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.
Tuesday, February 27, 18
Equity Market Recap
· Stocks dropped, snapping the 3-day win streaks for the Dow Industrials and S&P 500 Index, while the NASDAQ underperformed. Renewed interest rate hike increases (odds of four rates increases in 2018 rose to 33% from about 20% on Monday, according to some wires) and rising borrowing costs added to worries today after new Federal Reserve Chairman Jerome Powell testified for the first time in front of Congress about monetary policy. “We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative,” were among some of the commentary from Powell. Stocks dropped prior to his presentations, rebounded after the conclusion of his Q&A, but markets slowly faded into the close, erasing some of yesterday’s stellar market gains.
· Economic data was mixed as Durable Goods and Trade Balance missed, while the manufacturing and Consumer Confidence topped views (consumer confidence jumping to 17-year highs). The dollar was broadly higher while bonds dropped (sending yields higher) and commodity prices declined, led by a more than 1% drop for gold. Markets await another round of economic data, including Q4 GDP (estimate 2.5%), and PCE core inflation (est. 1.9%).
· In stock news, retailers outperformed initially after better earnings results and guidance from Macy’s and Dillard’s (though the group slumped late with the broader market), while investors also faced news on the M&A front, with a higher offer from Comcast for British Sky (topping FOXA), and concerns a deal could fall apart in the Pharma space. Consumer discretionary, utilities and real-estate sectors were leading the losses, down more than 1%.
· WTI crude futures fell 90c, or 1.4%, to settle at $63.01 per barrel (snapping a 3-day win streak), while Brent prices dropped over $1 to settle at $66.63 per barrel, with commodity prices falling amid strength in the dollar. Markets also anticipate the weekly inventory data tonight (API) and tomorrow (EIA). There were also reports from Bloomberg that the head of OPEC plans to dine with U.S. shale company executives on Monday in Houston, the second consecutive year that the secretary general has met with them.
· Gold futures fall -$14.20, or 1.1% to settle at $1,318.60 an ounce, its largest one-day dollar and percentage loss in a week as the dollar strengthened and bond yields rose amid increased expectations for future interest-rate hikes following Federal Reserve Chairman Jerome Powell’s congressional testimony.
· The dollar index (DXY) gained following better-than-expected economic data (17-year high for consumer confidence) and after Federal Reserve Chairman Jerome Powell told U.S. lawmakers the central bank would stick with gradual interest rate increases despite the added stimulus of tax cuts and government spending. The dollar index rose 0.5% to above 90.30, two-week highs as Powell avoided the question of whether the central bank would raise interest rates more than the projected three times, though said the economy had strengthened. The euro falls over -0/6% to 1.224 (down from overnight high 1.2346), while the greenback climbed against the yen. Bitcoin prices rise for a third day to $10, 600
· Bonds dropped as yield popped following the congressional testimony by new Federal Reserve Chairman Jerome Powell. The comments by Powell were taken as somewhat bullish by Wall Street, sending yields higher with the 10-year benchmark yield trading to 2.92% after lows of 2.84% prior, while the 2-yr jumped 6 bps from 2.21% to 2.27% and the 30-yr up 2 bps to 3.175% (traded to highs around 3.20%). Powell said the Fed would give the U.S. economy room to grow while preventing inflation from getting out of hand, in a hint that the central bank would not budge from its policy stance of gradual rate hikes.
· U.S. consumer confidence climbs to 130.8 in January (17-year highs) from 125.4 prior and came in above the 126.5 estimate; present situation index rose to 162.4 from 154.7, the highest mark since 2001 while future conditions moved up to 109.7 from 104
· Durable Goods Orders for January fell (-3.7%) vs. est. for down (-2%) largely because of a big drop in contracts for passenger planes that was expected; Durable goods new orders revised down to (-2.6%) for December from (-2.8%); new orders ex-trans. fell 0.3% in Jan. after 0.7% rise; first decline since April and new orders ex-defense fell 2.7% in Jan. after 2.2% rise
· U.S. Advance goods trade deficit widened to a (-$74.4B) deficit in January vs. revised (-$72.3B) in December (was -$71.6B). Exports declined 2.2% to (-$133.9B) following the prior 2.5% jump to $137.0B (revised from $137.6B), while imports dipped 0.5% to $208.3B
· The S&P/Case-Shiller national index rose a seasonally adjusted 0.7% in the three-month period ending in December, and was up 6.4% compared to a year before. The 20-city index rose a seasonally adjusted 0.6% for the month, and 6.3% for the year.
