Market Review: January 17, 2018

Scott GreenDaily Market Report

Closing Recap
Wednesday, January 17, 18
  
Equity Market Recap
·      The unstoppable force of the stock market continues, with major averages once again closing at record all-time highs, erasing yesterday market decline in another broad move higher. The Dow Jones Industrial Average posted its best single-session rise in about seven weeks, once again led by gains in component Boeing (BA) accounting for around 80 of the Dow points today. The rally came despite GS (another component of the Dow), falling over 2% on mixed earnings. The S&P 500 index moved back above the 2,800, while the Nasdaq Composite Index topped the 7,300 level intraday, led by semi-equipment stocks after ASML results handily topped consensus (KLAC, LRCX, AMAT jumped), lifting the Philly semi index (SOX) to record highs. The extension of market gains came late afternoon following an upbeat report from the Federal Reserve’s Beige book. After trading to the best levels since November (12.81 high), the CBOE Volatility index (VIX) slumped late day as stocks ripped higher. Currencies were volatile as the dollar rebounded off 3-year lows (big move higher in the afternoon), while Bitcoin also rebounded after being down over 20%. Every market pullback, no matter how small, continues to be met with tremendous buying momentum…today’s action was no different after yesterday’s drop.
·      Fed Beige Book showed: almost all of the 12 Federal Reserve districts reported “modest to moderate gains” in economic activity at the start of 2018. The central bank’s Beige Book said the Dallas Fed bank was the exception, reporting “a robust increase.” “The outlook for 2018 remains optimistic for a majority of contacts across the country.”

Economic Data
·      Industrial production rose 0.9% in December, above the 0.5% estimate and was the fourth straight monthly increase; the prior month was downwardly revised to (-0.1%) from 0.2% however; for the calendar year, production rose 3.6%, up from a 0.8% gain in 2016 and the fastest pace since 2010.
·      Capacity utilization rose to 77.9% in December, the highest rate since February 2015 and was above the 77.4% estimate (prior month revised to 77.2% from 77.1%)
·      U.S. Home Builders’ Confidence index in January falls to 72 from 74 last month, but in-line with estimates; present single family sales falls to 79 vs 80 last month; future single family sales falls to 78 vs 79 last month; prospective buyers traffic falls to 54 vs 58 last month
 
Commodities
·      WTI crude oil ends higher, rising 24c or 0.4%, to settle at $63.97 per barrel (highs $64.17 and lows $63.31), rebounding after WTI crude snapped its 5-day win streak yesterday, slipping from 3-year highs ahead of inventory data tonight (API pushed out a day due to holiday) and tomorrow
·      Gold prices got a late day boost, rising $2.10 to settle at $1,339.20 an ounce for it fifth straight session advance to best levels since early September; gold prices got that late rally after the dollar failed to hold early gains, falling lower and back near 3-year lows. The positive sentiment on the precious metal was supported by data showing traders continued to increased their bullish bets on gold for the fourth-straight week according to one report
 
Currencies & Bonds
·      Dollar bounces after touching 3-year low – but fails to hold gains; the U.S. dollar index (DXY) touched the lowest levels since December 2014, falling to lows of 90.113 before rebounding; the greenback jumped against the Canadian loonie after the Bank of Canada hikes rates by 25bps (as expected) and warns of NAFTA uncertainty. The bounce in the dollar comes a day after a sharp downward reversal vs. most currencies after earlier gains. The euro fell to $1.224, down from $1.2259 late yesterday before rebounding and turning positive, while the buck bounced to around 110.80 against the yen. The pound rose above the $1.39 level a day after crossing $1.38 for the first time since after the June 2016 Brexit.
·      Bitcoin dropped below the $10,000 level (to lows of $9,185) as the cryptocurrency and its rivals drop further after Tuesday’s big selloff. Bitcoin’s dropped over 20% to its lowest level since late November but rebounded to trade higher late afternoon. This week’s selling has been blamed in large part on worries about increased regulatory scrutiny in South Korea and other countries. The crypto currencies found some footing after the tumultuous two-day slide, but still under pressure, with Ethereum and Ripple falling.
·      Bonds slipped in the afternoon. As yields recover off earlier lows, with the 10-year yield up about 2 bps at 2.565% and the 2-yr up around the 2.04% level; bonds were initially higher despite a round of better economic data, but declined as more money piled into stocks late afternoon
 
Other Interesting tidbits
·      According to Investor Intelligence, newsletter writers classified as bulls rise to 66.7% from 64.4% last week and is now at the highest level since April 1986, or nearly 32 years ago, after spending the last three months just below the 1987 high of ~65%; those considered bearish drop to lowest since April 1986, tumbling to 12.7% from 13.5% and those expecting a correction drops to 10-month low of 20.6% from 22.1%; Bull-bear spread widens to 54.0 from 50.9, at the widest since April 1986’s reading of 57.7
   
