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.
Tuesday, January 23, 18
Equity Market Recap
· U.S. stocks end mixed on Tuesday, with all three main equity benchmarks touching intraday all-time peaks, though the Dow Industrials failed to close at a record best. The dollar rout continued (back to 3-year lows), falling again vs. the euro and yen (fell vs. pound before rebounding) ahead of the EBC central bank meeting later this week. Oil prices back to fresh 3-year highs ahead of inventory data tonight and tomorrow. Lone piece of economic data today showed the Richmond Fed manufacturing index suffer its biggest 2-month drop since 2006. The Nasdaq Composite traded up as much as 0.7% to 7,461, now up 12 of the 15 days to start 2018 and up 8% YTD).
· Sector movers: solar stocks and appliance makers in focus after the U.S. imposed tariffs on imported solar panels and washing machines. Defensive assets lead for a second day with telecom, REIT and utilities rising. Technology shares buoyed by Internet space after Netflix earnings and revs beat, but its subscriber numbers and guidance sent shares soaring.
· Several Dow components report earnings this morning: JNJ (EPS beat and said sees more R&D spending on tax reform), VZ (mixed quarter as EPS misses but tax reform helps revenue beat), TRV (Q4 core EPS handily topped estimates on growth in premium across businesses) and PG (Q2 EPS topped estimates, but not seen as high quality beat according to analysts). In tech, NFLX leads Internet names higher after Q4 subscriber metrics and Q1 guidance easily top consensus
· Late yesterday, Congress passed a three-week funding measure halting a three-day shutdown, with the bill then signed by President Donald Trump. The agreement keeps the government running up to Feb. 8, though underlying disagreements between the Republicans and the Democrats on immigration and other topics remain (a non-factor for now)
· About 80 S&P 500 companies are scheduled to report results this week. Of the 68 S&P 500 companies that have reported 4Q17 results, 78% posted a positive EPS surprise, according to data compiled by Bloomberg. For all of 4Q16 it was 66%. Sales are faring even better – so far 88% of 4Q17 sales have beat estimates vs 44% in 4Q16. Bloomberg LP
· Oil outperformed for a second day, rising 90c or 1.4% to settle at $64.47 per barrel ahead of inventory data tonight (API) and tomorrow (EIA). Markets await the report to see if it will reveal a tenth-straight weekly decline in domestic crude stockpiles (though production has been ramping). With today’s close, WTI crude traded back to fresh 3-year highs, extending yesterday’s gains after Saudi Arabia’s energy minister Khalid al-Falih said Monday that OPEC and a group of non-cartel members led by Russia could extend their production cuts beyond 2018. Natural-gas futures rallied, jumping over 9% to $3.522 per million btu’s (the highest finish since mid-May)
· February gold prices rebounded from earlier lows, rising $4.80, or 0.4%, to settle at $1,336.70 an ounce, once again helped by a decline in the U.S. dollar 9touching 3-year lows). Gold prices marked their highest close in about a week.
· Another day, another dollar decline, on track for a 6th straight weekly drop, falling sharply against nearly all major currencies (dollar index back near 3-year lows – Dec 2014). The British Pound rises to highs of $1.4027 vs. the greenback (highest since June of 2016 – Brexit) before paring gains to end flat; the euro traded above $.123 briefly while the dollar slumps against the yen by -0.5% to 110.30 (off overnight highs 111.18) despite dovish comments from Kuroda overnight (the Japanese central bank said it was still too early to discuss scaling back its easy-money policy stance). As the first day of the latest round of renegotiations of the NAFTA got under way, the greenback strengthened against both the Canadian dollar and the Mexican peso but later pared those gains. Bitcoin rebounded, rising as much as 8%
· Bonds bounce as yields slip (but the 10-year holding above the 2.6% level) helped by a better 2-year auction late day. Bonds gained early after the lone piece of economic data (Richmond Fed) missed estimates. Meanwhile, the Bank of Japan left its monetary policy unchanged (expected), as Gov. Haruhiko Kuroda attempted to reduce speculation that the central bank may follow the ECB and FOMC by adopting a more hawkish monetary policy. That did not stop the yen from strengthening however, rallying throughout the day. The yield for the 10-year note dipped to 2.635%, down about 3 bps from yesterday, while the 30-yr held above 2.91%. The U.S. Treasury sold $26B in 2-yr notes at a yield of 2.066% (vs. 2.067% prior to auction) with a bid-to-cover (demand) at 3.22 (highest since Sept 2015), and well above the 2.52 prior auction, with indirect bidders awarded 58.3% of the auction. Shorter term bonds advanced further following the results
