Market Review: March 9, 2018

Scott GreenDaily Market Report

Closing Recap
Friday, March 9, 18
Equity Market Recap
·      As good as it gets? It appeared to be the perfect storm for U.S. markets that were on edge coming into the week, ahead of an expected tariff ruling from President Trump, two central bank meetings (ECB and BOJ), monthly jobs data and inflation fears. However, all the pieces seemed to fall perfectly for global stock markets, with major averages soaring on Friday. The tone was set early after the monthly jobs report showed strong job growth (313K jobs added) and steady low unemployment (4.1%), while average hourly earnings (wages) increased, but at a more modest than-expected-pace, alleviating rising inflation fears (average wages YoY rose 2.6% s. est. 2.8%). The data showed strength in the economy and easing inflation concerns.
·      Yesterday, President Trump formally announced the imposition of tariffs on US imports of steel and aluminum, though there are exemptions for Canada/Mexico (contingent on progress of NAFTA talks), while other nations (US allies) will be able to negotiate exemptions – the carve outs helped alleviate trade war fears with two allies, lifting markets.
·      Central bank actions failed to move stocks (though did so for currency markets) as overnight, the Bank of Japan held rates steady, following the non-move by the ECB yesterday while BOJ Governor Kuroda repeated that there is a good chance of hitting the BOJ’s 2% inflation goal by FY 2019, but that doesn’t necessarily mean an exit from loose policy. Yesterday, the euro plunged after the ECB removed a pledge to raise its asset purchases if conditions deteriorate, but turned lower after Mario Draghi emphasized other, more dovish elements of the statement.
·      Overall, major averages posted solid gains on Friday, with the Nasdaq Composite trading back to intraday record highs, trading as high as 7,560, up as much as 1.79% (first time in six-weeks it reached a new record) amid broad strength in technology, with semiconductors setting new all-time highs as well. With today’s push higher, the S&P 500 moves also firmly above its 50-day moving average of 2,741 (cash SPX), as the index closed higher for a 5th time in the last six-sessions while the Nasdaq made it a 6th straight day of gains. 
·      Other top sector movers: Dow Transports outperformed, trading up more than 2% midday near the 10,700 level, with predominant strength in rails (UNP, CSX, NSX, KSU), though was broadly higher. Airlines (UAL, AAL, LUV) jumped as JP Morgan said several airlines may boost their Q1 outlooks at conference. Mall Reits (KIM, MAC) declined Bloomberg that Toys ’R’ Us is making preparations for a liquidation of its bankrupt U.S. operations

Economic Data
·      The U.S. added 313K new jobs in February, the biggest increase in a year and a half and well above the 205K estimate (prior month also upwardly revised to 239K from 200K). The unemployment rate held steady at 4.1% (vs. expected dip to 4%), while wage growth grew modestly. Hourly pay rose 4cs to $26.75 an hour (or 0.1% vs. est. 0.2% rise), but the yearly increase in wages slipped to 2.6% from a revised 2.8% in January. The participation rate 63% vs prior 62.7%. Nonfarm private payrolls rose 287K vs. prior 238K and Manufacturing payrolls rose 31K after rising 25K in the prior month
·      Wholesale Inventories rose 0.8% in January, slightly above the 0.7% estimate, increasing to $619.1B vs. $613.9B in the prior month; Wholesale sales fell 1.1% in Jan. after rising 0.8% the prior month; Wholesale sales excluding automobiles fell 1.2% in January
·      Gold prices advanced $2.30, or 0.2% to settle at $1,324 an ounce, ending the week with a mere 60c gain. Prices rebounded off earlier lows as the dollar reversed its gains. Monthly data revealed a strong rise in U.S. jobs, but disappointing growth in wages, causing a conundrum for those trying to guess the Fed’s next move (strong economy, but easing inflation).
·      WTI crude futures rise, ending with gains of $1.92, or 3.19%, rising to $62.04 per barrel, Brent crude rose $1.88, or 2.96% to settle at $65.49 per barrel and Natural gas futures settle down 2.4c, or 0.9% to settle at $2.732 mln btu. For the week, WTI crude posted a 1.3% gain thanks to today’s advance on dollar weakness and as Baker Hughes reported the first week in seven that oil rigs were not added.
·      The U.S. dollar trading was volatile, trading higher (DXY to 90.35 highs) after the release of the February jobs report which showed larger job gains, steady unemployment and moderating wages, but later slipped to lows of 89.99 before paring losses. Despite today’s pullback, the dollar index posted its 3rd weekly rise in a row. The Japanese yen slumped after President Donald Trump accepted an invitation from North Korean leader Kim Jong Un, seen as easing tensions between the two nations. The euro rebounded after falling nearly 1% yesterday after mixed ECB meeting comments yesterday (both hawkish and dovish). The peso and Canadian dollar advanced after being expected (for now) from the new imposed US tariffs of foreign steel and aluminum.
