Monday, December 3, 2018
Equity Market Recap
· U.S. stock markets cheered news over the weekend as the U.S. and China declared a truce in their trade war, helping stocks extend last week’s gains, though major averages closed off their peak intraday highs in a bout of profit taking. The Dow, NASDAQ and S&P rallied at the open, before trimming advances, after leaders of the two countries agreed to hold off on new tariffs and intensify trade talks. The U.S. said it won’t impose 25% tariffs on Chinese goods in January, as it had planned, and China agreed to buy more U.S. agricultural goods (leaving U.S. tariffs on $200M worth of Chinese products at 10% for now). However, the deal opened a 90-day window to negotiate a deal not just on trade but also on protecting intellectual property.
· European and Asian shares also closed higher on the positive developments, while oil prices jumped 4% ahead of the OPEC meeting this week following actions by Canada on oil production and comments from Russia and Said Arabia. Autos got a boost after President Trump said last night that China had agreed to “reduce and remove” tariffs on U.S. cars, now set at 40% (monthly Nov auto sales data was also released today). Was this the start of a “Santa Claus” rally with trade concerns easing, at least until the end of the year) following Fed Chairman Powell comments at its policy meeting last week perceived as more “dovish”, and lowering the likelihood of more aggressive rate hikes in 2019. There were also a few M&A deal helping lift the biotech and media sector, while healthcare names moved following data at a conference. Industrials and Materials gained on the trade news, semiconductors leaders in tech and consumer discretionary also higher. With today’s market moves, the benchmark S&P 500 index pushed above both its 50-day and 200-day moving averages for the first time since early October.
· The U.S. mourns the death of former President George Bush, passing away Friday at the age of 94 (NYSE and NASDAQ will be closed on Wednesday in observance). Note the Labor Dept. will release revised data on 3Q productivity and unit labor costs at 8:30 AM Thursday from Wednesday as federal govt. will be closed for national day of mourning for former President George H.W. Bush. ADP employment report for Nov. moved to Thursday at 8:15 AM from Wed.
· ISM Manufacturing for November rises to 59.3 from 57.7 last month and topped the 57.5 est.; new orders rose to 62.1 vs 57.4, while employment rose to 58.4 vs 56.8 though supplier deliveries fell to 62.5 vs 63.8; prices paid fell to 60.7 vs 71.6; largest monthly decline since June 2012; backlog of orders rose to 56.4 vs 55.8
· Construction Spending for October fell (-0.1%), missing the 0.4% estimate increase; Sept. was revised to -0.1% from 0.0%; private construction fell 0.4% in Oct. and private residential construction fell 0.5%
· IHS Markit manufacturing PMI falls to 55.3 in November from 55.7
· Oil prices rise, with January WTI crude rising $2.02 to settle at $52.95 per barrel, rising ahead of this week’s OPEC meeting in Vienna (Thursday). Oil rose on the China trade news, as Russia and Saudi Arabia agreed to extend OPEC’s efforts to stabilize oil markets and as Canada’s province of Alberta to cut crude production nearly 9% for next year. The news pushed beaten up oil prices, which have fallen more than 30% from their October highs on slowing demand and increasing supply concerns, off yearly lows. Gold prices rise $13.60 or 1.1% to settle at $1,239.60 an ounce, its highest settlement in a month, getting a boost from dollar weakness and as trade fears subside between the US and China.
Currencies & Treasuries
· The U.S. dollar ended mostly lower, posting small losses against major currencies such as the euro and pound while rising modestly against the Japanese yen (the dollar index – DXY – slipped back under the 97 level). The greenback fell vs. the Canadian dollar and other emerging market currencies leveraged to oil for their economy as oil prices jumped. Risk appetite jumped across financial markets following the trade-war cease-fire between the U.S. and China. Treasuries prices however rallied, sending yields lower as the benchmark 10-year fell to lows under 3%, while the 3-year and 5s curve inverted.
