Monday, December 21, 2009

Morning Note...

Futures +50bps this morning on relatively light holiday news flow.  As someone said this morning, “if you already expected light action due to the holiday, then the winter snow blanketing the northeast should truly dampen today’s activity…”  (See quote section below for the impact of the storm in retail terms.)  In corporate news, Walgreens (WAG) and ConAgra (CAG) reported better-than-expected earnings, and CAG also raised forward guidance.  There is some M&A on the tape, as SNY announced its intent to buy CHTT (maker of IcyHot, Dexatrim diet pills, Bullfrog Sunblock, and Gold Bond Powder, etc) for $93.50/share, which represents a sizeable 30% premium.  Further, TEX has agreed to sell its mining business to BUCY for $1.3B.  In political news, the watered-down health care bill made its way out of committee last night, and is inching closer toward final Senate passage later this week.  If and when it passes the Senate, this bill will need to be reconciled with the House-passed version which Obama already signed.  Here’s a solid summary of the Bill from research boutique Monness, Crespi, Hardt:

Insurers Lose, Pharma Wins in Amended Senate Bill…The Democrats have secured the 60 votes in the Senate necessary to pass their healthcare reform bill. Despite avoiding the “public option,” the bill may present a significant long-term threat to the HMOs, due to a last-minute provision inserted into the Manager’s Amendment. On the other hand, pharmaceutical companies, including the cosmetic companies, avoided significant damage.

Bottom line for the HMOs: good in the near term, terrible in the long term. Quite a bit of the legislation impacts the private health insurance industry. Among these include the excise tax on “Cadillac plans”; the individual and employer mandates; guaranteed issue; cuts to Medicare Advantage; restraints on health savings accounts; and constraints on medical loss ratio and executive compensation. Overall, if enacted, the bill will increase volume and price in the near-term, especially for those insurers not heavily exposed to Medicare Advantage. Over the long term, the excise tax on “Cadillac plans” may drive more and more individuals into the hands of non-profit insurers, because non-profits appear to have been exempted from the tax in certain circumstances. See our discussion on page 2 for further detail.

“Botax” is eliminated... In other news, the cosmetic industry was spared a meaningful problem. The original Senate bill included a 5% excise tax on elective cosmetic surgery procedures, such as Botox, which would be paid by the patient. This tax was replaced by a 10% excise tax on tanning salons. The amendment eliminates one overhang on aesthetics companies such as Allergan, Medicis, and Ipsen.

Taxes on medical devices... The bill applies a $2 billion annual tax on the medical device industry, exempting items less than $100, to be imposed relative to a company’s market share.

Pharma comes out smelling fine… Similarly, the bill includes a $2.3 billion annual tax on innovator drug companies, to be imposed relative to a company’s market share. From the pharma industry’s perspective, the tax in and of itself amounts to about 1% of annual revenues; its harm would come from any later increases in the tax. Pharma avoided its worst-case scenario, as it succeeded in scuttling measures to allow drug reimportation from Canada, and measures to allow the government to negotiate drug pricing. The elimination of this overhang should lead to multiple expansion for the large-cap pharma group, including Pfizer, Merck, Bristol-Myers Squibb, and Eli Lilly.

Assuming light volumes this weekend and next, expect the “window-dressers” (i.e. those “topping up” positions) to have their way marking names more favorably into year-end 2009.  Much has been made of Friday’s quad-witching volume, but BTIG’s Mike O’Rourke breaks it down quite neatly: 

Trading was already fairly slow in recent weeks but now, with the Eastern Seaboard of the U.S. buried in nearly two feet of snow during Christmas week, they will be all but officially shutdown.  Volumes did pick up on Thursday and Friday, but both instances were due to artificial means.  Trading related to Citi’s offering Thursday added roughly 2.5 Billion shares to the daily volume, in which case, it was only modestly heavier than the 8.2 Billion shares of volume the market has averaged since the start of November.  The Average Daily Volume for 2009 is 9.9 Billion shares.  Friday’s activity was bolstered by both expiration and an S&P rebalancing to 12.5 Billion shares, but that does not even crack the 20 most active sessions of 2009, 65% of which occurred from late February through the late March. 

BERN raises estimates in Managed Care space with Bill passage – UNH, CO, AET, HUM, WLP, CVH.  BEN announces one-time $3 dividend.  AA upped at BCAP, MSCO on Saudi Maaden deal.  BARD ups STX.  GIGM missed earnings estimates.  BCAP upgrades INTC.  GSCO ups MOS – positive mention in Barron’s as well.  Cramer bullish PCS.  GSCO adds POT to Conviction Buy List.  FBRC ups RSO.  MSCO cuts GENZ. 

Asia mixed overnight.  Europe up roughly 1% on light volume.  USD -15bps.  Gold +67bps.  Oil +50bps.

Brightpoint News

Brightpoint PreMarket (yest close/premkt/% change/volume):

S&P 500 PreMarket (last/% change prior close/volume): 
TEREX CORP                  21.01    +9.37% 142417
ALCOA INC                    15.18    +4.12% 587789
CONAGRA FOODS           23.02    +3.88% 30195
HUMANA INC                  45.16    +3.74% 170
WALGREEN CO               37.95    +3.58% 29568
FREDDIE MAC                1.34      +3.08% 175340
RANGE RESOURCES        52.56    +2.82% 8600
PAYCHEX INC                 31.73    +2.62% 2442
EXPRESS SCRIPT           86.57    +2.6 %  2600
ABERCROMBIE & FI        35.63    +2.59% 100
DR HORTON INC             10.80    +2.56% 6200

Today’s Trivia:  Most of you know that December 21st marks the Winter Solstice and thus the shortest day of the year.  But why is this?

Yesterday's Answer:  Frenchman Jules Bengue introduced his menthol cream to the USA in 1898 with the name “BenGay.”   

Best Quotes:  “The Showdown:  Mother Nature vs Santa

This storm is a really big deal.  The 3 largest shopping days of the year are Super Saturday, Black Friday and December 26th.  There is no question a large number of retailers had to miss plan for the weekend and those sales will be VERY difficult to make up considering there are only 4 shopping days left until Christmas.  It's certainly not going out on a limb to predict major underperformance for retail this morning.  Retail bears always worry about not owning the group into January given the power that a good December vs low expectations could have on earnings/valuation.  This storm substantially adds to the bear case as it basically takes the potential for any large industry sales beat off the table.   However, indiscriminately selling retail across the board this morning is not a good plan.  Investors should be thinking about today as an opportunity b/c I'm sure there will be stocks that don't react and enough and others that overreact ...   

Who has the most exposure?  We would expect M, BJ, SKS, TJX, PLCE and JCG to be the stocks that get picked on the most.  Whereas, companies like COST, ROST & JWN (minimal Northeast exposure) and AMZN (internet) should be the winners.

It should also be of note that casual dining names will continue to be a focus today.  The group had a big move higher Friday when DRI said sales improved in December.  Over the weekend widely followed Knapp Track data was released better than expected.  November came in (4.7%) which was a sequential improvement from October (4.9%).”

--BCAP retail desk

No comments:

Post a Comment