Market commentary provided by Hammerstone Markets, a division The Hammerstone Group, a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.
Equity Market Recap
· Stocks post their biggest drop since September (Dow fell 350 points), falling in broad fashion as concerns about President Donald Trump’s FBI controversy weighed on investor sentiment. The New York Times late Tuesday reported that Trump in February asked then-FBI Director James Comey to stop his investigation into former National Security Adviser Michael Flynn. The report cited a memo from Comey. It is the second controversial report in as many day that the White House is dealing with (yesterday Washington Post said Trump shared classified information with top Russian officials at a meeting last week). The controversy has raised questions about the president’s ability to implement pro-market policies (infrastructure spending, tax cuts/reform) that have driven stocks to recent records. The sectors expected to benefit the most from the policy push (financials, metals, industrials) were among today’s top decliners. Some of the top decliners in the S&P were financials – SCHW, CFG, MS, RJF, STI, BAC, ETFC, and CMA). Late day, it was reported that House Oversight Chair Jason Chaffetz said James Comey will testify before the committee next Wednesday (so watch for more market anxiety until then).
· Stock market weakness has boosted volatility as the VIX jumps over 40%, while defensive assets such as bonds and gold have surged and the dollar softened. Technology stocks, which have outperformed broader markets (NASDAQ came into the day at all-time highs), were among the top decliners today. Retail mixed as TGT reports strong results, but weakness in teen apparel with soft URBN/AEO results…results from Dow component WMT tomorrow. Transports fell across the board, with the DJ Transport index falling nearly 3% to lowest levels since November. The S&P 500 finished yesterday down -0.1% to finish at 2,400.67, for its 15th straight session with a daily change of 0.5% or less, the longest such streak since February 1969…that streak is now over!
· A few stats worth noting: 1) the S&P 500 falls through its 50-day moving average of 2,369; 2) the Dow Industrials post their biggest daily decline since September, led by big decline in financials; 3) defensive leads as gold rallies a 6th day and bonds hit lowest yields in a month; 4) SmallCap slide as the Russell 2000 falls more than 2% to the lowest in a month; 5) the CBOE Volatility Index (VIX) jumped as much as 40% to trade above 15, its biggest daily move since Sept/still, the one-day climb comes just a week after posting its lowest close since 1993.
· European stocks end sharply lower amid the latest political turmoil in the U.S. that is feared to put President Donald Trump’s pro-growth agenda at risk. The Stoxx Europe 600 index fell -1.2%, marking the biggest one-day percentage loss since September, while Germany’s DAX 30 which posted record highs in recent sessions, ended down 1.4% at 12,631.61.
· Total household debt rose 1.18% in 1Q from previous quarter, according to the Federal Reserve Bank of New York; Mortgage delinquency rate worsened to 1.67% from 1.57% prior quarter; Student loan delinquency rate decreased to 10.98% from 11.17% prior quarter and Student loan debt total at $1.344T from $1.31T in 4Q a change of $34b
· Oil prices managed to post gains after the EIA report shows U.S. crude and products stockpiles, as well as crude production dropped last week. WTI crude rose 41, or 0.8% to settle at $49.07 per barrel. Oil prices extended earlier gains after the EIA showed that domestic crude supplies fell by -1.8M barrels for the week ended May 12, the sixth weekly drop in a row reported by the EIA.
· Precious metals jumped, rising $22.30, or 1.8% to settle at $1,258.70 an ounce, its highest settlement since April 28th amid safe haven buying interest, as stocks fall broadly amid problems in Washington. Gold traded above its 200-day resistance of $1,256 an ounce and 50-day at $1,248 an ounce, propelled by the weaker dollar.
· Weakness again for the U.S. dollar, falling broadly across the board on the concerns out of Washington, raising sentiment concerns; the euro jumped to 6-month highs, trading highs of 1.1154 (off lows 1.1081 and best levels since the November election – and up 2% since start of week), while the dollar plunges vs. the safe haven yen to lows below 111 (down around -1.9% today), lowest levels since early May. The dollar index (DXY) traded to lows of 97.48, down over (-0.5%); British Pound rises 0.2% vs. dollar.
