Thursday, January 10, 2019
Equity Market Recap
· U.S. stock markets were modestly higher, erasing earlier losses as markets cheered Fed speaker commentary and momentum continuing to the upside to start the New Year. Markets appeared pleased with Fed Chairman Powell, who during a discussion at the Economic Club of Washington today, reiterated that the central bank will be “flexible” and “patient” on monetary policy as inflation is “under control.” However, Powell also expressed concern about the country’s rising debt burden and the ongoing government shutdown (currently in its 20th day). The comments helped propel stocks higher after trading lower initially on weak guidance in both the transport (AAL lowered year outlook) and retail sectors (weaker guidance from M, KSS, LB and BKS) which shook investor confidence. Also weighing on sentiment late, President Trump cancelled his trip to Davos with world leaders “because of the Democrats intransigence on Border Security and the great importance of Safety for our Nation” according to an afternoon tweet. The gains today were enough to keep the streak going, rising 5-straight days for major averages. Oil prices extended its gains for a 9th straight session despite a bounce in the dollar while Treasury yields rose and gold slipped. U.S. equity markets are coming off their best stretch of gains in a decade (Bloomberg notes market on track to end its strongest 10-day streak in a decade) amid signs of improved trade talks with China three-days this week. Mortgage rates fell to their lowest in nine months, and jobless claims fell more than expected.
· Fed speakers today were plentiful: Fed Chairman Powell in speech the Economic expressed concerns over mounting U.S. debt and the impact of the prolonged government shutdown on the economy. Federal Reserve Bank of St. Louis President James Bullard said the central bank should curb expectations for additional rate hikes amid slowing global growth and a flattening yield curve, with short-term yields near those on longer terms. Federal Reserve President Neel Kashkari said continued gains in the U.S. labor market and signals of a slowdown in the global economy allow the central bank to say, “maybe we can just take it easy a little bit, see how the economy evolves, before we continue raising interest rates.”
· Weekly Jobless Claims fell 17K to 216K, below the 226K est. while prior week claims revised up to 233K from 231K; the 4-week moving average edged up by 2,500 to 221,750; continuing claims fell 28k to 1.722m in the week ending Dec. 29; claims fell below the 2 million mark last spring for the first time since 2000 and have hovered near a 45-year low for months
· The 30-year fixed mortgage rate for week ended today fell to 4.45% from 4.51%, Freddie Mac said; 30-year fixed-rate mortgage at its lowest level since April 2018; 15-year rate avg 3.89%, down from 3.99% a week earlier
· Oil prices rise; WTI crude rises 23c to settle at $52.59, off earlier lows of $51.27 and enough to extend the oil winning streak to nine-days now, while Brent rose 24c to settle at $61.68 per barrel. Inventory data yesterday was bearish, but prices managed to jump anyway behind production cut commentary from Saudi Arabia.
· Gold futures edged lower, falling -$4.60, or 0.4% to settle at $1,287.40 an ounce, down from earlier highs as the dollar rebounded and stocks bounced off lows. Gold fell short again of the psychological $1,300 an ounce level, but holds around 7-month highs.
Currencies & Treasuries
· The U.S. dollar bounced after selling pressure Thursday, a day after dropping to a three-month low. Attention today turned to Fed speakers with Fed Chairman Jerome Powell among others speaking on the economy and rates. The euro fell from its best levels in October (highs overnight 1.157) dropping below the 1.15 level late afternoon, while the buck also gained vs. the Pound, Yen and Canadian dollar among others. The dollar has weakened this month on expectations the Fed will be less aggressive than previously thought in tightening monetary policy. In the U.K., a Labor Party official played up the chanced of a delay to the March 29 date when the U.K. is slated to leave the European Union. A delay was previously dismissed by Tory officials.
· Treasury prices fell as yields climbed late afternoon, getting a boost after Fed Chairman Powell commentary at the Economic Club. The 10-year yield rose to 2.73%, while the shorter-term 2-yr was at 2.55% and the 30-year held above 3%.
