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, February 5, 18
Equity Market Recap
· It was an absolute stock market melt-down late day, with all major U.S. averages plummeting, (erasing the hefty gains for the S&P 500 and Dow Industrial averages) as the Dow Industrials at one point fell over 1,600 points to session low of 23,923, the Nasdaq dropped over 250 points to lows of 6,967 and the benchmark S&P 500 index fell over -100 points to lows of 2,638 before bouncing sharply. Volatility spiked, with the CBOE Volatility Index (VIX) surging over 106% at its peak today, trading above the 35 level (after jumping 28% Friday). It appeared to be computer-driven selling pressure late day before the rebound, as major averages were plunging in a matter of moments, though there are lots of potential fears/reasons for the recent swoon in markets.
· With today’s selloff, the S&P 500 large cap index is off more than 5% from its all-time intraday high of 2,872.87 from Jan. 26, snapping a streak of 406 sessions without such a decline, marking the longest period without a 5% pullback in 20 years. Much like Friday, there was nowhere to hide for investors, with stocks plunging, commodity prices slipping, and crypto currencies extending its recent rout…though bonds did find some buying momentum late day. Today also marked the first dip below the 50-day moving averages in 5 months for the S&P and Dow.
· A combination of surging bonds yields (they pared gains today, but the 10-yr yield up over 40 bps since the start of the year, raising borrowing cost fears), rising rate hike expectations (now talks of a 4th rate hike by the FOMC after strong economic data again the last few days), rising inflation expectations (average hourly earnings last week jumped- Fed behind the curve in inflation?), the latest leg of earnings have been weak (XOM, CVX, HES, GOOGL), healthcare stocks down on drug pricing fear (as Per Trump comments last week), markets due for correction (the 406 days of no 5% drop in S&P evident of that), a rebound in the dollar (hit commodity/oil prices) to name a few.
· Another hit to Bitcoin as cryptocurrencies continue to fall apart (Bitcoin drops more than 20% to November lows ($6,853). Fed’s Kashkari also dampened spirits on tax reform, saying today that investors pricing in stronger effects of tax cuts and said was surprised by home much optimism tax cuts have created. Energy stocks again led U.S. stocks lower, with the sector extending its worst two-day rout in two years as WTI crude dropped nearly 3% intraday amid the rout in broader global stocks weighing on the outlook for energy demand against rising crude production
· Oil prices decline, with WTI crude down -$1.30, or 2% to settle at $64.15 per barrel, down at its lowest level in about 2-weeks and off from 3-year highs last week. It appears that the “risk-off” trade weighing on several asset classes with commodity prices and stocks falling sharply the last 2-days in a bout of price corrections after touching multi-year highs. The rebound in the dollar also having a hand in the drop in commodity prices today on better economic data.
· Gold prices slip, falling a modest 80c to settle at $1,336.50 an ounce, losing steam but holding up well amid the broad based market sell-off as investors rotate into defensive assets today (gold even and bond prices rise while the yen rallied). Gold futures attempted to rebound from last week’s losses, when stronger U.S. hiring and wage data lifted the dollar and Treasury yields. Silver slipped 3.8c, or 0.2%, to $16.671 an ounce after logged a 4.2% weekly decline last week.
· The U.S. dollar edged higher, rising against the euro and pound, though declined midday against the safe-haven yen as stocks dropped sharply and investors moved into more defensive assets. The dollar index (DXY) was up over 0.3% at 89.50, bouncing the last 2-days and off its 3-year low levels reached early last week as improved employment data on Friday indicated a pickup in stubbornly low wages and inflation lift rate hike expectations to potentially four this year from the expected three. The euro managed to hold above the 1.24 level most of the day (though off overnight highs 1.2475), while the Pound fell to lows around 1.40, down about -0.8% on weaker UK data.Bitcoin prices crushed again, falling more than 20% to lows of around $6,600 (recall record highs of $19,511 on 12/18) – with momentum leading lower, and the vast crypto-currency space imploding at this time. Bitcoin bounced late day off lows.
