Market Review: January 18, 2018

Scott GreenDaily Market Report

Closing Recap
Thursday, January 18, 18
  
Equity Market Recap
·      U.S. stocks end lower amid a late day pullback, as the Dow Industrials drops around -100 points, the Nasdaq Comp erased gains late and the S&P 500 dropped below the 2,800 level. Fears of a potential government shutdown (Politico reported that McConnell said to plan for shutdown) sent markets lower late morning, but as has been the case, markets quickly rebounded with investors taking any and all opportunities to snap up stocks on the slightest pullback. Mixed earnings in the financial sector (large charges, weak trading revenues) has clipped a few banks names, but hasn’t dented the broader market. Markets overall end down modestly given the incredible start to the year that has seen record highs for many indices, including a 5.3% YTD gain for the Dow, 4.8% for the S&P and 5.6% for the Nasdaq Composite. Bonds fell as the yield on the benchmark 10-yr traded as high as 2.62%, while commodities dropped and the dollar was mixed. The late day pull seemed like profit taking after all three main benchmarks closed at record highs on Wednesday – and ahead of another round of earnings tonight (AXP, IBM) and tomorrow.
·      The S&P 500 is nearing another record streak: through the close of trading on Wednesday, the index has gone 393 sessions without a 5% drawdown, the second-longest stretch in the history of the index, according to Goldman Sachs data. The longest stretch occurred between 1994 and 1996, and lasted for 394 sessions. If the current trend continues it will match the longest streak ever at the end of trading on Thursday and surpass it on Friday. The S&P 500 has closed higher in nine of the 11 sessions that have occurred thus far this year, ending at a record in each of its positive sessions. It closed at records in the first six sessions of the year.

Economic Data
·      Weekly Jobless Claims fell 41K to 220K (marking the biggest one-week decline since 2009), well below the 249K estimate while the prior week was unrevised at 261K; the 4-week moving average declined by a smaller 6,250 to 244,500; continuing claims rose 76K to 1.952M
·      Housing starts fell 8.2% in December to a 1.19M annual rate, well below the 1.275M rate estimate as single-family starts dropped 11.8%, but construction on buildings with five or more units rose 2.6%. Building permits for future construction were basically flat at 1.30M. Completions rose to 1,177k in Dec., from 1,152k the prior month
·      Philadelphia Fed manufacturing index drops to five-month low in January, falling to 22.2 vs. an upwardly revised 27.9 last and below the 25.0 estimate; new orders plunged to 10.1 from 28.2 and the six-month outlook fell to 42.2 from 52.7
·      The 30-year fixed mortgage rate for week ended today rose to 4.04% from 3.99%, Freddie Mac said in statement; the 15-year rate avg 3.49%, up from 3.44% a week earlier
 
Commodities
·      Gold prices slumped -$12.00 or nearly 1% to settle at $1,327.20 an ounce, posting its worst single-session decline in six weeks and snapping its 5-day win streak. God prices fell form 4-month highs likely on profit taking, while the dollar was mixed. Prices had settled at $1,339.20 Wednesday-the highest since Sept. 8th
·      WTI crude oil prices end little changed, down 2c to settle at $63.95 per barrel, edging lower from 3-year highs; weekly U.S. crude production remained close to a record, offsetting support from a ninth week in a row of declines in domestic supplies (rig cunts have jumped in recent weeks); the EIA also reported a rise of 258,000 barrels a day in total crude production to 9.75 million barrels a day for last week. That’s near the 9.789 million barrels a day seen for the week ended Dec. 15
 
Currencies & Bonds
·      The dollar ended little changed, giving up overnight gains, with the dollar index (DXY) ending flattish above the 90.50 level (after falling to 3-year lows yesterday); the euro rose around 0.35% at 1.2225 (just off recent 3-year highs above 1.23); the dollar also slumped vs. the yen and Pound while rising against the Franc; Bitcoin posted a nearly a $3,000 bounce off yesterday lows of 9,185 (traded to highs of $12,138 before paring gains), while other crypto currencies rebound.
·      Treasury markets slip as the yield on 10-year bond jumped above 2.6% for the first time since March (intraday high 2.62%), a day after the Federal Reserve’s Beige Book suggested a tighter labor market was finally translating into wage gains; the 2-yr yield traded to 2.06% before paring gains. The 10 year TIPS auction was pretty strong, with the awarded yield of 0.548% nearly 3 bps through the when-issued level.
   
