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 21, 18
Equity Market Recap
· Volatile afternoon trading for U.S. stocks, initially spiking following the release of the January FOMC minutes (at 2:00 PM EST) which appeared at first glance to be dovish…but as rates spiked following the comments (30-yr above 3.21% to highest since July 2015 and 10-yr to 2.95%, highest YTD) and the dollar extended its recent gains, inflation and rising borrowing cost fears sent stocks spiraling from highs to lows. Major averages pulled back from intraday highs, with the Dow falling more than -400 points off its best levels.
· Prior to the late day bond sell-off (and subsequent spike in yields), stocks had been enjoying strong gains amid dovish Fed commentary as the Fed Minutes from the January meeting suggested the central bank would be likely to move gradually to normalize interest-rate policy from ultralow levels in order to avoid upending the broader market. That, coupled with dovish comments from two Fed members earlier today helped boost stocks across the board. However, the minutes also showed officials saw a stronger economy than at the end of 2017 and that more rate hikes were in the offing.
· Higher rates, rising inflation fears that crushed markets 2-weeks ago, pulling major averages down 10% from record highs (correction territory) had recently eased as markets have rebounded nicely since, moving back above key technical levels. Volatility had died down with the CBOE Volatility index (VIX) down more than 15%, trading below the 17.50 level last day as stocks rallied (but after the late day selling pressure, the VIX pared its losses).
· Stocks got a lift on dovish commentary from the Fed’s Harker earlier this morning, sticking to his view that he sees two rate increases in 2018 as the labor market continues to add jobs to the U.S. economy. Federal Reserve Bank of Dallas President Robert Kaplan also reiterates his call for patient tightening of monetary policy this year in an essay describing his outlook for the U.S. economy. “Gradual and patient removals of accommodation will increase the likelihood of extending the economic expansion in the U.S.” Kaplan said
· Oil prices dipped modestly, down 11c to $61.68 per barrel in subdued trade ahead of upcoming inventory data. The dollar saw some modest strength keeping commodity prices in check while the American Petroleum Institute will issue its forecast on U.S. crude inventory tonight followed by official supply data from the EIA tomorrow at 10:30. Last week’s data showed U.S. inventories rising by 1.8 million barrels in the week ended Feb. 9, which was smaller than expected. The two benchmarks posted a mixed finish on Tuesday, as WTI prices gained ground while Brent slipped.
· Gold settled fractionally higher, rising 90c to finish at $1,332.10 an ounce, barley moving after posting its biggest one day retreat in more than a year yesterday on dollar strength. Prices remained subdued ahead of the FOMC Minutes from the January meeting, but prices bounced after the release of the text. Silver climbed 17c, or 1.1%, to end at $16.61 an ounce.
Currencies & Bonds
· The dollar rebounded late day, as the dollar index made it a 4th consecutive day of gains, getting a boost late day after the Fed minutes; after touching highs of 1.236 immediately after the Fed minutes, the euro quickly reversed lower to 1.23 (lows of the day), down -0.25%; the dollar also posted gains vs. the yen and pound late day; Bitcoin prices tumble over 10%, drops to around $10,400 (off overnight highs $11,784)
· Treasury markets end lower, sliding late session after the minutes from the January FOMC meeting was released; after surging initially on the apparent “dovish” Fed minutes, stocks slid late day from highs as yields climb with 10-yr at 2.93%…2-yr 2.26%…30-yr up at 3.215% (highest since July 2015). In a continued week of record bond issuance (Treasury sold $179B of fresh debt yesterday alone), the U.S. Treasury sold $35B in 5-year notes at a yield of 2.658%, with a bid to cover at 2.44 vs. 2.48 prior auction and indirect bidders awarded 58% of the auction.
