‘Sky High’ Equities Move Upward as Tensions Taper: Taking Stock

(Bloomberg) -- So memorandums of understanding seem to have indeed done the trick -- for S&P futures anyhow, despite the, shall we say, “uncomfortable” interchange seen between the President and his Trade representative Friday in front of reporters that debated the term.

Though nothing formal was accomplished over the weekend on the trade front besides Trump confirming a delay to the tariff deadline, which was mostly expected (MOUs remain the only real development, and that was executed before the weekend), we did receive material lip service from both the President and Chinese state-run media that progress was made.

We are now looking to move into the 2800 range on the S&P, which comes with it a slew of challenges, especially from the chartists who see resistance in the 2800-2817 area. The GE news is also giving the market a lift as it makes good on its attempt to divest certain units, now with a sale of its biopharma unit to Danaher. Just Friday, Moody’s wrote that the industrial conglomerate could receive $22 billion in asset sales and free cash flow through 2020. This Danaher deal alone is worth $21.4 billion, sending GE shares higher by 9 percent.

‘Sky High’ Equities Move Upward as Tensions Taper: Taking Stock

With the above optimism, Chinese ADRs are surging, led by Huya, Iqiyi and Alibaba, which are all up more than 2 percent. China-exposed tech should also perform today as risks slightly diminish. Shares of Micron, AMD and Western Digital are also up more than 2 percent.

Oracle’s Opinings

Kraft stayed a part of the news cycle over the weekend, and no, not THAT Kraft of Patriots fame. After the disclosure from Kraft Heinz, that sent shares careening, Berkshire Hathaway then disclosed its own results on Saturday. Berkshire’s $25 billion loss recorded in the fourth quarter was the largest loss in its history (though due to an accounting method that values investments, of which Berkshire has many, especially in stocks that were particularly volatile recently). Some of that net loss they attributed to the $2.7 billion impact it suffered from its stake in the condiment giant. For what its worth, despite KHC’s shortcomings and record lows, analysts at Morgan Stanley find that the stock is not yet a buying opportunity, though the bear arguments have "played out." They note the risk profile "remains high." Buffett on CNBC earlier admitted to have overpaying for Kraft while underpaying for Heinz. He also feels as though the company is not worth much more than what it is trading for today.
Buffett also took the opportunity to again knock gold (remember "You can fondle the cube, but it will not respond" annual letter from 2011?), which was timely in light of the BMO Materials conference which likely amplified the Barrick/GoldCorp/Newmont merger drama that is unfolding. Barrick earlier confirmed an offer to buy Newmont Mining, adding a wrinkle to its small stake that was confirmed last week. Newmont’s CEO called the Barrick move over the weekend "desperate and bizarre." The gold miner race to consolidate may lend credence to the Oracle’s skepticism on the prospects for gold investments to compete with the S&P.

It’s an interesting juxtaposition though for Buffett, as while he espouses the benefits of buying into the "American tailwind," of the stock market, he simultaneously discusses the difficulty in finding an immediate mega-deal due to "sky high prices.” You could argue it makes some sense, given his proclivity for industrials (his last two mega deals were Precision Castparts 3 years ago and the proposed and then withdrawn offer for railroad operator Norfolk Southern), which are the best performing group in the S&P 500 this year, at 18%, closely followed by energy and tech. And given his investment in Apple, this too should come as no surprise. It sounds like there’s nothing in his favored wheelhouse that is large enough and definitely isn’t cheap enough.

‘Sky High’ Equities Move Upward as Tensions Taper: Taking Stock

But JPMorgan strategists still see promise in the value segment for equities, despite the Berkshire CEO’s protestations. They write that value is "historically cheap" in the U.S. and provides downside protection in the event of a European downturn. Deutsche Bank too found that there was an opening to buy in to the market. In a note early last week, they wrote that unless markets rally, a favored valuation measure, the CAPE ratio, was close to falling below its 30 year average. This circumstance was rare, and historically, it had proven to be a good time to buy, with returns over a 1, 3 and 5 year basis outpacing those purchases executed when the markets were above the 30 year average CAPE ratio.