Sector News Breakdown
· Retailers; department stores a big drag on markets today as Macy’s (M) cuts its 2018 guidance, saying the company will continue to take necessary steps in January to ensure a clean inventory position (lowered year EPS to $3.95 to $4.00, saw $4.10 to $4.30)/said Nov and Dec owned comp sales are up 0.7%; Owned plus licensed comp sales up 1.1%; KSS reported Nov. and Dec. holiday-period comp sales rose 1.2% on a shifted basis, much lower than its prior year holiday sales growth of 6.9% (shares of JWN fell in sympathy); LB comparable sales for the December vs. +1% y/y that missed the average estimate of 3.4% while Victoria Secret comps fell (-6%); UAA upgraded to mixed at OTR Global while Needham upgraded shares of COLM, RL and NKE to buy
· Hardline/Broadline/non-apparel retail; COST reported net sales of $52.99 billion, an increase of 9.5% from $48.39 billion last year; BKS said it may cut earnings guidance by as much as 10%, due to increased advertising expense and promotional activity; BBBY shares jumped more than 20% overnight on a rosy 2020 outlook, while quarterly results were mixed to slightly lower (comp sales of -1.8%), and several analysts skeptical on outlook
· Consumer Staples; Wells Fargo is more cautious on Staples for 2019 based on macro-uncertainty, margin pressures, and the lapping of tax reform; after the recent flight to quality, XLP is at a 19% premium to SPX (vs 17-18% historical avg) despite weaker fundamentals – firm downgraded ELF and EL in the cosmetics sector) and see the beaten down Tobacco sector as a pocket of opportunity (top stock picks are PM, STZ, KO and MO); BGS downgraded to Market Perform at BMO reflecting case for aggressively investing in BGS is less persuasive at current valuations and the absence of debate on the health of its dividend
· Housing & Building Products; homebuilders active for a second day after KBH earnings overnight were small beat on EPS and revs, but said Q4 net orders down 12% at 2,013; results follow mixed results from LEN yesterday, though group rebounded on positive outlook from LEN; MTH was downgraded neutral at Wedbush because of a lack of upcoming catalysts following the recent boost from falling mortgage rates; DA Davidson downgraded BLDR and BMCH to neutral from buy noting that the summer slowdown in housing has morphed from a speed bump to something that looks to have begun impacting the starts rate for builders
· Leisure movers; in hotel REITs, Goldman Sachs reshuffled its ratings on hotel REITs to reflect recession risk and the firm’s expectation that RevPAR will slow toward 0% for full-service hotels by 2020 amid higher supply growth and dependence on tourist demand; said the average macroeconomic downturn may result in FY 2020 Ebitda estimates coming down by 20%-25% and 30%-40% revisions to FFO/share estimates; downgraded DRH to sell and reinstated PEB with a sell, upgraded PK to neutral and cut IHG to neutral; VICI upgraded to buy; MGM shares jumped after Bloomberg reported Starboard said to build stake and seek changes
· Energy stocks have been surging the last week with oil prices rising eight-straight days coming into today; little give back for stocks today; in research, Barclay’s upgraded HES to overweight given the recent selloff and more attractive valuation vs. large-cap E&P peers while downgrade PBR to underweight given share price outperformance and potential political risk with the new Brazilian administration taking office
· E&P sector; Jefferies downgraded SPN to underperform from Hold and FRAC to Hold from Buy primarily as both are vulnerable to more earnings erosion. SPN’s offshore (primarily DPS) outlook appears less prospective given lower oil prices while its underperforming U.S. businesses can cede more price;
· Utilities & Solar; PCG rebound after falling over 25% last few days on bankruptcy fears and credit rating downgrade; note a US judge proposed overnight PCG should re-inspect its entire electric grid and cut off power during certain wind conditions regardless of the inconvenience to customers or loss of profit
· Bank movers; more rating shuffling by analysts as Bank America/Merrill latest to weigh in, downgrading banks BKU, BY, ASB, CFR, TCF, BBT, PNC, UMBFahead of earnings kicking off for the group next week; Barclay’s upgraded SNV, TCBI to Overweight and OZK, PBCT to Equal Weight while lower PB to Equal Weight and NYCB to Underweight saying EPS estimates and price targets fall at most banks to reflect the impact of the flatter yield curve and our increased provision projections/FRC remains their Top Pick.
