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 12, 18
Equity Market Recap
· Stocks in full-fledged rally mode for a second session, picking up steam late morning after a brief pullback, with major averages now recouping a decent portion of its 2-week pullback. The S&P 500 has now rallied more than 130 points off its Friday lows, while the Dow Industrials have rebounded over 1,300 points during the same period as investors look to buy beaten up stocks following a 10% correction off the highs. The focus today, the newly released plan by the Trump administration to spend $200 billion to spur work on the nation’s infrastructure (helping lift industrial and materials). Despite the quick bounce from Friday’s lows, there remains concerns about the prospect of an overheating economy and higher inflation thanks to fiscal stimulus at a time when the unemployment rate is at historic lows. Oil prices climbed early, ending higher but closed not far off afternoon lows, while bond yields were active ending only slightly above Friday’s closing levels. A few key items this week for markets include: 1) Trump infrastructure plan (released today), 2) inflation data points (CPI on Wednesday) and 3) more earnings. The CBOE Volatility index (VIX) declined over 15% late day, while all S&P sectors rallied, led behind Materials, technology, Energy, Industrials and Financials.
· President Trump’s released infrastructure proposal, in effort to spur $1.5t in new investments, would spend $200b in federal dollars the following ways: $100b for incentives program to attract non-federal funds; $50b for rural infrastructure; $20b for transformative projects; $20b set aside to “advance major, complex infrastructure projects” by expanding existing federal credit programs; $10b federal capital financing fund
· Oil prices rebound, though pared gains into the close, with WTI crude ending at $59.29 per barrel, up only 9c after trading as high as $60.83 per barrel earlier. Crude looked to rebound from its work weekly decline in nearly 2-years (fell shy of 10% last week). Shale crude-oil production from seven major U.S. oil plays is expected to see a monthly climb of 110,000 barrels a day in March to 6.756M barrels a day, according to an EIA report. OPEC raised estimates for growth in rival oil supplies this year for a third month in a row as a rebound in prices spurs production from the U.S. and elsewhere. Oil production outside OPEC will expand by 1.4M barrels a day in 2018. Natural gas prices down again, now off more than 27% from its January 29th highs of $3.66 mln Btu’s (today down around $2.55).
· Gold futures rose, adding $10.70, or 0.8% to settle at $1,326.40 an ounce following a small dip in the dollar; gold managed to climb despite investors rotating back into riskier assets with stocks and oil prices climbing; today, gold saw its biggest one day point gain since the 2nd to last week of January after falling 1.6% last week amid fears about rising bond yields and inflation.
Currencies & Bonds
· The dollar declined on Monday after posting its best gains in over a year last week; the dollar erased early morning losses against the yen with “risk-on” as safe haven currencies saw modest selling pressure (bonds/yen); no major economic data today to move markets; The U.S. dollar was weaker (DXY down -0.25%) after recording its biggest weekly gain since December 2016 last week on rising inflation and rate expectations; the euro little changed around 1.2257 and dollar slips slightly vs. yen at 108.50; South African rand active after commentary about president Zuma
· Treasury markets end lower as stocks rise, as the yield on the 10-year Treasury moved back to 2.86% late day (after trading lows of 2.83%) though ended off its high of 2.893% this morning ahead of key inflation data later this week (CPI on Wednesday); bonds also sliding alongside growing budget deficits and the Federal Reserve’s unwinding of its balance sheet along with the inflation fears; 30-yr yield little changed at 3.14% initially, but now down around the 3.12% level; 2-yr yield little changed around 2.08%
Sector News Breakdown
· Retailers; VFC was upgraded to buy at Stifel and up tgt to $91 saying helped by fundamental strength, environmental factors, and FX they are confident in above consensus estimates; ULTA shares fall on Women’s Wear Daily article alleging reselling cosmetics https://goo.gl/hxCS95; ; ICON announced a debt exchange, unveiled a cost savings plan, provided guidance for 2018 and announced a new deal with TGT
· Restaurants; DNKN upgraded to outperform at BMO Capital citing increased confidence following the company’s investor meeting that the next gen store image can refresh the brand; QSR Q4 EPS topped consensus on Burger King boost while Tim Hortons posts weak same-store sales for the fifth quarter in a row
· Housing & Building Products; in flooring, LL was downgraded to neutral at Wedbush as now project slower improvement in fundamentals; MHK upgraded to Buy at Longbow; PT Set to $300
· Rebound in energy complex as oil rebounds from a 10% decline last week and as stocks in general recover after a week of selling pressure; OPEC raised estimates for growth in rival oil supplies this year for a third month in a row as a rebound in prices spurs production from the U.S. and elsewhere. Oil production outside OPEC will expand by 1.4 million barrels a day in 2018, about 250,000 a day more than the cartel projected last month as per its monthly report
· Top movers; bounce for MLPs today as Alerian MLP index up over 1.5% back above 270 level with rally in broader stocks and oil prices; BWP lags after earnings results; busy week for oil drillers with earnings expected; DO moved today after results
· E&P movers; WRD agreed to sell its north Louisiana assets to an unnamed buyers for $217M plus as much as $35M in potential contingent payments based on the number of wells spud by the buyer on the assets over the next four years; in research, TEGP downgraded at Barclay’s; at RBC Capital, EQT was upgraded to outperform, while they downgraded EQM and EQGP
· Tankers & Shippers; Morgan Stanley upgraded EURN, DHT, TOO, NVGS and downgraded SB, GOGL, GLOG saying although sees near term weakness for Crude and Product Tankers, but he is bullish over the next 2-3 years.
