If Earnings Can't Save This Market, Maybe M&A Will: Taking Stock

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(Bloomberg) -- Stock futures have climbed all morning, with M&A taking center stage ahead of another heavy week of earnings (McDonald’s up shortly and chip stock ON Semi already out with decent numbers), while the 10-year yield remains well below 3% ahead of PCE and Chicago PMI data.

Welcome to M&A Monday

We do have an M&A Monday on our hands, starting with the $26.5 billion Sprint/T-Mobile deal (watch tower stocks AMT, CCI and SBAC for weakness given revenue risk), the $23.3 billion refiner merger between Marathon Petroleum and Andeavor (watch for impact on refiner peers as well as MLPs ANDX and MPLX), J Sainsbury’s $10 billion purchase of Walmart’s Asda (see Street Wrap), the $8.4 billion DCT/Prologis tie-up (may lift industrial REITs like EGP, DRE, FR, LPT, TRNO), and a reported multibillion-dollar purchase of B/E Aerospace spinoff KLX Inc. by Boeing (scoop from Friday afternoon hit shares of BA supplier WAIR).

There is also attention being paid to Twitter getting embroiled in the Cambridge Analytica saga (shares were down as much as 3% at one point this morning), and Trump telling supporters at a rally that the stock market would be up more if it wasn’t for the trade issue ("could have been up 60 percent but I have to do things").

We’re also waiting to see what happens with the steel and aluminum tariff exemptions for the U.S.’s allies, which are set to expire tomorrow but are reportedly likely to be extended, as well as any incremental details on the upcoming Mnuchin-Kudlow-Lighthizer trip to China.

The State of the Tech Bull

We also have another enormous earnings calendar ahead of us this week, though it’s pretty much been established at this point that "earnings" aren’t going to be the savior for this market (RBC’s Lori Calvasina said that as of April 26, half of the S&P 500 reported with 79% beating the Street on EPS, a new all-time high). This was an expectation by many bulls after the early February meltdown in stocks and the compounding fears over a whole host of macro and political noise, but Caterpillar, Lockheed Martin, Alphabet, Intel, and the banks (and many others) have all but assured us that massive top line or bottom line beats will not translate into immediate stock market success.

The fact that the S&P 500 ended flat on the week while the S&P 500 Info Tech Index and the NYFANG Index each saw 0.6% declines in the same time frame must have been incredibly infuriating for the tech bulls. What else did the market want to see from the flurry of reports in the space that came in strong in the past few sessions (AMZN, FB, BIDU, MSFT, INTC, AMD, QCOM, et al)?

And how can these sector bulls feel any better going into the granddaddy of all tech reports, tomorrow’s Apple earnings, given all of the jitters going into the print? Shares are already in a precarious position, having taken a giant hit over the past week and a half (tumbling ~9% vs S&P 500 -1.4%) for a number of reasons. So there is potential for a better-than-feared result, which would likely send the stock in relief rally mode in the interim, though may be a muted reaction for the tech sector given what we’ve seen lately.

But what if it’s a complete disaster? What if Apple reports weaker-than-expected numbers versus consensus (recently lowered consensus, mind you), releases a horrific outlook vs the whispers and issues extremely cautious commentary that doesn’t gibe with investors in the least. What then? Could this end up being the report that tips the scales and crushes the bull market in tech once and for all?

What Fast Money Is Watching

This week brings countless reports from companies whose stocks have heavy interest, high momentum, increased volatility, climbing short interest and/or elevated implied options levels. Some names that will be watched closely by hedge funds, prop traders, risk arbs, the event-driven crowd, and the like, include:

  • Tech: Apple (last of the FAANGs to issue earnings), Alibaba (second of the BATs to report after Baidu), Spotify (first earnings since direct listing), Pandora (options imply 13% move), Snap (soared 48% after 4Q results), Square (just made biggest acquisition ever with Weebly), GrubHub (up 38% YTD), Activision (concerns over Fortnite impact), Universal Display (under pressure on Apple relationship fears), FireEye (prior M&A speculation), Acacia Communications (ZTE and Huawei supplier has plunged 29% in two weeks)
  • Risk Arbitrage: NXPI Semi (M&A spread widened to ~17% over Qualcomm deal worries), Lumentum (potential for renegotiated Oclaro deal after ZTE ban)
  • Consumer: Tesla (short interest surging), GoPro (shares down 36% YTD), Fitbit (cash burn concerns), Under Armour (options imply 11% move), Wayfair (has been a target of Citron Research’s short reports), Shopify (another target of Citron), Blue Apron (shares almost halved YTD), Shake Shack (up nearly 10% in last two days), Weight Watchers (up 237% in past year), Kellogg (after last week’s short seller attack), Tempur Sealy (competition concerns)
  • Others: FMC Corp (all lithium-exposed stocks have sold off year-to-date), Cboe (VIX futures volumes remain a concern after implosion of short vol strategy), Assured Guaranty (Einhorn’s short call at the Sohn conference) and Teva (has had ~66% peak-to-trough reversal since end of July)

Notes From the Sell Side

Some of the biggest calls so far... JPMorgan’s Jamie Baker is out slashing estimates on the airlines ("second half RASM trends are likely no match for fuel’s recent velocity"), calling for DAL to miss the low end of its guidance and downgrading JBLU & upgrading SAVE... Morgan Stanley says to buy the large-cap banks after their recent pullback with top picks BK, DFS, JPM, and STI, while Macquarie upgraded WFC to outperform...

Spotify is poised for a good day (indicated up ~3%) after four out of four initiations this morning were positive, from Morgan Stanley and UBS to Goldman and JPMorgan... MKM Partners says to buy the video game stocks like EA and TTWO on weakness as the "success of Fortnite doesn’t mean the sky is falling."

And on the Sprint deal, New Street Research said synergy guidance of $43 billion is well above where the Street settled and that the market will probably start at 50/50 odds that the deal will close. Morgan Stanley said any sustained shares weakness for the towers (AMT, CCI, SBAC) is a likely buying opportunity.

Tick-by Tick Guide to Today’s Actionable Events

  • Today -- Milken Institute Conference (Day 3), see schedule
  • Today -- Crypto Invest Summit West (Day 1)
  • Today -- NVS estimated Pdufa for Kymriah (may impact GILD), AKAO FDA documents
  • Today -- LOMA, ALTR IPO lockup expiry
  • Today -- TWX/T closing arguments in DoJ lawsuit
  • 7:00am -- AGN, DAN, CTB earnings
  • 7:58am -- MCD earnings
  • 8:00am -- ARNC earnings
  • 8:30am -- Personal Income/Spending, Core PCE
  • 8:30am -- AKS earnings; AGN earnings call
  • 9:45am -- Chicago PMI
  • 10:00am -- Pending Home Sales
  • 10:30am -- Dallas Fed
  • 11:00am -- MCD earnings call
  • 11:00am -- Citi CEO Michael Corbat at Milken conference
  • 11:40am -- Goldman Sachs President/COO David Solomon on Bloomberg TV
  • 1:45pm -- Tourbillon’s Karp and Sarissa’s Denner at Milken conference
  • 3:00pm -- Steven Mnuchin at Milken conference
  • 4:00pm -- AKAM earnings
  • 4:01pm -- SBAC, NTRI, WLL earnings
  • 4:03pm -- TXRH earnings
  • 4:05pm -- QTNA earnings
  • 4:06pm -- CGNX earnings
  • 4:15pm -- THC earnings
  • 5:30pm -- VNO earnings (roughly)

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