Bond Market
·      Treasury yields advanced as February data showed strong jobs gains (313K) but a muted wages number, which likely keeps the Fed schedule of 3-4 rate hikes this year. Outside of the jobs data, bond markets dealt with a handful of geopolitical events, including the implications of steel and aluminum tariffs signed by President Donald Trump late Thursday, and news Trump will convene with North Korean leader Kim Jong Un in a historic meeting and central bank rhetoric. The 10-year Treasury yield rose over 3 bps to 2.89%, while the 2-yr rose 1 bps to 2.26%.
Sector News Breakdown
·      Retailers; rough week for discount stores, with BIG shares falling after reporting Q4 comp sales and a full-year forecast and that missed expectations (comps -0.1% vs. est. +1.2%) – sees FY19 EPS $4.75-$4.95 vs. est. $5.17; group already down this week on softer DLTR results; KSS was upgraded to outperform at Cowen and raise tgt to $74 citing its off-mall footprint, improving product portfolio, strong customer loyalty position; PRTY rises on Q4 EPS beat
·      Toy makers (HAS/MAT) fell after reports toy retailer Toys ‘R’ Us is preparing for a liquidation of its bankrupt U.S. operations, as per Bloomberg; FNKO shares rallied after earnings beat; BMO Capital downgraded Spin Master (SNMSF) owing to 1) valuation, 2) increased risk and uncertainty prevalent in the toy industry, exacerbated by the recent bankruptcy of Toys “R” Us
·      Auto news; GKN PLC (GKN.LN) reached an agreement with DAN to include its Driveline business in Dana PLC, creating a new combined vehicle drive-systems group in deal valued at $6.1B ; DAN was also upgraded to neutral at Susquehanna on valuation; Citi said GM shares pulled back in recent weeks on renewed macro concerns ranging from steel and aluminum tariffs to rates & trade, though firm says think GM could be poised to deliver another “prove it” moment evidencing resilient earnings in the face of a choppy macro; TSLA said its accounting chief left the electric auto maker for personal reasons
·      Consumer Staples & Restaurants; UNFI rises after forecasting full-year revenue above estimates and said it plans to ease higher costs by boosting capacity at existing facilities this fall; restaurants LOCO and CHUY among actives after earnings results; FIZZ falls on earnings results
·      Casino, Lodging & Leisure; WYNN rises as agreed to pay a total of $2.4B to settle a lawsuit with Universal Entertainment Corp. over the forced redemption of the Japanese pachinko-machine maker’s 20% stake in the casino operator six years ago (Deutsche, Jefferies and Nomura all said positive on the development on a long-term view that strategic options are opened up); in leisure, HOG with cautious comments by Goldman that Feb checks showed continued declines
·      Energy stocks among top sector gainers after floundering earlier in the week; rising oil prices amid a rebound in riskier assets (stocks, commodity prices rise), helping boost energy components; there were a few buybacks this week (HES and DVN announced $1B buybacks), while analyst days from Dow components CVX and XOM this week  left investors with sour taste in their mouth’s (XOM talked of increased spending had shares at 52-week lows Wednesday)
·      Oil services: Goldman Sachs said they see potential for incremental M&A in Oil Services as companies reinvent themselves to meet key goals of lowering customer project costs, while improving their competitive position and end market structure…said buy-rated SOI, NINE and Neutral-rated PES, FTI, OII most likely incremental M&A targets in our coverage; HPwas upgraded to positive at Susquehanna
·      Baker Hughes weekly rig count report showed the total U.S. rig count rose 3 rigs to 984, with oil rigs down -4 to 796 (first time oil rigs were cut in seven weeks), while gas rigs jumped 7 to 188
·      Large Cap banks; other than volatility in bond market, with yields rising on better economic jobs data, lifting yields and boosting financials, group was relatively quiet; WSJ reported late morning that GS CEO Blankfein preparing to exit as soon as end of year, saying company isn’t looking beyond Goldman’s two co-presidents, Harvey Schwartz and David Solomon, to replace him. Blockchain related names slumped this week as Bitcoin and other crypto-currencies declined, with Bitcoin down more than 20% over the last few days.