Sector News Breakdown
Consumer
·      Retailers; WMT upgraded to buy and added to the Americas Conviction List at Goldman Sachs with $117 tgt as the firm’s strategic positioning remains compelling; apparel stocks outperformed (VFC, PVH, RL) after JP Morgan raised tgt prices on each with positive commentary; BOOT 6M share Secondary priced at $17.25
·      Consumer Staples/Restaurants; GNC surged after saying domestic company-owned comp. sales (including GNC.com sales) rose 5.7% vs. estimate +3.1% (other weight loss/vitamin names such as VSI, WTW, NTRI, USNA were active); BUFF active after its largest customer, PetSmart, announced the launch of Ainsworth Pet Nutrition’s Rachael Ray Nutrish products in stores and online; cosmetic names (COTY, ELF) fall after JP Morgan said mass cosmetic companies will underperform in 4Q; CMG tgt raised to $425 at Maxim and maintain buy ahead of quarterly results as expect benign food costs to provide an additional boost to 2018 EPS
·      Housing & Building Products; Mizuho upgraded homebuilders LEN to buy (given favorable relative valuation (P/E and PTB), robust EPS growth/ROE potential) andPHM to buy given outsized YOY earnings growth and discounted relative (P/E) valuation and remain buy-rated on TOL and raise tgt to $58; U.S. shipments of major home appliances rise 7% y/y to 6.9M units in Dec., while monthly shipments of AHAM 6 (washers, dryers, dishwashers, refrigerators, freezers, ranges, ovens) increase 2% to 4.5M units (WHR leveraged to data)
·      Casino, Lodging & Leisure; in lodging space, WYN will buy the hotel operations of LQ for $1.95B https://goo.gl/6qCidA; other lodging stocks were mixed on the day (H, CHH, HLT); cruise lines (CCL, NCLH, RCL) were lower mid-session after the group has rallied over the last 2-weeks
 
Energy
·      OPEC increased its forecast for rival oil-supply growth for a second month running after a recovery in prices sent Brent to $70/b. Yet the rally has prompted concerns that the U.S. will be emboldened to expand production. Expected growth in total U.S. crude supply was revised higher by 110,000 b/d to 820,000 b/d, led by conventional production. OPEC lowered its forecast for shale-oil output by 1.1% from last month’s report, to about 5.42 million
·      Inventory data mostly bullish; the API said U.S. crude supplies dropped by -5.1M barrels for the week ended Jan. 12, showed a rise of 1.8M barrels in gasoline stockpiles, while inventories of distillates rose by 609K barrels. This morning, the EIA reported a weekly drawdown in stockpiles of -6.86M barrels in crude (vs. est. -3.15M), while Cushing inventories fell -4.18M barrels; gasoline build was +3,620M vs. est. +3,992M and distillates draw of -3,887M vs.  est. +1,550M
·      Solar movers; Guggenheim downgraded FSLR and VSLR to neutral from buy and now neutral on all integrated names, though RUN remains their sole buy and the top pick in the solar space. In the Yieldco space, they see continuing M&A activity and we think that BEP and PEGI will emerge as consolidators
·      Utilities; AES shares advanced after ValueAct takes stake, pledges clean energy push; Deutsche Bank upgraded shares of AEP and PPL to buy from hold noting the sector has sold off hard lately on tax positioning, rates, inflation and have continued to lag so far in 2018. The group is now down 11% since November and has underperformed the S&P 500 by ~16% over the same period
·      Oilfield services; Raymond James downgraded APLP and NCSM and adjusted tgts for several after 4Q17 marked the best leg for oil prices in quite some time as oil staged a significant recovery to end the year with stocks following. Oil prices rallied during the quarter, with WTI rising from ~$50 in September to exiting the year at ~$60; FRAC 13.3M share Secondary priced at $18.25
 
Financials
·      Banks; 52-week highs for several financials today: BLK, V, JPM, WFC, MA, PYPL, MTB, CFG, RF, CMA, MS; another busy morning of earnings; BK falls as reported in-line 4QEPS and CEO Charles Scharf says the bank will likely almost entirely offset tax cuts with reinvestment; MS earnings beat as its wealth-management fees climbed to a record in Q4; PACW EPS misses by 8c and misses on revenue; KEY now sees long-term cash efficiency ratio 54%-56%, had seen less than 60% while long-term target for risk profit remains unchanged
·      Business info services; Bank America upgraded TRU to buy on healthy US consumer credit trends, new products, likely upward earnings revisions and potential market share gains from Equifax’s data breach and for other top pick CSGP, sees strong earnings growth in 2018 fueled by the bankruptcy of competitor Xceligent, corporate tax reform, LoopNet transition; BoFa downgraded CATM saying is likely to emerge smaller and less profitable as it shrinks its ATMs footprint
·      Mortgage insurers active; RDN said that it strengthened its Private Mortgage Insurer Eligibility Requirements (PMIERs) financial position and expects to comply with PMIERs 2.0 (Compass Point noted RDN underperformed peers after MTG gave a PMIERs 2.0 update on Dec. 21, as investors were worried that RDN might not be compliant)
·      Blockchain movers; MARA announced that it has entered into a purchase agreement to acquire four patents related to the transmission and exchange of cryptocurrencies between buyers and sellers; LITB opened lab to explore and develop blockchain technology platforms and application on the cross-border e-commerce industry; RIOT submitted registration to participate in the U.S. Marshals Service sealed bid auction of bitcoins; DPW subsidiary, Super Crypto Mining, has escalated its current deployment in the first quarter of 2018 from 40 to 100 units per week
 
