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.
Monday, January 8, 18
Equity Market Recap
· U.S. stocks end mixed and little changed, with the tech heavy Nasdaq Composite outperforming (despite a pullback in the biotech sector), while the S&P 500 Index remained virtually unchanged after its best week in 13 months. Major averages closed at or near the record highs they attained on Friday, while the dollar rebounded following last week’s losses. The S&P 500 Index shrugged off early weakness to extend its rally to start the year to five days while the NASDAQ advance was led by semiconductors. European equities added to the biggest weekly advance since April, while Asia was higher (Nikkei was closed). Markets continue to surge on hopes and expectations regarding the corporate taxes passed late last year, as analysts note the benefits to balance sheets for financials, industrials, healthcare and consumer discretionary. Bitcoin dropped as much as 17% before paring losses on concerns about regulation and demand from Asia. Earnings kick off later this week, starting with big banks JPM and WFC Friday.
· Early market movers a result of several key conferences taking place this week: 1) Tech moving as the Consumer Electronics Show (CES) started in Las Vegas; 2) Healthcare active after several companies’ issue guidance ahead of the JP Morgan Healthcare conference (stared today); 3) Retailers and Consumer related stocks also active amid several guidance forecasts ahead of ICR Conference 2018 in Florida (started today – 3-day conference).
· Federal Reserve Bank of Cleveland President Loretta Mester said Friday the strong U.S. economy and low unemployment level make the case for four rate hikes in 2018. San Francisco Fed President John Williams in another Reuter’s interview on Saturday called for three rate hikes this year, arguing that the already solid economy will get a boost from the Republican tax reform. However, Federal Reserve Bank of Atlanta President Raphael Bostic said today he’s “comfortable continuing with a slow removal of policy accommodation.”
· WTI crude oil advanced 29c, or 0.5%, to settle at $61.73 per barrel, while Brent crude settles highs by 16c to $67.78 per barrel, adding to last week’s rally and rebounding from a -0.7% decline on Friday. Oil prices continue to steadily march higher with WTI and Brent posting weekly gains of 1.7% and 1.1%, respectively last week, boosted by a seventh-straight drop in U.S. crude supplies and ongoing concerns over unrest in Iran.
· Gold prices fell -$1.90 to settle at $1,320.40 an ounce, its first decline in 12 sessions amid a rebound in the U.S. dollar (gold prices posted its 4th straight weekly gain and closed at its best levels since mid-September on Friday).
· The dollar rebounded on Monday, rising firmly against the euro (0.5%) but was flat against the Japanese yen (above 113) following commentary from several Federal Reserve members hinting that at least three interest rate hikes are on the table in 2018. The dollar index (DXY) advance came mostly at the expense of the euro, though the Pound also slipped (comes after a week of declines for the greenback vs. rival currencies last week – and a 10% decline in 2017). Crypto currencies declined, led by weakness in Bitcoin and Ripple.
· Bonds end little changed from Friday’s closing levels, as the yield on the 10-year benchmark note held at 2.478%, while the 2-year note yield slipped 1 bps to 1.956% and the 30-year bond yield was flat at 2.81%; bonds slipped early, lifting yields after somewhat “hawkish” Fed commentary this weekend but was followed by “dovish” comments by the Fed’s Bostic today. Another active week of auctions with as the Treasury Department set to issue 3-year note, 10-year note and 30-year bond arrive this week.
