Market Review: February 14, 2018

Scott GreenDaily Market Report

Closing Recap
Wednesday, February 14, 18
Equity Market Recap
·      Stocks surge – making last week’s plunge nothing but a memory! Markets rally for a 4th day showing resiliency again, this time in the face of rising inflation prices, which had been a market concern over the last two weeks that partially took major averages into correction territory (defined as down over 10% from highs). Another factor dragging markets lower, rising bond yields (increasing borrowing costs) also failed to dent buying optimism today, as the yield on the 10-year touched a fresh 4-year high above 2.91% after a stronger inflation reading – but as yields went higher, so did stocks! U.S. consumer prices rose 0.5% in January, the biggest monthly increase since August 2012 and above estimates for a 0.3% rise, while core CPI (ex: food & energy) rose 0.3%, also topping estimates. Interest rate sensitive sectors initially declined (Utilities, Telecom, and REITs), while a soft monthly retail sales report weighed on consumer discretionary. However, the weakness was very short lived as major averages opened near the lows, only to rally throughout the entire session and close near the best levels. The S&P 500 reclaimed the 2,700 level (off the Feb 9th lows of 2,532), while the Dow Industrials neared the 25K level (well of its lows of 23,360 on Friday), and the Nasdaq Comp jumped topped 7,150, up about 2% (and off its Friday low of 6,630) – as buying momentum continued into day 4! Even the Russell 2000 SmallCap posted its best daily gains since September on today’s rally. And what fear? As the Cboe Volatility index (VIX) dropped more than 20% as stocks extended gains. The VIX fell back below 20 for the first time since Feb. 2nd after moving as high as 50.30 last week – its highest reading since mid-2015 – as major indexes suffered their first correction in two years.

Economic Data
·      Consumer price index (CPI) for January rose a “hotter” than expected 0.5% (above the 0.3% est.), and its core gauge, stripping out volatile food and energy prices, rose 0.3% (above the 0.2% est.); CPI YoY rose 2.1% vs. est. 1.9%. The rise in the cost of living last month was driven by higher prices at the gas pump. But the cost of food, housing, medical care and car insurance also rose.
·      Retail Sales for January fell (-0.3%) vs. an expected rise of 0.2%; retail sales less autos unchanged in January, well below the 0.5% estimate; auto sales fell slightly in December and they sank 1.3% in January; gasoline station posted a 1.6% increase in sales as prices at the pump rose
·      Business Inventories for December rose 0.4% MoM, slightly above the 0.3% estimate, while business sales rose 0.6% in Dec. after rising 1.4% the prior month
·      Oil rises – strong bounce off the lows for WTI crude oil, settling up $1.41, or over 2.4% to $60.60, near its best levels of the day and way off earlier lows of $58.20. Prices got a lift amid several factors including: 1) the EIA reported a smaller than expected weekly build of 1.84M barrels (vs. est. 3.1M build), while distillates fell -459K barrels vs. expectation to remain unchanged; 2) OPEC said it would stick with production cuts this year despite rising US output – Saudi energy minister said; 3) dollar declined, which boosted commodity prices
·      Gold futures jump in volatile trade, rising $27.60, or 2.1%, to settle at $1,358 an ounce, its third straight day of gains and its highest close in about three-weeks as the dollar erased gains and inflation fears were renewed. The hotter-than-expected headline inflation reading prompted investors to turn to gold as a hedge against rising retail-level prices. Gold had been improving over the last few days after the futures contract erased 1.6% last week in its worst performance in two months.
·      The dollar fell in volatile trade; with the dollar index (DXY) spiking to highs of 90.124 immediately after the release of the higher CPI reading, but it was all downhill from there, ending near the lows and erasing all of the CPI driven rally. January consumer price inflation data as headline CPI rose 0.5% in January, compared with a forecast of 0.3%. The Dollar Index (DXY) ended near the lows of 89.10, down over -0.6%, posting broad declines against other currencies and falling to 15-month lows of 106.72 vs. the Japanese yen (before partially paring losses), while the euro rose to highs, up 0.8% at 1.245 vs. the dollar late day. South Africa’s rand headed for its strongest level against the dollar in almost 3-years, up 2.5% after the ANC said it will remove President Jacob Zuma from office tomorrow. Bitcoin prices steadily higher all day, rising over 7% to above $9,200, up for the 6th time in the last 7-sessions.
