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, January 10, 18
Equity Market Recap
· U.S. stocks fall for the first time of 2018, snapping the six day winning streak for the S&P 500 and Nasdaq Composite, but end well off their worst levels of the day. Bonds were volatile, gaining strength late following a strong 10-year auction, as yields earlier surpassed the highs of 2017 for the benchmark 10-yr (traded above 2.59% before falling back below 2.55%). The other big story was the dollar, slipping vs. the yen and euro, but gaining late day against the Peso and Loonie on fears of the U.S. pulling out of NAFTA. Early on, U.S. assets were under pressure with stocks, bonds and the greenback all falling after a report said China could be looking to reduce or halt its purchases of Treasury bonds – but stocks pared losses, and bonds reversed higher.
· Interest rate sensitive sectors such as real estate, utilities and telecom were lower as yields extended gains early. Semiconductors underperformed, pulling back the most in one day since early December amid continued fall-out from the recently announced security flaw in chips (Spectre and Meltdown software) as more chip-makers announce patches. There was a report late day by Reuters saying that Canadian government officials feel there’s an increasing likelihood that U.S. President Donald Trump will give six-months’ notice to withdraw from Nafta (which rebounded the dollar against the Canadian Loonie and Mexican Peso). The Dow Transport index fell about 40 points from record highs of 11,093 led by weakness in the rails (CSX, KSU) after the NAFTA headlines. The White House later responded saying “there is no change to position on NAFTA.” Next market catalyst, quarterly earnings with the unofficial start Friday with big banks.
· Oil prices continued their recent ascent, with WTI crude rising 61c, or 1%, to settle at $63.57 per barrel, its first close above the $63 level in 3-years as bullish oil inventory data overshadowed the bearish gasoline and distillate inventory data. The Energy Information Administration reported an eighth-straight weekly decline in U.S. crude supplies, along with a fall in weekly production
· Gold prices climb $5.60, or 0.4%, to settle at $1,319.30 an ounce, pulling back from earlier highs of $1,328.60 an ounce (which was its best level since mid-September), but partially recouping some of the last two days of losses on profit taking. Gold climbed to its highest level in 4 months on weak dollar and concerns over report about Chinese slowing purchases of U.S. debt.
· The U.S. dollar was lower as the dollar index (DXY) snapped its 3-day win streak (but pared losses – as DXY off lows of 91.92 to around 92.25) but fell the most against the Japanese yen following news the Bank of Japan cut its bond purchases, marking a possible slowing to years of loose monetary policy. Reports that China is considering slowing or halting purchases of U.S. Treasuries also raised fears about holding on to U.S. assets such as government bonds and the greenback. The dollar gauge, which has been enjoying a modest uptrend, on Tuesday reached its highest level since Dec. 28th before slipping today (and recently off 4-month lows). The euro pared its gains against the dollar, up 0.2% at 1.196 (down from earlier highs 1.2018), but the greenback fell 1% against the yen to around 111.50. The Canadian Loonie and Mexican Peso tumbled late on reports the U.S. might pull out of NAFTA according to a Reuters report.
· Cryptocurrency news; Berkshire Hathaway CEO Warren Buffett said in a CNBC interview, “in terms of cryptocurrencies generally, I can say with almost certainty that it will come to a bad ending.” Separately, Chinese authorities ordered the closing of operations that create a large share of the world’s supply of bitcoin, tightening a clampdown that has already shuttered exchanges for the trading of cryptocurrencies in China. Crypto currencies were lower initially, but pared losses late day (Bitcoin off lows $13,442).
· Bonds reversed after early weakness; the yield on the 10-yr traded just shy of 2.60% (ended 2017 around 2.41%), surpassing its 2017 high of 2.58% before reversing lower; the yield on the 2-yr rises to around 1.98% before slipping back to 1.96% and the long-end 30-yr yield trades 2.93% (but also pared gains). The 6 bps move higher yesterday to 2.54% on the 10-yr partially on news the Bank of Japan cut its bond purchases, sparking chatter that the Japanese central bank is getting ready to end years of ultra-loose monetary policy. Bill Gross of Janus Henderson said the Janus Unconstrained Bond Fund has gone negative on bonds and credit spreads. The U.S. Treasury sold $20B in 10-year notes at a yield of 2.579% (vs. 2.584% w/i prior) with the bid-to-cover at 2.69 from 2.37 prior auction and indirect bidders awarded 71.4% of the auction (bonds reversed higher after the auction).