Sector News Breakdown
· Retailers; KSS rises as boosts FY18 EPS view to $3.98-$4.08 compared to prior forecast of $3.60-$3.80 (est. $3.79) and said total and comp sales for November and December combined period rose 6.9%; CROX boosted its Q4 sales guidance to $195M-$198M from prior $180M-$190M; SHOO said it now sees year EPS at the high end of range and prelim Q4 sales $364.4M vs. est. $360M; GCO said it sees year EPS at low end of recent guidance; FIVE sales performance (guides year EPS $1.09-$1.16 vs. est. $1.17); PLCE raises 4Q and Year comparable retail sales and adjusted EPS forecast on higher retail selling metrics; HIBB upgraded to buy at Canaccord
· Restaurants; PLAY shares fall after lowered profit and sales guidance; DRI said it expects the federal corporate tax cut to fatten profits, and it promised to pass along some of the money to employees; WING said Q4 prelim domestic comp sales up 5.2% and co-owned 4.6%
· Casino, Lodging & Leisure; Stifel on leisure space as they names SEAS, NCLH, LVS their Top Ideas for 2018 and raising target prices on SEAS/LVS as expect a strong global consumer macro environment to persist into 2018; in theme parks, Wedbush raises price targets for FUN (to $72 from $69) and SIX (to $76 from $67); in lodging, Raymond James upgraded HLT to strong buy, Hyatt (H) to outperform and HST to outperform (downgraded SHO)
· Banks remains strong with 52-week highs for financials BLK, TROW, RJF, CBOE, NDAQ, BRK/B, V, CME, AFL, ICE, CMA in the S&P 500 today
· Mortgage insurers ESNT, MTG, NMIH and RDN all upgraded to buy at Deutsche Bank amid fresh optimism about tax cuts and new Private Mortgage Insurer Eligibility Requirements (PMIERs); says outlook for forward earning has “materially increased’; revises ests. to take into account lower U.S. corporate tax rate; macro outlook suggests strong future
· Brokers and financial service stocks; Goldman Sachs bullish on industry as 2017’s appreciation might have been “relatively muted,” with much of the rally explained by higher rates/markets and tax cuts. Goldman upgraded LAZ to buy as large-cap M&A may accelerate as tax uncertainty fades and upgraded SF as financial M&A may return amid higher SIFI threshold, pause in regulations – firm prefers ETFC, SCHW over AMTD, as commission price cuts are more likely than not in 2018 and said potential infrastructure bill may benefit SPGI, MCO; downgraded MKTX to neutral as risk/reward is more balanced; separately, AMTD upgraded at Barclays; IVZ was removed from focus list at JP Morgan and was downgraded at Bank America to neutral (while the firm upgraded TROW to buy)
· Other movers; banks continues to benefit on positive analyst commentary given rising rate environment and benefit from tax reform/lower corporate tax rate; Morgan Stanley upgraded STI to overweight and BBT to equal-weight; in payments, WU upgraded to positive at Susquehanna saying the elixir of a blockchain opportunity may buoy the shares; FNMA and FMCC shares dropped for a 10th day as Compass Point recently noted a Bloomberg story stating the Senate is considering proposal that would make owners of GSE preferred whole or close to it, while owners of common shares could fare worse
· Biotech among the day’s top decliners, led lower after several disappointing revenue guidance outlooks to start the JP Morgan Healthcare conference (see details below)
· Pharma and Specialty/Generics; PFE will stop trying to discover new drugs for Alzheimer’s disease and Parkinson’s disease, WSJ reported https://goo.gl/RrLWcR; FMSwill continue to look for acquisitions even if that leads to a temporary rise in debt, its CEO said https://goo.gl/ggoMbi ; ACOR is exploring a sale of the company, the WSJ reported late Friday, https://goo.gl/me5mKw ; ALXN shares fell after saying it sees tax rate rising to 16%-18% after tax reform
· Gene editing sector under pressure in biotech, leading to a decline of as much as 2% for the IBB today; EDIT, NTLA and CRSP shares dropped sharply, with Bloomberg noting a possible delayed reaction to a January 5th publication suggesting there may be some pre-existing immunity to Crispr technology
· Biotech movers: a whole slew of companies issuing guidance ahead of the JPM Healthcare conference which started today;; AXON shares fell after saying it would stop development of its main experimental treatment after it failed another trial; AGEN announces $230M royalty monetization with HealthCare Royalty Partners; ALNY and SNY to restructure their RNAi therapeutics alliance to streamline and optimize development of certain products for the treatment of rare genetic diseases
· M&A news in biotech; CELG agreed to buy privately-held blood-disease biotechnology company Impact Biomedicines for as much as $7B https://goo.gl/GAQe34 ; ABLX shares jumped after NVO offered 2.6 billion euro ($3.1 billion) bid for Belgian biotech group Ablynx as it seeks a new source of growth by bolstering its treatments for rare blood disorders https://goo.gl/RCag2S
· Healthcare services; TDOC shares dropped after guiding 2018 revs to $350M-$360M below est. $364.4M and Q4 revs in-line at $76M; INOV shares dropped after Q4 revs $113.5M-$115M fell below the $118M estimate and sees significant decrease in provision for income taxes
