Market Review: February 22, 2018

Scott GreenDaily Market Report

Closing Recap
Thursday, February 22, 18
Equity Market Recap
·      U.S. stocks end mostly higher, though the tech heavy Nasdaq Composite underperformed broader markets, as the market debate whether the strong economic data and signs of economic growth (which included data points of rising inflation – such as wage increases and CPI) will force the Fed’s hand to accelerate the pace of rate increases. Markets have been on shaky round the last few weeks, on pace for its worst monthly return in over a year amid rising yields and borrowing cost fears, though a handful of Fed speakers over the last few days have tried to alleviate or downplay the fears of four rate hikes this year. The dollar snapped its 3-day win streak, while bond yields pulled back from YTD highs yesterday (but still remain at elevated levels). Oil prices popped to its highest in two weeks as American supplies unexpectedly shrank and exports surged, alleviating fears of oversupply. With today’s gains, the S&P 500 still remains more than 5% from its all-time high, as February shapes up as one of the worst months for global equities in more than a year. The rally today also pared yesterday’s Fed-inspired sell-off.
·      St. Louis Fed President James Bullard dampened the growing expectations of economists that the U.S. central bank will engineer four quarter-point rate hikes this year. “The idea that we have to go 100 basis points in 2018, that seems like a lot to me,” Bullard said in an interview on CNBC. Everything would have to go just right, with upside surprises, to justify that pace of tightening, he said. Yesterday, Robert Kaplan reiterated his call for patient tightening of monetary policy. “The headline rate of inflation is likely to firm during the year, and we are likely to make progress toward reaching the Fed’s 2% longer-run inflation target.”

Economic Data
·      U.S. weekly jobless claims drop 7,000 to 222,000 and fall back to 45-year low and below the 230,000 estimate; the 4-week moving average declined by 2,250 to 226,000; continuing claims, or the number of people already collecting unemployment benefits, dropped by 73,000 to 1.88M
·      Leading economic index (LEI) jumped 1% in January, the fourth straight gain and the biggest monthly rise in three months (topping the 0.7% estimate) with building permits and the financial subcomponents were the main drivers of the strong gain
·      The 30-year fixed mortgage rate for week ended today rose to 4.40% from 4.38%, Freddie Mac said in statement; 15-year rate avg 3.85%, up from 3.84% a week earlier
·      Precious metals close modestly higher, rising 60c, or less than 0.1%, at $1,332.70/oz as the dollar slipped and yields pulled back. Gold in a fairly tight range today, this after prices plunged nearly 2% two-days ago as the dollar surged and rate hike expectations had jumped from the Fed) – cautious/more dovish commentary from Fed speakers yesterday and today have helped alleviate the fear of four potential rate hikes in 2018
·      Oil futures settled higher, rising $1.09 or 1.8% to settle at $62.77 per barrel (highs of day $63.09 and lows $60.75), following an unexpected fall in U.S. crude inventories. Weekly inventory data showed a surprise drawdown for crude oil stockpiles, falling -1.6M barrels vs. an expected build of 2.9M (Cushing fell -2.66M barrels), with gasoline inventories a smaller build of 261K barrels vs. an estimated build of 1.35M barrels; distillates fell a greater -2.4M barrels vs. an estimate of -1.2M according to the EIA
Currencies & Bonds
·      The U.S. dollar index (DXY) snapped its 3-day win streak, falling to lows vs. the Japanese yen, down at 106.65 (off as much as 1%), while the euro advanced about 0.4% after sliding yesterday; for the second straight day, cryptocurrencies are retreating, with all major digital currencies sliding/Bitcoin down over 3% to under $9,800. Economic data came in better-than-expected, but the greenback failed to rally
·      Treasury market’s rebounded (partially) after the yield on 10-year U.S. note rose to a four-year high on Wednesday (above 2.94%), inching nearer the closely-watched 3% handle. On Thursday, however, the yield moved back slightly to 2.91%, while the 30-yr slips back to 3.20% after topping the 3.215% level yesterday (highest since 2015). The 2-yr yield however held steady at 2.25%. The U.S. Treasury sold $29B in 7-year notes at a yield of 2.839% (compared to 2.832% prior to auction), with the bid-to-cover (demand) weak at 2.49 vs. 2.73 in previous auction and indirect bidders were awarded 62.2% – the weak auction spurred a small roll in bonds, lifting yields
