Friday, January 11, 2019
Equity Market Recap
· U.S. stocks end mixed on Friday, snapping the 5-day win streak for some major averages in what was a generally quiet day of news. U.S. stocks fell as a drop in crude prices led risk assets lower, with WTI crude falling for the first time in ten days. A mid-session rebound in financial shares ahead of earnings results next week (JPM, C, WFC, and GS) helped partially offset weakness in the energy sector. The dollar bounced while Treasury yields slumped and gold ended the day and week slightly higher. The U.S. government shutdown rolled into day 21 with no quick resolution on the horizon, while European markets await the Brexit vote next week. Note major averages, coming into today, had posted its best 7-session start to the year for the Dow, S&P 500 and NASDAQ since 2006 and has climbed about 10% since the Christmas Eve lows). S&P Global Economics estimates that the government shutdown, now the second longest in U.S. history, could shave about $1.2 billion off real GDP in the quarter for each week that part of the government is closed. Autos got a boost after a surprise upward revision from GM while homebuilders add to gains. Asset managers declined with weakness across the board following weaker monthly AUM data from WDC, IVZ, AB overnight due to market depreciation as well as firm wide net outflows – while analysts also get cautious amid downgraded from Bank America and Deutsche Bank.
· U.S. consumer prices fell for the first time in nine months in December, dragged lower by gasoline prices, however core inflation remained firm. US CPI for December fell (-0.1%), matching economist estimates while core prices (ex food & energy) rose 0.2% (also in-line). CPI YoY data was in-line as well at 1.9% for headline and 2.2% for core prices.
- Oil futures snapped their nine-day winning streak by falling -$1.00 or 1.9% on the day to settle at $51.59 per barrel…but managed to post a gain of around 7.6% for the week, its second weekly gain in a row. Oil jumped late yesterday to add to its longest win streak since 2010, helped this week by bullish commentary from OPEC leader Saudi Arabia. Prices climbed out of a bear market Wednesday/Thursday’s settlement, up about 24% from the 52-week low of $42.53 late Dec.
- Gold prices rose $2.10 to settle at $1,289.50 an ounce, ending the week with a very modest 0.3% advance amid volatility in the US dollar and dovish speakers from the Fed this week (Powell, Evans, Bostic, and Bullard). Gold made several attempts this week, but failed to breach $1,300.
Currencies & Treasuries
· Treasury prices rose as yields fell with stocks snapping their recent five day win streak, as safe haven assets such as treasuries posted modest gains on a day light of economic data and Fed speakers. The December consumer price index data came out, posting its first decline in nine-months, but was in-line with consensus estimates across the board, boosting expectations the Fed could stay the course and not raise rates anytime soon with inflation steady. The 10-year Treasury note yield fell 3.8 basis points to 2.695%, while the 2-year note yield dipped 3 bps to 2.435% (note the 1-yr yield 2.572%, 2-yr 2.535%, 3-yr 2.503% and 5-yr 2.52%). In currency markets, the U.S. dollar was mixed vs. most currencies with the euro, coming off its best levels since October yesterday (above 1.157) has fallen back below the 1.1475 level while the Pound active ahead of key Brexit vote next week.