· Existing-Home Sales for January fell (-3.2%) to 5.38M, below the 5.6M estimate, while December was revised to 5.56M from 5.57M; there was 3.4 months’ supply in Jan. vs. 3.2 in Dec.; inventory rose 4.1% to 1.52M homes; median home price rose 5.8% from last year to $240,500
· Feb. Flash Markit Composite PMI 55.9 vs 53.8 and vs. year ago 54.1; new orders rise to 58.1 vs 56.3 in January (highest reading since March 2015)
Sector News Breakdown
· Retailers; WMT reversed earlier highs after fading from 100-day resistance of 95.20 to add to yesterday earnings related decline; RCII posted a wider than expected Q4 EPS loss of (41c) vs. est. loss (7c), a miss on revs and an unexpected decline of comps (-2%); WWW mixed Q4 results (revs just miss ests.); gun makers (AOBC and RGR) weaker initially on expectations for more regulation
· Consumer Staples; day three of Consumer conference taking place (CAGNY); MO reaffirmed guidance at the conference; other speakers today at CAGNY included CPB, HSY, K, PEP, PM; Consumer staples in general underperformed a second day in reaction to WMT’s lower earnings and guidance yesterday (hitting consumer products and grocers)
· Restaurants; TXRH reported a slight headline EPS miss as stronger comps were more than offset by lower than expected store margins; CHEF shares rise after posting Q4 profit above consensus; RUTH posted Q4 EPS beat of 5c and raised its dividend
· Housing & Building Products; TTS posted an unexpected 4Q loss and the first comp sales decline in several quarters, along with gross margin deterioration; OC Q4 EPS and sales beat consensus ($1.11/$1.61B vs. est. $1.04/$1.52B) helped by insulation sales; in furniture makers, LZB quarterly profit down, missing estimates (due to tax reform), but sales and comps strong; JELD falls as Q4 top/bottom line missed estimates on lower 2018 Ebitda guidance ($500M-$530M vs. $534.8M)
· Casino, Lodging & Leisure; in gaming, BYD 4Q EBITDA was slightly below expectations, and 2018 EBITDA guidance came in 4% below consensus at the midpoint, driven by headwinds; NCLH reports earnings tomorrow morning in the cruise line sector
· Auto movers; in auto parts retail, AAP shares rallied after 4Q results beat, though posted what analysts considered conservative 2018 guidance (AZO, ORLY, MPAA, DORMmoved in reaction)
· E&P sector; DVN shares slide after the company posted weaker-than-expected Q4 earnings (38c vs. est. 62c) and offered downbeat production guidance for 2018; NFX shares fell to 52-week lows as Q4 production of ~170 Mboepd came in 1% above Street estimates, with oil (67.1 MMbpd) falling in-line with Consensus; CXO Q4 production of 211 Mboepd easily beat consensus by 4%, which drove a 9% EBITDA beat ($513MM vs. ~$472MM)/also laid out a plan to deliver 20% oil production growth while keeping capital outlays within operating cash flow for year; EQT approved a plan to separate its upstream and midstream businesses, creating a standalone publicly traded corporation (NewCo) that will focus on midstream operations
· Other movers (drillers/equipment); SPN was upgraded to buy at Seaport Global; RIG reported a 4Q17 miss as EBITDA of $161M came in below consensus at $200M; in MLPs and Pipelines; ENLC and ENLK both reported earnings results
· Frac sand stocks active; SLCA posted a Q4 Ebitda miss, along with 1Q guidance calling for volumes and pricing in Oil & Gas segment to be unchanged QoQ (shares of FMSA, SND, HCLP move)
· Large Cap banks; solid gains for banks and financials; 52-week highs for ZION, STI in banks; ETFC said customers can now trade certain widely held ETFs 24 hours a day, five days a week (trade SPY, QQQ, EEM, DIA, GLD, USO, FXI, TLT, SLV, UNG, IWM, and SH); VRSK rises as quarterly revenue and adj. EBITDA each ~2% above consensus
· Consumer Finance and Lending; Oppenheimer said they continue to believe investors should own AXP over the next 12-18 month and ahead of the 3/7 Investor Day; LC shares slip as reiterated its ’18E outlook, while introducing 1Q:18E Revenue/EBITDA guidance, 5%/$5.6M below the Street at the midpoint on higher marketing/servicing costs, and structured programs seasonality; SQ tgt raised to $52 from $40 at KeyBanc; WEX Q4 top and bottom line results beat; COF was downgraded to neutral at Nomura as sees limited room for positive revisions and a full valuation
