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.
Wednesday, December 20, 17
Equity Market Recap
· U.S. stocks end modestly lower to mixed, while Treasury yields (benchmark 10-yr) climbed to nine-month highs (2.50%) as the Republican tax bill cleared both the House and Senate and now waits for President Trump to sign the bill into law. All the focus remained on Washington, as has been the case the last few weeks, with the hopes and expectations for lower tax rates to boost spending and increase sentiment. The dollar, which had rallied into the FOMC rate hike and tax decision, has declined the last few days, while bond yields have spiked. Crude oil extended gains after a report of a drop in U.S. crude stockpiles. Economic data strong again as Existing Home Sales for November soars to its highest levels since 2006 and easily topped consensus estimates.
· After a surge of M&A deals announced Monday, corporate stock news has been relatively quiet (outside of a handful of earnings reports) into the Christmas holiday weekend. The Dow Transport index traded to fresh all-time highs, outperforming the broader market on the back of better top/bottom line earnings results from FDX overnight. Interest rate sensitive sectors (REITs, Utilities, and Telecom) remain weak following the jump in bond yields. The CBOE Volatility Index (VIX) pared losses after hitting lows of 8.9, its lowest level since Nov 24th.
· World stocks, as measured by the MSCI AC World Index, have risen every month this year so far. In fact, they haven’t had a down month since October 2016. If they were to close out December in the green, that would represent the first year ever without a single monthly decline https://goo.gl/txicip
· Gold prices advanced $5.40, or 0.4% to settle at $1,269.60 an ounce, rising for the fifth time in six sessions, as the U.S. dollar declined despite lawmakers approving a sweeping tax overhaul. Gold prices have climbed over the last week (off 6-month lows) amid the weaker dollar and still remain up about 10% for the year. In other metals, Zinc posted its highest close in more than 2 weeks as Goldman predicts more gains in 1H of 2018; Copper climbs for a sixth day and aluminum rallies as Chinese production slumps to a 21-month low
· WTI crude settled higher by 53c or 0.9% to settle at $58.09 a barrel following a larger-than-expected drawdown in crude inventories. The API said crude stockpiles fell -5.2M barrels, with gasoline inventories up 2M and Distillates with a draw of -2.9M barrels; the Department of Energy (DOE) said weekly crude stockpiles fell -6.945M barrels (Cushing build 754K barrels), with gasoline rising a smaller than expected +1,237M barrels vs. est. +2,300k and Distillates +769k vs. est. +250k. Natural gas prices fall 5.5c or 2% to settle at $2.637 mln btu’s
· The U.S. dollar dipped, extending its recent pullback despite the Republican tax cut package moving closer to becoming law as the Senate and House both passed the bill which is now headed to President Trump to be signed. The dollar index (DXY) traded to a 2-week low of 93.16 as the euro and Pound both advanced, but the greenback gained vs. the yen. The ZAR tumbles vs. the dollar as South Africa decides to nationalize Central Bank and enacts expropriation of land without compensation. The dollar also lost ground despite better housing data. Back to the plan, U.S. corporations will pay a one-time tax of up to 15.5% on the profits they have stockpiled abroad, which could boost demand for the dollar.
· Treasury prices fell, pushing yields higher for a third straight session after the Senate passed a tax bill that raises expectations of increased spending given lower corporate and individual tax rates which could stoke inflation expectations. The benchmark 10-year Treasury note yield traded above 2.49%, up over 3 bps and now up about 14 bps over the last 3-session; the 2-yr yield rose to 1.86%, now up about 4 bps the last few days, but the biggest jump came on the long-end, with the 30-yr yield touching 2.88%, up about 20 bps in 3-days as the curve steepened. Prior to this week, bond markets had been stagnant, but after the FOMC boosted rates last week for a 3rd time this year (and still see 3 more hikes next year), continued strong economic data, and tax reform passage, bonds have rolled.