Sector News Breakdown
· Retailers; sporting goods store DKS upgraded to positive at Susquehanna as believes earnings results should surprise to the upside given a low bar; CAL was downgraded to neutral at Susquehanna; JWN was downgraded at William Blair as sees risk to the company’s initial 2018 margin guidance; DG was upgraded to outperform at Wells Fargo and boost tgt to $117 from $83 saying performance has improved recently, and the momentum should accelerate in 2018; toy retailers HASand MAT posted sharp gains late day on no apparent news
· Consumer Staples & Restaurants; Dow component PG Q2 EPS topped estimates, but not seen as high quality beat as analyst note beat was not based on operational factors – organic growth in the quarter was all “volume driven, with PG’s portfolio still not able to propel pricing; KMB mixed Q4 as EPS beat by 3c but revs miss estimates and said organic revs fell (1%); IPAR cut at KeyBanc based on valuation; TXRH upgraded at Credit Suisse to outperform
· Housing & Building Products; appliance makers benefit (WHR) from tariffs after the Trump Administration imposed a tariff of up to 50% on large residential washing machines; home improvement retailers LOW and HD touched fresh record highs today
· Energy stocks mixed after the group posted strong gains yesterday, led by oil services after HAL earnings beat; oil drillers weak on analyst downgrade; E&P stocks lagging; refiners were slightly lower, while solar stocks jump on overseas tariffs; MLPS rally off lows after strong boost the last few weeks (Alerian MLP Index up over 17% since November lows)
· Solar stocks active after the Trump administration imposed 30% tariffs Monday on imported solar-energy cells and modules. The decision imposes a 30% tariff on imported solar cells and modules in the action’s first year, with levies slowly falling to 15% four years from now. The U.S. government will exempt the first 2.5 gigawatts of solar cells imported into America in each of the next four years (shares of FSLR, SPWR, VSLR, SEDG, CSIQ were all initially gained – but slipped)
· Oil drillers; Barclays’ downgraded DO and RDC to underweight from equal weight and lowers near-term dayrate forecasts, saying there’s a few green shoots on the horizon (potentially) in the offshore sector, though the group is overvalued (sees an avg of 35% downside to group)
· Utilities; sector led early as defensive assets bounce after weeks of declines on rising bond yields (making dividend paying names less appealing); Mizuho downgradedSO to neutral based on a need for incremental equity, while the firm upgraded PNM (following a final NMPRC rate order in the company’s general rate case on January 17) and EXC (driven by an increase in estimates); Credit Suisse upgraded DUK to outperform with $83 tgt as believes credit risks are priced in, while downgraded ES to underperform from neutral on recent outperformance
· Banks; another busy morning of earnings in banks, especially regionals, with ZION, SNV, FNB, HBAN, FITB, WBS, FULT among those reporting results; HRB rises after updating on the impact of new tax laws; in online brokers, AMTD rises on significant beat driven by much higher revenues as well as lower expenses; trust bank STTrises on earnings beat; BPOP Q4 earnings beat; Earnings due post-mkt: CHFC, COF, FCB, FCF, GSBC, HAFC, LTXB, NAVI, STL, TRMK, UBNK, UCBI, UCFC, UMBF, UMPQ, WSBC
· Insurance; Dow component TRV Q4 core EPS handily topped estimates ($2.28 vs. $1.50 est.) on better revs of $7.45B on growth in premium across businesses; other P&C stocks such as ALL and PGR were weak most of the day (KBW said this morning they expected pressure on P&C insurers exposed to California after the state’s insurance commissioner said he’s directed his staff to review P&C insurer rates to see whether — under the new 21% federal corporate tax rate — expected profits exceed the limits embedded in California’s prior approval process)
· Bond insurer shares active (AMBC, AGO, MBI) after Puerto Rico Governor Ricardo announced his intention to privatize the Puerto Rico Electric Power Authority (PREPA) – the Commonwealth’s troubled electric utility – in the aftermath of the damage caused by Hurricane Maria, stating that the process of selling the assets would take about 18 months.