· Bonds soared as yield plunged amid the sharpest stock sell-off in 8-months after reports of an old memo from former FBI chief Comey showed Trump asking him to drop an inquiry investigating links between Russia and the White House’s ex-national security adviser Michael Flynn. Treasury yields were broadly lower as the 2-year note lost 5.3 bps to 1.246%, the 10-year yield fell over 10 bps to lows around 2.21%, while the 30-year bond lost 9 bps 2.90%.
Sector News Breakdown
· Retailers; TGT rallies (ahead of WMT earnings tomorrow morning) as Q1 EPS beat by 20c on better revs and comp sales falling less than expected (-1.3% vs. est. -3.6%); teen retailers AEO andURBN both reported 1Q EPS that missed analyst’s estimates, while AEO also provided a 2Q EPS forecast that also trailed consensus (GPS, LB, ANF, ZUMZ among movers in space); AEO noted mall traffic headwinds, especially early in the quarter, while URBN Q1 results missed revenue, margin, and earnings expectations; WWW was upgraded at Baird as Q1 report combined with mgmt meetings has strengthened conviction in margin/EPS recovery; LB reports earnings tonight, BONT, CATO, HIBB, PLCE, RL, WMT tomorrow
· Consumer Staples; CL rises after the NY Post reported CEO Ian Cook is mulling a sale of the company valuing the company at more than $88B, or $100 a share https://goo.gl/WLkSR6; GNCinterim CEO Moran buys 300K shares of stock on 5/12 according to filing
· Restaurants; RRGB shares surge on better than expected 1Q results (EPS beat by 32c) on better comps, and raised year outlook (also upgraded at Bank America); JACK news mixed as news of a potential Qdoba sale (mgmt said they are re-evaluating potential alternatives with respect to Qdoba) drove shares higher following mixed results and management lowering FY17 guidance.
· Auto movers; auto retailers AAP and AZO both mentioned positively at Raymond James ahead of earnings next week though cut targets on both, but auto industry was broadly lower; Ford (F) said to cut 1,400 jobs in US and Asia
· Inventory data: 1) the Department of Energy reported a smaller than expected inventory draw of -1.75M barrels, vs. est. -2.67M, while gasoline fell -413K barrels vs. est. -1.0M, though distillates fell -1.94M vs. est. -1.45M; 2) The American Petroleum Institute (API) reported a climb of 882,000 barrels in U.S. crude supplies for the week ended May 12; showed a fall of 1.8 million barrels in gasoline supplies, but inventories of distillates were up 1.8 million barrels
· Energy analyst changes: Jefferies upgraded COP to buy from Hold and raise price target to $59 from $55 saying aggressive divestitures have repaired the balance sheet more quickly than we expected; MRO was cut at Jefferies to hold as lower oil prices will pressure MRO’s cash flow, especially with still high capex plans
· Utilities/Alternative power; utilities outperform on lower bond yields/rotation into defensive assets today as high beta stocks slide; PLUG downgraded to sell at Roth Capital on obvious customer attrition and poor quality of revenue, earnings, and gross margins going forward.
