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, March 6, 18
Equity Market Recap
· U.S. stocks end mixed, getting a boost early after reports North and South Korea will be holding their first summit in over a decade in late April, and North Korea will also be willing to talk to the U.S. about giving up nuclear weapons, but the potential impact of a trade war in the wake of President Donald Trump announcing a pair of tariffs on steel and aluminum keep fears alive. Pushback against the Trump administration’s tariff plan from key Republicans such as House Speaker Paul Ryan (comments yesterday) also helped lift equities, but markets await the final decision from the President regarding the tariff decision. Overnight, the European Union proposed retaliatory tariffs on imports of a range of U.S. products with a list targeting imports of shirts, jeans, cosmetics, other consumer goods, motorbikes and pleasure boats. Treasury Secretary Mnuchin held out to Canada and Mexico the prospect of avoiding U.S. tariffs on steel and aluminum, echoing President Donald Trump by tying them to a remake of the North American Free Trade Agreement (NAFTA). Materials and industrials sectors were leading the market’s move higher while utilities and consumer staples lagged. In Europe, the Stoxx Europe 600 index gained 0.7% to 373.56, building on a 1% gain from Monday. Italy’s FTSE MIB Index rallied 1.1% to 22,053.68, rebounding from a 0.4% loss on Monday that came after the country’s general election. Big week ahead for economic data with private payroll data tomorrow (ADP) and Nonfarm payrolls and wages on Friday. The dollar slumped, lifting gold prices, while oil and bonds were steady. Markets also steady after surging more than 1% yesterday.
· Oil prices ended little changed with WTI crude rising 3c to settle at $62.60 per barrel, ekeing out a third straight day of gains ahead of weekly inventory data tonight and tomorrow morning. Rising oil prices helped by weakness in the U.S. dollar, continued declines in OPEC production and winter weather on the East Coast. Today’s quiet action comes ahead of API inventory and DOE inventory data and after jumping more than 2% yesterday. Oil production from OPEC fell by 70,000 barrels a day to 32.39 million barrels in February from a month earlier, according to an S&P Global Platts report. The decline was driven by “continued collapse in Venezuela’s oil industry to a historic nadir” and field maintenance that dropped output from the United Arab Emirates to almost two-year lows. Gold prices climb $15.30, or 1.2%, to settle at $1,335.20 an ounce, posting its highest settlement since February 16th, getting a boost amid a weaker dollar
· The U.S. dollar slumped, falling vs. most rival currencies, as fear of global trade tensions appeared to recede somewhat, allowing rivals to stage a recovery rally. The euro touched highs of 1.2420, rising 0.5% (off overnight lows 1.2328), while the Pound advanced as well. The dollar index (DXY) dropped back below the 90 level amid ongoing fear of global trade tensions. The Canadian dollar and the peso gained early as investors hoped the Republican backlash against Trump’s tariff plan will soften his stance. Bitcoin prices dropped over 7% to around $10,600.
· Treasury markets little changed, rising initially before sliding amid more concerns regarding President Donald Trump’s plan to institute global tariffs on aluminum and steel imports/fears of sparking trading issues with foreign allies (Canada, Mexico); the yield on the 10-yr little changed at 2.88% after trading up as highs as 2.89% (low around 2.86%); the 2-yr yield was little changed at 2.24% and the 30-yr yield dipped a few bps to 3.13%. Economists have warned tariffs could weaken the dollar and increase costs for broader U.S. industry raising inflationary pressures.
· Factory Goods Orders for January fell (-1.4%) MoM, in-line with estimates, while Factory orders for December revised up to 1.8% gain from 1.7%. New orders ex-trans. for Jan. rise 0.4% and new orders ex-defense for Jan. fall 0.8% after rising 1.6% in Dec.
· Durables orders for January fall (-3.6%) after rising 2.7% in December, but was in-line with expectations; Consumer goods shipments for Jan. rise 1.1% after rising 0.8% in Dec.