· Existing-home sales for November rose 5.6% to 5.81M, handily topping the 5.53M estimate, and above the prior month reading of 5.5M (revised up from 5.48M); there was 3.4 month’s supply in Nov. vs. 3.9 in Oct. and inventory fell 7.2% to 1.67M homes; 1st-time buyers 29% of total sales; all cash 22%; investors 14%; median home price rose 5.8% from last year to $248,000
Sector News Breakdown
· Consumer Staples; in tobacco, PM shares slipped after Reuters reported the company has experienced irregularities involving clinical trials with e-cigarette product iQOS (shares of MO also declined in reaction) https://goo.gl/Ajtojh ; in food, GIS reported 2Q revenue that topped estimates and slightly raised its year organic sales outlook
· Restaurants; WEN was upgraded to outperform at Wedbush citing solid same-store sales growth and visibility into free cash flow generation; JACK was downgraded to hold at Jefferies after agreeing to sell Qdoba to Apollo Global Management for $305M saying it’s hard to see big upside from here; CMG shares slipped after reports public health officials are investigating reports of illnesses tied to a Los Angeles Chipotle restaurant https://goo.gl/QuLZQF
· Office Furniture stocks; SCS slipped initially after a disappointing Q4 EPS and revenue forecast, falling short of views amid a 3Q orders decline of ~6% in the Americas, with backlog down ~7% YoY (recall SCS recently lowered outlook) – shares of other office furniture makers, distributors and retailers active: HNI, MLHR, LEG, LZB, KNL, ACCO, ESND
· Weekly inventory data showed: The API said crude stockpiles fell -5.2M barrels, with gasoline inventories up 2M and Distillates with a draw of -2.9M barrels; the Department of Energy (DOE) said weekly crude stockpiles fell -6.945M barrels (Cushing build 754K barrels), with gasoline rising a smaller than expected +1,237M barrels vs. est. +2,300k and Distillates +769k vs. est. +250k
· In news; TELL active after WSJ reports Saudi Arabian Oil Co., or Aramco, had initial conversations about either taking a stake in TELL or agreeing to buy some of its fuel in the future https://goo.gl/AUHSHw ; NBL was upgraded to buy at Jefferies as thinks investors will become increasingly focused on the company’s 2020 free cash flow given its Leviathan investment; Seaport Global upgraded BAS, ESES, PEG and KEG; strength in the E&P space overall with oil bounce – PXD, FANG, CXO, APA, MUR, EOG all between 2%-4%
· Utilities; sector has posted (coming into today) 4% underperformance relative to the S&P 500 in the past week largely on tax reforms, as bonds have slumped and yields surged, making interest rate sensitive sectors (such as utilities) less appealing
· MLPs; SEP was downgraded at Barclay’s upon further assessment of the potential impact of an IDR buy-in and the limited visibility for organic growth opportunities, which may have the MLP depending on dropdowns.
· Large Cap banks were mixed again after rallying the last few weeks on tax reform bill passage expectations; group has posted strong returns on hopes that a lower tax rate will help boost profits; today, Wells Fargo was the latest to boost estimates and targets (for 18 large-cap banks to reflect more upside from lower taxes, higher interest rates, and lower cost of capital due to greater resiliency); ICE files for Bitcoin ETF with SEC, CNBC reported midday
· REITs; several analyst rating changes the last few days; today KeyBanc upgraded office sector to Overweight while remain Overweight in the industrial and data center REITs, and continue to recommend an Underweight weighting on healthcare and self-storage REITs (individually, KeyBanc upgraded BDN, HR and RLJ and cut DDR and NHI); Raymond James downgraded KRG in the shopping center sector, and upgraded O in the free-standing retail sector, and in the mall sector, downgraded CBL to underperform
· Payments, Lending and Services; NXTD shares jumped as the provider of secure-payments and encryption company was the latest to enter the cryptocurrency arena through its Fit Pay Inc. subsidiary; NETE also rises after announces the launch of a blockchain-focused business unit
· Biotech movers; Credit Suisse upgraded BIIB to outperform and raised tgt to $385 from $321 as the firm thinks a significant turnaround is underway for the company’s business, while they downgraded GILD to neutral as they think upside is limited until HCV expectations for 2018 and beyond are more reasonable; BIIB and IONS enter into a new collaboration agreement to identify new antisense drugs for SMA