· Bonds end slightly higher with yields pulling back from fresh 4-year highs; given the volatility in stocks the last 2-days, bonds managed to post a small gain, with the benchmark 10-year yield falling from earlier highs (briefly) of just above 2.88%, to end down under 2.83% as stocks plunged mid-afternoon. Bond prices have dipped recently as inflation concerns (average hourly earnings rose 0.3% in January, above forecasts… pushing up the 12-month increase to 2.9% from 2.6%, fastest pace since 2009) and strong economic data helped to drive yields higher. The 2-yr slumped nearly 5 bps to 2.097%, while the 30-yr yield was steady above 3.10%.
· ISM Non-Manufacturing index (services) rises to 59.9, above the 56.7 estimate and above the 56 prior month; new orders rose to 62.7 from 54.5 last month, employment rose to 61.6 from 56.3, inventory change fell to 49.0 from 53.5 and prices paid rose to 61.9 from 59.9
· IHS Markit U.S. services PMI slips to 53.3 in January from 53.7
Sector News Breakdown
· Retailers; DKS was downgraded to underweight and cut price target for the shares to $25 as firm questions business model/separately, said its chief EVP Merchant resigns to become CEO of CBK; FLWS and FTD shares volatile after AMZN/Whole Foods said to cut flower prices; VFC upgraded to overweight at Piper as believe the improving macro backdrop, strong momentum of Vans and improving outdoor lifestyle dynamics support a beat & raise; KORS estimates raised at Piper as believe comps in NA are a little “less bad”–down 7% vs. the -9% prior; FL added to the Best Ideas List at Wedbush as checks indicate 4Q is likely tracking to the high-end of guidance
· Consumer Staples; SYY Q2 net income as sales increased, and said it remained confident of meeting its full-year financial targets; CHD Q4 EPS and sales topped views while its year forecast fell short of consensus views ($2.24-$2.28 vs. est. $2.30); BG shares rose on Bloomberg report that ADM is in advanced talks to acquire the commodity trader, saying they could reach an agreement as early as this week https://goo.gl/kv1qAt; KR to sell convenience store business in $2.15 billion deal https://goo.gl/uBUb2n
· Housing & Building Products; LOW was upgraded to buy at Jefferies and raise tgt to $129 from $81 as deep-dive analysis suggests Lowe’s can double EBIT and triple EPS within 5 years by driving key changes that narrow productivity and profit gaps with competitors and lead to reasonable comp sales improvement.
· Casino, Lodging & Leisure; in cruise lines, NCLH was upgraded to overweight at JP Morgan saying it is the most geared to capture upside from continued strong demand, pricing trends in cruise industry; casinos little rebound after recent pullback, especially for WYNN after shares have plunged as gaming commission opened probe into Steve Wynn sexual misconduct allegations
· Major oils; after each dropping over 5% on Friday given weaker earnings and lower production, shares of Dow components CVX and XOM each remained weak in the early going Monday; HES posted a wider-than-expected Q4 EPS loss; Jefferies downgraded MPC to hold from buy noting it has outperformed an energy index by ~32% since Jan. 1, 2017, which now implies little upside, while the firm also cut MPLX to hold as views as less attractive; results from a few large cap E&P’s tomorrows with PXD and APC results expected
· Large Cap banks; the news today was all about WFC as the Federal Reserve hit them with sanctions, saying it can’t grow any further until its submits a plan that proves it has beefed-up its risk management and board oversight following a 2016 “fake accounts” scandal (downgraded by several analysts on the news) – shares fell as much as 9%
· Consumer Finance and lending; PYPL upgraded to outperform at Wells Fargo as believe strength of its competitive position and substantial tailwinds outweigh any negative earnings headwind; CIT said in an 8-K late Friday indicating that it received approval from the Fed to amend its capital plan in the 2017 CCAR cycle; The Consumer Financial Protection Bureau investigation into the hack at EFX that exposed personal data about 143M Americans has reportedly sputtered after Reuters reported, the CFPB hasn’t ordered subpoenas against the company