Sector News Breakdown
· Retailers; PVH raises Q4 and FY18 guidance, earmarks $120M for Calvin Klein restructuring and outlines strategy; Barclay’s downgraded GPS to underweight while upgraded high-end retailers TPR (to overweight) and RL (to equal-weight) noting the broader softlines group has underperformed the market since the start of 4Q and sees an attractive opportunity for investors to rotate into high-quality brands at the expense of certain retailers; URBN reported sales for the two and eleven months ended December 31, 2018, with two-month net sales up 5.0%; CHS to close 250 stores in U.S. over three-year period as part of digital expansion
· Consumer Staples; WTW downgraded to Neutral from Overweight at JPM due to a “weak start” to the company’s enrollment period/said current trends will make it difficult for the company to generate significant growth in members; slashes its price target to $37 from $70
· Auto movers; GM guidance lifts the sector after saying it expects earnings growth in 2019 and forecasts EPS of $6.50-$7.00 for the year vs. $5.95 consensus and also says that it expects 2018 EPS-diluted-adjusted and adjusted automotive free cash flow to exceed its prior guidance (guidance helped boost autos FCAU, F and suppliers LEA, VC)
· Restaurants; sector active after analyst rating changes; Goldman Sachs upgraded TXRH to buy from neutral for lower end exposure, less leverage, and the potential for incremental pricing, while downgrades YUM to sell from neutral as peak valuation does not in their view fairly reflect the risks to the business model discussed above and more challenging value laps at TB and lastly cut SBUX to neutral on valuation, China macro concerns and the comp. sales trajectory in that region, and view that gift cards and digital trends could be “points of caution” in 1Q; Bank America upgraded DRI to buy from neutral based on the view that the company is well positioned for an industry shift towards scale
· Housing & Building Products; Housing sector rises again with broad gains after LEN, KBH earnings this week; in building products/housing, RBC turns cautious as they downgraded PHM, MHK, JELD, IBP, and BLDR and lowered estimates and targets as now assume a flat environment for new construction through ’20. They remain more positive on building products, but become more selective and generally favor those with high R&R exposure and strong balance sheets such as FBHS and MAS.
· Casino & Leisure movers; MTN falls as cut its year EBITDA view citing missed pre-holiday results/now expect full year Resort reported EBITDA guidance to be slightly below the low end of the guidance range; CZR rises after CNBC’s David Faber said Carl Icahn is building a stake ; CHDN was upgraded to buy at Jefferies saying weakness in shares presents a compelling entry point; Stifel issues 2019 leisure outlook saying NCLH, LVS, SEAS, BYD and EVRI are Top Picks for 2019 while they upgraded BYD to buy from hold
· Energy stocks took a breather after rising the last 2-weeks on surging crude prices; Baker Hughes weekly rig count showed the total count fell was steady at 1,075, with oil rigs down -4 to 873 while natural gas rigs rose 4 to 202; FTK rises after agreeing to sell Florida Chemical Company, LLC, its Consumer and Industrial Chemistry Technologies segment, to ADM for $175M in cash, retaining all of its patents; earnings start in energy patch next week with SLB Friday; MLPs lows as the Alerian MLP Index (AMZ) slides more than 1.3% for a 2nd straight day – but had followed 7-straight days of gains to start the year
· Utilities & Solar; PCG under pressure again early following protesters at a hearing Thursday to fight any move to pass costs on to customers for billions of dollars in potential wildfire liabilities. Also, state regulators failed to offer assurances that they’d help keep the company solvent and finally, Moody’s Investors Service Inc. cut the company’s credit to junk, a move that will force it to post cash collateral and kicks it out of the biggest investment-grade bond index; Dominion (D) was downgraded to Underperform with $69/sh PO as they reflect latest twin headwinds of ACP delays and pension headwinds
· Top movers; Banks kick off earnings next week with Citigroup results on Monday 1/14 and Tuesday, FRC, JPM WFC; Wednesday BAC, BK, BLK, CMA, GS, PNC, SCHW, USB and Thursday BBT, KEY, MS, MTB; Citigroup (C) shares active after entering an agreement with one of its largest shareholders, ValueAct; ACGL pre-announced 4Q catastrophe losses of $110M-$130M pre-tax from the California wildfires as well as Hurricane Michael; Sandler O’Neill with a few changes as they upgraded KEY to buy while downgraded FBC to hold in the regional bank sector
