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FactSet StreetAccount Summary - US Weekly Recap: Dow (0.22%), S&P +0.16%, Nasdaq +0.81%, Russell 2000 +0.67%

May 22, 2015
  • Overview:
    • Three of the four major US equity indexes finished higher this week, while sector performance was mixed. There were no meaningful directional influences and conviction remained in question. US economic data continued to largely disappoint, but did not have much impact on liftoff timing expectations. A similar dynamic played out with regards to the April FOMC minutes and comments from Fed Chair Yellen. However, the backup in Treasury yields resumed. Retail remained in focus on the earnings calendar. The M&A theme continued to grab a lot of headlines and drive some outsized moves. There did not seem to be anything particularly new from a macro perspective out of the widely followed EPG Conference. The airline group came under scrutiny on pricing and capacity concerns, weighing on the industrials sector. The consumer staples sector fared the worst. Dollar strength was mentioned as a partial overhang. It also weighed on the commodity complex, driving the underperformance in materials and energy. Healthcare, financials and tech outperformed.
  • No surprises from FOMC minutes, Yellen:
    • The meaningful Fed-related events this week did not have much impact on the liftoff timing debate. The April FOMC minutes noted that many officials did not expect that the economy would improve enough to warrant a June tightening. As expected, Q1 weakness was partly chalked up to temporary factors. However, there were concerns that downside risks to the economy may have increased. Some of the focus revolved around the potential for dollar and oil headwinds to have a larger and longer-lasting effect. In what seemed to be the most widely anticipated event of the week on Friday, Fed Chair Yellen said that if the economy continues to improve in line with her expectations, liftoff will be appropriate at some point this year. She was even more dismissive of the Q1 slowdown than the Fed minutes. She also pointed out that while the economy is nearing full employment, it is not there yet. She added that wage growth has been disappointing, but did note some more recent signs of a pickup. Yellen highlighted economic headwinds on both headline and core inflation, but also reiterated Fed expectations that inflation will move up to 2% as transitory influences subside and the economy improves.
  • Treasuries back on the defensive:
    • Following some reprieve last week for the bulk of the curve, Treasuries were back on the defensive this week. Treasuries were unable to take advantage of a rally in Eurozone debt on Tuesday following dovish comments from the ECB’s Coeure about frontloading QE purchases. This was largely a function of a ~20% surge in housing starts to the highest level in 7-1/2 years in April (though the other housing data this week missed). In addition, there remained a good deal of focus on both the transitory nature of Q1 headwinds and the assertion that growth was much stronger than the initially reported 0.2%. Fed Chair Yellen argued that the slowdown in Q1 GDP was “largely” due to temporary factors. A San Francisco Fed paper highlighted evidence of residual seasonality, noting that after a second round of seasonal adjustments to the data, the economy actually expanded 1.8%. Finally, inflation data surprised to the upside on Friday as core CPI jumped 0.3% m/m, the firmest since August 2011. It pushed the annualized three-month rate to 2.6%, up from 1.3% in January. Medical care services rose 0.9%, the largest since 1990 according to Goldman Sachs. In addition, shelter costs rose 0.3% for the third time in the last four months.
  • Another mixed batch of takeaways from retail earnings:
    • Retail beat the tape this week with XRT +0.6%, though there was no meaningful shift in sentiment surrounding the group. There seemed to be some disappointment that the market did not have a better reception for the strong print and upbeat outlook commentary from HD (1.1%). Rival LOW (4.9%) fared much worse as a slower April drove below-consensus comp growth of 5.2%. Gross margin upside, partly fueled by mix shift, helped TGT +1%. However, WMT (4.3%) missed on comps despite a second straight quarter of positive traffic growth. In specialty retail, AEO +2.9% beat on all key metrics with the Street positive on merchandise execution that limited promotional activity. ARO (21.5%) sold off on much worse than expected Q2 guidance with the company needing to clear inventories into BTS. Limited visibility into its turnaround was another concern. The Street remained largely positive on the off-price segment. TJX +1.8% talked up traffic trends and noted Q2 is off to a strong start. However, valuation seemed to be an overhang on ROST (3.4%). WSM +3.7% beat on comps despite the West Coast ports disruption.
