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.
Wednesday, February 7, 18
Equity Market Recap
· It was another wild day on Wall Street with lots of volatility, big swings in the markets, surging bond yields and plunging commodity prices as the dollar index continues its bounce off recent 3-year lows. The Dow Jones Industrial Average climbed as much as 381 points at its session high after opening 127 points lower. After spiking to its best levels in over two-years Tuesday (above the 50-level), the CBOE Volatility index (VIX) has since cut its gains by half to around the 25 level (it surged 104% Monday). Energy stocks dropped as oil prices decline over 2% as weekly inventory data showed record production output, while bonds slipped on a weak 10-year auction along with rising rate and inflation expectations. The tech heavy Nasdaq Composite underperformed most of the day amid mixed earnings in semi’s and software today, though SNAP shares surged over 40% on its earnings beat. Debt ceiling fears eased after Senate leaders struck a two-year budget deal that would lift the debt ceiling. The bill must be voted on in Congress. Senate Majority leader Mitch McConnell Says said “the compromise we’ve reached will ensure that for the first time in years our armed forces will have more of the resources they need” and ensure funding for disaster relief, infrastructure and work to combat opioid abuse, he said.
· Crude oil prices drop, with March WTI crude falling -$1.60, or 2.5% to settle at $61.79 per barrel, the lowest settlement in about a month, on mixed inventory data earlier today and a resurgence for the U.S. dollar. The EIA posted smaller crude inventory build of 1.895M barrels vs. the est. build of 3.15M barrels (bullish), but weekly crude output rises to 10.25M barrels per day, the highest on record, sending prices lower (bearish). Last night the API said U.S. crude supplies fell by -1.1M barrels for the week ended Feb. 2.
· Precious metals fall as gold trades down for a fourth-straight session as the dollar index and Treasury yields gained and stocks churned between gains and losses; gold prices mark lowest settlement since Jan. 9th, falling -$14.90, or 1.1%, to settle at $1,314.60 an ounce. Gold had found little support from the recent U.S. stock market selloff.
· The U.S. dollar posted strong gains on Wednesday, with the dollar index (DXY) rising over 0.7% (toughed highs of 90.40), as the euro falls over -0.8%, its biggest one-day drop since October according to Reuters. Rising interest rate and inflation expectations helping propel the dollar the last 4-days vs. most currencies. Bitcoin prices moved back above $8,000 level just one day after the cryptocurrency briefly dipped under $6,000 (lowest levels since November).
· Bond yields edged higher early as stocks bounced around, but yields pushed high late day following the results of a weak 10-year auction mid-afternoon. The U.S. Treasury sold $24B in 10-year notes at a yield of 2.811%, higher than the 2.803% when issued, but demand was weak with a bid-to-cover at 2.34 vs. 2.69 in the prior auction; indirect bidders awarded 67.5% of the auction. The weak demand sent bonds falling, and lifting yields to highs (10-yr yield ended up around 8 bps at 2.85% – but still off Monday’s 4-yr highs of 2.883%). The weakness came on a day absent of market moving economic data. Market participants have largely pegged the resurgence of choppiness in stocks/bonds to fresh concerns about the pace of rate increases by the Fed in the face of growing signs of inflation.