Bond Market
·      Up, up and away for bond yields, with the benchmark 10-year yielding topping 2.91% today, a fresh 4-year highs after a stronger-than-expected rise in inflation, as the January consumer price index came in well above consensus views (0.5% vs. est. 0.3% and higher core reading as well); the 10-yr yield rose over 6 bps to 2.91% after sitting as low as 2.819%. The 2-year note yield spiked 6 bps to 2.17 (most impacted on n-t interest rate hikes), while the 30-year bond yield rose 4 bps to 3.17%. Markets have cited wage gains, a weak dollar, fiscal stimulus and a tight labor market for stoking inflationary pressures
Other Interesting tidbits
·      Wall Street firms cut their forecasts for U.S. economic growth in the first quarter of 2018 after a disappointing decline in retail sales in January. Morgan Stanley chopped its estimate for gross domestic product to 2.9% from 3.3%. Barclays and IHS trimmed their GDP estimates to 2.3% from 2.5%. And Bank of America Merrill Lynch lowered its target to 2% from 2.3%. Sales at U.S. retailers fell 0.2% in January, the biggest drop in almost a year –
Sector News Breakdown
·      Retailers; sector weaker initially as the reported January U.S. retail sales down -0.3% vs expectations of a 0.2% gain, suggesting consumer spending started current quarter with less momentum, following a 3.8% annualized increase in 4Q (shares of COST, M, HD, TGT, ANF, NKE among movers) – but as markets recovered off lows – so did the retailers; LULU 1.2M share Block Trade priced at $76.25; on a positive note, FOSL shares spiked as much as 80% after posts an unexpected comp sales beat of 2% vs. an expected decline of (-6%) and better Q4 sales (also high short interest); TGT upgraded to buy at Baird; GCO said it is initiating a formal process to explore the sale of its Lids Sports Group business
·      Auto sector; auto parts retailers and dealers weak initially after data show purchases at auto dealers dropped (-1.3%), the most since August; GM, F, ORLY, AZO, AAP, GPC, MNRO, KMX, ABG, AN, GPI, PAG, and SAH among movers; LAD reported Q4 EPS and sales above consensus; LEA boosts share buyback authorization to $1.5B and raises dividend
·      Consumer Staples; DPS posted Q4 sales that were below consensus views; GIS upgraded to buy at Jefferies with $63 tgt saying it has significantly enhanced its capabilities and refined its strategy; HRL also upgraded to buy at Jefferies; PEP downgraded at Evercore/ISI; TAP Q4 net sales mostly in-line with estimates
·      Restaurants; CMG shares jumped as announced that it has appointed Brian Niccol as CEO (effective March 5) coming from Taco Bell (YUM) and that founder Steve Ells will assume the role of executive chairman; DENN better Q4 EPS and guidance for the year
·      Casino, Lodging & Leisure; in lodging, HLT Q4 EPS/revs/RevPAR stronger than expected, though Q1 guidance falls short of views; WYN mixed Q4 as EPS beats but revs of $1.25B ,misses the $1.39B estimate and guidance for year well below consensus; in leisure, BC was upgraded to outperform and $70 tgt at Wedbush
·      Mixed oil inventory data failed to rally prices meaningfully, but between the smaller oil inventory build, bullish OPEC comments, and a pullback in the dollar from earlier highs, oil prices managed to squeeze higher after the recent downdraft that saw prices drop about 10% last week
·      Top movers; OXY slides after Q4 production missed, along with lower than expected Q1 production guidance and its FY capital budget was also slightly higher than Street estimates
·      Oil services; BMO Capital said they are no longer cautious on the oil service sector following 25% declines from year-to-date highs on average; but the firm isn’t bullish yet, since the WTI is at the high end of BMO’s $55-$60 range; PTEN upgraded to outperform from market perform
·      Refiners; Citigroup upgraded shares of ANDV, VLO and DK to buy saying the U.S. is at the cusp of an epochal hydrocarbon market share transformation. Readily-available, relatively-cheap crude will create a sustained cost advantage for US refiners, while global capacity growth constraints and IMO 2020 act to expand the available market. They see a 20%+ FCF/sh 4-yr CAGR for the group over our forecast period
·      E&P sector; FANG posted a strong Q4 update, including the initiation of a 50c dividend, though its 2018 spending guidance came in above Street estimates; AR Q4 results were in line with its preannouncement as was 2018 production guidance of 2.7 Bcfe/D implying 20% growth
·      Large Cap banks one of the top beneficiaries in rising rate environment given improved lending margins as rates rise – group rallies a second day, helped by the CPI inflation report, lifting banks, brokers, and insurance names; ZION added to US 1 list at Bank America with $60 tgt
·      Insurance; KMPR agrees to buy IPCC for $129 in cash and stocks, in deal valued at about $1.4B ($51.60 a share paid in cash, rest in stock) ; METmixed Q4 results and guidance as operating earnings miss views, though beats on revs and said increased reserves by $510M on material weakness; AFL announced a 2 for 1 stock split in the form of a dividend;