· Large Cap banks under pressure as bond yields tumble (lower lending margins) as well as concerns the ongoing FBI controversy with the Trump administration will cause delays with his push forward with his pro-growth agenda (tax reform, etc.); shares of BAC, GS, MS, JPM among those falling; financial weakness was broad based for brokers, insurance, banks
· Insurance; CNO said that President Gary Bhojwani will succeed Edward Bonach as CEO; PGR to buy back as much as $250M in shares/reports earnings
· Lending and Finance; SQ was downgraded to neutral at BTIG following investor day, and removing price target of $20 following the achievement of that level
· REITs; no bounce off lows for mall REITs, as SPG, SKT, CDR, MAC, GGP among those that remain under pressure on weak retail earnings; prison REITs CXW and GEO fall, as JPM investors voiced concerns regarding the bank’s role in financing debt for companies, Bloomberg reported
· Healthcare services, suppliers; WBA/CVS shares traded lower after a CNBC report that Amazon may be seeking to enter the pharmacy market; note RAD/FRED shares weak yesterday after FTC said to seek more information on Walgreens’ deal for Rite Aid; Jefferies initiated Rx distributors with hold ratings on ABC, CAH and MCK
· Large Cap Pharma; ABBV slipped after the PTAB ruled against ABBV and in favor of CHRS and invalidated a Humira rheumatoid arthritis method of use patent; OME received an SEC subpoena May 12the related to Title XI loans; generic and specialty pharma (ENDP, VRX, MNK) slipped on negative sentiment in the sector; CNCE falls as FDA places Concert Pharma’s mid-stage study of CTP-543 in hair loss disorder on clinical hold pending review of non-clinical toxicology studies; OMER announces completion of IgA Nephropathy Cohort in OMS721 phase II clinical trial
· Biotech movers; CLVS was upgraded to overweight at JP Morgan; ADRO expands clinical collaboration with MRK to evaluate CRS-207/Pembrolizumab combination; XLRN initiated new sell at Goldman Sachs with $20 tgt citing lack of catalysts; PBYI shares jumped ahead of next week’s FDA advisory panel on neratinib.
· Medical equipment and devices; VIVO shares slipped as FDA and CDC warned about risk of inaccurate results from certain lead tests manufactured by Magellan Diagnostics, a division of VIVO
Industrials & Materials
· Materials & Machinery; ADM said cutting soy, corn, wheat, rice production costs in Argentina amid weak commodities price cycle; industrial and E&C/building stocks (FLR, MTZ, PWR) underperform on fears the ongoing Trump controversy in Washington will deter the push for infrastructure policy push by the administration (weakness in metals – FCX, X, NUE – as well)
· Transports; Transports underperform as the TRAN index down over 2% (touched lows of 8,810) – all components in index lower, led by MATX and airlines (AAL, AAL); DAL said SkyMiles members can earn miles for every Lyft ride; receiving one mile per dollar spent on all rides, with unlimited mileage earning, among other benefits; LUV $2B buyback and boosts dividend
Technology, Media & Telecom
· Internet; Pandora (P) was removed from the Americas Conviction List at Goldman Sachs (since adding to the CL on Oct 4, 2016, P is down 36% vs. Russell 2000 up 12%); just profit taking Internet space after huge rally (AMZN, FB, NFLX, GOOGL); BABA reports tomorrow morning
· Semiconductors; after jumping over 11% yesterday ahead of its analyst day, shares of AMD are paring those gains, after the company highlighted components of the company’s core strategy with a primary focus on developing high-performance technologies/is targeting gross margins of 40%-44% and annual adjusted earnings of greater than 75c a share long-term/showed off its coming “Epyc” CPU offering and Radeon GPU product for data-center servers; PLAB Q2 EPS/revs missed consensus and Q3 guidance also below estimates; QCOM files lawsuit against four ofAAPL’s suppliers for non-payment of royalties; overall pullback in semi’s (biggest drop in 5-months) after group strength has fueled the tech advance to all-time highs as of yesterday
· Media & Telecom; DISH and AMZN are in talks that would make the giant internet retailer a foundational customer of the wireless network Dish Network hopes to launch within the next few years, Satellite Business News has learned https://goo.gl/8eyFgR; WIN upgraded to outperform at Raymond James noting shares have fallen ~52% since 8/5/16 compared to a 10.9% gain in the S&P 500; BZUN in-line Q1 results, while Q2 rev guidance mid-point misses estimates; DIS was downgraded at Macquarie and cut tgt to $105; towers broadly higher today (SBAC, AMT, CCI) amid press reports that Amazon is in early-stage talks with DISH to possibly become a “foundational customer” of the wireless network that Dish plans to build over the next few years; Bloomberg noted but 4 of the 30 media industry stocks in the S&P 1500 are declining today, with GCI, MDP, AMCX all down at least 3%
· Hardware, Software and Component movers; AAPL shares a big decliner with broader markets/also confirmed that it had completed a trial of its first-ever iPhones to be assembled in India;CSCO reports earnings after the close; ACXM shares dropped as Q4 results in-line to slightly better, but year profit forecast fell short of consensus