Healthcare
·      Pharma movers; generic companies (TEVA, MYL) were volatile after the NY Times reported that a group of hospital systems plan to “create a non-profit generic drug company” to battle shortages and high prices; RDUS rises after positive JPM comments on prescription data for osteoporosis treatment Tymlos
·      Biotech movers; JUNO was downgraded to neutral at Citi, but tgt raised to $98 at Maxim on recent M&A news; ONTX downgraded to hold at Maxim on expanded INSPIRE phase 3 study; CLSN says it has achieved key development goals for ThermoDox and GEN-1 saying it has capital sufficient to complete enrollment of our Phase III OPTIMA Study; BGNE 7.425M share Secondary priced at $101.00; ARWR 10M share Spot Secondary priced at $5.25
 
Industrials & Materials
·      Machinery; Jefferies said machinery stock outperformance is expected to continue in 2018, although comparisons and cost pressures will get tougher in the 2H (firm upgraded TKR to buy and still recommends under-appreciated growth stories such as KMT and NAV); Wells Fargo boosted estimates and price targets for CAT, PCAR, PH, and TEX due mainly to anticipated tax benefit saying 2018 appears to promise more end market improvement
·      Industrials & E&C; JCI downgraded to market perform at Cowen saying the company’s 2H weighting in 2018 and anemic actual free cash flow may render the stock “dead money”; FLR upgraded to outperform and $71 tgt at Credit Suisse viewed as a higher-quality bellwether with a diverse end market offering, and more importantly a more cyclical growth bias; HUBB upgraded to overweight from neutral at JP Morgan and raise tgt to $155; BA pulling back after setting record highs over the last week (has led the Dow Industrials lately); GE falls to 6-year lows, and the worst four-session stretch in nearly eight years, in the wake of the company’s disclosure of massive losses in its legacy insurance business earlier this week (down 11% in 4-days)
·      Transports; in car rental, HTZ upgraded to outperform at Macquarie and up tgt to $30 as sees U.S. tax reform potentially leading to a bounce back in corporate travel and says there is potential for U.S. infrastructure bill to create excess rental car demand (ups CAR tgt to $50); overall, the Dow Transport index failed to extend momentum higher (last record high was 1/16 of 11,423) – seeing a little profit taking in group after record run; JBHT Q4 revs beat
·      Metals & Mining; AA earnings weigh on aluminum stocks (CENX) as missed 4Q EPS, adj. Ebitda and revenue estimates and guided towards FY adj. Ebitda of $2.6B-$2.8B in 2018
·      Chemicals; ALB shares fell on potential weakness on supply concerns after SQM’s deal with Chile to expand production (shares of FMC also under pressure in lithium space); PPG Q4 EPS and sales beat while sales volume increased 3%
 
Technology, Media & Telecom
·      Semiconductors; new record highs for the Philly Semi index (SOX) early in the session; ESIO shares surge after the company’s positive Q3 pre-announcement along with above-consensus revenue guidance for Q4 and Q1 (preliminary Q3 revenue $106M-$111M vs.  consensus $85M); PLXS weaker as guides Q2 EPS 68c-78c on revs $670M-$710M vs. est. 82c/$693.7M after weak Q1 results; TSM advances on better Q4 results
·      Telco, Media & Advertising; Wells Fargo downgraded IPG to market perform and lower estimates for agency holding companies and are broadly below consensus (except for WPP) as believe pressures on advertising asset creation budgets will largely carry through into FY’18; CMCSA was downgraded at Nomura to neutral on declining video subscribers; VZ higher as tax overhaul will drive a one-time reduction in net deferred income tax liabilities of about $16.8B and boost its Q4
·      Software movers; PTC shares rally as delivered a strong F1Q performance, with bookings and subscription ACV well above the high end of guidance/outperformed on every major metric, with subscriptions driving the majority of the $12M bookings beat; APPN downgraded to sell at Goldman Sachs after rally in shares (marks 4thanalyst downgrade in seven days
·      Security software; SYMC was downgraded to Underperform at Jefferies and cut tgt to $23 as believe current guidance is unachievable and the stock will rerate lower;PANW was upgraded to outperform and tgt upped to $180 at Evercore/ISI as believe the risk/reward has become more compelling with product growth expectations now reset
·      IT Services; Citigroup said they remain cautious on sector as challenges include the transition to digital transformation from legacy outsourcing; immigration reform; tight IT labor market and clients’ significant productivity demands – the firm says DXC remains top idea followed by EPAM and also recommend GLOB, DOX, WNS andG as a Buy and upgrade CTSH to buy as valuation remains quite attractive even though the stock outperformed the market in 2017
·      Optical, Networking and Hardware movers TIVO stock rallies after expanded patent licensing pact with Google; IPHI said the ongoing slowdown in the China Long Haul and Metro markets is expected make its 1Q (March) results challenging; networking stocks weak again – group fell yesterday on HIVE and ATEN lower guidance…JNPR, ADTN under pressure
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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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