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.
Thursday, January 11, 18
Equity Market Recap
· New Year, same results as 2017! Major U.S. averages once again setting all-time closing record highs (7th time in 8 days), propelled by energy stocks as WTI Crude (and Brent) at fresh 3-year highs, while financials were mixed ahead of tomorrow earnings from JPM, PNC and WFC. There was absolutely no letup in Transports, with the Dow Transport index up another 2.5% at fresh record highs above 11,300, led by gains in airlines (positive monthly metrics from AAL, UAL, JBLU, DAL the last two days), packaged delivery (record highs UPS) and rails. Commodity and Industrial names continue to benefit from a falling dollar and positive tax reform implications. The S&P 500 Index pushed its gain in 2018 past 3%, while small caps and tech shares rose to all-time highs. The 10-year Treasury yield fell to 2.53%, while 30-year yields slumped after an auction. Overnight, Chinese regulators blasted a report that Beijing will scale back its U.S. bond purchases as “fake news,” which also helped bonds snap its 5-day losing streak. Sentiment remains exuberant with several strategist calls saying that tax reform benefits are still being underestimated, and the path of least resistance remains higher…will earnings help or hurt the cause?
· Oil prices close higher as a rally in oil took Brent crude above $70 a barrel on Thursday, hitting its highest level since 2014. WTI crude also at best levels since December 2014 as momentum remains to the upside in commodity prices; weekly natural gas inventories fell -359 bcf vs. est. -333 bcf (larger draw bullish), sending natural gas higher. Oil prices have been buoyed by a pullback in the dollar and U.S. production and eight weeks of declines in domestic crude stockpiles, as markets await the Trump administration’s decision on whether to extend temporary waivers on sanctions against Iran. WTI crude settles at $63.80 (nearly a dollar off highs of $64.77), rising 23c on the day
· Gold prices rise back near 4-month highs, rising $3.20, or 0.2%, to settle at $1,322.50 an ounce as movement in the dollar (to the downside) continued to impact gold prices. Prices have risen to their highest level since September and stayed above $1,300 recently, boosted in large part by a weaker dollar.
· The dollar was broadly lower, with the euro spiking to highs of 1.2059 before paring gains (up as much as 0.85%) following minutes from the European Central Bank’s December meeting earlier, which were interpreted as bullish (Euro was at 1.194 prior to minutes). The release of minutes from the European Central Bank’s December meeting showed the central bank could shift away from its ultra-loose monetary policy efforts this year. The dollar also slipped vs. other currencies as the dollar index (DXY) turned down over -0.5% (traded lows 91.78). The dollar slipped to a 6-week low against the Japanese yen, falling to around 111. Bitcoin briefly traded below $13,000 this morning as concerns mount over a South Korean proposal to ban cryptocurrency exchanges, but pared losses (though crypto currencies fell on the day).
· Treasury markets gained as the yield for the 10-year benchmark note fell over 2 bps to 2.535, falling for the first time in six sessions (after taking out 2017 highs yesterday, moving above 2.59%); the yield on 30-year bonds fell 2.3 basis points to 2.878%, while the rate on the two-year yield dropped 1.2 basis point to 1.964%. Back to back unexpectedly strong auctions (10-yr yesterday and 30-yr today) helped boost bonds, as well as reports that China called a report that Beijing will scale back its U.S. bond purchases as “fake news.” The U.S. Treasury sold $12B in 30-yr notes at a yield of 2.867% (vs. 2.888% when issued prior), with bid-to-cover strong at 2.74 (highest since Dec 2014) vs. 2.48 prior auction and indirect bidders awarded 71.5% of the auction – bonds rallied following the strong results (high demand and lower yield than w/I and big indirect bidders), sending yields lower
· Producer Prices for December unexpectedly fell (-0.1%), below the expected rise of 0.2% (after rising 0.4% last month); the core PPI (ex: food and energy) also fell (-0.1%) vs. an expected 0.2% rise; final demand rose 2.6% YoY vs. est. up 3% and final demand ex food, energy rose 2.3% YoY vs. est. up 2.5%
· Weekly jobless claims rose 11K to 261K (4-month highs), above the 245K estimate, while the prior week was unrevised at 250K; the 4-week moving avg. rose 9K to 250.75K in the week ending Jan. 6, while continuing claims fell 35K to 1.867M in the latest week
Sector News Breakdown
· Consumer Staples; POST said it is exploring strategic alternatives for its private brands business, including an initial public offering, a placement of private equity or outright sale; in tobacco, Stifel said believe the fundamental outlook remains robust and we see little risk around FDA regulatory actions in 2018 (upped tgt on MO to $78 and cut PM to $125); IPARwas upgraded to buy at Davidson noting strong year-end momentum across key French brands