· Richmond Fed’s Feb manufacturing survey at 28 vs 14 last month and above the 15 estimate; shipments rose to 31 after 15 the prior month, new order volume increased to 27 after 16 the prior month and order backlogs rose to 18 after 5 the prior month
Sector News Breakdown
· Retailers; sector got a big boost after department store Macy’s (M) reported Q4 earnings that beat expectations and gave upbeat guidance/comp sales on an owned basis rose 1.3%, and were up 1.4% on an owned-plus-licensed basis); DDS better Q4 results also helped lift the retailing segment; WMT introduced four new apparel private brands for women, men and kids; CRI Q1 EPS missed lowest estimates; in tech retail, FIT shares dropped after lower guidance came in below estimates – retailers were up initially on M/DDS, but slumped later on market reversal; gun stock weakness continues (AOBC, RGR) as pressure mounts on regulation
· Autos; auto retailers fall after AZO Q2 profit missed analysts’ expectation as adjusted EPS for the quarter came to $8.47, ex-charges vs. est. $8.87 and posts modest comp sales growth (AAP, ORLY move lower in reaction);
· Consumer Staples; in weight loss space, NTRI exceeded Q4 expectations, but indicated its FY02018 is off to a tough start as guidance was below expectations; WTW set to report earnings tonight after the close; VSI dropped as Q4 sales missed on comp decline (-4.6%) and sees year comparable sales of low to mid negative single digits
· Restaurants; CMG upgraded to outperform at Baird and raise tgt to $400 following the appointment of Brian Niccol as CEO, as become more optimistic about the potential to demonstrate better sales/traffic momentum over the next 12-24 months; FRGI shares fall as Q4 EPS missed estimates, though revs beat and announced a stock buyback
· Housing & Building Products; in homebuilders, TOL Q1 EPS and orders topped consensus estimates/reported 1Q order growth of 20% vs. MKM’s estimate of 7%; in building materials, SUM upgraded to buy at Goldman Sachs as remain positive on SUM’s M&A strategy and ability to consolidate a fragmented industry at value-enhancing valuation; flooring names active as LL posted mixed results as earnings better but noted weaker comp outlook on soft January
· Casino, Lodging & Leisure; busy week of earnings on the hotel/lodging sector; VAC Q4 EPS beat but revenue missed and posts weaker EPS outlook; LQ reports tomorrow; STAY with a Q4 top and bottom line beat though rev outlook softer; in leisure, SEAS Q4 Ebitda topped consensus but was overshadowed by CEO departure; WGO upgraded to outperform at BMO Capital
· E&P sector; PDCE Q4 results were in line with prior indications and 2018 guidance of 25% growth at midpoint and 2019 growth of 30-40% growth along with capex; CRK reported 4Q earnings with a beat on EPS and DCPS (lower cash opex), reaffirmed 2018 guidance, and announced encouraging early results from its first two wells further north in the Haynesville; CRZO downgraded at KeyBanc after earnings results saying Q4 missed on oil and capex was high, 1Q18 production was guided shockingly low, 2018 oil production was guided 10% below; CRC falls after saying California wildfires hurt production by ~2,200boe/d in Dec., and remained down by ~1,200boed in January
· Other names moving on earnings in energy complex/MLP/Utility sector; AES shares rise on results; OKE results met estimates; in equipment, BAS falls on results; in refiners, DK shares move higher on earnings beat
· Large Cap banks; U.S. banking industry fourth-quarter profit plummeted 40.9% YoY earlier on adjustments to new tax law, FDIC says in report. Without the one-time changes, $25.5B net income would have been $42.2B, FDIC said; online brokers (SCHW, AMTD, ETFC) advanced after JPM investor day comments about its own brokerage offering were less worrisome than feared; Piper raised Q1 estimates on BPOP, FBP, and OFG following their trip last week to Puerto Rico; in insurance NGHC rises on earnings; BRO announces stock split
· Pharma/Generics; MNK Q4 results came in ahead of expectations and 2018 sales growth guidance was roughly in-line; ENDP posted Q4 EPS and sales above views on higher Xiaflex revs of $61.3M, but guided year EPS $2.15-$2.55 vs. est. $2.86;
· Specialty Pharma; AKRX shares plunge on concerns FMS may back out of the planned acquisition of the company if its probe into data integrity yields evidence of wrongdoing, the German healthcare group’s chief executive said. Fresenius had said late on Monday it was conducting an independent investigation into “alleged breaches” at Akorn of U.S. FDA data integrity requirements relating to product development https://goo.gl/Fxnfth
