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.
Friday, January 19, 18
Equity Market Recap
· U.S. stocks end the day (and week) higher, rallying for a third straight week despite several negative stories/events today that could have shaken confidence. The S&P 500 index and Nasdaq Comp each touched intraday highs, though the Dow Industrials lagged amid a few earnings reports. For the week, the Dow was up 0.6% (5.3% YTD), while the S&P 500 has gained 0.6% (4.9% YTD) and the NASDAQ is up 0.8% (6.2% YTD).
· There was a confluence of factors that could have pulled markets lower today including: 1) weakness in Dow components AXP and IBM after earnings (both beat top/bottom line, but AXP suspends dividend on tax charge and guides year lower while IBM margins miss views), 2) fears of a potential gov’t shutdown (reports today that progress has been made in Senate – but still no deal after House worked out deal), 3) softer bond prices making stocks less appealing as yields rise (note weakness over the last few weeks in REITS and Utilities), and 4) weaker confidence data as University of Michigan sentiment falling to lowest levels since July and missing estimates.
· But markets again remain resilient, with major averages recouping early losses and rebounding after yesterday’s late day decline from record highs. Energy stocks dropped after the IEA said in its monthly report this morning that U.S. oil output is set for “explosive” growth in 2018, raising its forecast for production, while technology, consumers and retailers led the gains.
· The S&P 500 also posted another record streak: the S&P 500 index has now gone 395 sessions without a 5% drawdown, the longest stretch in the history (prior stretch occurred between 1994 and 1996, and lasted for 394 sessions). The last 5% pullback in the S&P came during Brexit
· Energy futures declined, with WTI crude slipping 58c, or 0.9% to settle at $63.37 per barrel, and tallying a loss of about -1.5% for the week, its largest weekly decline in a month. Crude started lower after the International Energy Agency (IEA) raised its outlook for U.S. crude supply this year by 260,000 barrels a day, to a record 10.4 million barrels a day, largely a result of the recent rally in crude prices. The IEA said surging U.S. crude oil production this year is expected to surpass output in Saudi Arabia and rival that of Russia. Concerns about growing U.S. crude production, along with expectations for a rise in domestic output to a record annual level hit prices yesterday. Note oil prices are up somewhere in the range of about 30% over the last quarter
· Gold prices rose $5.90, or 0.4% to settle at $1,333.10 an ounce, cutting its loss for the week to roughly down -0.1%, ahead of a potential U.S. government shutdown this weekend. The weekly decline snapped the five-week winning streak for gold. The rebound in prices today came just a day after posting its worst daily decline in six weeks.
· The U.S. dollar slipped again this week, extending recent declines as the dollar index (DXY) ends slightly higher on the day (after touching 3-year lows again this morning), but down on the week. Negative consumer-sentiment data and fears of a gov’t shutdown weighed on the greenback. The euro pulled back from earlier highs of 1.2295 to end little changed (around 1.2235) ahead to the first meeting of the European Central Bank in 2018 next week. The dollar slipped vs. the Japanese yen to around 110.60 most of the day, down about -0.4% on the day (and week). The British pound slipped back below the $1.39 barrier early, but up 1% for the week. Bitcoin was down over 3% today after a volatile week that saw lows of $9,185 on Wednesday and highs $14,317 Monday
· Bonds ended lower as yields extended gains on Friday, with the 10-year yield topping 2.63% (highest since 12/16) earlier, but ended above 2.62% after topping its 2017 high yesterday. It was a week-long sell off for bonds as attention turned to a potential government shutdown as the Senate prepares to take up a short-term spending bill. The 2-year note yield little changed at 2.05%, while the 30-year bond yield rose 3 bps to 2.91%. Rising Treasury yields also reflect concerns about strengthening global growth and improving inflation prospects following comments from Fed speakers, and stronger economic data.
