Market Review: January 24, 2018

Scott GreenDaily Market Report

Closing Recap
Wednesday, January 24, 18
  
Equity Market Recap
·      U.S. stocks end mixed, showing the first sign of weakness in over a week following commentary from two members of the Trump administration. Commerce Secretary Wilbur Ross discussed the current global trade situation, saying “the Chinese for quite a little while have been superb at free-trade rhetoric and even more superb at highly protectionist behavior,” raising fears of trade concerns which weighed on market sentiment somewhat briefly. Overnight, comments from Treasury Secretary Steven Mnuchin hurt the dollar, saying weaker greenback is good for trade and wasn’t concerned about the currency’s recent decline. Those comments provided selling pressure for the dollar and a boost to stocks early in the session. The tech heavy Nasdaq underperformed, led by a decline in semi’s ahead of several earnings the next few days (LRCX, TER, XLNX tonight and INTC, MXIM, KLAC, MSCC tomorrow), and a pullback in biotech’s after touching 52-week highs yesterday. The NASDAQ posted a 60-point bounce off lows of 7,376 (but that was after falling more than 100 points from earlier intraday record highs of 7,486), while the Dow bounced over 200 points off its intraday lows. Oil prices closed above $65 per barrel for the first time since December 2014 after the EIA posted a 10th straight decline in U.S. crude supplies. Transports a standout to downside after UAL earnings/said plans to increase capacity for the next three years (weighing on airlines). Markets will focus on more earnings tomorrow, along with the ECB central bank meeting.
 
Commodities
·      Oil prices rise, with WTI crude up $1.14 to settle at $65.61 per barrel, not far from the intraday high of $65.72 and best levels since Dec ’14. Oil (along with many other commodity prices) were helped by the ongoing decline in the U.S. dollar. Inventory data also helped boost sentiment in crude after the EIA showed a 10th straight week of falling inventory (though production also increased again); natural gas prices add to yesterday’s 9% gains, up at $3.50 mln btu up 1.9%
·      Gold prices rose sharply, surging $19.60 or 1.5% to settle at $1,356.30 an ounce, its highest finish in more than a year, as another big decline in the greenback following comments from Treasury Secretary Mnuchin favoring a weaker dollar knocked the U.S. currency to three-year lows. Silver prices also benefitted from the weak dollar, rising more than 3%
 
Currencies
·      Ugly day (week and month) for the U.S. dollar, falling to multi-year lows vs. a majority of rival currencies after U.S. Treasury Secretary Steven Mnuchin said in Davos overnight, that a weaker greenback is good for trade and wasn’t concerned about the currency’s recent decline. The dollar is on track for its 5th straight weekly decline, with the dollar index (DXY) trading to lowest levels since December 2014 (breaking below the 90 level – lows 89.15). The British pound breaks above $1.42-level for the first time since Brexit vote – up 1.4% today to 1.4241 high before paring gains and up 2.5% just the last 3-days (Monday low $1.3857); the euro tops the 1.24 level, up 0.8% and at highest levels since December 2014 (highs of 1.2415), while the dollar falls over 1% vs. yen to 109.20, lowest levels since Sept; Canadian dollar strengthens as well.
 
Bond Market
·      Bonds fall, giving up yesterday’s gains, while the yield on the 10-year rebounds back above the 2.65% level after Treasury Secretary Steven Mnuchin suggested a weak dollar could boost trade; the 2-yr up 2 bps to 2.08% and the 30-yr up about 3 bps at 2.93%; US Treasury auction of 5-year notes good, but not as strong as demand for 2-year yesterday.
 
Economic Data
·      Markit Economics release flash composite purchasing managers’ index for U.S. in January as the composite PMI 53.8 from 54.1 in December, while services 53.3 (vs. est. 54.3) and manufacturing 55,5 (vs. est. 55); lowest reading since May 2017; new orders rise vs prior month
·      Existing-home sales for December fell (-3.6%) at 5.57M, slightly below the 5.7M estimate, while November revised to 5.78M from 5.81M (rose 5.1% prior month); said 3.2 month’s supply in Dec. vs. 3.5 in November and inventory fell 11.4% to 1.48M homes; said median home price rose 5.8% from last year to $246,800
   
Sector News Breakdown
Consumer
·      Consumer Staples & Restaurants; in tobacco (PM, MO), the FDA hosts Tobacco Products Scientific Advisory Committee (TPSAC) meeting to review iQOS (1/24-1/25);BF/B announced a special dividend and stock split; SBUX said it will spend $250M on worker benefits after tax cut; WHR shares rose a day after the trump administration raised tariffs on foreign made appliances
·      Casino, Lodging & Leisure; in cruise lines, RCL earnings exceed expectations, employees to receive bonus for reaching EPS goal; boating stocks active after HZO shares rise on earnings with a surprise Q1 profit and revenue that topped estimates, and also boosting its year forecast; in gaming, SGMS shares slipped despite better prelim revs
 