Sector News Breakdown
·      Retailers; department stores bounce, led by a rebound in WMT after falling 10% the last few days following an earnings miss/lower guidance; TPX Q4 top and bottom line results missed estimates on in-line guidance; gun makers active after RGR sales dropped 27% Y/Y and EPS dropped 46% Y/Y with ending backlog was down 61% Y/Y as results were well below street expectations; GIL forecasts YoY declines in 1Q adjusted EPS and sales
·      Consumer Staples; HRL boosts FY18 adj. EPS view to $1.81-$1.95 from $1.62-$1.72; says new view based on expected effective tax rate of 17.5%-20.5% vs original guidance of 32.3%-33.3%; in protein space, SAFM falls following 1Q earnings report; HSY reaffirmed forecasts; SAM shares weigh on beverages after Q4 revenue missed estimates; SPTNsales miss, hitting shares
·      Restaurants; CAKE with mixed results as beat on EPS driven by lower G&A and a lower tax rate, but comp sales fell (-0.9%) missing views on slower traffic; WEN in-line Q4 EPS but comp and total sales fell short of estimates on weaker profit guidance; BLMN Q4 EPS and sales topped views with comps up 3.3%, also above estimates; JACK mixed results as EPS beat but posted unexpected drop in Q1 Jack system comp sales of (-0.2%)
·      Education services; BPI shares dropped the most in five-years, falling on a bigger than expected quarterly loss and a miss on revenue; LOPE shares jumped as the company reported higher profits and higher sales than estimated; CECO posts quarterly earnings results
·      Gaming sector; shares weaker as LVS and MLCO declined after reports that Zhuhai Customs boosted the price of transit visas in Macau to 340 yuan from 50 yuan; WYNN weak as well after Massachusetts officials said their investigation of Wynn Resorts and the sexual misconduct allegations against its founder remains active, and is a priority for the agency
·      Energy stocks mostly higher, led by bullish inventory data and as several stocks react positively to earnings/production updates  (CHK, GPOR, WLL); Repsol SA (REPYY) said it has reached an agreement to sell its 20% stake in Gas Natural SDG SA to CVC Capital Partners for EUR3.82B euros ($4.7B), or EUR19 a share.; in equipment, FTIshares climb on 4Q Ebitda beat, and both onshore and offshore guidance; NE Q4 adjusted revenue and EBITDA came in almost exactly in line with consensus; utilities outperform as investors rotate into defensive sector: earnings today from CNP, SCG, and EIX tonight
·      E&P news: CHK move on earnings, said plans to raise 2018 output on lower spending, and to reduce debt by $2B-$3B in 2018; SD reported a 4Q earnings beat and reiterated a modest 2018 capital program that may result in a 22% y/y production decline; MTDR reported earnings beat, but FY Ebitda outlook of $425M-$455M missed views; APAreversed to trade lower, with one analyst noting given the bottom-line miss, 2018 outspend with below consensus production guidance; WLL earnings beat (narrower loss) on higher sales, issued an efficient ’18 outlook; GPOR Q4 EBITDA of $224MM is largely in line with Street ($226MM), on preannounced production of 1.26 Bcfepd; PE Q4 in-line following the 1/29 pre-release, which preannounced volumes, capex and revised 2018 guidance; SM falls as 2018 capex came in above expectations, while production guidance missed estimates; CLR and CJ falls on results, WPX rises
·      Large Cap banks with small gains early as environment continues to favor financial landscape with rising rates; MTB announced an additional common stock repurchase program for up to $745M; BCS said it will return its dividend to previous levels, while considering stock buybacks for the first time in more than 20 years, as its capital buffer rose in excess of its target
·      Insurance; ATH Q4 earnings results beat by 40c; STFC quarter was noisy when including the impact of tax reform; PRA earnings missed wile underwriting results mostly in-line;VOYA is eliminating the role of COO and Alain Karaoglan will be departing the company
·      Consumer Finance, Lending and Services; GDOT Q4 results contained a top- and bottom-line beat with key drivers organic active card growth and more frequent card growth;TREE Q4 results mixed as EPS missed by 6c while revs beat; VRSK was upgraded to overweight at JP Morgan saying Q4 results demonstrated strong organic revenue growth