Sector News Breakdown
· Autos higher; shares of GM, F, FCAU and suppliers move higher after Donald Trump said China had agreed to “reduce and remove” tariffs on imported American-made cars (which is now set at 40%); also today, sales for November releases: FCAU Nov auto sales rose 17% vs. est. up 15%; TM said Nov US auto sales fell (-0.6%) vs. est. up 0.1%; HMC said Nov US auto sales fell (-9.5%) vs. Bloomberg est. down (-5.9%); Ford (F) Nov US auto sales fall (-7.1%), better than the est. loss of (-8.7%); NSANY Nov auto sales fell (-18.7%) vs. est. loss of down (-15%); APTV shares mentioned positively in Barron’s saying its worth a look and could reach over $100 in the next two years; Electric car subsidies “will all end in the near future,” White House economic adviser Larry Kudlow tells reporters, adding in 2020 or 2021
· Retailers; Footwear active after Citigroup named NKE a best idea for 2019, while also said with more headwinds than tailwinds likely in 2019, they downgrade DKS & SHOO and overall revenue growth and EPS growth assumptions are estimated to decelerate in 2019 when compared to 2018; TSCO downgraded at Oppenheimer as views lower oil prices as a risk for the company
· Consumer Staples and restaurants; shares of ag names ADM and BG strong after President Donald Trump touted an easing in the trade war with China and said “farmers will be a very big and fast beneficiary” of a deal between the two countries; overall Staples sector underperformed early, led by losses in beverage stocks (PEP, KO); NDLS upgraded to outperform at RBC Capital saying the 40% decline in the stock price since mid-October largely as a result of share sale by private equity owners has not come with any change in the company’s fundamentals
· Housing & Building Products; building products higher; MAS upgraded at RBC saying this past weekend’s agreement to delay the implementation of 25% tariffs lifts one major near-term overhang on the stock; SWK was upgraded to outperform at Baird saying with the delay in the 25% Chinese tariffs, we believe SWK will be a net beneficiary, on top of consensus estimates that we believe were already properly set for tariffs/cost headwinds; housing stocks rallied off their lows, ahead of TOL earnings results tomorrow morning
· Casino & Leisure movers; gaming stocks (LVS, WYNN, MLCO) rise after gross gaming revenue in Macau rose 8.5% in November to 25 billion patacas ($3.1 billion) from a year earlier, according to data Saturday from the Gaming Inspection & Coordination Bureau. That beat the median analyst estimate for growth of 4% according to Bloomberg
· Energy stocks were very active amid several market moving developments in the space today: 1) OPEC meeting starts Thursday in Vienna with Reuters reporting Qatar will leave OPEC in January to focus on its gas ambitions; 2) Russia and Saudi Arabia have agreed to extend OPEC’s efforts to stabilize oil markets, Russian President Vladimir Putin said over the weekend. Russia has yet to decide on how much production it would cut, Putin said; 3) Canada’s Alberta province ordered oil producers in the province to curtail output by 325K barrels a day, an unprecedented step to ease a crisis in the Canadian energy industry. The plan will reduce production of raw crude and bitumen by 8.7% starting in January until the levels of excess oil in storage are drawn down. The reduction would then drop to 95K barrels a day until the end of next year at the latest
· E&P sector; MUR raises its Q4 and FY 2018 production guidance after closing its previously announced deal to form a Gulf of Mexico joint venture with PBR/MUR will own an 80% stake in the JV after paying $795M to PBR, which will own 20%; E&P., drillers and service stocks were among the names rallying in reaction to the bounce in oil prices
· Utilities & Solar; FSLR was upgraded to neutral and upped tgt to $46 at Goldman Sachs as now view risk-reward as being slightly more favorable in the near-term owing to the stock has been the second worst performing solar stock under coverage since mid-2018; PEIX and GPRE (ethanol producers) climbed after the U.S. and China declared a truce in the trade war, with President Donald Trump saying China would immediately restart buying U.S. farm products
· Bank movers; financial sector one of the quietest of the session, with banks and insurance stocks mixed as investors decipher impact of trade, rate hikes and economic data (though European banking names advanced); PFG outlines certain business unit outlook metrics and capital deployment plans for 2019 and updates long-term guidance; quiet I the consumer finance and lending sector; credit cards MA and V shares rise; IBKR said for November, 907K Daily Average Revenue Trades (DARTs), 14% higher than prior year and 8% lower than prior month.