·      Payments, lending and services; WU reported a Q4 rev beat but missed on EPS due to higher marketing expenses, lower margins, and a higher tax rate (was upgraded at Mizuho); BXMT advanced on Q4 core EPS beat; RM 52-week highs after earnings
·      REITs; DLR upgraded to buy at Citi largely on valuation after retreating to a peer group low on P/AFFO using our ’19 forecasts/see opportunities for its salesforce restructuring to improve bookings in future periods; SKT falls as full-year FFO forecast misses lowest estimate (the lower guidance weighed on other mall REITs, along with pressure from rising yields); OHI drops on lower year FFO outlook $2.88-$2.98 vs. est. $3.21
·      Large Cap Pharma; SHPG shares fell as Q4 results topped views but guidance for $14.90-$15.50 came in well below the $15.95 estimate with lower gross margins; MRK said it will end its Alzheimer’s trial as alternative approach fails; DBVT rises as received permission to seek U.S. FDA approval to sell its experimental peanut-allergy patch; BFRA 1.22M share IPO priced at $9.88; RARX 8.333M share Spot Secondary priced at $6.00; PIRS 5.5M share Spot Secondary priced at $8.00; GLMD shares plunge after its “Arrive” trial of Aramchol in HIV associated lipodystrophy failed to reach its primary target/ trial showed no difference between patients receiving Aramchol vs placebo; TTPH drops after a Phase 3 trial of its lead drug eravacycline for treatment of complicated UTI (cUTI) failed
·      Biotech movers; BIIB shares fell after they told investors at the Leerink conference that 510 Alzheimer’s patients are being added to the aducanumab clinical trial due to “increased variability; NKTR shares active after announcing a partnership with BMY for NKTR-214 (there had been prior reports NKTR was weighing options, including an outright sale) – BMY to pay NKTR $1.85 billion upfront, comprised of $1 billion cash and the purchase of about 8.28m shares of Nektar stock at $102.60 per share); CELG announced a $5B stock buyback; ICPT posted a wider than expected Q4 EPS loss on lower revs; shares of ALKS rallied on earnings and in sympathy with NKTR deal with BMY as ALKS’s Phase 1 cancer drug candidate, ALKS 4230, has a similar mechanism of action as NKTR’s cancer drug, NKTR-214
Industrials & Materials
·      AG & Machinery; EMR upgraded to outperform at RBC Capital as they like the setup for upside organic growth, opportunistic bolt-on M&A, and tax reform benefits;TEX declined despite better earnings results; LAYN to be acquired by GVA for $17 per share in stocks, in deal valued at $565M including assumption of debt upgraded to buy at SunTrust citing healthy demand and improving margins
·      Aerospace & Defense; NOC upgraded to buy at Jefferies saying top-line growth can be sustained at the high end vs peers through 2020 and beyond
·      Transports; Transport index follows market higher, bouncing off the lows – UNP top gainer (upgraded at Citi and tgt upped to $151), while CAR the biggest drag, down -7% after Goldman Sachs downgrade; car rental stocks weak after Goldman Sachs cut the sector to cautious and cut CAR to sell saying hurricane benefits begin to wane and headwinds resume;
Technology, Media & Telecom
·      Internet; NFLX tgt raised to $270 at SunTrust after further evaluating his FY18 revenue, EBIT, and EPS growth view; GRPN falls after mixed Q4 results as EPS missed, but lower Ebitda and revs guidance weigh; BIDU posted better Q4 results announces IQiyi IPO plan; in online travel, SABR Q4 results beat, while TRIP reports after the close; CARS pre-releases largely in-line revenue and EBITDA for Q4 and guides 2018 revs in-line on organic basis & EBITDA below
·      Semiconductors; semi-equipment stocks rising ahead of AMAT earnings results tonight; Philly semi index (SOX) rises over 1% early, led by gains in LRCX, XLNX, TER, AMAT, with the index rising 20 points off its lows as approaches its 50 day resistance of 1296.70; XPER reported in-line 4Q results and guided 2018 materially above prior EPS estimates/strong C18 EPS outlook is offset by lower C19 outlook; LSCC reported 4Q miss and 1Q guidance
·      Software movers; CSOD reported a 4Q billings beat highlighted by a strong all around quarter with large deal success across geographies; CARB Q4 revs slightly below estimates due to lower license revenues, but subscription business did well/EPS beat and acquired Mozy for $185M in the cloud-backup market; CALX positive earnings results and guidance; TWLO rises as 4Q results beat estimates for revenue amid a narrower-than-expected adjusted loss; HUBS and TLND also advanced in tech rally after earnings for both
·      Media, Advertising and Marketing; IPG 4Q results which beat estimates, adding to positive views on the industry from Japanese advertising company Dentsu and Europe’s Publicis; CRTO shares surged as posted better-than-expected financial results for Q4 and delivered a strong outlook (Q1 revs seen $230M-$235M vs. est. $205M); MTCH rises after reports that Tinder will roll out a feature that lets women choose who makes the first move

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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