· March IBD/TIPP economic optimism index at 55.6 after Feb.’s 56.7; the economic outlook fell to 52.9 vs 57.5 last month
Sector News Breakdown
· Retailers; TGT Q4 EPS missed by 1 penny on better revs and comp sales 3.6% vs. est. 3.4%, though Q1 EPS guidance mid-point misses estimates/ EBIT margins fell 140 bps for the quarter and 120 bps for the year; the special committee of the JWN board rejected an initial proposal by the Nordstrom family for a $50 per share cash buyout https://goo.gl/zQtNU4 ; ASNA shares drop on larger quarterly loss and guided next quarter EPS to unexpected loss w/comp sales down (3%-5%); NLSQ4 revenue missed estimates
· Consumer Staples; HLF was upgraded to buy with $114 tgt at Citigroup saying even with the rise in the stock, they see upside as HLF executes a tender offer and refinances its debt, to both reinvest in the business and repurchase shares in 2019; ADM & BG both upgraded to buy at Citigroup and raises estimates as conditions in the global soy crushing market have taken a dramatic turn for the better over the past two months; the FTC filed an administrative complaint challenging theSJM’s proposed $285M acquisition of CAG’s Wesson cooking oil brand because it would reduce US competition for canola and vegetable oils; FRPT shares decline after Q4 revs miss and guided year revs under $185M vs. est. $188M
· Restaurants; CAKE provided 2018 profit and same-store sales guidance that was in line with expectations; BOJA announced the resignation of its CEO, sending shares lower; Dow component MCD estimates lowered by another analyst (CSFB) after recent negative comments by RBC Capital/separately, MCD said was swapping to fresh beef in quarter pounders from frozen
· EIA ups 2019 U.S. crude output forecast by 0.8% to 11.27 mln bbls/day; lowers 2018 WTI oil-price forecast by 0.2% to $58.17/bbl; cuts 2018 natural-gas price view by 6.6% to $2.99/mln Btu’s
· Top stories: CVX hosted its analyst day today (XOM tomorrow), as the company said it intends to maintain capital discipline, citing an $18B investment program this year and $18B-$20B annual investment range projected through 2020; affirms free cash flow growth, sees delivering stronger upstream cash margins
· Utilities; PPL upgraded to Outperform at RBC Capital with $33 tgt as believe uncertainty around RIIO-2 has been more than discounted into PPL’s share price; PORdowngraded to Underperform at Bank America saying recent mgmt meetings indicate the Wind build could be a challenge; VST upgraded to buy at UBS as a result of incorporating the DYN merger into our model post the affirmative shareholder result on Friday March 2nd.
· Large Cap banks were mostly lower; today the U.S. Senate advanced legislation that would give small and mid-sized banks relief from regulations imposed by the 2010 Dodd-Frank law. Procedural vote to limit debate on proceeding to S.2155 is 67-32, with 60 needed to advance; FRC was upgraded to Overweight at Barclays and making it new Top Pick, replacing WAL;
· Online brokers; KBW upgraded AMTD & ETFC to Outperform mostly on valuation and compelling risk/reward saying economic baseline remains below the forward interest rate curve, but they remain above consensus for both AMTD and ETFC in 2019 – also believe the current backdrop of strong economic growth, increasing interest rates, high consumer confidence, and recently, a more normalized level of equity market volatility provides a good operating environment
· Large Cap Pharma; MYL upgraded to overweight at Morgan Stanley saying the combination of its differentiated growth prospects compared to peers, and pipeline catalysts will drive the stock to outperform; Boehringer Ingelheim and LLY will expand their clinical trial program for Jardiance in chronic heart failure; FLXN said it will present additional data from three studies on the benefits of ZILRETTA at the annual meetings of the AAOS and APS
· Biotech movers; MRNS dropped as increased targeted enrollment in its Phase II trial to evaluate the safety, efficacy and pharmacokinetics of ganaxolone in women diagnosed with severe post-partem depression (shares of competitor SAGE active on results); GLYC shares fell (and defended by many analysts) after plans for a late-stage study of its GMI-1271 disappointed those hoping for a trial design that might get the treatment to market sooner; CERS given “fresh pick” designation at Baird in anticipation of faster-than-expected uptake in France