· Pharma movers; BMY reported earnings and said a late-stage study of its Opdivo combined with Yervoy and chemotherapy showed a significant effect on progression-free survival compared to chemotherapy alone. (weighs on MRK and RHHBY which have own therapy); GSK and Reckitt are the only companies to have submitted bids for PFE’sconsumer business after rival candidates walked away https://goo.gl/dJAJYa ; CORT shares dropped after noting TEVA submitted a new drug application (NDA) for a generic version of its hyperglycemia treatment Korlym/also said notice letter alleges that the Korlym patents, with expiration dates August 2028-2036, won’t be infringed by Teva’s proposed product; EYEG shares plunge as lead candidate EGP-437 failed to sufficiently separate from placebo in a Phase 2b study in patients undergoing cataract surgery
· Biotech movers; overall index slipped with broader pharma weakness; drug pricing fears remain an issue for the sector after President Trump focused on high drug prices during State of the Union last week; ALXN was upgraded to outperform at Evercore/ISI
Industrials & Materials
· Machinery; monthly Class 8 and medium duty truck orders for January came in significantly above expectations and were the second and third highest on record, respectively amid strong and accelerating carrier CapEx environment, which has also been reflected in trailer orders (shares of CMI, PCAR, NAV, ALSN leveraged to the data) – more: In January, Class 8 truck orders were 48,700 units, up 119% YoY (highest since March 2006) while Class 5-7 were 31,700 units (highest since July 2006), up 39% YoY; CMImaintained sell at Deutsche Bank; MNTX announced that CFO Michael Schneider had resigned from the company/no reason was cited
· Metals & Mining; group was under pressure again after dropping with broader markets last Friday; today, JP Morgan raised estimates & targets for AA, CENX, FCX, and TECKto reflect J.P. Morgan’s higher 2018 price forecasts for the metals; HAYN was upgraded to overweight at JP Morgan as believe Haynes is at a positive inflection point in its earnings growth
· Industrials and Multi-industry; KMT downgraded from overweight to neutral at JP Morgan as believe that incremental profits have peaked and, as a result, would expect the multiple to compress as we move forward; ETN was upgraded to buy at Stifel; ARNC shares dropped as 2018 outlook disappoints ($1.44-$1.45 vs. est. $1.61), offsetting better Q4 results
Technology, Media & Telecom
· Internet; GRUB was downgraded to Market Perform at Raymond James saying the risk/reward is less favorable at current levels, consensus estimates appear too high, and UberEats appears to be gaining share in the U.S. online takeout market; AMZN held up well despite broader pullback in the high betas Internet sector (good earnings last week); GOOGL extends losses after earnings miss last week hit shares
· Semiconductors; AVGO raised its bid to QCOM to ~$120B or $82 per share ($60 in cash & $22 in AVGO shares), up from ~$70 prior and saying it’s their best and final offerhttps://goo.gl/NegBAV; ON reported a strong beat and guidance above expectations as broad based strength at ON and continued GM execution are driving results; Morgan Stanley said Apple’s weaker units, and weaker aggregate smartphone units overall, create some obvious concerns for semis; SWKS reports tonight; NVDA and Continental AG team up to develop an autonomous vehicle system
· IT Services; Morgan Stanley said recent CIO survey suggests that cloud adoption has crossed the 20% threshold, implying a secular shift that should drive IT Services growth and also sees a late cycle cyclical shift into high quality and defensive stocks, which should allow multiples to remain resilient (firm upgraded industry view from Cautious to attractive and also upgraded ACN)
· Hardware and Comm equipment; AAPL breaks below the 200-day moving average, extending losses after earnings last week; NOK was upgraded to buy at Bank America on an attractive valuation and view of the high potential for improvement throughout 2018, while firm downgrade ERIC to underperform after reported mostly disappointing 4Q results; XRX was upgraded to buy at UBS after transaction with Fuji Xerox
· Media & Telecom; CHTR positive analyst mentions after shares jumped last week on better subs/earnings, as was upgraded to outperform at Wells Fargo on renewed confidence in a successful turnaround despite a tough competitive environment; Sprint (S) upgraded at KeyBanc