Incendiary, Synced Fireworks Risk Confusing Bulls: Taking Stock

(Bloomberg) -- S&P futures are remarkably resilient early after fear-inducing headline alerts crossed smartphone and computer screens while the western hemisphere was sleeping.

Fighter jets and bombings between two nuclear powers threatened a fragile peace between India and Pakistan, while President Trump’s ex-lawyer’s testimony was circulated, which makes incendiary accusations about his former boss, including that the President was aware of Roger Stone’s attempts to work with Wikileaks.

While we all knew the testimony would likely captivate, I think the detail may come as a bit of a surprise, and threatens to overwhelm another bit of testimony markets may have been keenly looking forward to: the U.S. Trade Representative Robert Lighthizer’s comments to the House Ways and Means Committee later this morning. It’s important given the implications -- Bloomberg Intelligence economist Tom Orlik has written that “the U.S. lacks the resolve and coordination necessary to follow through on its threats” in the trade negotiations, and that a full fledged trade war "could shave 0.8% off global GDP”.

All of this comes nearly simultaneously with the President’s scheduled dinner and meeting with another nuclear entity, North Korea’s Kim Jong Un. The summit continues tomorrow, but twitter will be closely watched for anything that can disrupt the 24 hour news cycle any further. FOMC Chair Powell’s second day of testimony will likely be much like the first, where he didn’t disappoint the bulls, lending credence to the dovish narrative to which we’ve been accustomed, even helping to salvage a precipitous decline in the late morning Tuesday.

Reshuffling the Deck Chairs

Not on the Titanic, but more to balance the ship. Or even hiking -- if you’re a true sailor -- as a way to describe some of the recent consolidation in the S&P. We were essentially flat Tuesday, but that didn’t tell the full picture.

Moving sideways though, isn’t all bad. Voices on the Street are coalescing around the idea that bullish sentiment remains and that bulls just need a little break before pushing higher. BofAML analysts wrote earlier in the week that they were seeing bullish signals with the percent of SPX stocks at their 52-week highs approaching 13%. That figure plummeted to 3% Tuesday, though we ended down less than one tenth of one percent, which says to me that investors are taking profits on some of the biggest winners. Indeed industrials and energy names (among the top 3 performers this year) bore a fair amount of the selling Tuesday. Health care, though weaker, saw most of that isolated in the devices segment, while pharmaceuticals and biotech together escaped unscathed from drug price criticism in Senate hearings that took place.

Incendiary, Synced Fireworks Risk Confusing Bulls: Taking Stock

Janney analysts also agreed with the positive sentiment, writing that you can’t "negate a short-term correction", but that the breadth shows health in the S&P over the medium term. The lackluster direction we saw Tuesday had a little bit more for the growth bulls than for the defensives, as the gains in Staples can mostly be attributed to the standout results from JM Smucker that lifted the defensive sector. Bloomberg Intelligence analysts led by Michael Halen wrote that they have "increased confidence" that launches "in coffee, pet food, pet snacks and fruit spreads will boost 2020 results." That sector may get another lift in today’s session after Campbell Soup and Dean Foods both sought strategic actions (DF hiring an advisor and CPB selling a unit and updating the sale of another) post market.

Retail Therapy

Only a toe was dipped into the department store retail space Tuesday with Macy’s results (which were mixed at best when you combine the restructuring with a less than inspiring full year forecast), and its shaping up to be a quarter where each company will have its unique signature (Nordstrom is later this week, Kohl’s and Target are next week).

The consumer itself seems to be just fine, as consumer confidence figures single-handedly gave the S&P a lift Tuesday (current views hit an 18-year high), while smaller department store peer Dillard’s rose nearly 20% with its results that showed the fifth consecutive quarter of positive comp sales. Deutsche Bank flagged the risks in inventory, an issue Macy’s had discussed with its pre-announcement in January, and the risk for additional mark downs in the future. The analysts remained cautious as "growth via cost savings is unsustainable" -- a point Bloomberg Intelligence analyst Poonam Goyal also discussed in relation to Macy’s.

The story may instead be around off-price retailers. TJX Cos., which has been eating the lunch of retailers for years now, is due for results shortly, and is keenly positioned to benefit from the above inventory issues.

Incendiary, Synced Fireworks Risk Confusing Bulls: Taking Stock

Credit Suisse analysts speculate that off price retailers had a "strong holiday," and can "capitalize" on the fact that department stores are "struggling" to clear their January inventory. The analysts favor BURL (results due next week), ROST and TJX after some EPS expectations have already come in. DA Davidson analysts wrote that the headwinds that face the segment are likely more near-term in nature, and expect TJX to beat and BURL results to meet expectations.

