ADVERTISEMENT

You’re Buying Certainty. And the Art of the Bluff: Taking Stock

You’re Buying Certainty. And the Art of the Bluff: Taking Stock

(Bloomberg) -- So much for keeping up with the day-to-day lurches from crisis to crisis. Somehow we always knew it was going to come down to the wire -- otherwise, where’s the leverage?

But let’s be clear -- the agreed upon trade “deal” as it’s already become known, is just Phase One, and for the most part, avoids the fresh tariffs that were due to go into effect this Sunday (the legal text is still in process). They would have impacted made-in-China smartphones, toys, tablets and laptops -- shares of Mattel (MAT) are among the winners this morning, up nearly 3% pre-market, extending a 4.4% regular session performance Thursday (watch HAS as well). Apple shares, too, are narrowly outpacing futures, up 0.4% vs the broader S&P which looks to notch another 11 handles on to its all-time highs set yesterday.

You’re Buying Certainty. And the Art of the Bluff: Taking Stock

Are we out of the woods? It’s unclear at this stage, but Chinese foreign minister Wang Yi said earlier today that the skirmishes in this trade battle have “severely damaged the hard-earned basis for mutual trust.” Whether those comments themselves are a negotiating tactic for future engagement is a topic outside my pay grade. That future engagement, however, now turns to finding a way to lower existing tariff rates by as much as half, Bloomberg reports.

The moves in stocks started well before reports indicated Trump was to sign off on the deal. A tweet right after the market open (whereby Trump said a “big deal” was close), followed by a WSJ item set the wheels in motion, and the rising tide lifted most boats (76% of the S&P gained, while defensives lagged), even those previously capsized. Momentum as a factor was sucking wind as the lofty market heights (all-time highs were set) failed to benefit some of the best performers over the past 12 months, instead leading value and those that have struggled to benefit.

As an example of the diverging fortunes, of the top 50 performers in the Russell 3000 Thursday, only 9 had positive equity returns over the prior 12 months. That means more than 80% of the top names yesterday had been negative over a period in which the index the itself was on track to have a stellar year, up nearly 19%.

Will that repeat itself? Today will undoubtedly be dominated by similar forces, with a closer look at sentiment and where talks go from here. You do have the U.K election to consider, after all, which finally achieved some certainty with a resounding victory for Boris Johnson. An assured Brexit is still unclear, but the overall political uncertainty has diminished. An equity screen of U.S.-traded names domiciled in the U.K. and/or have revenue exposure in excess of 20% of their total (given the British pound spike) can be found in the below chart.

You’re Buying Certainty. And the Art of the Bluff: Taking Stock

Other aspects of the trade agreement (beyond just tech, toys) must also be weighed, as growth prospects have risen, boosting treasury yields (watch banks and financials, even as the S5FINL exceeded its pre-financial crisis highs for the first time yesterday), commodity-exposed stocks (X, FCX, LIN) and crude (oil servicers like FTI, SLB are higher by nearly 1% in the premarket). Semiconductors and tech (MRVL, ON, AMD, MU, QCOM, NVDA) should also be strong.

On Tap for Next Week

The last full trading week of 2019, if all things stay copacetic on the trade front, should be less frenetic than what we saw this week and almost assuredly less so than Thursday.

What will make it interesting is that the earnings docket includes some names that are multinational in scope, to a degree that they may provide nice context into tariff impacts (and what may have been dodged).

FedEx in particular, as singled out in last Tuesday’s Taking Stock, was particularly sensitive to any worsening of U.S.-Sino relations, given that its name was floated as a potential target for China’s “unreliable entities” list. The air-freight company Thursday staged one of the larger rallies in the S&P following reports that a deal in principle with China had been reached. It also benefited from an upgrade at UBS, which cited no imminent catalysts to the downside. The company should also have an outlook for how the Christmas season and shipments will unfold. Interestingly, despite the challenges this year (-12% over the past twelve months), the Street has yet to throw in the towel. Sell ratings are few and far between, with just as many on the Street recommending to buy the shares as hold them, according to data compiled by Bloomberg.

Micron, Nike and Jabil too, should have an opinion on the trade detente (if we can call it that at this stage), given their reliance on international markets for material percentages of revenues (JBL attributes 53% of its revenue to Asia).

From the consumer standpoint, we’ll see results from Carmax and Winnebago, two sectors that have seen diverging outcomes off late. The auto dealer is near highs after a series of positive earnings reports and its potential to disrupt the used-car dealership model, Morgan Stanley analysts wrote in September (shares are about a 1% from their all-time highs). The RV retailer, however, is still 20% off its 2017 highs, while earlier this month analysts warned about shipment declines in the sector.

Notes From the Sell Side

Credit Suisse is out with a broad call on biotech stocks, upgrading both Biogen and Regeneron but lowering its view on Gilead. Biogen was raised to neutral, with the firm citing positive feedback from physicians about aducanumab. “While we think the data is challenging, we also believe that broader desire for an approved Alzheimer’s drug could help adu. cross the FDA finish line.”

Regeneron’s upgrade to outperform comes after “reports of Eylea’s demise are somewhat exaggerated.” Execution on this front, “layered with progress in the novel oncology platform will drive outsized outperformance” in 2020 compared with peers.

On the downside, Gilead was cut to underperform as the setup for 2020 “remains challenging with an unclear strategy from the new management team.” Credit Suisse noted concerns over earnings and revenue growth. Neurocine and Galapagos were also downgraded at Credit Suisse, with the rating on both dropping to neutral.

Outside the biotech space, Snap was upgraded to market outperform as JMP Securities has higher confidence in the social-media company’s ability to grow its user base and improve monetization in 2020.

The Snapchat parent “is well positioned to continue to add [daily active users] and close the monetization gap with other major social networks,” thanks to the launch of new advertising products, as well as a reorganization of the sales force. Improved reach, user engagement, and execution “should lead to continued revenue growth and improving overall profitability.”

Shares are up 2% in pre-market trading; the stock has jumped more than 150% from a January Low. Analyst Ronald Josey noted that the valuation was “among the most expensive in our coverage universe.”

The move represents just the latest sign of improved sentiment surrounding Snap. Since the start of October, Snap has received upgrades from Morgan Stanley, BofA, JPMorgan, Needham, and Loop Capital, according to data compiled by Bloomberg.

Sectors in Focus

  • Broadcom results picked a poor day to underperform while the rest of the space rises after the trade agreement. Watch suppliers like FLEX, AMKR, FNSR, CDNS for a drag that may not have otherwise occured
  • SaaS names after Oracle’s weak forecast sent shares lower by more than 2%. Its 2Q revenue also missed expectations
  • Adobe beat analyst expectations, prompting a series of bullish analyst commentary. Watch ANSS, CRM, CDNS SNPS
  • Trade-war related names (CAT, BA, GE, FDX, WYNN, LRCX, NKE, LVS, A)

Tick-By-Tick to Today’s Actionable Events

  • President’s Cup play continues. America versus the World (ex. Europe)
  • 8:30am -- November Import Price Index 8:30am
  • 8:30am -- November Retail Sales 8:30am
  • 8:30am -- AGCO analyst meeting
  • 9:45am -- Bloomberg December U.S. Economic Survey 9:45am
  • 10:00am -- October Business Inventories
  • 11:00am -- Fed’s Williams discusses topics in monetary policy

--With assistance from Ryan Vlastelica.

To contact the reporter on this story: Brad Olesen in New York at bolesen3@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Brad Olesen

©2019 Bloomberg L.P.