Sector News Breakdown
Consumer
·      Consumer Staples & Restaurants; EAT upgraded to mixed from negative at OTR Global; FTD fell after investor day presentation; PZZA announced CFO Tucker leaves to join JACK in same role; MNST rises early after Stifel and Credit Suisse raised estimates ahead of investor day  and positive tax rate implications; IFF was upgraded to outperform at Evercore/ISI citing organic growth momentum and overdone investor concerns about raw material inflation; DF was upgraded at Morgan Stanley today; French retailer Carrefour lowered its operating profit forecast for 2017 for the second time in six months
·      Housing & Building Products; in home furnishing, ETH reported 2Q preliminary results that trailed estimates, causing Telsey Advisory Group to downgrade stock to market perform (furniture peers HVT, BSET, HOFT, LZB, MLHR, STLY, HOME active as well); homebuilders outperform, led by gains in TOL, PHM, LEN, MTH – homebuilding exchange-traded funds climbed to record highs in line with the rising confidence that’s helping propel U.S. housing demand
·      Casino, Lodging & Leisure; in cruise lines, NCLH was upgraded to buy at SunTrust with $68 tgt saying 2018 pricing and demand look solid; in lodging, Morgan Stanley upbeat on U.S. lodging stocks in the near term but is worried about the economic outlook at the end of 2018 (firm upgraded LQ to overweight and downgraded HLT – maintains MAR at overweight, DRH and SHO at underweight); in leisure, PII was upgraded to neutral at Longbow
·      Auto movers; Ford (F) slides as said it expects lower operating EPS profit in 2018, with higher commodity costs and adverse exchange rates offsetting gains from cost-cutting efforts and continued demand for high-margin pickup trucks; said it sees 2018 EPS $1.45-$1.70 vs. est. $1.62; ADNT downgraded to neutral at Baird as company published slides which detail intensifying operational challenges in its Seating components unit that are likely to weigh on margin/cash flow; GT said it expects “strong growth in 2018, building off of recovery in Q4
·      Retailers; SKX rises after Citigroup raise tgt to $45 and raise estimates as expect SKX to continue outperforming based on an improving product cycle, strong int’l momentum; ULTA upgraded to overweight at Morgan Stanley after raising his comparable sales estimates modestly for the bulk of the Hardline/Broadline retail sector on tax reform benefits; TIF posted strong same-store sales for the holiday period, putting it on track for its first quarterly increase in more than two years and prompting a rise in its full-year profit forecast
 
Energy
·      Energy stocks have been grinding higher the last few weeks with oil prices touching 3-year highs, but a little consolidation the last two days as oil steadies and stocks pullback after run-up; CLR, COG and PXD downgraded to neutral from positive on valuation and lower gas prices; also says firm is increasingly cautious the recent oil price rally could stall as U.S. production growth accelerates; boosts 2018 WTI oil price est. to $54/bbl from $50/bbl, though prices could moderate to $50-$55 range over time; MLPs lower, drillers higher and E&P names mixed
·      MLPS; Alerian MLP Index (AMZ) falls to lows, down nearly 1%; Barclays said they inclined to favor MLPs closer to the wellhead, driven by crude economics versus gas; also favors MLPs that “participate in the integrated value chain in attractive basins”; doesn’t see the “more stable names” that outperformed last year continuing under 2018 backdrop; upgrades TRGP, OKE to overweight from equal weight; upgrades BWP, CEQP to equal weight from underweight; downgrades PAA/PAGP, WMB/WPZ, AMGP, WES/WGP, PSXP, VLP to equal weight and downgrades DKL to underweight from equal weight
 
Financials
·      Large Cap banks busy after more earnings; GS Q4 revenue from fixed-income trading tumbled 50%, with revenue falling to the lowest level since the financial crisis and the last three months also brought Goldman Sachs’s first quarterly loss in more than six years (overall beat on EPS and revs but other items weighed on stock);BAC another messy quarter for big banks, though EPS tops views though said client activity was strong across all of our businesses in 2017; OZRK and Citigroup (C) both downgraded at KBW after earnings yesterday; SCHW Q4 revs met estimates and EPS beat but expenses missed; USB also a mover on earnings; PNFP falls on earnings
·      Payments, Consumer & Finance; WU shares fall after Stifel issued caution ahead of the Q4 results saying the stock’s cryptocurrency-related rally has led to an unfavorable risk/reward ahead of initial 2018 guidance; a rebound for crypto related blockchain names as Bitcoin rebounds off lows (fell 50% from record highs) –RIOT, MARA, LFIN, NETE, NXTD, LBCC, KODX active)
 
