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.
Monday, January 22, 18
Equity Market Recap
· U.S. stocks at it again, rising to fresh record highs for the S&P 500 and Nasdaq Composite, though defensive/interest rate sensitive sectors such as Utilities, Telecom and REITs paced the gains (the three top declining sectors over the last month), even outperforming technology and bank stocks. Stocks bounced off lows this morning despite news coming into today that the government shutdown reached a third day after the Senate failed to reach an agreement on the spending bill Friday. However, markets rebounded midday after reports the Senate had approved a procedural bill that would allow government to end the shutdown. Biotech stocks outperformed, helping lead the Nasdaq Comp following two big M&A deals this morning (CELG buys JUNO for around $9B and SNY buys BIVV for around $11.8B). There is a busy week of earnings upcoming (NFLX, ZION tonight…PG, JNJ, KMB, TRV, VZ tomorrow morning), with markets also keeping an eye on central banks as the Bank of Japan is holding its two-day policy meeting this week, while the European Central Bank is set to begin their get-together on Thursday. Outside of the Washington spending bill drama, the handful of M&A deals news, and a few earnings results, markets were generally quiet, continuing to extend records!
· Commodity prices generally quiet on the day; Gold prices were little changed most of the day, falling -$1.20 to settle at $1,331.90 on ounce, slipping as the U.S. Senate voted to end the government shutdown and as the dollar stabilized. WTI crude holds gains, rising 25c to settle at $63.62 per barrel (highs $64.14 and lows $63.17). Prices were helped early after OPEC and Russia reaffirmed that they’ll persevere with production cuts until the end of the year. The March WTI crude contract rose 26c to $63.57 (February expired today).
Currencies & Bonds
· Bond gained early as yields fell from yearly highs, but reversed late afternoon with the 10-yr trading above 2.66% and the 2-yr steady at 2.065%. Treasuries erased gains after lawmakers voted to end a partial government shutdown that lasted just over the weekend. There were no major economic data points to move bonds today, as investors were focused on Washington.
· The U.S. dollar slipped late in the day after spending most of the session lower, ahead of central bank meetings later this week for the ECB and BoJ. The dollar index remains not far off its 3-year lows reached last week (just above the 90 level), while the euro held above the 1.225 level vs. the greenback and the Pound surged to highs up over 0.9% as approaches the 1.40 level. The crypto currency market slumped with declines in Bitcoin, Ripple and Ethereum.
Other Interesting tidbits
· The International Monetary Fund (IMF) revised up its outlook for global growth in part because of upside surprises in Europe and Asia. In its revised world economic outlook, the IMF said the global economy would expand at a 3.9% rate this year and next, revised upward by 0.2% from its prior forecast and also said the Republican tax bill will add 1.2% to U.S. growth through 2020 but will then lower growth for a few years from 2022 onwards
Sector News Breakdown
· Consumer Staples; NSRGY active as activist investor Dan Loeb’s Third Point LLC said the company needs to do more to realign its portfolio, including getting out of its stake in cosmetics giant L’Oréal SA; in tobacco, PM IQOS heated tobacco product appears to have “lower toxic potential than cigarette smoke in certain conditions,” according to briefing documents released ahead of an agency advisory committee later this week (note FDA is evaluating PM iQos application for modified risk claims in a two-day meeting Wednesday and Thursday); PG reports tomorrow
· Housing & Building Products; homebuilder LEN and MTH upgraded to outperform at Credit Suisse as firm maintains positive outlook for housing space as forecast continued expansion this year, with single family starts rising ~11%; LOW upgraded to outperform at Bernstein as outlook has changed and raised tgt to Street high $125
· Autos – Ryan Brinkman previews auto OEM earnings; raising GM ests. for ’18 and PT moves from $55 to $56 while F/Ford estimates cut (and PT moves from $15 to $14); Ryan remains neg. on TSLA (his $185 PT suggests 47% downside). Ryan also previews auto parts earnings; overall Ryan is modeling earnings below the St; cautious near-term remarks but he remains bullish on the space and is modeling earnings above the St for ’18 and ’19; d/g ADNT from N to UW (given operation/execution headwinds) and VC from OW to N (on valuation). – autos at JPM
· Casino, Lodging & Leisure; casinos rally as WYNN reported Q4 EPS and revs above consensus views ($1.40/$1/69B vs. est. $1.38/$1.56B); prior to earnings, Jefferies positive on space saying channel checks indicated that over the past week, GGR in Macau has accelerated from the prior week, is currently on run rate to support 28% y/y growth (LVS, MLCO, MGM active); in leisure, HOG was upgraded to outperform at Wells Fargo
· Retailers; ANF boosts guidance for Q4 comp and overall sales and announces Arthur Martinez to step down as executive chairman; ULTA shares underperformed retail, down as much as 4%; PETS declined despite quarterly results topping consensus
· Very quiet sector outside of earnings from oilfield service giant HAL, rising on the results (after SLB reported Friday); MLP sector a top performer, extending recent gains as the Alerian MLP Index (AMZ), the primary benchmark index for master limited partnerships, traded up over 2% and back above the 300 level as nearly all of the 40 index components higher today led by NGL up over 5%, VNOM, NS, GEL and ENLK also rising
