Thursday, June 29, 17
Equity Market Recap
- Markets end broadly lower, as both stocks and bonds came under pressure today, both falling sharply with much of the blame being directed at non-FOMC central banks and their recent “hawkish” commentary related to interest rates. End of quarter/month/1H asset positioning could also have been to blame (tomorrow last day). Technology was the biggest drag on markets, as the Nasdaq Comp fell around 1.5% (third straight day of 1% moves – first time since September). The S&P 500 (SPX) with a nice bounce after briefly breaking below the 50 day MA support of 2408 (traded as low as 2405 briefly) before paring losses. Back to central banks, many reports noted that central bankers seem to be hinting towards possible rate hikes (Bank of England Carney and Bank of Canada Poloz made such comments this week, along with ECB Draghi hinting the ECB might start winding down its large monetary stimulus), which could have fueled the hefty declines in Europe as well today (German DAX of 200 points). Overall, very similar action to that of Tuesday with weak bonds, weak dollar, bond-proxy equity weakness, bank strength, and commodity-linked equity outperformance. The CBOE Volatility Index (VIX) pared gains after trading as high as 15.16 from close of 10.03 yesterday, but pared gains late day as stocks bounced off key technical levels paring losses.
- Under owned and unloved financials and energy led the gains today, while favorites this year (tech such as semiconductors, Staples) were among the biggest decliners in a continued rotation this week. Financials gained as stress-test results cleared the way for share repurchases. Interest rate sensitive sectors also slipped today as yields rise – with Utilities, Telecom, REITs all falling …along with sectors seen to have high valuations (such as tech) as the rising yields lessens appeal for them. Consumer Staples active after earnings from STZ, CAG and MKC in space along with IPO of Blue Apron. Tonight, earnings from Dow component NKE, along with semi-player MU.
- Weekly jobless claims rose 2K to 244K, slightly above the est. of 240K, while the prior week was revised up to 242K from 241K; the four-week jobless claims average drops 2,750 to 242,250; continuing claims rose 6k to 1.948m in the week ending June 17
- Gross domestic product (GDP) expanded at a 1.4% annual pace in the Q1, revised figures show, an uptick from the prior 1.2% reading and double the initial 0.7% estimate (The U.S. grew 2.1% at the end of 2016). Personal consumption rose 1.1% in 1Q after rising 3.5% prior quarter. The GDP price index rose 1.9% in 1Q after rising 2.1% prior quarter and the core PCE q/q rose 2.0% in 1Q after rising 1.3% prior quarter
- Energy futures rise, extending its winning streak to 6-straight days, its longest run of gains since April. WTI crude ended higher by 19c, or 0.42% to settle at $44.93 per barrel but down from earlier highs of $45.45 per barrel as global stocks declined. From a technical perspective Brent and WTI closed above their 5-day, 8-day and 13-day moving averages for the first time since before the OPEC meeting in May, according to Bloomberg.
- Gold prices end lower, slipping -$3.30 or 0.3% to settle at $1,245.80 an ounce. The lack of strength in the precious metal was noticeable, usually seen as a safe haven in times of weaker stocks and a weaker dollar. But gold failed to rally as expectations for further rate hike in the U.S. have risen given better recent economic data.
- The dollar extends losses in what has been a rough week for the greenback. The euro hit the highest level in 14-months (1.1445 high) vs. the dollar even after ECB officials walked back hawkish comments from Mario Draghi on Tuesday (as he had hinted that the ECB might start winding down its large monetary stimulus as the EuroZone economy picks up speed). The British Pound rises for a 7th straight session, longest streak since 2015 after BOE Governor Mark Carney said this week that policymakers could lift rates if business investment rises. The dollar fell to fresh 4-month lows vs. the Canadian dollar after BOC Governor Stephen Poloz reiterated yesterday the bank may consider higher rates (higher oil also helping). The dollar even slid late day vs. the yen after touching 1-month highs earlier after the GDP data. There also remains (some) skepticism of another Federal Reserve interest rate increase this year.
- Treasury markets drop for a 3rd day, as yields extend recent gains, with the benchmark 10-yr around the 2.295% (highest since late May) at best point today, but pared gains to around 2.26% (rising 4 bps) and are now up about 12 bps over the three-day stretch. Stronger GDP data, along with hawkish commentary from several central banks (non FOMC) the last few days has but a spark into yields, as investors dumped bonds globally.