· Asset managers/Exchanges; shares of AMG, BLK, EV, LM, and IVZ all downgraded to hold from buy at Deutsche Bank as believes “investor neglect” toward the stocks should continue on fears of a market downturn, as well as due to poor fundamentals from product outflows and pressure on fee rates and operating margins. Bank America downgraded BEN to underperform, CME to neutral, and NTRS to neutral while upgrade LM to neutral and STT to buy
· Monthly metrics out for asset managers: 1) WDR total assets under management $65.8b at Dec. 31 vs $72.0b at Nov. 30, 2) IVZ prelim month-end assets under management of $888.2B, a decrease of 4.1%; 3) APAM prelim AUM as of December 31, 2018 totaled $96.2 billion. Separate accounts1 accounted for $49.6 billion of total firm AUM, while Artisan Funds and Artisan Global Funds accounted for $46.6 billion; 4) AB Dec. AUM of $516B vs. $533B, down 3.2% MoM due to market depreciation as well as firm wide net outflows
· Pharma movers; CRBP tgt raised to Street high $38 at Cantor while maintaining its Overweight rating and modeling upfront cash ($27 million) and potential milestones from Kaken; in managed care, Bernstein said CNC is top pick (52% potential upside) given LT growth of high acuity in Medicaid and Medicaid expansion, its potentially positive positioning for Democratic sweep in 2020, and attractive valuation; HUM was upgraded to outperform at Cowen
· Cannabis sector; TLRY after its biggest stakeholder Privateer Holdings said it would hold onto shares of the Canadian cannabis company until at least the second half of the year ; APHA confirmed that its CEO and co-founder would be transitioning out of their roles, as it reported earnings for its fiscal second quarter that reflected the start of full legalization of the substance in Canada – note APHA is currently the subject of a hostile bid
· Biotech movers; PETX shares fall after Stifel downgraded to hold and cut tgt to $5 from $8 saying they have seen ongoing Entyce adoption, but little progress on lengthening the drug’s duration; shares of PETX also hurt as shareholder Engaged Capital reduced its stake to 4.1%
Industrials & Materials
· Transports; HA expects to report operating revenue per available seat mile fell 3%-4% in 4Q, had seen drop of 3%-5%; YRCW says it anticipates reporting Q4 consolidated operating revenue of ~$1.2B to $1.3B vs. $1.23B consensus
· Metals & Materials; metals were mostly positive to end the week on weaker U.S. dollar and U.S.-China trade optimism. Chemical stocks were active (seen slight negative impact from Georgia-Pacific shutting paper mill) while paper/packaging stocks extend gains on the GP news the day prior (WRK, IP, PKG, GPK)
Technology, Media & Telecom
· Internet; NFLX was upgraded by two analyst today as UBS raised to buy and Raymond James to strong buy with $450 tgt saying deep dive into content investments and the film strategy suggest Netflix is approaching a profit inflection (note shares topped its 200-day MA resistance today (was 332.86) to best levels since mid Oct – and up ten of the last twelve days)
· Semiconductors; sector led the tech bounce in afternoon as the Philly Semi index (SOX) rises 1.8% or 20 points to above 1,220 as extends gains off December lows of 1,066 on 12/26; all 30 components higher in the index, with ON, QRVO, SWKS among top gainers; INTC tgt raised to $54 at Citigroup as recent checks indicate order rates from the PC end market remain solid driven by shortages of PC microprocessors; IPHI was initiated buy at Citigroup with $40 tgt saying it will be a beneficiary of three catalysts which will grow sales by 50% by 2020
· Software movers; ATVI fell as announced that it will be turning over the publishing rights of the Destiny franchise to developer Bungie and thus no longer recognize economics from the franchise. This is an incremental negative surprise/development according to several analysts
· Media & Telecom movers; FOXA says in an SEC filing that it doesn’t intend to bid for any of the regional sports networks that DIS is putting up for sale/Disney is acquiring the 22 RSNs from Twenty-First Century Fox as part of a $71B asset deal, but must divest them as part of a consent decree with the Justice Dept.; VIAB was upgraded to outperform by Imperial with $37 tgt
· Hardware & Component news; INFY revenue up 8.3% Y/Y to $2.99B as digital revenue jumped 33.1%/signed large deals of $1.57B entering 2019/raised FY19 revenue guidance to 8.5%-9.0%; global PC sales fell 4.3% to 68.6 million units in Q4, and 1.3% to 259.4 million in 2018, Gartner said. Overall worldwide PC sales declined for both the fourth quarter and year in 2018, while Lenovo Group Ltd. and Dell Technologies Inc.’s share of the market grew; SNX rises after Q2 results topped consensus views