Sector News Breakdown
· Retailers; KORS Q3 results topped views (followed good results from TPR yesterday) and boosted its year revenue forecast; PVH upgraded to buy at Deutsche Bank as now see sufficient upside (19% from current levels) with revised EPS ests. well above the Street; PERY confirms going private proposal at $27.50 per share https://goo.gl/WERiU2; toy retailer HAS weak after reported a surprise fall in Q4 revenue due to a decline in sales of its toys based on the Star Wars franchise and the lingering impact of the bankruptcy of retailer Toys ‘R’ Us, but hares bounced
· Consumer Staples; SVU shares rise as activist Blackwell Capital LLC turns up pressure, planning a board fight and urging a breakup and potential sale, WSJ reportshttps://goo.gl/2VGS31; CHD was upgraded to buy at Oppenheimer following the company’s upbeat analyst day and encouraging fiscal 2018 guidance; HAIN Q2 sales were in line but EBIT/Ebitda missed by 11%/7%, respectively, with U.S. segment sales, profitability missing expectations; WTW said in update it aims to increase revenue to more than $2B by end of 2020 more than double its prior estimate given last year; PFGC a mover on earnings; SMPL 8.84M share Spot Secondary priced at $12.75
· Restaurants; CMG shares dropped, downgraded by at least two analyst following inline 4Q results but disappointing QTD commentary that suggests soft underlying traffic even amid the 5% price increase
· Housing & Building Products; LEN was upgraded to outperform at Barclays saying investors should see improved returns, margins and growth with the company’s acquisition of CalAtlantic; BZH Q1 revenue topped the highest estimates; TCS Q3 earning and sales miss sending shares lower initially before bouncing; CVCO shares jump on Q3 EPS beat
· Casino, Lodging & Leisure; WYNN shares active after Steve Wynn resigned as chief executive and chairman following allegations last month of sexual misconduct (shares moved higher on the announcement); BYD to replace CAA in the S&P Midcap 400
· Energy stocks reversed, moving lower late day as oil prices turned markedly lower, closing at 1-month lows on higher production data; in E&P sector; PXD posts Q4 strong beat, oil production and said plans to sell all non-Permian assets (~20% current production) though Q1 production guidance slightly below views; APC strong Q4, boosts quarterly dividend to 25c from 5c and also authorizes $500M increase to share-repurchase program, bringing the repurchase plan to $3B; HP boosts its 2018 capex budget to $350M-$400M from ~$350M citing recent improvement in market conditions/gives drilling ops outlook for 2Q compared to 1Q; CHK posts slight Q4 production beat; HK 8M share Spot Secondary priced at $6.90/agreed to acquire 22,617 net acres in Ward County, Texas for approximately $381M; PDCE preannounced Q4 oil production of 40.4 MMbpd bests Street expectations while posted 3% miss on headline production
· Drillers; Jefferies said they remain positive on the outlook for the group as we believe Street ’18/’19 estimates are not giving enough credit for the double boost from rising activity and dayrates. We model US land rig activity for our coverage growing 13%+ and avg. spot rig dayrates growing by 7% in ’18. Our EBITDA estimates average well ahead of consensus for ’18 and ’19 and top ideas are PDS, PTEN, NBR and HP
· MLPs weak; the Alerian MLP Index (AMZ) fell over -1% midday, about 8 points off earlier highs of 284.67 as rising rates and weaker oil prices take a toll on the dividend paying sector; TRGP announced the formation of three different development JVs with PE player Stonepeak Infrastructure Partners to finance its large infrastructure build-out, which is primarily geared towards Permian production growth
· In brokers & exchanges, CBOE falls a second day after JPM downgraded to neutral and cut tgt to $110 citing risks associated with the “massive deterioration of value” in short-VIX strategies; SCHW was downgraded to sell at Citigroup as think the risk/reward tips more negative; ICE Q4 EPS slight beat on in-line revenue of $1.14B and raises dividend
· Insurance; GNW shares rise after earnings report which affirmed that it would continue to pursue approval for its deal to be acquired by China Oceanwide despite twice being rebuffed by the Committee on Foreign Investment in the United States (CFIUS) due to concerns about protecting U.S. customers’ personal information; Japan’s biggest mobile-phone carrier Softbank Group Corp. is in talks to acquire a stake in Swiss Re worth up to $10B – WSJ https://goo.gl/FYcwfY
· Services/Blockchain; RIOT said it plans to launch a digital-currency exchange and a futures brokerage; KODK was named as a short idea by Kerrisdale Capital