Sector News Breakdown
- Pharmacy Retailer; big news today was WBA terminates agreement to fully acquire RAD after months of ongoing attempts (antitrust issues). WBA agrees to acquire 2,186 stores, three distribution centers and related inventory from Rite Aid for $5.175B in cash, the assumption by Walgreens Boots Alliance of the related real estate leases and the grant of an option to Rite Aid, exercisable through May 2019 and subject to certain conditions, to become a member of Walgreens Boots Alliance’s group purchasing organization https://goo.gl/t4e3FR; shares of FRED plunge after divestiture agreement terminated after RAD/WBA call off merger
- Consumer Staples; APRN 30M share IPO priced at $10.00 (low end of range after recently cutting IPO price); MKC cut its forecasts for annual operating income and earnings per share; CAG Q4 EPS/sales were in-line with consensus and reaffirmed its 3-year forecast; STZ jumps Q1 EPS handily topped consensus with sales in-line to a slight miss/also handily boosts year EPS view to $7.90-$8.10 above prior $6.55-$6.65
- Housing & Building Products; FOR to be acquired by DHI for $17.75 per share, accepting offer and terminating its prior proposal from Starwood and paid a $20M break-up fee; home retailer PIR falls after larger than expected Q1 loss on weaker revs and cuts FY18 revenue growth view to 1.5%-2.5%, previously saw 2%-3%; wallboard names slip after GMS reported 4Q adjusted EPS and revenue below estimates and warned 1Q gross profit margins will be “somewhat below fourth quarter levels” (USG, FBM, among movers)
- Casino, Lodging & Leisure; Nevada reports May Las Vegas Strip gaming win up 2.97% to $546.79M; THO shares weak initially after Off Wall Street initiates with a new sell, citing expectations for U.S. RV sales to peak this year; MBUU to acquire Cobalt Boats for an aggregate purchase price of $130M
- Other retail; private-equity firm Sycamore Partners agreed to buy SPLS for about $6.9B, or $10.25 per share https://goo.gl/qs6P12 . Deal represents a nearly 20% premium to where the shares traded just before the WSJ reported Staples was exploring a sale in April; LULU spikes after filing showed purchase of 100K shares from 6/26-6/27 by Chairman; NKE to report earnings tonight; auto retailers AZO and AAP trade to 52-week lows today
- News in energy; COP agrees to sell interests in Barnett to affiliate of Miller Thomson & Partners for $305M plus net customary adjustments/expects impact to 2017 production guidance to be less than 5 MBOED dependent on timing of closing/doesn’t expect any material impact to 2017 cash flow or other 2017 guidance; CRZO agreed to acquire Delaware Basin properties from ExL Petroleum Management, LLC for $648M in cash; 15.6M share Spot Secondary priced at $14.60/ raises Q2 crude oil production to 33,600-33,700 from prior view 31,800-32,200
- In research; PDS was downgraded to neutral at Piper and reducing estimates for land drilling universe given the continued weakness in oil prices and the prospects for moderating activity in 2018/2019; SLB downgraded at Iberia given “lower for longer” oil prices and recovery in the international market (cuts tgt to $77 from $100)
- Strength in financials as Trust banks NTRS, STT, BK all at 52-week highs today after Fed stress results; Exchanges and brokers at 52-week highs for CME, ICE and CBOE with broader financial rally; COF received a conditional non-objection to their capital plan and is required to submit a capital plan addressing weaknesses in its processes by the end of the year; FSAM shares rallied after the WSJ reported OAK nears buyout https://goo.gl/V51Toa
- The Federal Reserve approved plans from the 34 largest U.S. banks to use extra capital for stock buybacks, dividends and other purposes beyond a cushion against possible catastrophe. Strength in trust banks (STT, NTRS, BK), finance/lending names (AXP, SC, DFS), though COF received a conditional non-objection to their capital plan; Morgan Stanley said biggest upside surprises were FITB, ZION, JPM, WFC & C; while BMO said winners were C, ZION, and JPM, and the disappointments were COF, HBAN, and ALLY; KBW said banks most above expectations, based on the percentage point difference, were RF (+43%), NTRS (+26%), FITB (+24%), ZION (+19%), STI (+17%), AXP (+17%), C (+15%), BBT (+13%), PNC (+12%), DFS (+12%), & JPM (+11%).