·      REITs; HASI shares dropped after saying it wouldn’t raise its dividend for 2018 and gave a 3-year target for “total shareholder returns” of 8%-12%; AKR rises on earnings results;HST Q4 FFO beat by 2c on RevPAR gains; INVH same-store results were strong, SSREV of 4.8% beat BTIG 4.6% est and SSNOI of 9.3% beat BTIG 6.5% est; CLI reported lower Q4 FFO, missing by 2c and guidance for year also below consensus
·      Large Cap Pharma; VRTX initiates late-stage study of triple combo therapy for cystic fibrosis; ALKS shares were downgraded to hold at Jefferies saying shares are fairly valued and saying that ALKS-4230 may be weaker on efficacy vs Nektar Therapeutics NKTR-214; GWPH shares fall as its GWP42006 fails mid-stage study in focal seizures
·      Biotech movers; CLVS upgraded by a few analysts (Evercore/RBC) as see the CHMP SAG positive trend as a clearing event with potential for appreciation; MESO reported its Phase 3 GvHD clinical trial has achieved its primary endpoint; MNTA upgraded to buy at Stifel; SGMO rises after agreeing to $3B gene-editing collaboration with GILD on engineered cell therapies for cancer; BLUE shares dropped on wider Q4 earnings loss; LGND another decliner on earnings
·      Healthcare services/facilities; PRAH beat in 4Q17 and issued ’18 guidance that supports consensus; BKD shares plunge as shakes up management, rejects $9/shares takeover bid; AAC shares jumped as Q4 results topped consensus, rebounding beaten up shares; ACHC Q4 rev/EPS came in ahead of consensus driven by robust +6.6% US comp sales growth
·      Healthcare devices/suppliers; MDXG hasn’t reported financial ties to doctors as at least one of its direct competitors does regularly , the WSJ reported ;GMED trades to 52-week highs after earnings beat/reaffirmed forecast
Industrials & Materials
·      Industrials; SRCL posts Q4 miss and a significant 2018 guidance miss, as weaker revenue, cost pressures, and investments weigh on earnings and cash flow; HSC strong results driven by improving heat exchanger business; MIC downgraded to hold at SunTrust and JP Morgan with an unanticipated ’18 shortfall in IMTT driving a 31% dividend cut, expects to underperform; PWR shares jumped after earnings results; UTX among top Dow leaders on the day after its CEO said yesterday at an investor conference that it is studying a plan to split up a portfolio that includes jet engines, elevators and air conditioners
·      Transports; sector boosted by car rental company CAR as Q4 results were ahead on key U.S. metrics; UPS said it is planning to deploy 50 plug-in electric delivery trucks that will provide almost 400% fuel efficiency improvement.
Technology, Media & Telecom
·      Internet; Pandora (P) Q4 results well above consensus, posting y/y growth and positive EBITDA, but guided Q1 well below expectations; STMP rises as reported 4Q results which outperformed while guiding 2018 mixed (better sales/lower EBITDA); Wayfair (W) Q4 EPS loss wider than estimates and says Q1 Ebitda may be negative due to higher ad spend;SNAP slides early after Kylie Jenner tweets she doesn’t use the app anymore
·      Semiconductors; KLAC upgraded to neutral from negative at Susquehanna; AXTI Q4 sales and Q1 guidance short of consensus weighs on shares; overall semi sector underperformed broader markets throughout the day; IDCC shares slumped on earnings
·      Software movers; FIVN 4Q revenue, operating margin and EPS were meaningfully above estimates and included typical seasonal revenue uplift said one analyst; CTXS was upgraded to buy with $100 tgt at Argus; SNPS posts beat and raise quarter; SAIL reported Q1 revenue forecast that exceeded expectations, while Q4 revenue climbed 53%; TYLresults show revenue short of expectations and cash flow ahead of consensus; AYX jumps as top-line beat across the board in terms of geographies, verticals, and business segments, while billings grew 62% and customer count grew 46% from last year; other movers in software on earnings: ANSS, MB
·      Optical space weak after AAOI shares fell as reported light 4Q results and guided 1Q well below consensus on higher expenses (opex/taxes) and lack of clear growth outlook (guided Q1 EPS 28c-34c on revs $67M-$71M, well below the consensus 74c/$87.21M) –NPTN, ACIA, FNSR fell
·      Hardware and components; ROKU shares fell with Citigroup noting revenues did not exceed expectations as much as had expected as meaningful upside in Platform/Advertising revenue was offset by lower than expected Player revenue

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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