Healthcare
·      Large Cap Pharma; MNK is weighing a breakup of its generics business after getting bids that were less than expected for an outright sale, according to Bloomberg; EXEL shares active as its cabozantinib cancer drug achieved its primary endpoint in a late-stage study and will be submitted to the FDA before the end of the quarter/overall survival data was on par with standard of care (Bayer’s regorafenib); JNJ slipped late day as the U.S. Patent Trial and Appeal Board finds its ’438 patent for Zytiga cancer drug is invalid, according to decision posted
·      Biotech movers; CELG is in talks to buy biotechnology company JUNO just days after announcing another major deal to bolster its portfolio of blood-cancer drugs https://goo.gl/aSWZ2c ; XON  6M share Spot Secondary priced at $12.50; AVXS 3.921M share Secondary priced at $102.00; HALO shares weak on updated data of PEGPH20 in combo with modified Folfirinox chemotherapy (mFFOX) showed a sizable difference in median overall survival that will concern investors
·      Healthcare suppliers and services; XRAY shares fell after the WSJ reported three executives were forced out last year in management shake-up, announces new CEO;EXAS shares dropped after release of abstract on possible Cologuard competitor (single-center study in Taiwan showed promise for detecting early stage colorectal cancer from liquid biopsy, raising fears of competition for its only on-market product, the colon cancer test Cologuard); EHTH shares rise on better preliminary Q4 results and purchase of GoMedigap; NUVA downgraded at Wells Fargo
 
Industrials & Materials
·      Industrial, Distributors & Machinery; DE tgt raised to $184 at Stifel; FAST shares dropped as 4Q gross margin disappoints investors, down to 48.8%, down from 49.8% y/y citing changes in product and customer mix, higher freight expenses from higher payments to third party shippers and investments in hub assets (MSM, WCC fell in sympathy)
·      Transports; CSX the first rail to report earnings last night with mixed results on EPS beat but revenue miss; overall transport sector was modestly higher as investors prepare for rail earnings; airlines had good run last week after better monthly metrics from DAL, UAL, AAL
·      Packaging sector; JP Morgan downgraded SLGN to Underweight while firm says looking into 2018, they expect EPS growth for the packagers to accelerate and be roughly double the growth rate of the market, with acquisitions and synergies from deals being the largest driver of this growth; said BLL, BERY and CCK remain our top picks as they should see strong EPS and FCF growth rates; in other news, BLL was upgraded to buy at Citigroup as views the recent selloff as overdone and sees an attractive entry point at current share levels
·      Dry bulk sippers; JP Morgan downgraded DSX, NMM to neutral saying with the recovery in dry bulk maturing and the consensus view shifting, they are becoming more selective in stock picking, downgrading a portion of our names. However, they continue to see material upside in our remaining OW stocks (SBLK, GOGL, andSALT). At this point, they anticipate a cycle peak around 12-18 months out, and assuming investors are forward looking 6-9 months, see a dry bulk investment having an exit potentially in the back half of 2018
 
Technology, Media & Telecom
·      Internet; GRPN was upgraded to neutral at Goldman Sachs as believe stabilizing gross profit growth will be augmented by cost savings to drive upside to Street EBITDA and firm downgraded SFLY to sell noting shares have rallied 31% (vs. S&P +7%), more than pricing in any benefit of tax reform and making for an unfavorable risk/reward; FB falls for a 6th straight day – extending losses after last week announced the company will make significant changes to its social networking platform over the coming months
·      Semiconductors; ASML led semiconductors higher after reported Q4 revenue and earnings that topped analysts’ expectations, though it mixed forecast and announced it will buy back up to €2.5 billion of its shares through next year; shares of LRCX, AMAT, KLAC rose in reaction; IDTI was upgraded at Barclays to equal-weight; SOX index traded back to record highs today
·      Software & Hardware; IBM leads the Dow earlier as Barclays upgraded to overweight and raise tgt to $192 as company could be entering a period of top-line stability and maybe even modest growth over the next 12-18 months; ADTN reported slight Q4 EPS/rev beat; AAPL was downgraded to neutral at Longbow saying the current iPhone cycle is “good, not great (meanwhile Bank America raised its target to Street high $220 for AAPL); STX rises for an 8th straight winning session – 52-week highs; HPQ downgraded at Barclays; AAPL announces new U.S. investments, sees $38B of repatriation taxes
·      Networking; sector weaker after HIVE cuts Q4 revenue view to roughly $37M from $40M-$42M vs. est. $40.89M; expects non-GAAP gross margin to be between 67.5%-68.5%, and ATEN sees preliminary Q4 adjusted EPS 5c-6c on revs $55.5M-$56.0M vs. est. 3c/$65.1M (shares of CSCO, FFIV, JNPR among movers on guidance);JNPR was downgraded at Barclays
·      Media & Telecom; Morgan Stanley downgraded DISH to equal-weight citing fewer likely buyers of Dish assets and a less favorable regulatory environment for M&A, while the firm upgraded LBTYA to overweight citing new build project (Lightning) 
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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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