· Large Cap banks/top movers; financials among top gainers today on rising rate and inflation expectations; AXP was upgraded to buy at Nomura citing an improved valuation after the recent selloff; in insurance; PRU was upgraded to outperform at RBC Capital citing recent pullback in shares; PFG was upgraded at both JP Morgan and Barclay’s after pullback; FDC shares outperform after in-line Q4 EPS results and in-line guidance despite seeing higher tax rate
· Exchanges and Brokers; NDAQ upgraded at Wells Fargo saying the company is at an inflection point where both its trading and non-trading segments will begin to generate faster growth; CBOE with relief rally after share dropped over 20% last week on weaker earnings and overall concerns about volatility products/collapse of VIX linked fund (XIV last week); ETFC announced January Daily Average Revenue Trades (DARTs) rose 29% vs. December
· REITs; sector among the weakest in the S&P 500, with shares of HCP, HCN, BXP, REG, SPG, MAC, FRT, VTR leading lower early; BTIG noted today that half of their coverage universe has reported 4Q17 results and issued 2018 FFO guidance with only 4 of the 24 companies issuing FY 2018 FFO guidance have provided for mid-points at or above the consensus estimate – note guidance is lower for two primary reasons: Lower than expected and/or back-end weighted SSNOI growth and higher than modeled interest expense (the RMZ decreased 3.7% last week, outperforming the S&P 500 and Russell 2000 which declined 5.2% and 4.5%, respectively)
· Large Cap Pharma; COLL rises after main competitor, closely-held Purdue Pharma, said it would stop promoting its opioids, including the popular OxyContin, to doctors; LPJC was downgraded to underperform at Jefferies on concerns hospital P&T committees will be lukewarm to Giapreza adoption; after several downgrades last week on lower guidance, TEVA upgraded to outperform and $23 tgt at Credit Suisse; CARA upgraded to buy at Janney saying time to buy as shares down 50% from 2017 highs and its drug CR845 to treat chronic kidney disease-associate pruritus (CKDaP) is likely to reach the market first than MNLO’s Serlopitant
Industrials & Materials
· Aerospace & Defense; CSRA to be acquired by GD for $40.75 per share in cash, a 32% premium to Friday closing price, in deal valued at $6.8Bhttps://goo.gl/iVW8Es; shares of CACI, BAH, LDOS were active on the CSRA/GD deal news; UTX active after Airbus said almost a third of its Pratt & Whitney-powered A320neo aircraft were affected by a new engine glitch, forcing it to halt some deliveries of the narrow body jet
· Transports; CSX announces $5B share buyback and boosts its dividend to 22c from 20c; GM was reiterated buy at Citi and upped tgt to $70 from $60 with greater confidence on its $134 long-term potential Transports outperform, as the DJ index tops the 100 day resistance of 10,251; airlines helped pace gains AAL, ALK andUAL
· Metals & Mining; in the steel sector, KeyBanc adjusted 2018 estimates on CMC, NUE, and STLD to reflect tougher 1Q18 comps and higher tax, but maintain positive strategic bias on STLD via industry leading ROIC, strong FCFE, and balance sheet optionality to explore M&A and upgrade TMST to overweight with a $17 price target from SW via improving risk/reward
· Industrial and Machinery; DY shares fell as guided prelim January qtr revs to $655M compared to prior view of $645M-$675M and est. $663.2M with EPS 9c-12c, down from 24c-36c; also said sees FY19 contract rev. $3.30B-$3.50B (shares of MTZ, PWR active on guidance); overall infrastructure and material plays moved higher on the Trump plan released today
Technology, Media & Telecom
· Internet; after mass selling pressure in large cap Internet stocks last week, group rebounds to start the week as investors look to scoop up beaten stocks; STMPactive after Craig Hallum comments on disappointing PC Postage volumes for December, which were up only 4% from the previous year; some chip names move after The Information reported AMZN is developing a chip designed for artificial intelligence to work on the Echo and other hardware powered by Alexa
· Software & Hardware; AAPL leads the Dow with a 4% rebound; WDAY upgraded to buy at Needham well ahead of Q4 results as sees better-than-expected sales from the financial platform driving upside to estimates; RPD shares slipped initially after reporting quarterly results for Q4
· Hardware and components; ARW upgraded to strong buy at Raymond James saying improved gross margins are outweighing slower growth; CSCO was upgraded to buy at Nomura and raise tgt to $46 to reflect the webscale uptick and believes tax reform and the company’s recurring revenue transition provide downside protection
· Media & Telecom; DIS raised the cost of some single-day theme park tickets by about 9%,with peak one-day tickets for a single theme park at the Disneyland Resort in Anaheim, California, will see the biggest increase, rising to $135 from $124; FOXA said it would commit to maintain Sky News in Britain for at least five years and would establish an independent board for the channel to try to secure its takeover of pay-TV operator Sky https://goo.gl/Qfbyuw; in media, WWE was upgraded to outperform at KeyBanc; HMNY’s MoviePass cuts price again to $7.95 per month with unlimited streaming; CDLX shares up over 20% in its 2nd day of trading (had priced its 5.4M share IPO priced at $13.00 on 2/8)