· Medical equipment and devices; BABY shares fall to more than 1-year lows after expects Q1 and FY revenue below estimates; HOLX said preliminary year results are at top of prior guidance of $775M-$790M and sees non-GAAP effective tax rate 23%-24%; NUVA said it sees flat Q4 sales and mid-single-digit growth this year; PODD, LMNX also provided outlooks; NVRO shares jumped after issuing upbeat revenue guidance of $97.4M-$97.9M vs. est. $90.4M and receives FDA approval for Senza II(TM) Spinal Cord Stimulation System Delivering HF10(TM) therapy; EXAS guided Q4 revs above views but selling price weighed on shares
Industrials & Materials
· Industrial & Machinery; CAT upgraded to overweight at JP Morgan saying the new tax law is likely to extend the cycle for CAT’s N.A. construction business and supports higher free cash flow; raises PT to $200 from $144; TXT announced late Friday a restructuring across its business segments; UTX upgraded at Goldman Sachs to buy (2ndanalyst upgrade in a week for stock); ALB upgraded to outperform at Baird as believe the company is the best way to play the multiyear lithium growth cycle
· Transports; stocks made highs again (though some weakness in airline sector); led by gains in truckers and rails; car rental names (CAR, HTZ) were weak initially; FDXmentioned positively in Barron’s this weekend
· Metals & Mining; in steel sector, Bank America lifts Q118E HRC to $675/t from $650 and see prices peaking in Q218E at $720 from a prior $625/t., with a new 2018E at $680, up from a prior $625; ATI upgraded to outperform at Cowen with $32 tgt based on set-up that would improve ests., accelerating sales/EPS gains and positive FCF prospects
· Paper & Packaging sector; KeyBanc noted the sector active after industry information provider RISI reported on Jan. 5 that WRK informed its customers it will raise coated recycled paperboard (CRB) prices by $50/ton (shares of GPK also moved); RBC said the price hike attempt comes after the last industry wide attempt ($50/ton in February-March 2017) fell short, leading to a $35/ton decline in RISI’s published prices in November (targets raised on IP, PKG at Wells Fargo)
· Aerospace & Defense; ARNC tgt raised to $33 at Longbow as believe the Street has misjudged the underlying intrinsic value of the EP&S segment by $2-3, after looking at the topline and margin potential; FLIR upgraded at SunTrust citing excellent visibility, increasing aircraft production rates, sustained aftermarket momentum, and a strengthening U.S. defense spending upcycle; BA tgt raised to $430 at Melius Research, saying the market is still underestimating the possible upside to BA’s free cash flow and EPS (Bloomberg); HEI was upgraded to buy at Jefferies
Technology, Media & Telecom
· Internet; GRUB downgraded to neutral at Wedbush but up tgt to $70 saying while they continue to like the company’s market opportunity and competitive positioning, believe the current peak valuation reflects it; Pandora (P) downgraded to equal-weight at Morgan Stanley with $6 tgt saying growing ad revenue in ’18 is no longer a given as Pandora faces engagement and monetization challenges; SNAP downgraded to hold at Jefferies after reaching price target/said fundamental execution needs to be shown before we can be more positive on the name
· Semiconductors; CRUS downgraded at KeyBanc on valuation; PLXS upgraded to buy at Longbow with a 12-month target price of $72 seeing the shares ignoring the EPS accretion potential from accretive deployment of PLXS’s approximately $570M of offshore cash toward an expanded share buyback or debt reduction; AMAT upgraded to Strong Buy at Needham and raising tgt from $66 to $72, and naming AMAT our favorite large-cap SemiCap for CY18 (cut KLAC); coming into today, the semiconductor industry, as measured by the Philadelphia Semi Index (SOX), increased a 38% gain in 2017 and has tacked on another ~550bp in the early days for 2018. This compares to performance of the broader NASDAQ which has turned out gains of 28% in 2017 and ~250bp YTD; NVDA new 52-week high as Uber to deploy Nvidia’s Technology for Self-Driving
· Software movers; Barclay’s said CRM is Top Pick and believe that the combination of healthy growth and ongoing margin improvements, combined with reasonable valuation levels, should drive another year of strong performance for shares (firm also upgrades SPLK, MULE and COUP all to overweight and downgrading CTXS, FIVN, HDS and APPN); MB upgraded to buy at Jefferies as see multiple positive drivers outweighing risks; APPN downgraded to hold at SunTrust on valuation; ULTI was upgraded to buy at Mizuho and raised tgt to $250 from $200; in video games, EA was upgraded to outperform at BMO Capital saying reaction to “Star Wars” is overdone
· Hardware and Component movers; GPRO plunges as cut its revenue guidance (to $340M vs. est. $472M) and workforce and was also downgraded to neutral at Longbow saying is likely to negatively preannounce fourth quarter earnings this week (which they did today); in hard-disk drives, STX shares outperformed on a report from Seeking Alpha that it invested in the Series A and B of Ripple, owner of 61% of XRP, a top-three cryptocurrency https://goo.gl/n7r3f9