· Managed Care/Services: CVS plans to sell about $44B of bonds to help pay for Aetna deal, the largest corporate bond sale in more than 2-years; Yesterday, the Arizona Health Care Cost Containment System awarded Medicaid managed care contracts to seven MCOs (Managed Care Organization) that will coordinate physical and behavioral health care services for 1.5M Medicaid members in the state (CNC, WCG, UNH among them)
· Medical devices and equipment movers; ADMA shares rise after FDA clearance of implant device; ALOG rises early as reported strong earnings results
Industrials & Materials
· Industrial & Machinery; PCAR upgraded to buy at Longbow due to strong Class 8 fundamentals based on a higher sales outlook from our dealer contacts and a higher production forecast for 2018 and 2019 from FTR Associates; FAST reported average daily sales of up 14.8%; NX shares rallied early after earnings
· Paper & Packaging sector active amid deal news; Europe’s largest paper packaging producer Smurfit Kappa has rejected a takeover approach from IP saying the proposal “fails entirely” to reflect its growth prospects and industry outlook. https://goo.gl/So98Sy ; Wells Fargo said they see upside potential to Q1 estimates forIP and lesser extend PKG on lower recovered fiber costs
· Chemicals; ALB shares rebound for a second day after Seaport Global upgraded to buy noting shares are down ~34% from the 52-week high set in November and down ~26% YTD, it’s time for a reevaluation of its risk/reward potential. Long story short, we think concerns about lithium supply/demand dynamics are overblown, and we view ALB’s risk/reward as compelling
· Transports; UPS was upgraded to buy at Stifel as believe the package and general freight markets remain strong, and the stock has sold off to a valuation that we believe reasonable; CNI was downgraded to Underperform at Bank America and cut tgt to $72 saying its CEO stepped down at a time when the company’s pace of growth is set to stagnate
Technology, Media & Telecom
· Internet; NFLX tgt raised to $400 at Pivotal and tweaked our long term international subscriber forecasts higher +20M to 250M international subscribers by ’24 (up from 230M), raised our long term U.S. ARPU expectations; GRUB downgraded to neutral at Bank America saying despite solid growth and earnings trends, they think that much of Grubhub’s upside priced in; CARS guided 2018 revenue growth of ~10% to 11%, including 3%-4% growth from its organic business; BZUN shares surge after Q4 results positive commentary
· Semiconductors; QCOM said that its annual shareholder meeting would be held April 5 (the meeting was supposed to be Tuesday morning – but the Committee on Foreign Investment in the United States requested a month delay after deciding to look at AVGO hostile offer for co; Treasury letter dated March 5 says the national security concerns relate to risks associated with Broadcom’s relationships with third party foreign entities and national security effects of Broadcom’s business intentions with Qualcomm
· Other semi news; MU shares remain strong (rose to 17 ½ year highs yesterday) after Goldman Sachs said the company is benefiting from increasing DRAM pricing and is likely to beat 2Q Street EPS estimates when it reports March 18 (raises tgt to $58 from $55); CREE acquired assets of Infineon RF Power business for about EU345M; RMBS announces $50M share buyback; LRCX shares were active as hosted analyst day today; INTC fresh 52-week highs in the Dow
· Software movers; CHUBA agreed to be acquired by private-equity firm Sycamore Partners in a cash deal valued at $1.1B, with holders getting $22.75 a share,https://goo.gl/uFECQ8; TNTR shares active following a better than expected quarter, with a report that included a weaker sales outlook, plans to slash costs, and a CEO transition; ADSK reports earnings tonight after the close; PRGS 3.7M share Block Trade priced at $45.75
· Hardware & Component movers; NTAP was added to Bank America US 1 list following their recent upgrade to Buy as they see long cycle sustained topline growth for the company; in optical space, CIEN Q1 EPS beat by 3c on better revs, though margins of 42.6% light (helped lift shares of other opticals early – FNSR, AAOI); BBfiled a patent infringement lawsuit against FB’s WhatsApp and Instagram in a Los Angeles federal court, Reuters reported