· The Preliminary Jan. Michigan Sentiment fell to 94.4 from 95.9 last month, and was below the 97 estimate by economists; the current economic conditions index fell to 109.2 vs. 113.8 last month, while expectations index rose to 84.8 vs. 84.3 last month
Sector News Breakdown
· Retailers; outperformance in the retail/consumer space as analyst get more bullish; NKE upgraded to outperform and $74 tgt at Wedbush given confidence for an inflection in margin and a return to growth in North America in FY19; ANF upgraded to buy at Argus with a $25 tgt noting shares have been on a five-year slide, but a new CEO is implementing a turnaround plan and beginning to see positive results; FL was upgraded to outperform at Telsey with a $56 tgt and Canaccord said shares to cheap not to own; KSS tgt raised to Street high $100 at Jefferies, encouraged by actions the company is taking to embrace the digital revolution
· Tobacco sector; Jefferies said they are bullish on tobacco for FY18 and upgrade shares of MO & PM to buy and Japan Tobacco to hold saying the 12-month underlying sector TSR of c15% expected vs wider large-cap staples of c10% and a less demanding valuation, its discount to staples at recent highs; Piper also said they remain bullish on the outlook for US tobacco companies and non-combustible innovation
· Consumer staples; APRN active as Armistice Capital reported initial 8.8% passive stake last night, making firm APRN’s second largest holder; MKC downgraded to sell at Deutsche Bank as believes organic revenue growth expectations in the company’s Consumer segment for fiscal years 2018 and 2019 are too high
· Restaurants; CMG upgraded to market perform at Raymond James as no longer see material downside risk to 2018 estimates, and are in fact raising our 2018 estimate; Goldman Sachs upgraded JACK to buy on potential secular rotation, saying domestic fast-food shares have underperformed casual diners relative to run-rate benefits of tax reform (cut BLMN to neutral)
· Housing & Building Products; in home improvement retail, LOW tgt was raised by two analysts (UBS to $120 and BTIG to $115) saying execution at Lowe’s is improving, with staffing issues now in the past; also on LOW, nominates three directors amid pressure from D.E. Shaw; HD shares also surging, rising above the $200 level for first time ever today
· Casino, Lodging & Leisure; in gaming, Jefferies initiated 11-stocks with WYNN ($202 tgt), ERI ($41 tgt) and PENN ($39 tgt) their top picks, noting the casino industry reflects the best operating environment in many years, with solid top line expectations, heightened cost management and stable capital structures; ADT 105M share IPO priced at $14.00 (low end of range); WYN upgraded to buy at Goldman Sachs after acquires LQ hotel business for $1.95B yesterday; GDEN 6.5M share Secondary priced at $28.00
· Energy stocks were among top sector laggards as oil prices pullback from 3-year highs after the International Energy Agency (IEA) raised its outlook for U.S. crude supply this year by 260,000 barrels a day, to a record 10.4 million barrels a day, largely a result of the recent rally in crude prices. The IEA said surging U.S. crude oil production this year is expected to surpass output in Saudi Arabia and rival that of Russia
· In oil services, SLB the first of the majors to report earnings, with EPS beating by 4c on slightly better revs of $8.18B, but cap-ex below views at $2B; SLB also said it will exit the marine and land seismic acquisition market and transform its WesternGeco product line into an asset-light business over concerns about future returns.
· The Baker Hughes (BHGE) weekly rig count showed total rigs slipped 3 to 936 (after surging 15 the prior week), as oil rigs fell 5 to 747 and gas rigs rose 2 to 189
· More bank earnings amid a busy week of results that were mixed and messy given the impact (some positive/some negative) of the tax plan; in regionals today, STIposted a 4c EPS beat for Q4 as revs rose 5% to $2.27B (in-line); PBCT, RF, and FHN also post EPS beats; CFG sees NIM improvement of 5 bps for Q1 after boosts dividend and reports earnings; SCHW downgraded to neutral at Citigroup
· In trust banks, Morgan Stanley upgraded BK to overweight following negative reaction in the stock following management’s report of plans to reinvest the “vast majority” of tax savings (saying sell-off overdone), but JP Morgan cuts to underweight based on the same news
· Insurance; Lincoln Financial Group will pay Liberty Mutual about $3.3 billion, which consists of a $1.446b total net investment for the Group Benefits business.https://goo.gl/QGQfxH; Citi comments on insurance group as expect tax reform focus will shift from EPS/BVPS impacts to the retention of any benefits, which should favor U.S. Life (firm removes VOYA from focus list and add PRU, while raising tgt on BHF to $55 and maintain sell on MET)