· Utilities; shares of FE advanced after Elliott Management Corp. is part of a group of investors that agreed to a $2.5 billion equity investment for the companyhttps://goo.gl/fZWPzK; the defensive utility sector generally outperformed today, but did pare gains in the afternoon as bonds yields rebounded off earlier lows (UTY has fallen sharply over the last few weeks)
· Large Cap banks were mixed to lower, paring recent gains after rally in bonds yields lifted prices on increased lending benefits; lower corporate tax rate also seen as long-term tailwind for sector (though some noting charges this quarter); GS playing catch-up, bouncing after last week’s earnings related decline (shares nearly rebound all of its recent losses)
· Insurance; VR to be acquired by AIG for $5.56B/$68 per share https://goo.gl/eLgnZA; AFL was upgraded to Strong Buy from Outperform at Raymond James noting shares underperformed relative to peers on a year to date basis (-1.1% vs. +3.9%) due in part to the recent article alleging fraud at the company; HRTG downgraded to market perform at JMP Securities, falls over 6%
· REITs; SunTrust upgraded AIV, ESS, LPT, SRC, VNO and WRI to Buy from Hold and EGP to hold from sell saying see several specific headwinds, but significant REIT underperformance last year (+5% vs +20% S&P 500) and YTD (-5.7% vs +4.7%) has created attractive entry points for many
· Biotech and Pharma M&A deals; 1) JUNO to be acquired by CELG for $87 per share/$9B deal https://goo.gl/Q7Ndgx as Celgene will gain research into a novel class of therapies known as CAR-T that use the body’s own immune system to fight cancer (shares of BLUE also higher); 2) BIVV to be acquired by SNY for $105 per share in deal valued at $11.6B to gain treatments for rare blood disorders https://goo.gl/3sEdVx (BIVV had been a spin-off of BIIB); 3) BCRX and IDRA said they plans to merge into a rare disease company https://goo.gl/H7geyK
· Biotech movers; ARRY with updated results from a Phase 3 clinical trial, BEACON CRC, assessing the triplet combination of encorafenib, binimetinib and Eli Lilly’s ERBITUX (cetuximab); MDCO resumed buy at Citigroup as believe MDCO’s inclisiran is a more valuable LDL-lowering agent than ESPR’s bempedoic acid, and this is currently not appreciated (cuts ESPR to neutral)
· Pharma movers; OMER confirms that the European Medicines Agency’s Committee for Orphan Medicinal Products issued a positive opinion on Omeros’ application for orphan drug designation of OMS721 in the treatment of primary Immunoglobulin A nephropathy; LLY was downgraded to underperform at Credit Suisse; BMY gets EC approval for expanded use for its Yervoy; TEVA active after Q4 letter reveals Jana Partners took new stake, Bloomberg reported first
· Healthcare suppliers and managed care; BAX announces FDA approval of heart medicine bivalirudin; ABT was downgraded to neutral at BTIG on valuation/rally in shares; AET upgraded to buy at Deutsche Bank with $212 tgt; CRL downgraded to hold at SunTrust saying the firm’s 2018 tax rate estimate for the contract research organization was too low
Industrials & Materials
· Industrial & Machinery; GE fell to fresh multi-year lows after Bank America downgraded shares, before shares rebounded (touched low $15.80); defense stocks rebounded after news of a government shutdown ending after three days
· Metals & Mining; steel sector active after Citigroup upgraded US Steel (X) to neutral and raised targets for all steel equities raised (top picks STLD, NUE, CMC) as the group will see another rally, even after recent share price rise – firm notes steel equities have rallied 35% since November as higher steel prices closed out the import arb, but they anticipate another leg higher with significant potential for a multi-year cycle of above-average utilization and profitability; SCCO was downgraded to neutral from buy at UBS; FCX was downgraded at CIBC
· Chemicals; ADM sought merger talks with BG, said a person briefed on the matter, potentially setting up a battle for control of the giant agricultural trader withGLNCY – Bloomberg (late Friday) https://goo.gl/DumKGG
Technology, Media & Telecom
· Internet; TWTR slides after WSJ reported that COO Anthony Noto is said to be in talks to become the next CEO of SoFi; NFLX to report earnings after the close tonight
· Semiconductors; TSM upgraded to buy at Goldman Sachs as finds an extra spring in its step, with EPS growth accelerating to 16-18% over the next two years; more weakness in AAPL suppliers on further cautious analyst comments (QRVO, SWKS, AVGO); INTC said it began rolling out an early version of an updated solution to industry partners for testing and will make a final release available once testing completed
· Software movers; PANW downgraded to neutral at Goldman Sachs as believe risk/reward is balanced at current levels; NUAN active after guides Q1 EPS 26c-27c on revs $500M-$503M, above est. 22c/$492.72M; ADSK stake revealed in Jana Partners Q4 letter; SYMC shares slide after Credit Suisse downgraded to neutral
· Tech Services and equipment; SANM shares fell after guides prelim Q1 EPS to 48c on revs $1.74B, below est. 71c/$1.77B, saying the disappointing financial results are driven by slower than expected new program ramps and an unfavorable program mix (JBL, FLEX, BHE fell in reaction)
· Hardware and Networking; JNPR upgraded to overweight at Oppenheimer citing overly bearish sentiment and a valuation disconnect following tax bill, which create a near-term opportunity and said Amazon related weakness is temporary and likely to correct in 2H18; XRX first- and third-biggest investors, billionaires Carl Icahn and Darwin Deason, have formed an alliance and plan to encourage the printer and copier giant to explore a potential sale https://goo.gl/H4emw6