Energy
·      Oil prices rise early as stockpiles fall for a 10th straight week; the API reported U.S. crude supplies rose by 4.8M barrels for the week ended Jan. 19, a climb of 4.1M barrels in gasoline stockpiles, while inventories of distillates fell by -1.3M barrels; the EIA reported a weekly draw of -1,071M barrels (falling for a 10th-straight week – but production rises again), smaller than the -2M barrel estimate while Cushing crude fell -3,150M; EIA said gasoline inventories rose +3,098M vs. est. +2,200M and distillates +639M vs. est. for draw of -1,100M
·      Sector movers: in oil services; BHGE marks the third major oil service company to report in the last few days (SLB slipped and HAL jumped on results); pressure pumping stocks fall after RES missed 4Q estimates (PUMP, FRAC, CJ); in the E&P space, Morgan Stanley upgraded EGN to overweight and cut RRC to underweight as expect 2018 plans to reflect the greatest capital discipline E&Ps have exhibited since the dawn of shale (top pick CLR); ECA also upgraded to overweight at Morgan Stanley in oil call while downgraded HSE on low oil leverage; KOS was upgraded to buy at Bank America saying shares have lagged the sector recovery and closest peers; PBR shares jumped with broader Brazilian stocks as two judges vote for Lula conviction
 
Financials
·      Large Cap banks were mostly higher as investors rotate back into the sector; GS trades to fresh record highs, rebounding as much as 15 points off its earnings related losses just a week ago; another round of mid-tier banks reporting earnings moving stocks: CHFC, HAFC, LTXB, WSBC, UBNK, UCBI, UMPQ, STL, PFBC
·      Consumer finance and lending; NAVI rises on earnings and better guidance; COF quarterly earnings fell short of consensus; CATM was upgraded to outperform at Wells Fargo based on client outsourcing opportunities and less competition; TREE shares came under pressure falling over 10% with weakness in lending names
·      Property Service sector; JMP Securities changes shifts view to Market Perform saying earnings prospects for the sector have remained surprisingly resilient, as exhibited by consistently stable operating trends and double-digit revenue growth. JMP expects more of the same for the fourth quarter, though looking into 2018 and beyond, believe growth prospects are dimming as key fundamental drivers, particularly among business lines with higher margins, are illustrating late-cycle erosion. Upgraded MMI to outperform but downgraded CBG, JLL, and HF to Market Perform partially based on valuation context, but also less favorable fundamental backdrop
·      Financial services; TSS reported solid NetSpend prepaid card metrics with 16% Q4 revenue growth, 15% GDV growth, and 14% active card growth/and upbeat guidance (LakeStreet analyst said believe this bodes well for GDOT as well as the prepaid space (CASH); SPI said COOIX will provide customized services to SPI Energy blockchain projects and support related to the blockchain technology
 
Healthcare
·      Biotech & Pharma; VRX downgraded to neutral at Goldman Sachs, sending shares down  around 10% late morning; PBYI shares dropped after European CHMP (Committee for Medicinal Products for Human Use) communicated a negative “trend” vote on the neratinib MAA for extended adjuvant HER2+ breast cancer following today’s oral hearing, making it unlikely that a positive opinion is coming in Feb; MDCO adds to yesterday advance after telling analysts that a study of its experimental bad cholesterol lowering therapy, inclisiran, was enrolling faster than expected and presented new results; MGNX rises after FDA Grants Fast Track designation to Margetuximab
·      Medical equipment and devices; ARAY reported revenue beat and a slight beat on gross orders; QDEL tgt raised to $60 from $50 at Piper saying the 2017-18 flu season continues to intensify and raises tgt and forecast based on that; ABT Q4 EPS narrow beat on better revs on strong medical device business and 2018 forecast beats;CERS rises as study met primary endpoints in chronic anemia study
·      Healthcare services and suppliers; Mizuho updated 2018E and 2019E adjusted EPS and price targets for tax reform for our entire coverage universe and downgradedPRAH to Neutral from a Buy as they are incrementally negative on the CROs heading into initial 2018 guidance due to FASB ASC 606; MCK was upgraded to buy at Jefferies in distributor group
·      Secondary offerings; ADMS 3M share Secondary priced at $41.50; AERI 1.3M share Spot Secondary priced at $59.20; RARE 4.4M share Secondary priced at $57.00;RCKT 5.5M share Spot Secondary priced at $13.25; STML 3.7M share Secondary priced at $14.00; SYBX 5.13M share Spot Secondary priced at $9.75
 
