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, February 6, 18
Equity Market Recap
· Volatility is alive and well! After major U.S. averages posted their worst 2-day decline since Brexit two years ago, markets responded by surging late afternoon. It was a bit precarious for U.S. stocks initially, with the Dow Industrial Average trading down as much as -567 points at its worst point and the S&P 500 cash low of 2,593 (over 2%). The “fear” gauge, or VIX also spiked to its highest level since August 2015, topping the 50 level (a spike of over 30%) while the Nasdaq Comp traded to lows of 6,824. Things perked up for major averages, rising the first 30-minutes of trading in a straight line up, followed by sideways action most of the day until stocks surged to highs in the last 90 minutes of trading. The Dow Industrials posted a swing of nearly 1,200 points from its lows to highs late day (24,946 high vs. 23,778 low), the Nasdaq Composite a nearly 300 point swing off its lows and the S&P 500 a more than 100 point bounce off its lows. The CBOE Volatility Index (VIX dropped over 20% late day back under 30 (from the highs of 50). It appeared machines were again responsible for the volatile market action that has to have average investors scratching their heads as to how this is possible without a major catalyst. You could have pointed to weakness in energy shares, rising interest rates, or inflation fears weighing on markets the last two days – but what had made the market’s drop worse was volatility indexes and the billions of dollars tied to them. Today was no different, just to the upside!
· Oil prices dropped a 3rd straight session ahead of weekly inventory data tonight from the API and weekly DOE inventory data tomorrow morning. WTI crude prices dropped 76c or 1.2% to settle at $63.39 per barrel, while Brent also lost 76c to settle at $66.86 per barrel, near its lows of the year. Prices had been buoyed in recent months by strong demand, geopolitical risk to supply, declining inventories and crude production cuts led by OPEC. Gold futures decline $7.00 or 0.5% to settle at $1,329.50 an ounce, falling for a 3rd consecutive session as the U.S. dollar rebounds over that stretch as well.
Currencies & Bonds
· The U.S. dollar was initially higher, on track for a 3rd straight advance before losing steam late morning, as the dollar index (DXY) slid to around break-even where it held the majority of the day (DXY high 90.03 but ends near 89.55, flattish). A sharp rebound in the euro to around 1.24 (after lows of 1.2314), helped push the dollar lower. Bitcoin was volatile again in crypto currency space, rebounding back above the $7,400 level after falling to lows of $5,922 overnight (closed higher after falling more than 16% at one point).
· Treasury markets pulled back after surging yesterday following the mass sell-off in global stock markets; the 10-yr yield fell to lows around 2.70% after recently touching fresh 4-year highs of 2.88%; today, the 10-yr yield bouncing about 7 bps to 2.77% as bonds pullback given the late day bounce in US stocks
· The December trade deficit widened 5.3% to (-$53.1B), a nine-year high from (-$50.4B) in the prior month and was greater than the estimated deficit of (-$52.1B); imports rose 2.5% in Dec. to $256.47B from $250.24B in Nov. and exports rose 1.8% in Dec. to $203.35B from $199.81B; the 2017 U.S. goods deficit with China hits record $375 billion
Sector News Breakdown
· Retailers; LULU CEO Laurent Potdevin has resigned from his role and from the board of directors. The company suggested that Potdevin had not met lululemon’s standards of conduct; TPR shares rise early after robust holiday sales helped its comp sales top estimates (helping boost shares of FOSL, GII and KORS – ahead of earnings)
· Consumer Staples/Restaurants; DNKN profit, sales beat targets amid price war and provides view on adoption of new revenue recognition; BMO Capital initiated beverage sector with outperform ratings on STZ and TAP; ARMK shares dipped early despite quarterly beat and raise; CMG to report earnings after the close
· Autos; group gets a lift after GM Q4 results topped market expectations, helping to boost other autos such as F, TM and FCAU as well as auto suppliers; GM margins and pricing were strong, as they sold more higher-margin trucks in North America, but there was some weakness in China; HOG raises dividend to 37c, announces new 15M share repurchase plan; ABG rise on earnings, while ORLY reports in auto parts retail space tomorrow
· Housing & Building Products; furniture retailers active on earnings with MLHR raising its Q3 EPS vie and announced a CEO succession plan; SCS said it sees a $30M charge due to the tax reform act; LEG traded to 52-week lows on earnings miss and weak guidance before rebounding; Dow component HD tried to snap its 6-day losing streak
· Energy stocks have been among the biggest sector decliners during the recent downdraft in U.S. stocks; CAFD shares fell after announced that it will be acquired by Capital Dynamics for $12.35/share in cash, ~11% lower than the closing price of $13.83; CVX was upgraded to overweight and XOM downgraded at Barclay’s after recent earnings for both weighed heavily on share prices; BP took a softer hit than its European energy peers after a strong earnings showing