· REITs; LHO shares fall as issued below-consensus guidance for 2018; PSA shares rise after Q4 FFO beats by 2c, though revs fell short of consensus and named new CEO; EXR Q4 FFO beat by 4c on lower revs
· Large Cap Pharma; ABBV and NBIX reported positive results for uterine fibroids drug, saying their drug met its primary endpoint in a phase III trial testing it in women with uterine fibroids; along with 4Q financial results, TXMD provided an update on plans to launch TX-004HR in 3Q18 and TX-001HR in 1Q19; DVAX rises early after hepatitis B vaccine recommendation by CDC immunization committee
· Biotech movers; PTLA tgts cut by analysts after the CHMP communicated a positive trend vote on the MAA for AndexXa and a negative trend vote for BevyxXa following oral explanations; REGN downgraded to hold at Canaccord based on concerns over lack of EYLEA guidance going forward and Dupixent competition (cuts tgt to $356 from $522);UTHR falls after 4Q revenue beat estimates but EPS missed on higher taxes and operating expenses.
· Healthcare services; QTS falls after Q4 results, 2018 forecast for FFO/share and adj. Ebitda was materially below analyst estimates and announced restructuring of its sales and management teams; HSTM rises as reported 4Q results that were largely in line with consensus, with initial 2018 revenue guidance relatively close to expectations
Industrials & Materials
· Industrial & Machinery; industrials in general among the top performing sectors today; in E&C space, FLR reported adjusted 4Q results above views and guidance driven primarily by new revenue recognition methodology from the new tax law/new orders were disappointing; MDR shares slipped following mixed Q4 results and in-line guidance
· Transports; sector outperforms, with the DJ Tran index rising as much as 2% above 10,500 (earlier highs 10,560), with nearly all components trading higher, as only MATXshares down significantly after earnings, while EXPD rises after better earnings yesterday, as well as notable gains in the rail and airline space – group pared gains late day with market slide
· Chemicals; MOS upgraded to overweight at JP Morgan and raise tgt to $30 as the company’s reduced phosphate production in the U.S. has created a positive price dynamic;CF initiated outperform at Bernstein and $60 price target as nitrogen recovery continues; KRA shares fall after quarterly earnings and in-line guidance
Technology, Media & Telecom
· Internet; NFLX tgt raised to $319 at Piper; AMZN tgt raised to $1,750 at MKM saying is most impacted by: lower long-term tax rate assumptions, a higher revenue growth outlook and a lower discount rate in our methodology (record highs); GOOGL tgt raised to $1,355 at MKM following a mixed Q4 with strong revenue momentum and a margin miss; Pandora (P) reports after the close
· Semiconductors; AVGO said it will offer $3 less per QCOM share if NXPI deal is not completed consisting of $57 in cash and $22 in AVGO shares – had previously said it was prepared to acquire QCOM for $82 a share, made up of $60 in cash and $22 in Broadcom shares)
· Software movers; LPSN rises despite forecasts for 1Q and FY EPS that were below expectations, with analysts saying they delivered a good quarter of results and guidance;PANW upgraded to positive at Susquehanna; 52-week highs for CRM, RHT, ADBE, CTSH in tech
· Media & Telco; in media research, MTCH was downgraded to neutral at JP Morgan saying Tinder subscriber net adds are likely to slow to more normalized levels; LGF/Adowngraded to market perform at Bernstein saying the company faces increasing competition in premium TV and subscription video on demand; VG Q4 revs missed estimates, sending shares slumping; DISH falls after Q4 revenue misses for fifth straight quarter
· Services and Hardware movers; AAPL may start buying cobalt directly from miners, according to a Bloomberg report, which says that Apple is concerned about there being a shortage of the material amid booming demand for electric vehicles https://goo.gl/ucYmoG; GRMN shares declined after earnings results while HCKT shares jumped on earnings/guidance