· Pharma movers; Dow component JNJ Q4 profit topped views though posted a quarterly loss of $10.7B after taking a one-time charge of $13.6B related to accounting changes caused by tax legislation (year EPS guidance above views and revs in-line) – also said sees “significant” R&D spending after tax reform; GBT initiated buy and $80 tgt at William Blair saying on positive HOPE data, they would see Global Blood Therapeutics as a prime takeout candidate; AMRN said a study of cardiovascular outcomes nears completion that will show whether Amarin’s Vascepa helps extend lives; VYGR said FDA cleared their Investigational New Drug Application for VY-AADC for Advanced Parkinson’s Disease; VRTX added to Bank America US1 List/maintain buy and $180 tgt
· Biotech movers; AMGN upgraded to buy at Argus with $220 as assumes that Amgen will make shareholder-friendly moves this year as it deploys repatriated overseas cash/also see several catalysts for growth in 2018; upcoming stock secondary offerings for ADMS, RARE;
· Services, equipment and suppliers; RMD shares jump on earnings results, though analyst mixed on report (upgraded at Northland but Macquarie downgraded citing valuation and ongoing ASP declines, while Jefferies noted margins continue to deteriorate)
· Gene-editing stocks rise; SunTrust said “gene editing will be the next major therapeutic modality” and should be the focus of small- to mid-cap investors as firm upgraded CRSP to buy from hold (PT to Street-high $45 from $16), and EDIT to buy from hold (PT $45 from $17) as firm highlights approaching clinical data with CRSP expected in mid-2018, EDIT by year-end
Industrials & Materials
· Aerospace & Defense; RBC Capital preview as they raise 2018 EPS estimates by 10% on average (range: +3% to +20%) to account for the Tax Cut and Jobs Act. On valuation, believe defense stocks should trade at 20x 2019 FCF given its positioning early in an up-cycle, and incremental demand signals from international markets are not yet reflected in orders, backlog, or the 2019 estimates that are the basis of our targets, and relative to depressed interest rates.
· Industrials & Machinery; CAT upgraded to buy at Seaport Global saying the stock may have more room to run, citing 4Q dealer checks and discussions with CAT and competitors and they downgraded VMI after rally in shares; in chemicals, BASF was upgraded at Raymond James to Outperform on higher dividend potential, M&A execution, and higher options after the Oil & gas separation, while downgraded PX
· Transports; airlines earnings coming later this week with UAL tonight after the close and AAL, JBLU, LUV this upcoming Thursday morning; the overall transport index has failed to make new record highs since last Tuesday (1/16), one of the few major averages to not do so this week as investors take profits off soaring rail, airline and trucker prices
· Metals & Mining; STLD and ATI shares were active after earnings results; base metal/diversified mining companies dropped as copper prices fell after inventories surged most in 10 months (copper prices fell to neat 1-month lows), with FCX and TECK shares dropping
Technology, Media & Telecom
· Internet; NFLX Q4 results handily topped consensus on subscriber growth (4Q domestic streaming net adds 1.98M vs. est. 1.29M and 4Q international streaming net additions 6.36M well above the est. 5.05M, while Q1 guidance also well above views; Wayfair (W) downgraded to hold at Stifel as view the risk/reward profile as more balanced at current levels; TWTR shares pressured after confirmed reports COO Anthony Noto to resign to accept CEO role at SoFi; BIDU downgraded at Jefferies on valuation after strong rebound; CTRP downgraded at Guggenheim
· Semiconductors; AMD and NVDA estimates raised at Morgan Stanley “meaningfully” as the rally in Ethereum since October has led to more mining activity than expected; ACLS upgraded to buy at Stifel as believe last week’s sell-off due to concerns of the company’s revision of its operating model and its margin profile targets are overblown; CREE downgraded to neutral at Roth Capital citing pricing pressure from SiC wafer sales; iPhone suppliers slipped late day after JP Morgan said they seeAAPL iPhone X build to be down 50% QoQ (AVGO, SWKS, CRUS moved)
· Hardware movers; AAPL says HomePod will be available to order online on Friday, Jan 26 in US, UK and Australia and arrive in stress Feb 9th; Morgan Stanley raised its view for the IT Hardware industry to attractive as see multiple drivers of inflecting growth that aren’t priced into most IT Hardware stocks: strong IT budget growth, margin expansion, and tax reform (upgraded HPE, NTAP and TDC while downgraded HPQ); NTAP was downgraded to neutral at Davidson noting stock has appreciated 65% and strength in storage reflected in valuation; KRNT upgraded to buy at Citigroup saying recent pull back presents an attractive opportunity ahead of FY18 guide
· Software movers; ADBE raises 2018 adjusted EPS to $6.20 from $5.50 due to the new tax law and also reports it expects 1Q adjusted eps $1.43 and had previously forecast $1.27; in security software, FTNT downgraded to hold at Deutsche Bank on negative channel checks, and see a very different risk/reward profile, while they upgrade PANW to buy
· Optical, Networking and Equipment; ANET downgraded to hold at Deutsche Bank on valuation and sees potential for order pauses during the second half of 2018 and into fiscal 2018 from one or more cloud and content providers; LITE was upgraded to equal-weight at Morgan Stanley as thinks a near-term valuation floor may be near (but MKM cut estimates)
· Media & Telecom; Dow component VZ Q4 EPS missed by 2c on slightly better revs and said sees 2018 capital spending outlook to be $17B-$17.8B; Sprint (S) cut to underperform by Macquarie saying shares are stuck between a slowdown in multi-year turnaround and lack of near-term strategic options/also cuts net adds, ARPU assumptions; ATUS upgraded to overweight at Barclay’s saying spin by Altice NV should address many of the concerns around Altice USA’s complex holding structure;CRTO downgraded at BMO Capital