· Pharma movers; ABBV’s Upadacitinib as monotherapy in phase 3 rheumatoid arthritis study met the study’s primary endpoints of ACR20 and low disease activity versus continuing prior stable methotrexate therapy; TXMD shares slide after the company said the FDA will re-review its therapy by the end of May (instead of January); CBIO 1.11M share Secondary priced at $9.50
· Hospitals; Morgan Stanley downgraded HCA & THC to underweight (though raised tgt to include tax reform benefits; HCA PT to $84 from $79; THC PT to $15 from $14), while upgraded QHC to equal-weight as sees managed care sector as more attractive for 2018. Says the marriages of CVS/AET and UNH/DVA’s Medical Group shows the drive in the sector to focus less on hospital visits and more on lower-cost places
Industrials & Materials
· Industrial & Machinery; group posting several news 52-week highs for UTX, FCX, EMR, DOV, TXT, DE, and CAT; EMR said Nov. trailing 3-month orders Increased 20% while underlying orders increased 11% excluding favorable currency translation of 5%
· Transports; FDX delivered an earnings and revenue beat, driven by much better-than-expected revenue growth in all segments, plus improved margins in Express, but Ground and Freight margins fell shy of street estimates; 52-week highs for FDX, UNP NSC and JBHT
· Aluminum sector; AA upgraded to Outperform at Credit Suisse and up target to $61 from $42 saying the aluminum market is set to tighten into 2018, as structural policies in China address captive coal plants and illegal smelters remain intact; Deutsche Bank downgraded CENX to hold as higher carbon costs weigh on earnings and consensus estimates are likely overestimating next year’s Ebitda; says CENX’s higher alumina, coal tar pitch and calcined coke costs will reduce 2018 Ebitda by 15% and 2019 by 20%; reiterates buy on CSTM due to growth opportunities
· Steel sector; Longbow Research upgraded shares of AKS, NUE, STLD and X to buy from neutral as channel checks show that sentiment has “clearly improved” since Sept. and the equities have potential to trade higher over the next 12 months; firm is bullish on the sector as equities can rise on improved domestic industry fundamentals, including accelerated demand growth and limited supply; raises 2018 estimates due to stronger price expectations
· Tankers & Shipping; UBS cut 4Q17 EPS estimates to reflect weaker than expected tanker rates. Firm said while tanker rates did increase sequentially due to seasonal strength, the uplift was not as strong as we expected and think consensus estimates will likely be cut in the coming weeks as analysts mark forecasts to market actual (GNRT, STNG buy;DHT, EURN, TNP neutral; TNK sell)
Technology, Media & Telecom
· Semiconductors; MU Q1 results and forecast handily beat estimates on strong demand with gross margins of 55% above views and analysts note DRAM and NAND remain strong, with DRAM Enterprise and Cloud shipments up 50% YoY and SSDs up 50% QoQ; MU maintained its target FY18 capex-spend of $7.5 bln, +/-5% (good for equipment names AMAT/LRCX)
· Software movers; RHT reported results that broadly came in above consensus expectations as strong renewal activity during the quarter drove large deal metrics – billings, total subscription, services revenue, operating margin, EPS, and CFFO/FCF all topped guidance and/or consensus estimates; SSC shares jumped as announced a 27% purchase of The Delaware Board of Trade Holdings, a blockchain based Alternative Trading System fully licensed by the SEC
· Hardware and component movers; BB Q3 results topped consensus as analysts note IP and service access fee revenue were above expectations once again as well/handset revenue was also above expectations and total software & services revenue rose 16% to $199M
· Media & Telecom; AT&T (T) announced late day it will “pay a special $1,000 bonus to more than 200,000 AT&T U.S. employees” due to tax reform passage and will also increase US capital spending by $1 billion; HMNY said it surpasses 1M subscribers which is up by over 6500% since the introduction of its $9.95 per month pricing model on Aug. 15; LAMR was downgraded to sell at Citigroup on valuation
· Internet; SFIX shares dropped after reporting quarterly results for the first time as a public company/Barclays said Q1 revs at the high end of the flash range, and EBITDA beat slightly; MELI was downgraded to sell at Citigroup saying lack of logistics could limit growth and profitability; AMZN said Fire TV customers will be able to browse the web on their TV