· Large Cap Pharma/Managed care; HUM profit tops estimates; sees $550M tax benefit; EXEL Cabometyx shows treatment benefit in early-stage genitourinary tumor study;GSK posted quarterly earnings results; KERX fell to 52-week lows after wider Q4 loss; SGEN shares dropped as its full-year revenue forecast missed estimates after better Q4 results
· Biotech movers; GILD shares rise on earnings beat, but despite cautious comments by analysts after earnings/Leerink noted 2018 HCV product sales guidance of $3.5B-$4B is substantially below consensus of $5B; ICPT downgraded to sell at Goldman Sachs and cut target to $45 from $74 as sees a lack of catalysts to move the stock higher; TBPHshares outperform as teams up with Janssen to develop candidate for inflammatory bowel disease; CRSP, NTLA, EDIT rises as Crisper stocks outperform after GILD said at it is talking to gene-editing companies
· Healthcare services and suppliers; CERN reported mixed results as bookings were significantly above guidance while quarterly revenue and EPS missed expectations (raised year on tax reform); HQY falls on 2019 guidance and concerns about the slowing HSA growth; HCSG downgraded at Baird to neutral after Q4 EPS misses estimates
Industrials & Materials
· AG & Machinery; AGCO upgraded to neutral at JPMorgan citing evenly balanced risk/reward at current valuation and outlook for global end market growth remains stable; in E&C space, JEC shares rises early on quarterly beat on top and bottom line
· Transports; Dow Transports advance, rising over 100 points or 1% midday as all 20 components of the index were higher by midday
· Metals & Mining; RS upgraded to buy at Longbow; CLF was upgraded to outperform at Credit Suisse as expects hot-rolled coil steel prices to remain strong in 2018 (raise tgt to $9); gold-producer index slumps fifth day, longest losing streak since Dec. 7
Technology, Media & Telecom
· Internet; SNAP surges after several analysts upgraded the shares today as Q4 revs topped views on smaller quarterly loss and users at 187M above Street at 184M while monetization ramped much better than expected; AKAM posts across the board 4Q beat as media, performance and security all beat, although only security accelerated over 3Q on a constant currency basis; TRVG posted greater Q4 Ebitda and revenue miss than expected; TWTR reports tomorrow morning
· Semiconductors; MCHP slight beat to consensus top and bottom line estimates/but also posts lower than expected March quarter guidance; MTSI shares dropped over 30% as Q2 EPS guidance misses lowest estimates and Q1 earnings miss/compression in gross margins; other chip makers active after earnings: ACLS, MX, NANO
· Media movers; Dow component DIS results were largely above consensus forecast, as strong Theme Park results and in-line Media Networks OI were offset by unfavorable comps at the Studio and softer Consumer Products; TRNC surges as agrees to sell LA Times, Sand Diego Union for $500M to Patrick Soon-Shiong https://goo.gl/2WxsJ8; MTCHrises on Q4 EPS, revenue, Ebitda beat and higher guidance for Q1; upcoming earnings for NLSN, NYT in media
· Telecom movers; ALLT upgraded to buy at Bank America citing successful pivot from being an appliance based DPI company to having a growing share of Security revenues, profitability in sight, and a low valuation; DISH upgraded to buy at Citigroup as believe wireless carriers will likely compete for $10B in annual NB-IoT revenue by 2025; AT&T (T) said it is exploring the possibility of an initial public offering of a minority interest in its Latin America entertainment business subsidiary, DirecTV Latin Americahttps://goo.gl/iJEQut ; BBOX drops on earnings
· Software movers; NEWR Q3 beat on both top and bottom line that showed continued momentum in the enterprise segment and solid traction with the new Infrastructure product (revenue, billings, margins, and EPS all beat); ZEN upgraded at Stephens following another strong quarter and the company’s issuance of better than expected FY18 guidance; ACXM announced strategic review for Marketing Services + most of Audience Solutions/also weak quarterly results; MANH shares fall on mixed Q4 results and a lower 2018 revenue outlook; ULTI posted a strong end to the year, with both subscription and total revenue coming in ahead of consensus; MODN surged as reported 1Q beat and increased its F’18 guide for both top line and bottom line; other software movers on earnings: BLKB (higher), PAYC, JCOM, PFPT (light guidance)
· Hardware and communication equipment; EXTR shares declined after mixed Q2 results (revs miss) and mixed guidance as well; in networking, Goldman Sachs initiated in the group, with buy ratings in CSCO, (street high $48 tgt), ANET and NTNX, with a sell rating on PSTG; NTGR to spin off its internet-connected camera business Arlo in IPO, but guided next quarter revs lower