Market Review: January 9, 2018

Scott GreenDaily Market Report

Closing Recap
Tuesday, January 9, 18
Equity Market Recap
·      Major U.S. stock averages continue to churn higher, with the S&P 500 and Nasdaq Composite touching a record all-time best all six days of 2018 thus far while the Dow Industrials traded to a new high after a small blip lower yesterday. Today’s rally was again broad based, but led by strength in yesterday’s laggards Healthcare and Financials. The Dow Transport index posted new record highs as the index touches trades above 11K for the first time, led by truckers and rails. Interest rate sensitive utilities underperformed as bond yields jumped, making dividend paying stocks less attractive. The yield on the benchmark 10-year touched the highest levels since March, rising above 2.54%, while the 30-yr approached 2.9% while the dollar climbed and oil prices touched a fresh 3-year high. It has been a “risk-on” day after day for global equities with Asia and Europe also advancing overnight amid continued support from an expanding global economy, growth in corporate profits and enthusiasm over the Trump administration’s tax cuts.
·      Lots of news/guidance in the retail/consumer sector as well as Healthcare given the ongoing ICR Conference and JP Morgan Healthcare conference taking place this week. Next market catalyst, quarterly earnings, with large cap banks JPM and WFC kicking off results this Friday. There have also been a few Fed member speaker moving markets the last few days. Not all three major indices also broke key milestones in the first trading week of 2018, as the Dow, S&P 500 and Nasdaq closed above 25,000, 2,700 and 7,000, respectively, for the first time ever, and at this point, new milestones will be reached by next week as well
·      Gold prices slumped -$6.70, or 0.5%, to settle at $1,313.70 an ounce, falling a second straight session after having its 11-day win streak snapped yesterday, as the dollar rebounded from more than 4-month lows late last week. Last week, gold prices touched their strongest since Sept. 15 at $1,325.86. Gold slipped on the aforementioned firmer dollar on concerns about instability in Europe, and rotation into riskier assets as stocks post fresh intraday highs
·      Energy futures rise, with WTI crude up $1.23, or 2%, to settle at $62.96 per barrel, marking its highest finish on Nymex since Dec. 2014 and extending gains from a strong start to the week. Momentum has been to the upside for oil with Iran issues, OPEC extending production cuts and oil rigs falling the last few weeks. Investors await an update on U.S. supply (API data tonight and EIA tomorrow)
·      The U.S. dollar made it a second straight day of gains (3rd against the euro) trying to extend its rebound after ending 2017 with a 10% decline and starting off the year lower; the euro stretches its losing streak to 3-days around 1.1933 after topping at 1.2089 on January 4th, down due to concerns about upcoming Italian elections, and lingering concerns about Brexit; the dollar fell against the Japanese yen on news that the BoJ has cut back its bond purchases in the long; Bitcoin prices posted small declines, holding under $15,000
Bond Market
·      Bonds dropped and yields popped, pushing sharply higher; the benchmark 10-year yield rises over 6 bps to above 2.54%, its best levels since March while the 2-yr is up at 1.96% and the 30-yr rises to 2.88% as long end of the curve sees sharper spikes; (10-yr yield hit its 2017 peak on March 10 at 2.58%) – yields got a boost in the wake of the Bank of Japan’s decision to trim its purchases of longer-dated debt overnight. The bank trimmed purchases of government bonds with 10 years to 25 years left to maturity by ¥10 billion ($1.7 billion). The U.S. Treasury sold $24B in 3-year notes at a yield of 2.08%, the highest yield since May 2007 (vs. 2.086% w/I prior) with a bid-to-cover at 3.13 vs. 3.15 prior (demand) and indirect bidders awarded 54.9% of auction.