· Housing & Building Products; homebuilders again active after KBH reported a Q4 EPS beat of about 8c as higher unit delivery volume and lower than expected SG&A/Sales drove the beat, while orders increased 2% in units and 9% in dollar volume (also bumped up margin guidance); RH upgraded to buy at Loop Capital and up tgt to $120 as believe the company has definitively proven its next generation design galleries and merchandising are differentiated from its competitors; TSCO was downgraded at Wedbush to neutral on valuation
· Retailers; WMT is boosting its starting hourly wage to $11 and delivering bonuses to employees, capitalizing on the U.S. tax overhaul; dollar stores DG and DLTR holding around 52-week highs; WMT also announced today several store closures, reported by local media in Texas, New York, New Jersey, Indiana, Arizona, Alaska, and elsewhere (COST shares advanced)
· Energy stocks lead today’s broad based rally, with several E&P and integrated names trading at 52-week highs (CVX, CXO) as oil traded at the highest level in three years. The EIA also recently raised its 2018 demand outlook, which has further help boost sentiment. Goldman Sachs said in note the firm left its conference with greater confidence that incremental corporate returns and free cash flow yields will improve in 2018; CVX was upgraded to outperform at BMO Capital; solar stocks spiked along with the bounce in energy prices (FSLR52-week high)
· Oil drillers; group downgraded at Piper, reducing rating on RDC and ESV to neutral and cut DO and NE to Underweight saying the group continues to exhibit clockwork crude beta, and with Brent spot now flirting with $70/bbl and the ’19-’20 strip hovering above $60/bbl, it’s no surprise to see this group ripping says valuations have already reflated demonstrably
· Utilities; Goldman Sachs upgraded the utilities sector to a neutral view after the group underperformed the broader market over the past six months. Goldman noted utilities have lagged the S&P 500 by 17% since Goldman reduced its rating on the sector to cautious in June and now prefers diversified utilities over regulated, as many emerge as tax reform winners (the firm upgraded NI and OGE to buy while downgrading SO to sell and DUK to neutral)
· Refiners; two analyst calls today; 1) Morgan Stanley said they see the constructive 2018 macro largely reflected in US refining valuations and coupled with an improved MLP outlook, they reiterate preference for diversified names with upside to cash returns (upgraded DK to overweight and cut PBF to underweight); 2) Wells Fargo said ANDV remains top pick in the refining sector and raised price target to $173 from $153, while maintain Outperform ratings on DK, PBF and VLO, but note modest upside potential for VLO.
· MLPs; two analyst calls today for the sector that has rebounded over 13% from November lows of 249 for the Alerian MLP Index; 1) Wells Fargo said they are bullish midstream/MLPs for 2018, based on (1) improving fundamentals, (2) attractive valuations, (3) healthy demand for midstream/MLPs from credit, preferred and private markets, and (4) our perception of increased interest from outside capital (upgraded CEQP, HESM, OKE and cut KMI and SEP); 2) Morgan Stanley said Midstream valuations are now more “defensibly” attractive when anchored to Utilities as a “base augmented by higher growth, higher yields, and tax benefits” (the firm upgraded TRP to overweight and downgrades EEP/EEQ to underweight and PSXP to EW)
· Banks; group will be in focus over the next week or so, as earnings kick off with JPM, WFC and PNC tomorrow morning; many large cap and regional banks trading at 52-week highs; earnings pick up even more with results from several names the following week as well; the group has big one of the best performers recently on expectations tax benefits will boost earnings
· Asset managers; monthly AUM data out: 1) IVZ preliminary month-end assets under management (AUM) of $937.6B, reflecting no change month over month; 2) AB AUM increased 0.9% to $554B during December 2017 from $549B at the end of November; 3) TROW prelim end of month AUM $991B; 4) APAM AUM at end of Dec totaled $115.5B; 5) LMpreliminary AUM $767B as of December 31, 2017 (included flat long-term flows, consisting of net inflows in fixed income of $1.7B and in alternative of $0.2B, partially offset by net equity outflows of $1.9B); 6) VRTS preliminary total AUM $91B as of December 31, 2017
· Payment and services; MGI has partnered with Ripple, provider of an enterprise blockchain solution for payments, to pilot XRP in their payment flows; DST to be acquired by SSNC in a deal valued at $5.4B, with holders receiving $84 per share in cash https://goo.gl/YyqCTV; DPW said subsidiary Coolisys expects to begin delivering power supplies for crypto mining within next 40-45 days
· Brokers and exchanges; WSJ reported that the Massachusetts Securities Division confirmed that it sent letters of inquiry, which serve as a notice that the division has begun an investigation, to discount brokers Fidelity, SCHW, AMTD to ask about their sales practices; TCAP and ABDC upgraded at Raymond James given that we believe the trade off from the 4Q17 dividend cut, credit quality issues, and resulting end-of-year tax loss selling are heavily baked in at these prices
