday lows after the statement, turning negative by a few points and falling as much as 50-points off its earlier record high of 7,748.95 before recovering. The Telecom sector decline was led by AT&T after winning clearance to buy TWX for $85B (which is also boosted several media related stocks – FOXA, LGF/A, CBS, VIAB). Healthcare stocks also rising as the decision by Washington judge overnight on TWX/T now lays the groundwork for current deals that have antitrust issues (CVS/AET and CI/ESRX). In a late day curve ball for markets, the WSJ reported that The U.S. is preparing tariffs on billions of dollars of Chinese goods as early as Friday, likely sparking heavy retaliation. Despite the big macro stories this week (G7, CPI/PPI data and the U.S. and North Korea summit yesterday), major U.S. markets have been holding in fairly tight ranges considering. If the upcoming ECB meeting (tomorrow morning) and BoJ policy meeting (Friday morning) don’t shake things up, there’s always triple witching expiration of futures and options on Friday that could stir volatility.
· The FOMC (as expected) raised interest rates by 25 bps to a range of 1.75%-2% (unanimously 8-0), its second rate hike this year (and 6th in 18-months) and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected. “Economic activity has been rising at a solid rate,” the FOMC said in its statement. “Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.” The so-called “dot plot” showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. Fed Chairman Powell also confirmed speculation that the Fed will start holding press conferences after every meeting starting in January, suggesting every meeting is a “live” one.
· Producer Price Index (PPI) for May jumped 0.5% vs. est. 0.3%, while final demand ex food, energy (core) rose 0.3% MoM vs. est. up 0.2% – both coming in above the consensus views; final PPI demand rose 3.1% YoY, topping the 2.8% estimate and was the largest YoY rise since Jan. 2012; lastly, PPI core YoY rose 2.4% vs. est. up 2.3%
· Oil prices bounced off lows following mixed inventory data and IEA outlook. WTI crude rose 28c or 0.4% to settle at $66.64 per barrel, a near 2-week highs. Oil was active after the IEA laid out for the first time its oil demand forecast for next year, saying it expects demand to grow by 1.4 million barrels a day in 2019, on par with this year. Meanwhile inventory data overnight bearish as API showed supplies rose by 833,000 barrels for the week ended June 8; showed an increase of 2.3 million barrels in gasoline stockpiles, while inventories of distillates climbed by 2.1 million barrels). EIA data was bullish with a larger than expected -4M weekly drawdown in crude
· August gold futures gained $1.90, or nearly 0.2%, to settle at $1,301.30 an ounce ahead of Fed policy statement (prices settled before the 2:00 FOMC policy results). Gold reversed lower after the Fed statement, moving back below $1,300 an ounce.
· After lagging earlier in the session, the U.S. dollar bounced following the FOMC rate hike announcement and its boosted outlook for more rate hikes this year than originally forecast. The dollar index jumped back around the 94 level, gaining vs. most currencies. Bitcoin prices fall further, down over 4% now at $6,250. The Argentine peso fell to a record low against the U.S. dollar as rising rates taking toll on emerging market currencies. The dollar fluctuated in the final hour of trading as markets digested to statement and Powell’s Q&A.
· Bonds dropped and yields popped after the Fed confirmed it would raise rates and boosted its outlook on futures rate hikes. The yield spread between the 2-year note yield and the 10-year note yield narrowed by one basis point to 40 basis points, the tightest since Aug. 2007.The yield on the 10-year topped 3% briefly, before paring gains while the 2-yr topped 2.6%. “Hotter” than expected inflation data the last two days also supported rising yields.
Sector News Breakdown
· Retailers; after strong gains the last few weeks, profit taking in retailer space with M, KSS, JWN, ANF, GPS down between 2% and 4%;OXM shares fall from recent 52-week highs after better than expected quarterly results (profit taking); GME fell to session lows after a report that Netflix was planning to bring video games to its streaming service
· Consumer Staples/Restaurants; HSY downgraded at Credit Suisse to underperform as believes the shift in shopping patterns to more convenient methods like online and click-and-collect will materially reduce the number of impulse purchase occasions for confectionery products merchandised at traditional checkout aisles; SHAK said its on track to achieve 2018 revenue and new store goals and is testing self-order kiosks in six locations
· Housing & Building Products; Homebuilders continued to edge lower in the afternoon with shares of KBH, PHM, LEN, TOL and MTHfalling as weaker data possibly weighing as MBA mortgage applications index fell 1.5% in the week ended June 8 after rising 4.1% in prior week…also perhaps after the FOMC rate hike, sending rates mortgage higher. Bloomberg noted group pressured after research firm Zelman & Associates downgraded several stocks in conjunction with a survey that implied risk to near-term order estimates.