· Import Prices for December rise a smaller-than-expected 0.1%, missing the 0.4% estimate, while the prior month was revised to 0.8% from 0.7% (due to a spike in oil); if you excluded energy, import prices fell (-0.1%); for the full year, import prices rose 3% to mark the biggest increase since 2011; export prices fell (-0.1%) in December after rising 0.5% in November
· Wholesale Inventories rose 0.8% in November, slightly above the 0.7% estimate; Nov. wholesale inventories increased to $611B vs. $606.1B in prior month; Wholesale inventories excluding oil rose 0.7% in November and Wholesale sales rose 1.5% after rising 0.8% the prior month
Sector News Breakdown
· Retailers; after raising earnings guidance yesterday, Susquehanna upgraded shares of TGT today; VNCE shares rise as holiday same-store sales rose 15.9%; SHLD raises $100M in new financing, eyes $200M in cost cuts; BIG was downgraded to Perform at Oppenheimer; SIG slides after narrowing its FY18 EPS view and reporting Holiday Season same-store sales declined 3.5%; JWN raises the low end of EPS outlook on Holiday sales results
· Consumer Staples & Restaurants; grocers active after SVU 3Q net sales/comp sales missed estimates, and as expenses rose more than expected as the company integrated its Unified Grocers acquisition into its wholesale unit; DPZ shares slid after CEO Patrick Doyle announced his plans to depart the company in June; HSY was downgraded to underweight at Morgan Stanley
· Housing & Building Products; the homebuilders sector was active amid earnings as LEN Q4 EPS missed views, but the company noted the miss was due to a “single, strategic transaction shifted into the first quarter of 2018” (delayed land sale that was pushed into Q1); KBH expected to report tonight after the close; DHI aid it sees a Q1 charge about $115M to cut deferred tax asset/sees the Tax Act having a favorable effect on its FY18 results; also CAA (which LEN is in process of purchasing), also released strong preliminary 4Q data
· Inventory data: The American Petroleum Institute (API) reported that U.S. crude supplies dropped by 11.2 million barrels for the week ended Jan. 5; showed a rise of 4.3 million barrels in gasoline stockpiles, while inventories of distillates climbed by 4.7 million barrels. This morning, the EIA reported weekly crude inventories fell -4,948M barrels, more than the -3.75M estimate, while Cushing crude draw was -2,395M; also, gasoline a bigger +4,135M barrel build (vs. est. +3,550M) and Distillates build of +4,254M (vs. est. +2,250M) – both bearish
· E&P sector; SM agreed to sell its Powder River Basin assets for $500M which includes about 112,200 net acres (Tudor Pickering said CHK was likely to see the biggest equity move from the asset sale as CHK may pursue similar transactions to cut leverage)
· Utilities; sector under pressure, with the UTY down over -1% (and now down over -10% from record highs of 726 on Nov 15th) as rising bond yields make the sector unappealing; in a positive turn for the beaten up sector, Morgan Stanley said the electricity consumption required for bitcoin mining may represent a new business opportunity for renewable energy developers, with possible winners including utilities (NEE, Iberdrola, Enel), new big oil entrants. Bitcoin power demand in 2018 (estimated at 120-140 terawatt hours; 0.6% of world consumption, or the consumption of Argentina) will be bigger than global Electric Vehicle power demand in 2025)
· Large Cap banks/Regionals/Exchanges/Insurers rally with the jump in bond yields and as analysts continue to raise estimates and targets in group amid benefit from tax reform and lower corporate tax rates; 52-week highs in the S&P 500 dominated by financials today: banks ZION, PNC, BAC, BBT, JPM, WFC, STI, HBAN, MTB, KEY, CMA, CFG, MS; Insurers: PFG, LNC, TMK; Finance: COF, SYF, DFS; Trust banks: STT, BK, NTRS; Asset managers/brokers: TROW, SCHW, ETFC, and Exchanges: CBOE, ICE, NDAQ, CME; in news, AFSI shares jumped after a Stone Point group proposed to acquire the company at $12.25 per share https://goo.gl/LMsnGr ; NYCB was upgraded to buy at Bank America, seeing risk reward skewed to the upside
· REITs; DLR upgraded to buy and downgraded MPW and CIO to hold from buy at Deutsche Bank saying given discounted valuations, they don’t see significant downside risk in the REITs as a whole, but neither do we see a whole lot of catalysts to the upside that will make REITs great again in 2018; REIT sector weaker given the sharp spike to start the year in yields
· Trust Banks; BK and STT were both upgraded to buy at Citigroup as digital transformation is likely to gain importance over the next several years, with winners and losers among U.S. banks determined by digital capabilities