Homes for the Holidays

We got a preview into Lowe’s results Tuesday (which was initially lower this morning after missing comparable sales estimates about an hour ago, but has since pared the losses. RBC wrote that the comp sales gap to HD was the lowest in about two years) when Home Depot disappointed analysts by missing on their comparable sales estimates, earnings and revenue.

Suppliers got hit, including Masco and Lumber Liquidators, among others. The two mega home improvement retailers are to some extent dependent on rising home prices (as owners tap housing equity for renovations, together with the anticipation that repairs/upgrades benefit future home prices), and the December housing data released failed to help sentiment.

The data, to be sure, had been delayed by the Government shutdown, and was originally scheduled for Jan 17, so its tough to lean too hard into what it signals, but the pace of price increases was the slowest in four years, according to S&P CoreLogic Case-Shiller index. Toll Brothers, a luxury homebuilder, reported earnings post-market, and cited a decline in 1Q contracts (signed contract value fell 31% y/y) to an industrywide slowdown that began in the second half of last year. That being said, their revenue and earnings beat expectations and their CEO said that their decline in each month of the quarter decreased as the quarter moved on.

Credit Suisse analysts, in their review of broad fourth quarter housing data, expected soft 4Q demand, with traffic declines most notable in the southern California region (TOL counts just 18% of its revenue from California broadly, according to Bloomberg data and shares are up 2% pre-market). Positive indications were seen in Colorado, with analysts cautiously optimistic about the spring selling season.

Sectors in Focus Today

  • Cyber security names (FTNT, SPLK, FEYE) after PANW’s results led shares to rise nearly 10% post market
  • Consumer electronics names like FIT, GPRO, SONO, NTGR, HEAR after Best Buy blew away expectations with shares are higher by 10%
  • Generic drug makers (PRGO, TEVA) after Mylan’s results disappointed
  • Online travel agencies ahead of BKNG results post market today
  • Weight management companies like Nutrisystem after Weight Watchers massively missed its year forecast and is down more than 35% in the pre-market
  • Beauty and cosmetics names after Elf Beauty announced it was closing some stores; shares are down 20% as of writing

Notes From the Sell Side

Tobacco purveyor Philip Morris is indicated to open higher this morning after getting an upgrade at UBS to buy (price target goes to $101, $1 short of the Street-high) as analyst Robert Rampton’s expectations for the company’s compound annual growth rate (CAGR) in the 2019-2021 put him above consensus and the firm’s guidance of >5%. He expects growth for the company to be weighted towards Europe, a market that boasts high revenue per pack. Rampton also finds that the stock’s current 14% discount to global staples as "unjustified."

Deckers Outdoor’s upside is limited, Susquehanna analyst Sam Poser wrote in a downgrade to neutral from positive, though the company is in "great shape." Most of the improvements at the company have been "baked into" the stock price, and Poser added that he is concerned the initial guidance for FY20 will not live up to expectations. Shares are indicated to open lower despite the analyst boosting his PT to $161 (which implies 9% upside to shares).

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

  • Today: SVB Leerink Global Healthcare Conference in NYC
    • U.S. Trade Rep. Lighthizer to testify about China trade to the House
    • Morgan Stanley TMT Conference
    • BMO Global Metals and Mining conference
    • KLDO IPO expected to price
    • INTC, MSFT, RHT, WATT at Mobile World Congress
    • NVT, ACRS investor meetings
  • 7:00am -- MBA mortgage applications
  • 8:00am -- BBY earnings call; SRPT gene therapy trial conference call, RF investor day
  • 8:15am -- TJX earnings
  • 8:30am -- Dec. Trade balance; Retail inventories
  • 9:00am -- LOW earnings call
  • 9:30am -- AGN at SVB Leerink Global Healthcare Conference
  • 10:00am -- Dec. Wholesale inventories; Jan. Pending home sales; Dec. Factory orders, durable goods
  • 10:00am -- FOMC Chair Powell to testify before the House of Representatives
  • 11:00am -- TJX earnings call
  • 12:30pm -- HAIN investor day
  • 1:00pm -- LLY at SVB Leerink Global Healthcare Conference
  • 3:30pm -- ICPT at SVB Leerink Global Healthcare Conference
  • 4:00pm -- BKNG earnings
  • 4:05pm -- BOX, HPQ, CWK earnings
  • 4:15pm -- SQ earnings
  • 4:30pm -- BKNG earnings call, American Association for Cancer Research (AACR) abstracts and late breaking titles to be released
  • 5:00pm -- BOX, HPQ, CWK, SQ earnings call

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