Your 63-Hour ICYMI

Kraft Heinz, just days after writing down the value of some of units, is reviewing options (including a sale) for its Maxwell House unit, CNBC reports; NY Post dug deeper into Under Armour CEO’s media contacts following the WSJ report last week, finding he was close with Steve Schmidt, a political analyst at MSNBC; an Atlas Air Worldwide plane servicing Amazon Prime crashed near Houston; Some Microsoft employees are pushing back against the company’s work with the U.S. military on Hololens for the battlefield; the 128 carat yellow diamond necklace last worn by Audrey Hepburn and draped around Lady Gaga’s neck was out-shined by her duo performance with Bradley Cooper, who has some pipes of his own; Dustin Johnson beat Rory Mcilroy by 5 strokes and the 3rd place finishers by 10 strokes to clinch the WGC tournament in Mexico; Huawei one-upped Samsung, piercing the $2000 barrier with its $2600 smartphone at the Mobile World Congress; Twitter Co-founder Evan Williams is stepping down from the Board; Altria got a positive mention at Barron’s, which called the stock a value for a ’sin stock,’ while Nvidia’s valuation was pricey, the publication wrote; Odds are coming in on Kyler Murray and where he’ll land in the NFL draft, which has him favored to land with the Dolphins (who have the 13th overall pick), according to oddsshark; Green Book won Best Picture at the Oscars (Spike Lee attempted to leave during the acceptance speech, according to Yahoo), while Olivia Colman (ironically for the film "The Favourite", despite the fact that Glenn Close was in fact the favorite to win) and Rami Malek (the odds on favorite) won for best actress and best actor.

Sectors in Focus Today

  • Miners after ABX, NEM offer, and the simultaneous BMO conference
  • Restaurants ahead of Shake Shack and Potbelly earnings post-market; William Blair last week highlighted that though restaurants underperformed the greater market, the strength seen was led by fast-casual and casual dining stocks. They write, “trends appeared to have remained solid” given "fairly benign” weather gave a lift to trends. The analysts expect labor inflation to remain a key headwind in 2019
  • Packaged foods relief rally after KHC earnings and SEC investigation weighed on the sector Friday
  • Hemophilia and gene therapy companies (like QURE, CRSP, BMRN, Chugai Pharmaceutical) after Roche confirmed an agreement to acquire Spark Therapeutics at more than a 100% premium to its last close; a deal that "makes sense" even with the valuation, Bloomberg Intelligence analysts led by Sam Fazeli write

Notes From the Sell Side

Cboe Global Markets is indicated higher after getting an upgrade at JPMorgan, which, despite "awful" trading volumes in VIX futures and Options, writes that leading indicators are "on the rise." Analysts led by Kenneth Worthington write that earnings may be positively impacted should trading rebound with the term structure in the VIX and AUM improving. His price target goes from $105 to $113 (with a peak target of $121), just $6 from the Street high.

Data center REIT CyrusOne was cut to neutral at Credit Suisse, which discussed their results that missed expectations. Its recent Zenium acquisition is an EBITDA "margin drag," analysts led by Sami Badri write, while equity dilution is likely in 2019 and 2020 given their "elevated levels" of CAPEX. Price target goes to $52 (Street-low sits at $50).

Tick-by-Tick Guide to Today’s Actionable Events

  • BMO Global Metals and Mining conference (NEM, MOS, STLD, FMC, FCX, LUN CN, ABX, GLEN LN, RIO LN)
  • Morgan Stanley TMT Conference
  • QCOM, ADTN, GRPN, LITE, ATEN, CSCO at Mobile World Congress
  • JMP Securities Tech Conference
  • 5:30am -- QCOM at Mobile World Congress
  • 8:30am -- Jan. Chicago Fed activity index
  • 9:00am -- INTC at Mobile World Congress; FCX at BMO Global Metals and Mining conference
  • 9:45am -- CSCO at Mobile World Congress
  • 10:00am -- Dec. Wholesale inventories
  • 10:00am -- TECK/B CN at BMO Global Metals and Mining conference
  • 10:30am -- Feb. Dallas Fed manufacturing activity; ETH investor meeting
  • 11:00am -- MSFT at Morgan Stanley TMT Conference
  • 11:30am -- TEAM at JMP Securities Tech Conference; AEM CN at BMO Global Metals and Mining conference
  • 2:15pm -- TWLO at Morgan Stanley TMT Conference
  • 4:00pm -- HTZ earnings, ZEN at JMP Securities Tech Conference
  • 4:05pm -- ETSY, SHAK earnings
  • 5:00pm -- ETSY, SHAK earnings call
  • 5:30pm -- AVLR at JMP Securities Tech Conference
  • 6:30pm -- CSOD at JMP Securities Tech Conference

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