· More companies continue to get involved in Blockchain solutions: shares of KODK surged yesterday after saying it is launching a cryptocurrency called “KODAKCoin” for photographers, part of “KODAKOne.” Today, AMRH, COGT, HMNY the latest companies to announce they to expand its service offering with blockchain functionality; other companies that have been volatile in recent weeks on blockchain commentary have included: NETE, NXTD, LFIN, TEUM, LBCC
· Pharma and Managed care; MOH was notified by New Mexico Human Services Dept. that it wasn’t selected for tentative award of order under RFP issued Sept. 1 for Centennial Care 2.0; ALKS repeats FY 2017 revenue view $870M-$900M; PCRX said that some aspects of its partnership with JNJ’s DePuy to promote its Exparel injection in orthopedics “took longer to achieve” than company would have hoped for; TVTY extends partnership with HUM through 2022 to provide SilverSneakers fitness program; GBT rises amid JPM conference presentation
· Biotech movers; NKTR trades to record highs after announcing yesterday an update on its cancer therapy NKTR-214 (Canaccord raises tgt to Street-high $80 from $50); HALO said sees 2017 revs topping estimates sending shares higher early; EPZM initiated overweight and $20 tgt at Morgan Stanley; NVAX tgt raised to $10 at FBR Capital
· Medical devices and equipment movers; ISRG raises Q4 revenue to about $892M vs. estimate $847.5M; TNDM guided year sales to $39M-$40M, above est. $34.2M
Industrials & Materials
· Industrial & Machinery; DE was upgraded to outperform and target raised to $190 at RBC Capital; AAWW upgraded to outperform at Cowen saying is positioned for growth into 2018 as AAWW financials will reflect the benefits of the capacity additions in 2017 for AMZN
· Airlines outperform after UAL and AAL both posted preliminary 4Q unit revenue above their prior views; UAL Q4 numbers beat (raises Q4 capacity to 4% from 3.5% prior), driven by better unit revenue and lower non-fuel unit costs, while AAL better 4Q numbers were due to improving yields in all geographic regions and higher than expected domestic close (Q4 TRASM up 5%-6% vs. prior 2.5%-4.5% view); UAL was also upgraded to buy at Citigroup
· Industrial distributors; group active after MSM Q1 top/bottom line top consensus, but Q2 sales guidance ($761M-$775M vs. est. $774.6M) missed views; shares of GWW, WCCamong active movers (comes a day after two analysts raised targets for the group on tax benefits)
Technology, Media & Telecom
· Semiconductors; semi index underperforms, posting its worst daily return in over a month (but finishes off the lows); MU extends losses this week amid concerns over the announcement earlier this week that the memory-chip company and INTC were ending their 3D NAND memory development partnership; SIMO downgraded to reduce at Nomura as sees 30% risk to sales; NVDA said graphics chips ‘are not affected’ by Spectre, Meltdown security problems, issues software patch in response to concerns in other chips (equipment stocks fell the most today (AMAT, KLAC, LRCX, TER)
· Software & Hardware movers; CLDR was upgraded to neutral at both Mizuho and Citigroup saying recent concerns over Cloudera’s growth in cloud and its lack of profitability are overdone and estimates are too low; VOXX rises on earnings; WDAY was upgraded to overweight and $145 price target at Morgan Stanley as believes can sustain subscription revenue growth of over 30%; NTCT shares plunge after forecasting FY18 adj. revenue and EPS below estimates, citing “significant” pressure on capital spending in N.A.
· Internet; not much in the space specifically today, with large cap names mixed; EBAY shares slumped, with Bloomberg noting that Facebook Marketplace’s rollout to Europe could eventually hamper EBay’s Classifieds business if users move en masse to the social network’s offering
· Tech distributors, services; SNX reported November quarter ending results where both sales and EPS materially beat the company’s guidance and expectation as both organic and acquired operations helped drive growth (shares fell as CEO retirement overshadowed strong results)
· Movie theatres; RBC Capital upgraded CNK to outperform from sector perform, PT $40 saying CNK would provide upside in the event box office results outperform/sees a potentially meaningful dividend hike driven by tax reform; firm downgrades AMC to sector perform from outperform due to its high leverage and RBC’s assumption for flat box office results in 2018; PT $15 unchanged; IMAX was downgraded to neutral and tgt cut to $21 at Piper as believe faces another wave of major estimate revisions for Q4 and 2018, continued loss of casual fans and deteriorating PSAs in China, among other reasons cited