- Breakdown of individual stock buybacks and dividend raises: AXP raises quarterly dividend by 9% and buy back up to $4.4B in stock; BAC to buy back $12B of common stock and boosted dividend 60% to 12c; BK with $2.6B stock buyback & raised dividend to 24c from 19c; CIT raises dividend to 16c from 15c and to buy back up to $225M in shares; C to double its quarterly dividend to 32c and repurchase up to $15.6B of its shares; CFG raises dividend by 29% to 18c and announces $850M share buyback; CMA raises dividend to 30c, up 15% and to buy back up to $605M in shares; DFS raises dividend to 35c from 30c and share buyback of $2.23B; FITB raises dividend to 16c form 14c and raises hare repurchase plan by 76%; HBAN plans to raise dividend 38% to 11c, repurchase $308M of stock; JPM raises dividend to 56c from 50c and lifting buyback capacity to $19.4B; KEY to boost quarterly dividend to 10.5c from 9.5c and repurchase $800M in shares; MTB says capital plan includes $900M in buybacks, 5c dividend hike to 80c; MS raised dividend to 25c (up 25%) and repurchase $5B in common stock; NTRS raises dividend to 42c from 38c and buyback to $750M in stock; PNC raises dividend by 20c to 75c and buyback up to $2.7B in shares; RF raised its dividend to 9c and buyback allows up to $1.47B in repurchases; STT raises dividend by 10.5% to 42c and buyback up to $1.4B in shares; STI is lifting its dividend to 40c from 26c and is authorizing a $1.32 billion buyback; USB raises dividend to 30c and repurchase up to $2.6B of stock; WFC raises dividend to 39c from 38c and will also buy back $11.5B of stock; ZION to boost dividend to 24c and buy back up to $465M in shares
- REITs; Citigroup downgraded student housing REIT EDR to Neutral from Buy as confirmed that EDR is delaying the remainder of the Oklahoma State development to 2018; in mortgage REIT’s, KBW said legislation introduced recently in the House of Representatives could allow mortgage REITs that are currently members of the FHLB System to remain as members (would consider it a positive development for those currently members (RWT, NLY, TWO, IVR, & LADR); Healthcare REITs fall as bond yields climb yield climb (DOC, GOV, SNH, OHI); DOC 20M share Spot Secondary priced at $20.40 and GOV 25M share Secondary priced at $18.50
- Biotech movers; after surging last few weeks to 52-week highs, the IBB has pared gains along with broad pullback in the Nasdaq; SRPT viewed positively by analyst after appointed Doug Ingram, former president at Allergan as new CEO; PRTA shares named a new “short” by short seller Muddy Waters – spoke on Bloomberg TV this morning
- Pharma movers; ABEO confirms the FDA granted ABO-201 the agency’s orphan drug designation as a treatment for juvenile Batten disease, a fatal disease caused by mutations in the CLN3 gene; GEMP rises after its gemcabene successful in mid-stage HoFH study; OMER recovers after recent decline, as company said to pursue legal action after recent “short” report sent shares lower; TROV active after announcement of a supplier agreement with Nerviano Medical Sciences S.r.L. subsidiary NerPharMa; DOVA 4.415M share IPO priced at $17.00; AKBA 4M share Spot Secondary priced at $14.50; ALRN 3.75M share IPO priced at $15.00
Industrials & Materials
- Industrial & Machinery; lighting company AYI Q3 adjusted EPS and net sales topped analysts’ estimates but said profitability was hurt by higher-than-normal supply chain costs, including increased quality expense and greater inbound freight charges; WATT gets additional $15M investment from Dialog Semi; 52-week low for Dow component GE
- Transports; after surging yesterday, group higher early; Bank America positive on airline industry as says DAL and LUV best positioned into 2H17 raising estimates and some targets for group on lower fuel; rail cars weak after GBX mixed Q3 results (EPS beat/revs miss) and report from Axiom says TRN margins at risk of disappointing
- Metals & Mining; ATI preannounced quarterly sales and EPS light due to falling nickel prices; gold miners broadly lower today (ABX, AEM, NEM, GG, GOLD); WOR mover on earnings; EGO was downgraded to sector perform at Credit Suisse and RBC
- Chemicals; SHLM reports earnings below consensus with nice rev beat (organic +2%) –margin weakness attributed to impact on buying patterns due to perception of lower future input prices; reit FY guidance; FUL reported Q2 EPS and revenue miss and lowered top end of year guidance
Technology, Media & Telecom
- Internet; broad weakness in high beta space, with NFLX, AMZN, GOOGL, FB, BABA under pressure; GRPN was upgraded at B Riley to buy with $4 tgt citing better understanding of the optionality in the International business and the high incremental margin potential in the North American; YY slips after China’s Ministry of Culture is punishing twelve live-streaming platforms, including YY, Miaopai and Wukong TV, due to violations on content, according to Bloomberg
- Semiconductors; sector under pressure this week (minus yesterday rally), with the SOX index pulling back over 4% this week after being one of the top performing sectors of 2017; KLIC said it sees Q3 at high end of $235M-$245M vs. est. $239.89M; anticipates 2017 revenue to be approximately $790M, plus or minus $25M; MU to report earnings after the close tonight
- Software & Hardware; today marks the 10th anniversary of the AAPL iPhone; PRGS shares rose after Q3 results and raised its year outlook for EPS and revs; enterprise data-storage company Tintri Inc. (TNTR) cut its IPO price range to $7-$8 from prior $10.50-$12.50; EMKR fell on downgrade to neutral at B Riley on valuation and Cable TV uncertainties
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