· Asset managers; CNS reported preliminary assets under management of $54.8B as of December 31, 2018, a decrease of $3.8B from November 30, 2018. The decrease was due to market depreciation of $2.9B, distributions of $443M and net outflows of $384M; BEN prelim month-end assets under management of $649.9B at December 31, 2018, compared to $683.3B at Nov ‘18
· Biotech and Pharma movers; after being one of the busiest sectors this week on news/guidance, given the outlooks provided for several companies at the JPM Healthcare conference, group was extraordinarily quiet on the day with no major news; biotech space has posted a strong run to start the year with the IBB up 11.8% thus far in January, helped by big M&A deals in the space the last 2-weeks (BMY buying CELG and LLY buying LOXO)
Industrials & Materials
· Industrial & Machinery; DOV upgraded to buy at UBS as they think better than forecasted earnings as well as a valuation rerating will contribute to ~20% appreciation in shares over the next 12 months. JPMorgan with several changes, positive on US machinery universe saying the group looks “cheap” relative to the S&P 500 and believe that the sell-off has been overdone for a number of stocks in our coverage although Eurozone risks exist (upgraded OSK and TRMB to Overweight on valuation and downgraded PCAR, WBC and ITW to Underweight on EU exposure)
· Aerospace & Defense; Dow component BA was upgraded to overweight and $450 tgt at Morgan Stanley as the firm turned bullish on the defense and aerospace giant, citing optimism over the commercial aerospace industry. Morgan did downgraded LMT in conjunction with the call
· Transports; Transport index pared losses, bouncing off intraday lows of 9,400 as gains in rails such as UNP and KSU helped offset the airline weakness; a day after shares jumped on veteran hire for COO position, UNP issued guidance last night saying now expects to report a record full-year 2018 operating ratio of 62.7%, a 0.1% improvement from its 2017 adjusted non-GAAP operating ratio performance
· Airlines hit hard today after AAL lowers its full-year EPS guidance to a range of $4.40 to $4.60 vs. $4.50 to $5.00 prior and $4.62 consensus citing lower than anticipated improvement in the domestic market during Q4/outlook for Q3 cost per available seat mile reaffirmed at -1% to +1%; in research, UALwas upgraded to overweight from neutral at JPMorgan and upgrade ALK to neutral from underweight citing stronger 2020 forecasts and cheaper fuel prices; raised 2019 earnings estimates for the group by roughly 20% (firm downgraded JBLU). Cowen upgraded SAVE in low-cost airline carriers to outperform and downgraded LUV to market perform as continue to have a favorable bias toward the group as we believe the environment in 2019 will be similar
· Waste services; WM upgraded to Buy at UBS based on expected increasing equity cash returns and WM’s relatively lower 2.4x net debt to EBITDA driving more defensive relative performance in 2019. UBS downgraded RSG to Neutral as believe thesis has played out. We continue to view RSG as a well-positioned MSW stock providing stable, predictable returns and income.
· Tankers/shipping; Wells Fargo downgraded KEX, FRO, DHT, NVGS, TNK, CPLP, & TOO to Market Perform as macro headwinds, commodity/equity vol push us to the sidelines in 2019 – firm cut ratings on any remaining OP names with specific leverage to US production, (KEX, NVGS), less-liquid – or expensive Tanker exposures (DHT, TNK, FRO), and two special-sit names with either crude/offshore exposure (TOO) or changing dynamics (CPLP)
· Paper and packaging stocks jumped after Georgia-Pacific said it will exit communication papers business, citing assessment of its long-term competitive position in a declining market. Paper and packaging companies intraday higher included IP, UFS, PKG, WRK, GPK
Technology, Media & Telecom
· Internet; TWTR was double upgraded to buy from underperform at Bank America and raises the target from $31 to $39 citing its survey showing improving metrics in the 18-29 demographic; YELP downgraded to underweight at Morgan Stanley as see YELP’s more flexible ad product, still-high pricing vs GOOGL/FB, and falling reach driving lower than expected revenue per account, revenue and EBITDA; SNAP upgraded from Underperform to Outperform at Cowen with a $6 target citing an ad buyer survey showing improved trends and spending
· Software movers; MDB falls as AMZN unveiled a new cloud database called DocumentDB that emulates API functionality similar to MongoDB. KeyBanc said this was a product expected to be unveiled at AWS re:Invent in November, but it now appears was pushed into January; VERI raises Q4 revs view to $10.7M-$10.9M from prior $9.3M-$9.7M and vs. est. $9.49M citing strong demand for its aiWARE operating system
· Hardware & Component news; CRAY fell as Craig Hallum noted co speaks at Needham conference next week and believes sizeable new system orders from customer in 2019 could wait for the new product; The Information reported AMZN is joining MSFT and GOOGL in developing a video game streaming service “in what could be an important new battleground in online entertainment