· Biotech movers; NTLA announces preclinical data showing effective CRISPR/Cas9 genome editing; CLVS shares outperformed on earnings results while AKCA drags index down after disclosing a new case of thrombocytopenia with its drug candidate volanesorsen (downgraded at Stifel on the news); ALDR falls on Q4 adjusted loss; other movers on earnings: EXEL (which was also upgraded at Oppenheimer)
· Healthcare suppliers and services; ABC shares dropped late morning after CNBC reported talks between WBA and ABC about an acquisition of the wholesale drug distributor have ended without an agreement https://goo.gl/t1ApZc; DPLO reported Q4 sales miss and reiterated previously issued 2018 revenue and adjusted EBITDA guidance; in hospitals, THC helps lift the group after boosting its 2018 revenue outlook and Ebitda projections following better Q4 results; MDXG said it denies that the company has charged higher prices to federal accounts than commercial accounts in a response to a Bloomberg article published Feb. 26
· Medical devices & equipment; EXAS upgraded to outperform at Baird as believe the recent pullback has presented a compelling entry point for investors to buy a high-quality company that remains in the early days of penetrating its large addressable market; SYK was upgraded to neutral at Citigroup but do remain more bearish than Street on MAKO; LNTH down on earnings
Industrials & Materials
· Industrial & Machinery; BMI was downgraded to sell at Canaccord as they expect Badger will continue to benefit from favorable demand for water/flow measurement and conservation technologies in the future; firm upgraded ITRI to buy at Canaccord amid increased conviction in forward earnings power and find a very compelling current entry point; JBT slipped on mixed results and guidance; PLOW a gainer on better earnings results
· Transports; Transports falling to lows with broader market pullback as the index dropped over 100 points or 1% as nearly all components in the index are lower, led by declines for MATX and UNP, while airlines give up some of yesterday’s gains
Technology, Media & Telecom
· Semiconductors; potential deal in chip space as WSJ reported MCHP nears deal to acquire MSCC, the largest U.S. commercial supplier of military and aerospace semiconductor equipment, for roughly mid-$60’s per share https://goo.gl/dpLcF2; INTC moved to top semi pick at Citigroup, as believes the recovery in the enterprise end market will drive consensus estimates higher
· Software movers; PANW posted another beat and raise quarter as revenue up 28% YoY and billings up 20% YoY which outperformed expectations; SPLK to buy Phantom Cyber for $350M in cash and stock; APPF shares dropped as earnings came in below consensus (7c vs. 9c); SEND Q4 revs beat along with beat on other key metrics (email volumes and customer count) all topping views but shares dip after trading at all-time best; VERI shares dropped sharply after posting bigger-than-expected quarterly loss; WDAY earnings tonight
· Media sector movers; lots of moving parts after reports CMCSA made a tentative GBP22.1 billion ($30.9B) offer for Sky PLC, topping a rival bid from FOXA to consolidate ownership of the U.K. broadcaster. Comcast is offering GBP12.50 a share for all of Sky, topping a GBP10.75 a share offer from Fox for the 61% of Sky it doesn’t already own. https://goo.gl/Z19U3U (shares of DIS also moving lower on news); NXSTshares weak initially after better earnings, but concerns about FCF guide; DISCA reported a 6c EPS beat on better revs, lifting shares; other movers in the media sector on earnings included GTN, LAMR, SNI
· Tower stocks weaker: AMT posted Q4 rev beat but shares dipped as cash property revenue, EBITDA, and AFFO missed due largely to weaker than expected trends in India; SBAC Q4 results topped views but FY AFFO view of $7.27-$7.67 missed the $7.76 estimate
· IDC said global smartphone shipments declined 0.5% in 2017, but it predicts that shipments will return to growth in 2018 and beyond. Shipments in China dropped 5%, while U.S. shipments were near flat. Apple Inc. iPhone shipments grew 0.2% in 2017 after posting a decline the prior year, and the company is making up for that slow growth through higher selling prices for its devices. IDC sees iPhone volumes growing at a 2.4% annual rate through 2022