· Utilities in general at lows, with the UTY falling to fresh 52-week lows, with all 20 components in index down on the day (FE, DTE, PEG, PCG, AEP, DUK, XEL all falling) amid general weakness in stocks, specifically those leveraged to higher interest rates getting hit the hardest of late
· Large Cap banks failed to rally amid volatility in broader stock markets and bonds as well; CBOE shares plunged in exchange space after Credit Suisse announced Tuesday that it’s liquidating a VIX ETN (the XIV) that used VIX derivatives to track the volatility benchmark (CBOE owns he VIX intellectual property); VIRT upgraded to neutral at JP Morgan as the rise in volatility and volumes should provide an earnings tailwind; however, given the lack of predictability, they believe that VIRT will continue to trade at a discounted multiple
· Mortgage and commercial REIT universes; JP Morgan downgraded BXMT to neutral, KREF and WHF to underweight and upgrades BKCC and OCSL to overweight following the recent rise in Treasury yields; “core” and higher-quality real estate should remain unscathed from the rate moves, but anything off-the-run or lower quality in nature is likely to suffer. – financials at JPM
· Managed care; CNC and WCG both active on earnings, with bot raising guidance for the year; Bank America noted ANTM and CNC could see a negative impact from Indiana’s federal approval to implement Medicaid work requirements/estimates 33k could lose Medicaid coverage in the state, and estimates the net impact could be -0.1% to 2019 EPS for each; MOH shares fell as announced that it was invited to negotiate for Region 11, but not the remainder of the other seven counties that the company services
· Biotech and Pharma; AGN said its ACHIEVE I study meets co-primary endpoints in Phase 3/sees filing NDA in 2019; REGN shares drop to fresh 52-week highs; PAHC shares surge after Q3 earnings top the highest estimates and boosts guidance; ARRY rises after report a combination of binimetinib and encorafenib show melanoma patients with a mutation in a gene known as BRAF, survive a median of nearly 2 years and 10 months
· Healthcare products, suppliers and services; ABC shares dropped on Q1 results/mixed outlook; BDX Q1 EPS and revenue topped estimates and issued guidance; HAE shares jumped on earnings beat for Q3, raised guidance and $260M share buyback announcement; LH Q4 results and beat and new business wins reflected in guidance; CTLTdowngraded at Stephens
Industrials & Materials
· Industrial & Machinery; CMI shares slump as better-than-expected revenues were more than offset by weak operating results in engine, distribution and components; EMRQ1 sales topped the highest estimates and raised its year guidance; AGCO shares slide after disappointing Q4 earnings, weak 2018 guidance
· Transports; SAVE said it sees 1Q TRASM down 1% to down 2.5% YoY and industry holding tighter inventory control so far; Transports slip from highs after dropping below its 50-day moving average yesterday; UNP among top gainers, with weakness in delivery giant UPS
· Materials; CLW shares fell to 52-week lows after earnings and guidance miss views; VSM shares drop after earnings as margins fell y/y even while 1Q sales and year guidance beat estimates; NTR shares dropped after first earnings report as combined company
Technology, Media & Telecom
· Semiconductors; MU raised its q2 EPS view to $2.70-$275, up from prior view $2.51-$2.65 (est. $2.51) and raises Q2 revs view to $7.20B-$7.35B from $6.8B-$7.2B (est. $6.97B); SWKS Q1 EPS beat on in-line revs and announced $1B stock buyback plan, though guidance little light; CRUS shares drop as posted Q3 results and an outlook that fell short of estimates amid weaker iPhone sales, leading analysts to chop their price targets; overall, the Philly semi index (SOX) traded back below the 100-day MA of 1265 and down over 9% from record highs of 1393 back on 1/23
· Optical stocks rise on earnings; FN, OCRL, LITE EPS and revs all beat, but guidance also misses for all as well; OCLR reported a Q2 beat on both revenue and earnings but guidance missing consensus/showed strong margin outlook despite the end of its major product cycle; FN 2Q revenues and EPS came in above street expectations, driven by growth in lasers, but guidance also disappoints; LITE strong Q2 beat but sees Q3 EPS 65c-80c vs. est. 94c
· Software & Hardware; APTI Q4 results and Q1 guidance both top consensus estimates; FTNT shares rallied early after Q4 results and Q1 guidance topped views (helping other Internet security stocks): Fortinet First Quarter Revenue Forecast Midpoint Meets Estimates; ARW and VSH shares both dropped after earnings
· Media & Telecom; Dow component DIS to report earnings after the close tonight; DISCA $11.9B bid for SNI won EU approval after the companies agreed to make a Polish news channel available to TV distributors, the EU says in an emailed statement.