Sector News Breakdown
·      Retailers; TGT raises Q4 EPS view to $1.30-$1.40 from prior $1.05-$1.25 and said holiday com sales up 3%-4% (also raised year outlook); URBN shares fell as posted a 2% comp for Holiday (Anthro +2%, UO +1%, Free People +5%), below 4Q17 consensus for +3% and a deceleration from the early December trend of ~4%; AEO guides Q4 EPS 42c-44c vs. est. 44c on comp sales up 8%; UAA was downgraded to negative at Susquehanna saying brand at risk worsened by promo env’t; EXPR sees Q4 EPS 31c-33c, below estimates 43c and comp sales down (1%-2%)
·      Sporting goods stores fell after BGFV guided Q4 EPS to an unexpected loss on revs $243.2M, below est. $263.47M and comp sales fell (-9.4%) saying extraordinarily dry and warm weather conditions in most of the company’s major markets had a significant negative effect on sales of cold weather products
·      Consumer Staples; in beauty products, ELF cut compound annual net sales and adjusted Ebitda growth of 10%-15% from fiscal 2016 to 2019, down from 20% for each;LMNR shares fell despite beat on EPS/revs
·      Casino, Lodging & Leisure; in cruise lines, CCL was upgraded to outperform at Credit Suisse as no longer cautious on the stock following the 33% underperformance of the cruise sector relative to lodging since September; gaming stocks advanced midday with LVS and MGM higher
·      Energy stocks get a lift as oil prices jump to fresh 3-year highs, best levels since Dec 2014; Jefferies upgraded the energy space to bullish from modestly bullish saying the fundamental backdrop for the sector has improved materially and notes the bullish inventory data recently released from China, where inventories declined again in November, following a material draw in October; APA said it sees 4Q production to be at high end of guidance range of 218,000-224,000 per day BOE driven primarily by growth in Permian Basin.
·      Coal sector; MKM Partners reiterated buys on ARCH, BTU, TECK and raised price targets noting 2017 was a good year for coking coal equities in general, and they expect that to continue in 2018/said valuations are done off of 2019 estimates that assume $150/metric ton coking coal average prices. The longer that prices stay above our increased 2018 assumptions (now $200, $180, $170, $160/metric ton by quarter versus our previous $190, $170, $160, $150/metric ton by quarter), the more valuations should benefit for more cash on hand, debt paydown
·      Refiners; Barclays said the sector is impacted more than any energy sub-sector from tax reform, and raised tgts by 18% on average (ANDV $162 from $147, CVRR $17 from $14, HFC $65 from $57, MPC $97 from $76, PBF $49 from $39, PSX $111 from $100, VLO $125 from $108
·      Utilities/alternative power; CAFD was downgraded to neutral at JP Morgan; utility prices and other dividend paying sectors came under pressure as bond yields soared again, with the 10-yr trading to best levels since March (2.53%), making dividend paying stocks less attractive
·      Insurance sector; PFG was downgraded to Market Perform at Wells Fargo saying valuation has reflected the relative growth in earnings (prefers VOYA); in non-life, Wells Fargo downgraded ALL to Market perform and upgraded AXS to market perform; Goldman Sachs maintained its neutral coverage view on the U.S. Life Insurance industry as there is still pressure from a flattening yield curve, but note that the potential for a continuation of a restructuring in the life insurance industry related to a greater supply of life reinsurance capital may allow US life insurers to optimize/de-risk balance sheets (firm upgraded PFG to buy)
·      Alternative investments; Goldman Sachs said they sees more share price divergence and remains constructive on alternatives and trust banks (the firm adds KKR to conviction list; top picks and upgraded VRTS to neutral and downgraded AMG to neutral) – bullish on alternative managers (top ideas KKR, APO, BX), as fee-related earnings grow at 25% CAGR through 2019
·      Payment systems; PYPL upgraded to outperform at Cowen ($88 tgt) as believe most of the bear theses have not and will not play out (margin compression, outsized eBay renewal concerns, take-rate collapse); GPN was upgraded to overweight at Stephens; PAYX downgraded to neutral at Bank America saying the stock may take a rest after its 24% rise during the past five months, and tax-reform benefits seem priced in
·      Consumer Finance; ELLI upgraded to Overweight at Barclays and raised target to $114 from $100 saying mortgage volume processed by the company’s platform will accelerate for the next two years; Wells Fargo upgraded SYF shares to Outperform and target upped to $44 as recognize the stock has run but say they see more upside (said for the issuers near-term, they rank the stocks AXP, COF, SYF and DFS)
·      REITs; BMO Capital downgraded BXP and HR to market perform saying model of higher interest rate and capital rate assumptions reduces their target NAV on the REIT; A Blackstone Group (BX) affiliate is to buy Pure Industrial Real Estate Trust in an all-cash deal valued at about C$2.48 billion ($2 billion), the Canadian REIT said