· Card services; AXP shares slump, weighing on the Dow Industrials after guiding year earnings below guidance and also said it plans to suspend its share repurchase program for the first half of 2018 due to charge of $2.6B due to tax reform (AXP had beaten Q4 EPS and rev estimates); SYF earnings beat but said it expects net charge-off rate of 5.5%-5.8% in 2018 due to normalization and timing of portfolio acquisition (4Q provision for loan losses rose $278M to $1.4B)
· Payments and Consumer Finance; SQ tgt raised to Street high $64 at Nomura/Instinet as believe that an inflection in GPV growth will help Square keep transaction yield stable
· REITs, the sector has come under pressure with the Bloomberg REIT index sinking nearly 8% over the last 2-months as bond yields have ramped higher on rate hike expectations and better economic data; Stifel said following meetings at the National Multifamily Housing Conference they are upgrading MAA to buy from hold and downgraded ESS to hold
· Pharma movers; generics weak again on reports the Justice Department’s antitrust division may sue generic pharmaceutical companies as part of a criminal investigation into possible price-fixing in the industry, the division’s chief said (MYL, ENDP, LCI, TEVA); yesterday, generics fell after the NY Times reported yesterday that a group of hospital systems plan to “create a non-profit generic drug company” to battle shortages and high prices; AZN said that two new drugs, its Lynparza tablets for advanced ovarian cancer and its Fasenra treatment for bronchial asthma, have received approval from Japanese authorities; OCUL upgraded to buy at BTIG saying the company’s turnaround plan is starting to take form under its new management team
· Biotech movers; ATRA price target raised to Street high $70 from $47 at Canaccord based on higher conviction that Phase 3 studies for ATA-129 will be positive and lead to FDA approval; AGIO 7.09M share Secondary priced at $67.00; ACOR rises as Bloomberg reported the drugmaker has reportedly received takeover interest from biotech firm BIIB https://goo.gl/g6Xs3h
· Medical equipment and devices; SIEN upgraded to buy at Stifel citing proprietary work in the Breast division (72% of 2019E revenue), physician feedback from miraDry users (28% of 2019E revenue), and the recent pullback in the stock; HOLX downgraded to hold at Deutsche Bank citing secular growth challenges on a number of fronts; OBLN 5.455M share Secondary priced at $5.50; ALGN was downgraded to Equal-weight at Stephens
Industrials & Materials
· Industrials & Machinery; CMI was upgraded to buy at Bank America saying sees further upside driven by the still early recovery in the broader US capital spending outlook; GE extends losses after surprise charge announced earlier in the week, down 5th day;
· Transports; rails active after earnings results from KSU and CP; CP Q4 adjusted EPS C$3.22/C$1.71B vs. est. C$3.20/$1.7B; KSU Q4 EPS beat by 2c on slightly better revs; GWR said Dec. carloads fell -5.7% and traffic of 255,199 carloads
Technology, Media & Telecom
· Internet; AMZN raises its U.S. Prime memberships by nearly 20% to $12.99 per month; NFLX tgt raised to street high $270 at KeyBanc as expect solid 4Q results and see the potential for upside to subscriber estimates through 2018
· Semiconductors; sector dips from record high; Mizuho said chip pricing trends remain strong, which could bode well for AMD, NVDA, MU and WDC in the first half of the year; TXN tgt and estimates upped at Oppenheimer ahead of Tuesday’s earnings call as they see a beat/raise set-up; IPHI downgraded by Bank America and Morgan Stanley after lower guidance yesterday
· Apple ship suppliers; Citi said there could be downside to guidance for companies with high handset exposure such as SWKS and QRVO as Apple and Chinese handset manufacturers are pushing out orders; KGI Securities cut its iPhone X shipment estimate by 23%, citing weak demand in China and high prices (QRVO, AVGO, CRUSlower)
· Media & Telecom; Deutsche Bank upgraded SIRI and LSXMA to buy saying they think Liberty Sirius is a more favorable vehicle for owning SiriusXM right now given the ~20% discount to NAV that gives it additional optionality beyond the upside we see in SiriusXM (raise tgt to $6.50 for SIRI and $54 for LSXMA)
· Hardware, Software & Components; IBM snapped its 22-consecutive quarterly revenue decline, with top and bottom line beats, but shares slipped as gross margins missed estimates (49.5% vs. 50.8% est.); TEAM solid Q2 results, citing its revenue acceleration, better than expected billings, record number of customer additions, and margins ahead of expectations, but shares slipped from record highs as good news likely baked in; AVT upgraded to buy at Longbow; CSCO added nine more products to its investigation into dozens of systems potentially impacted by the Spectre and Meltdown exploits, CRN reports