  • Another week of big M&A moves:
    • It was another fairly busy week of M&A headlines. ANN +21.3% agreed to be acquired by ASNA +6.1% in a deal with an EV of $2B. Elsewhere in retail, the WSJ reported that PBY +14.7% had been approached by Golden Gate Capital and other potential suitors about a takeover. The semi space remained in focus as the NY Post reported that ALTR +6.6% and INTC +1.4% have resumed talks about a potential deal. The healthcare sector, where the CEO of VRX +5.7% said there is a “bit of a bubble” in M&A, was busy again. ENDP (0.5%) agreed to acquire privately held Par Pharmaceutical for just over $8B. In addition, CVS +1.8% announced the purchase of pharmacy service provider OCR +4.1% in a $12.7B deal. Consolidation in the cable space remained a high-profile theme as French telecom group Altice acquired a 70% stake in privately-held Suddenlink, the seventh-largest US cable operator, in a deal valued at just over $9B. Altice was also reported to be in talks with TWC +9.4% about a takeover. The Suddenlink move was cited as a driver of an upgrade of CVC +22.3% at Pivotal Research due to the increased probability of a deal.
  • Little new on macro out of EPG Conference:
    • The multi-industrial space received some attention this week with the focus on the Electrical Products Group Conference. However, analysts noted that there did not seem to be any surprises surrounding end-market commentary that continued to point to mostly sluggish, but stable industrial growth. The US was still highlighted as a relative bright spot, but remained bogged down by the spillover effects from energy, as well as FX. Several analysts also talked up the continued outperformance of non-residential. TYC +3.7% seemed to be one of the beneficiaries of this theme. M&A was widely cited as the high-profile theme given the low-growth environment. While several companies noted that valuations were too expensive, others reported that there has been a strong reception among potential acquirers for some of their assets. EMR +2.6% fit into the latter group, though its rally was largely a function of speculation that Trian (Nelson Peltz) plans to take a stake. GE +1.5% said it expects to sell ~$100B of assets from GE Capital, up from its earlier estimate of $90B. It also highlighted greater synergies surrounding its proposed Alstom deal.
  • Airlines under scrutiny:
    • The airline group came under outsized pressure this week on heightened scrutiny surrounding capacity and pricing. LUV (12%) set the wheels in motion on Tuesday after it raised its 2015 capacity growth guidance to 7-8% from ~7%. On Wednesday, the focus shifted to comments from the CEO of AAL (12.4%), who said that his company will “compete aggressively” with discount carriers that are adding capacity and cutting fares to keep planes full. This drove a ~6.5% decline in the average airline stock that day. The group was unable to generate any kind of bounce over the rest of the week, despite the extent to which analysts came out to defend. Barclays said that the industry earnings risk of higher capacity is overstated, noting that 100 bp more capacity growth is at most a ~4% hit to its pre-tax estimate of $24.8B. CRT said it would add positions in airline stocks, pointing out that plans to aggressively compete in key markets such as Dallas, Houston, Seattle and the transcontinental routes do not represent new news and are not unexpected. BofA Merrill Lynch had some similar comments, adding that LUV should be growing capacity. Goldman Sachs said it expects carrier behavior to remain rational in a very competitive industry.
  • Healthcare outperforms, consumer staples lag:
    • Healthcare, which has been a standout from a Q1 earnings perspective, was the best performer this week. Biotech led the way with the BTK +3%. Hospitals and managed care also outperformed. Large-cap hardware names like HPQ +3.5% and AAPL +2.9% boosted tech. Earnings underpinned INTU +4.3% and CRM +3.6% in software. ADI +6.2% was a standout in the semi space following its results. Financials beat the tape as higher rates continued to drive the strength in the banking group with the BKX +1.3%. Retail and builders underpinned consumer growth. The consumer staples sector put in the worst performance. Along with the drag from WMT, tobacco stocks were hit with RAI (3.2%), MO (3%) and PM (2.8%). Most beverage names also underperformed. Dollar strength received some attention as an overhang. The dollar index (DXY) ended the week up ~3% despite a mostly weaker than expected batch of US economic data. BofA Merrill Lynch noted that after seven straight weeks of selling that reduced the long position by a third, investors have started buying the dip in DXY. Dollar strength weighed on the commodity complex, driving the underperformance in the energy and materials sectors.
  • Sector Performance:
    • Outperformers: Healthcare +0.86%, Tech +0.54%, Utilities +0.51%, Financials +0.51%, Consumer Disc. +0.44%
    • Underperformers: Consumer Spls. (1.15%), Materials (0.77%), Energy (0.76%), Industrials (0.36%), Telecom +0.09%

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