·      Pharma movers; TEVA upgraded at Mizuho to buy with $23 tgt and also benefits from MNTA disclosure that its 40mg version of Teva’s best-selling drug, Copaxone, may not be approved until the latter half of this year; ARDM falls ahead of Ad Com review of inhaled ciprofloxacin for chronic non-CF lung infection; AGN rises early despite guidance falling short of consensus; JNJ among the top Dow gainers on the day in a broad bounce in pharma/biotech
·      Biotech movers; the biotech sector rebounds after the IBB fell over 1% yesterday ahead of the JPM Healthcare conference; ZIOP shares slide after pushing back start of pivotal cancer trial; NTLA and EDIT partially rebound after yesterday’s gene therapy technology pullback (Jefferies said today sell-off was an overreaction and overdone)
·      Medical devices and equipment movers; BSX sees Q4 prelim sales about $2.41B vs. est. $2.35B; DXCM Q4 revs about $218M vs. est. $212.9M but sees 2018 revs $830M-$850M vs. est. $853.5M; GMED sees prelim Q4 sales $175.5M vs. est. $165.5M; CFMS sees 2018 revs $79.6M-$83.6M vs. est. $84.2M; said prelim Q4 revs $20.8M vs. est. $19.9M; DHR said it sees both 4Q eps and 4Q core revs growth above the high-end of previously announced guidance ranges; ILMN sees ~$3.12B in 2018 revenue, representing a 13%-14% YoY growth, exceeding ests. of $3.09B
Industrials & Materials
·      Industrial & Machinery; AYI falls as misses both top and bottom line quarterly results/EPS miss by 14c (other lighting stocks such as HUBB, CREE, VECO were active on AYI miss and said expects the pricing environment to continue to be challenging in certain portions of the market); AZZ falls as reviewing accounting methodology
·      Airlines; few data points in airlines as LUV reaffirms forecast for 4Q operating RASM and reports Dec. traffic rose 2.6%; HA ups Q4 operating revenue per ASM to 2.5%-3.5% from 1.5%-3.5%; raises FY17 operating revenue per ASM view to 6.1%-6.6% from 5.5%-6.5%; in research, Bank America upgraded AAL to buy from underperform saying that tax reform is a significant positive for corporate spending, and can drive a pickup in corporate pricing across the airline sector (also maintains buy on DAL and UAL, and upgraded SAVE and ALGT to buy and downgrades LUV and ALK to neutral from buy and JBLU to underperform
·      Metals & Mining; AKS was downgraded to hold at Jefferies (though up tgt to $6.50) as think AKS’ leverage to the current up-cycle may continue to underwhelm; SCHNQ1 EPS beat by 2c but missed on revenue in steel sector
·      Industrial Distributors; Stifel said while they remain cautious given the strong move in these names after bottoming out in the summer, they say stocks will likely trade well if positive pricing commentary materializes/raises tgt on MSM to $98, FAST to $53 and GWW to $238; Credit Suisse also raises tgts on GWW (to $190), FAST (to $61) and MSM (to $112)
Technology, Media & Telecom
·      Internet; AMZN tgt raised to $1,400 from $1,200 saying his recent survey shows the company still has a large opportunity to gain U.S. wallet share; Facebook’s (FB) Oculus said it is working with Xiaomi as its hardware partner for the global launch of Oculus Go and is also announcing Mi VR Standalone-a VR headset; EBAY tgt upped to $44 at Baird as checks suggested the company had a strong finish to the holiday shopping season
·      Semiconductors; AMD shares were volatile after MSFT halts some AMD chip Meltdown patches after PCs freeze/customer reports some AMD devices getting into an unbootable state after installing recent OS security updates; XLNX tgt upped to $85 at Argus after mgmt changes; shares of MU, AMD, MKSI were among the top decliners in semi’s today
·      Hardware and components; Samsung Electronics Co. said Q4 operating profit will be its highest ever, as the company benefits from strong demand for its electronics components; STX pre-announced positive December quarter results, driven by high capacity drives, particularly for cloud environments; ROKU preannounced that active accounts “exceeded 19 million at December 31, 2017” (OpCo said was 2% below their 4Q:17 estimate)
·      Media & Telecom; Altice will spin off its two-thirds-plus stake in ATUS by the end of Q2 (and Altice USA board has authorized a share buyback program of up to $2B); TMUS said preliminary Q4 highlights where it added 1.9M total net subscribers (some 1.1M of those were branded postpaid net adds, and of that 891,000 branded postpaid phone net adds); VNET active as the company CFO resigns; HMNY said MoviePass added another 500,000 new paying subscribers since Dec 12th and MoviePass surpasses 1.5M subscribers; DISCA and FOXA downgraded at Pivotal as those companies’ recent gains result in relatively fully-valued stocks
·      Software movers; CUDA posts better Q3 top/bottom line results; FTNT was downgraded to Equal Weight at Barclays citing the slowing of aggregate firewall product revenue growth across the industry; video gamers weak early after Benchmark and M Science cautious saying view execution risk as elevated and would be cautious into the quarter release (EA, ATVI); MSFT said fixes for security flaws present in most processors may significantly slow down certain servers and dent the performance some personal computers (related to AMD)

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.

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