· Cruise lines (NCLH, RCL, CCL); Nomura boosted target prices for the cruise line group, which now imply ~40% upside for their Buy-rated stocks as rolling our target drivers forward to 2019E EPS from 2H18/1H19E EPS. Raises NCLH target to $72 from $69 (37% upside), RCL’s target goes to $156 from $152 (48% upside), and CCL’s target is now $86 from $82 (38% upside). Remain positive on the group as ~18% EPS growth, low leverage, and the potential for increasing capital returns in 2019E drive outperformance
· Inventory data: The API reported U.S. crude supplies rose by 833,000 barrels for the week ended June 8; showed an increase of 2.3M barrels in gasoline stockpiles, while inventories of distillates climbed by 2.1M barrels (broadly bearish). The EIA said weekly crude stockpiles fell a larger than expected -4,143M barrels vs. est. draw of -1.2M, while Cushing crude -687k
· Solar, utility and Power generation mover’s; ENPH to acquire SPWR’s microinverter business for $25 million in cash and 7.5 million shares of Enphase common stock ; utilities were little changed with central bank meetings upcoming and impact on rates/yields
· E&P sector; EQT positive mention at JPMorgan saying separation of E&P and midstream segments is on track for completion during 3Q18, which should be a catalyst to narrow the sum-of-the parts discount
· Large Cap banks; banks, both large cap and regionals advanced after the 25 basis point hike fy the Fed and outlook; Citigroup (C) CFO said at industry conference that they expected flattish trading revenue in Q2 compared with a year earlier, after previously forecasting a normal seasonal slowdown from Q1; in services, HRB shares drop as they beat on the top and bottom line for quarterly results, but shares plunge as revenue outlook of $3.05B-$3.1B was below the consensus estimate of $3.14B, and guidance for the company’s FY19 EBITDA margin of 24%-26% compared to FY18 EBITDA margin of 29.6%; SBNY was upgraded to overweight at Piper; in insurance METsaid it plans to exchange around $1.1 billion of BHF stock to retire debt as the insurer exits its stake in the company it spun off last year
· Consumer finance; FDC rises after several upbeat analysts notes concerning the company’s recent investor day; SQ falls after Buckingham downgraded to Neutral saying they are taking a “breather” following the year-to-date share outperformance, but raised his price target to $65; TREE shares declined sharply for a second straight day (down 7% yesterday) after William Blair said its mortgage business may see more near-term choppiness.
· Asset managers; MN preliminary AUM $23B as of May 31; compared with $22.9B at April 30, and $23.4B at March 31; WDRpreliminary assets under management of $79.8 billion for the month ended May 31, 2018, compared to $79.2 billion on April 30, 2018
· Managed care & service movers; space very active in reaction to the approval of the TWX/T $85B deal last night as a judge ruled in favor; Leerink noted court decision is in favor of the companies and against the DOJ, meaningfully increasing the probability that the two vertical mega-mergers will close (CI offered to buy ESRX for $67B on March 8th, while CVS agreed to buy AET for roughly $69B on December 3rd); IQV 12M share Spot Secondary priced at $103.50
· Pharma & Pharma movers; SCPH shares fall early after the FDA failed to approve the company’s edema treatment, Furoscix, which was intended for edema, or fluid overload, in heart failure patients; FLKS terminated its Phase 2 clinical trials evaluating lead drug FLX-787 in amyotrophic lateral sclerosis (ALS) and Charcot-Marie-Tooth (CMT) due to oral tolerability concerns; ALBO announced that it has been granted rare pediatric disease designation by the FDA for A4250, and that through this designation, it is eligible for the Priority Review Voucher program
· Medical devise and equipment; SYK rebounds after recent losses after saying in an 8K filing it is not in talks with BSX regarding a potential acquisition; CAH and Clayton, Dubilier & Rice to jointly invest in NaviHealth; JNJ formally accepted $2.1B offer from Platinum Equity to buy it LifeScan diabetes device unit
Industrials & Materials
· Industrial & Machinery; CAT said May rolling 3-month retail machine sales rose 24% vs April 28% rise, March up 26%/North America machine sales up 20% after rising 25% in April
· Transports; Transports bouncing off the lows, as the Dow Jones Transports down -0.5%, holding the 11,100 level earlier with rails (KSU, NSC) and logistics (R, EXPD) names lower, while JBLU and LUV lead higher in airline space
Technology, Media & Telecom
· Media & Telecom; AT&T (T) $85.4B acquisition of TWX is now set to close on or before 6/20/18 after Judge Richard Leon’s decision on the DOJ suit against the deal ruled in favor of AT&T/Time Warner. The favorable ruling for T/TWX came with no conditions, and the Judge urged the DOJ not to seek a stay pending appeal. FOXA shares jumped as analyst note it opens the door to a bidding war between CMCSA and DIS for some of its assets after Fox previously agreed to sell its entertainment unit to DIS for $52B
· Following the TWX/T news, Sprint (S) was upgraded at Raymond James reflecting a 65% probability of the proposed merger with T-Mobile being approved with a YE19 closing, while the firm downgraded CMCSA to market perform following a favorable ruling on AT&T/Time Warner, increasing the likelihood Comcast will make a formal FOXA offer; other media names CBS, VIAB, LGF/A, FOX were all active on the day
· Internet; YELP downgraded to sell at Aegis and lowered estimates for 2018 and 2019 on belief that the lifetime value of Yelp’s account base is diminishing by as much as 25% as the business model transitions away from the 12-month contract to non-term or good-’til cancelled contracts; Goldman Sachs raised NFLX target to $490 and sees significant positive cash generation in 2022 saying revs growth is beginning to outpace content spend growth for next year
· Semiconductors equipment; RBC Capital upgraded ASML to outperform and downgraded AMAT and LRCX to sector perform based on belief in lower than expected WFE spend in 2019, positive stance on EUV deployments (ASML), potential for estimate reductions in CY19E for semicap equipment in our coverage (ex: ASML), 4and positive long-term stance on the industry if we were to take a 3-5 year view (emphasis on our ratings being 12-month in nature)
· Semiconductors; Mizuho on MU, WDC, STX saying while NAND spot pricing has been weaker, SSD pricing at retail has been relatively strong and believe SSD suppliers WDC and MU could show better NAND and SSD margins, stronger than the softer pricing trends reflected in NAND. They see potential GM upside for WDC, MU and STX into 3Q; AMD shares outperformed
· Software movers; PVTL shares advanced after strong Q1 beat on headline metrics, and posting its first quarter of positive FCF; also guided F2Q ahead of street and raised FY19 guidance in excess of the F1Q beat; ADBE reports earnings tomorrow night after the close