·      REITs; SunTrust upgraded HIW to buy supported by one of the lowest-levered balance sheets in the industry, a relatively favorable geography, a well-leased development pipeline, and a valuation that we find compelling; SunTrust downgraded SLG to hold; Goldman Sachs said at a time when many REITs are growing dividends faster than earnings, investors should consider owning storage and net-lease REITs; Mall Reits were lower (KIM, MAC, CBL, SKT) after Bloomberg that Toys ’R’ Us is making preparations for a liquidation of its bankrupt U.S. operations after failing, so far, to find a buyer or reach a debt restructuring deal with lenders.
·      Large Cap Pharma; JNJ active after saying said the average price paid for its medicines in the U.S. fell by 4.6% last year due to the company’s discounts, and the company’s pharmaceuticals chief expects the pricing pressures on drugmakers will continue this year – WSJ; TXMD said that the NDA for TX-001HR has been accepted for review by the FDA with an Oct. 28 PDUFA; INSY downgraded to underweight at Piper saying weakness from key top-line driver Subsys was to be expected but larger issue is management guiding to relatively stable total sales in ‘18 vs. ’17; CNCE was upgraded to buy at Mizuho; GBT 4M share Spot Secondary priced at $54.00
·      Biotech movers; PDLI shares jumped as posted Q4 product revenue $32.6M vs. $20.1M QoQ; Q4 EPS 15c and total revs $68M vs. 14c/$62.7M QoQ; CALA shares fall on earnings miss; CHRS shares rallied after Q4 results though meeting with FDA to discuss immunogenicity assay for Neulasta biosimilar filing has gone well and the FDA has noted that the assay is “acceptable”
·      Healthcare suppliers and services; COO reported F1Q results with revenues and EPS 1% and 14% ahead of expectations, respectively, while Americas growth was modestly better than expected (said CEO to retire end of April and replaced by CFO); DPLO 2M share Block priced at $20.90
Industrials & Materials
·      Industrials & Machinery; FTV downgraded to neutral at JP Morgan as believe valuation now appropriately reflects upcoming capital deployment; heavy machinery stocks (TEX, CAT, DE) are expected to see costs rise due to the tariffs
·      Metals & Mining; steel attempt to rebound after President Trump’s decision to apply a 25% tariff to steel and a 10% tariff to aluminum, with Mexico and Canada excluded (steels and aluminum names fell yesterday); JP Morgan raised its tgt on US Steel (X) to a street high of $69 from $48, as Section 232 case should lead to higher steel sheet and tubular prices and somewhat higher volumes in the U.S., while the firm raised CMC to overweight from neutral and raises PT to street high of $30 from $24;
·      Chemicals; BG shares dropped late morning after the WSJ reported takeover talks the company and ADM have stalled, people familiar with the matter said;CDXS Q4 results came in below his estimates; potash related stocks NTR, MOS, IPI jumped late afternoon after Bloomberg noted mine collapse in Belaruskali
Technology, Media & Telecom
·      Internet; AKAM was upgraded to overweight at JP Morgan and tgt to $90 after the company announced shareholder value initiatives; AUTO downgraded to neutral at B Riley after missed consensus estimates, withheld 2018 guidance, and announced a CEO/CFO succession plan; WUBA upgraded to buy at Benchmark based on the Company’s solid 4Q results and based on our expectation for continued strong execution; NFLX tgt raised to $360 at Piper, helping shares trade to new all-time highs today
·      Semiconductors; sector on fire of late, with the Philly Semi index (SOX) rising to fresh all-time highs, up over 1.6% today, topping the 1,425 level, led by equipment name LRCX as well as MCHP, MRVL (after better earnings), CRUS and TER – AMD only name lower in index after recent surge; MRVL reported better-than-expected 4Q18 results/1Q19 guide; QCOMraises dividend
·      Software & Hardware; Dropbox and CRM report the companies are in a strategic partnership to connect Saleforce’s CRM platform with Dropbox’s collaboration platform; UPLDrevenue/EBITDA beat in 4Q17, with forward estimates again moving higher.
·      Hardware and Storage movers; NTNX was upgraded to buy at BTIG and $53 tgt while Stifel resumed buy and $52 tgt (also positive mention by KeyBanc); GPRO falls after the NY Post reported has no serious bidders for potential sale
·      Optical sector; FNSR shares dropped after Q3 top/bottom line missed and guided Q4 EPS and revs well below consensus and was downgraded at Needham citing dismal gross margins; ACIA downgraded to underweight at Morgan Stanley citing pressure on earnings power in the near term (cut tgt to $30); Morgan Stanley also initiated IIVI with an overweight and neutrals on FNSR and OCLR saying the optical industry enjoys strong secular tailwinds but has proved challenging
·      Media & Telecom; MTCH downgraded to market perform but up tgt to $45 saying high expectations are baked into price; VIAB and CBS declined midday

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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