· Biotech movers; TSRO rises more than 50% after agreeing to be acquired by GSK for $5.1B, with shareholders to receive $75 a share for the business/ GSK’s guidance for full-year 2018 adjusted EPS growth remains unchanged at 8 to 10% (shares of other small/mid cap biotech’s that focus on cancer treatments rose in sympathy – CLVS markets a cancer drug, Rubraca, which is similar to Tesaro’s Zejula); BHVN rises after migraine drug met primary endpoints in late-stage study
· Cannabis stocks active; CRON shares jumped after Reuters reported MO is in early talks to acquire the Canadian cannabis producer ; APHA shares drop after being pitched as a short idea by Quintessential Capital’s Gabriel Grego at Whitney Tilson’s short ideas conference; CGC to invest C$3M equity investment, supply deal and strategic partnership with 48North/will invest C$3 million into 48North and receive 4M common units at C$0.75 per unit, about 3.4% of 48North shares; Aristides Capital’s Chris Brown pitched TLRY as a short idea at Whitney Tilson’s short ideas conference in NYC
· Highlights from ASH conference in San Diego this weekend: 1) BLUE shares slip after updated data of its gene therapy, LentiGlobin showed an emerging significant adverse event that could overshadow encouraging data; 2) GILD reported the median duration of complete response for its CAR-T therapy Yescarta was not reached after two years of follow-up; 3) KPTI reports positive results from Phase 2b SADAL data for selinexor in patients with DLBCL/for the SADAL study’s primary endpoint, selinexor achieved a 29.6% overall response rate, including 9.6% complete response; 4) CELG and XLRN shares active after data from a Phase 3 trial of luspatercept met high expectations; 5) INCY Phase 2 “Reach1” study of Jakafi in combination with corticosteroids that previously met its primary goal; 6) AGIO presented updated efficacy & safety data from the untreated acute myeloid leukemia arm of the ongoing Phase 1 study of ivosidenib
· Pharma movers; GSK agreed to divest its Horlicks business and other consumer healthcare brands to UN £3.1B with net proceeds from the transaction should be ~£2.4B; GBT rises as much as 50% as the FDA agrees with the company’s proposal relating to use of an accelerated approval pathway for voxelotor for the treatment of sickle cell disease (SCD); SNNA falls after a Phase 2b study of its lead candidate, SNA-120, did not reach its primary target of statistical significance; ARGX rises after signs exclusive, global collaboration and license agreement for cusatuzumab (ARGX-110) with Cilag GmbH, an affiliate of the Janssen Pharmaceutical Companies of JNJ
Industrials & Materials
· Industrial & Machinery; was among the biggest sector winners on the day following the truce between the U.S. and China at the G20 this weekend; CAT was upgraded to buy at Bank America as macro risks recede for now while firm also upgraded AGCO to buy; CAT was raised to “bullish fresh pick” at Baird as well on developments; ag names also rise, with DE jumping after China agreed to buy more U.S. agricultural goods; TEX and MTW were downgraded by OTR Global
· Transports; Transports pullback from highs with rails moving higher UNP, NSC while airlines weakest link on oil spike after leading the transport index higher the last few weeks, airlines declined, led by losses in AAL, DAL, UAL, JBLU in reaction the bounce in oil prices
· Metals & Materials; materials sector gained after Trump-Xi trade truce temporarily eases concerns on the global demand outlook and puts a dent on U.S. dollar’s rise (copper, precious metals, energy, grains were all strong early); GLNCY said its head of copper trading Telis Mistakidis will step down by the end of this year/company also says marketing adjusted EBIT guidance revised to $2.7B +/- $100M vs previous 2018 guidance to be within the top half of the $2.2B-$3.2B long-term guidance range
Technology, Media & Telecom
· Internet; broader Internet sector moves higher with market overall gain, led by big bounces in AMZN, TWTR, GOOGL, FB, BKNG and others; CARG weak initially after Kerrisdale’s Sahm Adrangi pitched the company as a short idea at Whitney Tilson’s short ideas conference
· Semiconductors; QCOM ruled out any chance of a return to its abandoned bid for NXPI after U.S. and Chinese political leaders appeared to open the way for possible approval of the transaction; AVGO was upgraded to buy at FBR/B Riley as adds CA Technologies to estimates, which much more than offsets an iPhone and cyclical-induced core business cut, raising our price target from $250 to $300; ASML announced a fire at a supplier over weekend likely to impact shipments in early 2019; Craig Hallum noted positive developments on US & China trade over the weekend likely to help automotive suppliers work higher (CY, STM, ON)
· Media & Telecom movers; in media space, NXST agreed to buy TRCO for about $4.1B, creating the largest owner of local-TV stations in the U.S., with holders getting $46.50 a share, and including debt, deal at $6.4B ; CTL removed from US analyst list at JP Morgan while AT&T (T) was added to US analyst focus list; VZ was downgraded at JPMorgan after rally in shares; Cowen upgraded shares of AT&T (T) to outperform as thinks the plan laid out to get Entertainment EBITDA stable is credible, the dividend is safe and the stock is cheap; DISCA shares among the biggest decliners after presentation at UBS conference as CEO said advertising revenue will be slightly down due to lower ratings
· Hardware & Component news; ROKU was upgraded to buy and $49 tgt at Davidson citing the temporary truce in the US-China trade war since the firm believes Roku’s products are all manufactured in China; ARLO cuts Q4 outlook, as sees 4q net revenue of $125M-$130M vs. prior view of $140M-$155M on a delay in timing of Ultra shipments following a battery issue