Industrials & Materials
·      Transports fall; airline stocks plunge after UAL results, saying it plans to increase capacity for the next three years, raising fears of industry-wide pricing wars and potentially drive down margins (UAL downgraded at Evercore/ISI on report) – shares of DAL, AAL, SAVE, JBLU, LUV drop; rails active after earnings results from NSC(guidance weaker) and CNI
·      Industrial and Machinery; CAT December rolling 3-month retail machine sales rise 34% vs Nov. 26% rise, Oct. up 19% and North America machine sales up 23% after rising 12% in Nov (also reports earnings tomorrow); CWST upgraded to buy at Stifel on better organic and now deal growth too; MDR was upgraded at KeyBanc on recent CBI deal, sending shares to 52-week highs
·      Multi industry; GE posts large quarterly loss on weaker revs and discloses SEC investigating revenue recognition and controls for long-term service agreements (which led to insurance reserve increase); ITW earnings beat and guided year revs above views; UTX EPS topped views for Q4 while guidance was mixed for the year
·      Aerospace & Defense; GD Q4 EPS missed lowest estimates, with a 28c EPS miss on lighter revs $8.28B vs. est. $8.39B) and guidance was also short of consensus – shares opened lower but reversed higher (busy upcoming earnings for group with RTN, LLL, NOC tomorrow)
·      Distributors; GWW shares surged after the company’s 4Q results and full-year outlook topped analysts’ expectations and said it made progress during 2017 by removing pricing barrier and improving its cost structure (FAST, MSM, WCC also moved in reaction)
·      Forest, Paper& Packaging; BERY upgraded to outperform by BMO Capital as firm more positive amid its refocus on M&A and the performance of the new CEO/said pending acquisition of Clopay Plastic will help pivot toward health care and hygiene and away from consumer packaging; Bank America said they are becoming more positive on Wood & Timber as they upgrade WY (to buy) & LPX (to neutral) saying Pac. NW timber & lumber supply could be limited in aftermath of ’17 wildfires and Lumber & OSB look more favorable than prior forecast
 
Technology, Media & Telecom
·      Semiconductors; MSCC rises after DealReporter reported late Tuesday that Microsemi had potentially engaged an investment bank to try to sell itself/Piper said based on the different methodologies used, we arrive at a potential valuation range of $70 to $85 for the company; QCOM slapped with $1.23B antitrust fine by the European Union for illegal payments it made to AAPL for exclusively using its chips in smartphones and other products; TXN posted a roughly in line print, with EPS falling slightly short of expectations due to higher OpEx and taxes; Canaccord lowered estimates and tgts on AAPL suppliers SWKS and QRVO due to softer anticipated iPhone sales in 1HC2018 (lowered our 1HC2018 iPhone sales estimates from 117.4M units to 107.4M units); CREE posted mixed Q2 results and F3Q guidance as revenue beat but gross margin was soft, primarily due to lighting (better on semis and LED); SIGM announced selling Z-Wave biz for $240M to SLAB after initial closing conditions weren’t met;SYNA shares dropped on news screen protectors can interfere with in-display sensor
·      Opticals; Stifel cuts revenue estimates and price targets for optical companies, citing checks and public commentary from multiple vendors that have indicated a slow-down in optical industry trends within China and the broader market since December guidance; LITE cut to $66 PT from $75, FNSR cut to $24 PT from $26, FN cut to $35 PT from $40 and OCLR to $8.50 PT from $10
·      Advertising stocks active after Goldman and Credit Suisse both downgraded WPP (PUBGY also cut at Goldman) saying 2018 will remain challenging for WPP’s organic growth given persisting end-market pressures, a slowdown in principal buying in programmatic as well as weakness in market research; recall yesterday, PG said it has saved $750M in agency and production costs, and is “targeting to save another $400M”
·      Internet movers; stocks continue to surge in this sector; NFLX new record highs, taking out yesterday highs after earnings beat and big subscriber adds; BABA record highs today with Oppenheimer positive ($220 tgt) citing unrivaled dominant position of core business, “New Retail” strategy and it pioneer ecosystem creates significant barriers to entry; FBGOOGL, AMZN all also touched an intraday record high as well today
·      Hardware and software; IDC said it sees worldwide Blockchain spending up to $9.2B in 2021 and sees 2018 worldwide spending on blockchain solutions more than double the $945M in 2017; NOW tgt raised to $200 at Canaccord; AAPL iPhone X estimates coming down by a few analysts; MRCY shares dropped on earnings miss and mixed guidance; connectors TEL and APH both reported earnings results; EA shares slipped late day as BioWare, a subsidiary of Electronic Arts, will delay the release of its upcoming multiplayer action game “Anthem” to early 2019
·      Media & Telecom; in cable CMCSA lost video subscribers for the third straight quarter, but 350,000 customers signed up for broadband service, helping the company top sales and earnings estimates for the quarter
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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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