· REITs; KeyBanc said as corporates are poised to benefit from the recent tax cut and strong earnings growth, they continue to see steady demand for real estate/said the corporate rate cuts should bode particularly well for office and retail REIT tenants; GLPI upgraded at SunTrust; 52-week lows today for HCN, HCP, MAA, AIV, and VTR
· Pharma related movers; ENDP received a grand jury subpoena from the United States Attorney’s Office for the Southern District of Florida seeking documents and information relating to products containing oxymorphone; LPCN shares cut in half as fails to win FDA Panel’s backing on Testosterone Drug as the FDA advisory committee voted 13-6 that the overall benefit/risk profile of Tlando isn’t acceptable to support approval as a testosterone replacement therapy
· Healthcare services and equipment; CYH surges after Shanda Asset Management boosted its stake to 24%, expressing support for the hospital company; BSX gets FDA approval for spinal cord stimulator system that offers non-opioid pain treatment; DVA tgt raised to Street high $92 at Bank America saying the company highlighted a stable commercial rate outlook and reiterated its 2018 Kidney Care operating income guidance at JPM Healthcare conference
Industrials & Materials
· Airlines; another day of positive news for the space which outperformed yesterday on better monthly data metrics from AAL and UAL; today, DAL raised its 2018 EPS view on U.S. tax reform-related benefits and its 4Q profit and operating revenue topped expectations – DAL said it sees 1Q unit revenue up 2.5%-4.5%; JBLU boosted RASM up about 1.8% YoY; HAwas downgraded to hold from buy at Argus on concerns about increased competition and rising costs
· Transports; absolutely no letup in Transports, with the Dow Transport index up over 2% at fresh record highs 11,300…airlines up around 4% across the board on better metrics the last 2-days (DAL, UAL, JBLU, AAL); JBHT was downgraded to neutral at JP Morgan today on rather high rate expectations in the first half of 2018 and a full valuation’ Overall for the index, JPM believes the risk/reward is broadly neutral to negative for the sector and 4Q17 earnings will be the next disruptive point to the positive narrative for the stocks
· Metals & Mining; AA tgt raised to $65 at Citigroup as the firm remains constructive with the view that sustainably higher aluminum prices, supported by the cost curve, will re-rate multiples higher; KeyBanc on steel sector saying industry’s apparent demand shows promising start for 2018 – recent due diligence within the sector shows much better 4Q17 shipments, likely due to hedge-buying in front of rising raw materials and Section 232 deadline of Jan. 16 (the firm raises 2018 U.S hot rolled coil (HRC) price ests. to $655/ton from $615/ton…upgraded TMST rating and upped targets for STLD and RS)
· Paper & Packaging; KeyBanc said not surprisingly, according to RISI, GPK followed WRK with a $50/ton coated recycled board (CRB) price increase effective early February, but also announced a $50/ton coated unbleached kraft (CUK) increase effective the same date. Four of the five N.A. CRB producers have now announced February increases, and we assume the fifth will follow in short order (shares of WRK, GPK, PKC, IP, GEF all higher)
Technology, Media & Telecom
· Internet; EXPE upgraded to overweight at Morgan Stanley as remains bullish on the company’s room night supply and HomeAway ability driving faster long-term Room Night Growth;Zillow (Z) upgraded to overweight at Morgan Stanley saying shares attractive; AMZN tgt raised to $1,425 at Stifel ahead of earnings as expect strong Q4 results highlighted by healthy eCommerce holiday sales and continued momentum in Prime membership; AKAM downgraded to underweight at KeyBanc saying a takeout unlikely
· Software movers; PRGS delivered a solid 4Q and guided well above FY18 consensus EPS on a lower tax rate; COUP to offer $200M convertible senior notes; Cowen upgraded VMW to outperform and tgt upped to $150 saying VMW is very likely to outperform growth rate targets for their vSphere biz and total compute bookings CAGR; Cowen downgraded CTXS on valuation; APPN downgraded underweight by Morgan Stanley on elevated risks following the shares recent outperformance to valuation vs. peers
· Semiconductors; after falling 1.2% yesterday and about 1% on Tuesday, the Philly Semi index (SOX) partially rebounds (IDTI, MSCC, INTC rise), while equipment names fall again (LRCX, AMAT, KLAC); SYNA rises after unveiling a Vivo smartphone equipped with an in-display fingerprint sensor at CES
· Media & Telecom; outperformance in media with DISCA up over 5% (rose 5.4% yesterday), VIAB up 5%, and gains in CBS and DIS; COMM tgt raised to $45 at Citigroup as the Telco spending environment is improving ahead of 5G/spectrum deployments by carriers, and firmer outlook for spending related to FirstNet; TIVO announces additional patent litigation against CMCSA