Market Review: March 13, 2018

Scott GreenDaily Market Report

Closing Recap
Tuesday, March 13, 18
Equity Market Recap
·      Stocks finish lower! U.S. stocks opened higher on what turned out to be an interesting (but low volume) day, as stocks slumped late morning and major averages end near their worst levels of the day. In what was supposed to be a potential market moving catalyst, the February consumer price index (CPI inflation report) turned out to be a non-event, as results were spot on with analyst estimates. However, the big news today came out of Washington, as President Bush removed Rex Tillerson as Secretary of State following a series of disagreements and nominated CIA director Mike Pompeo to run the State Department. Markets seemed to take the news in stride at first, with major averages up across the board, as all eleven S&P sectors opened higher.
·      However, by late morning, the Nasdaq Composite, after touching fresh intraday record highs of 7,637 turned sharply lower in an apparent bout of profit taking, snapping its 7-day win streak, led by declines in some of the biggest recent outperforms (Internet, semi’s and software). The Nasdaq Comp traded down below the 7,500 level, down more than -140 points off its earlier highs. The market pulled back amid weakness in energy as well, as oil prices ended lower by 1.1% to $60.71 per barrel ahead of inventory data. The Dow Industrials dropped late as well, falling more than -400 points off its earlier highs of 25,376. In stocks news, QCOM shares slid after President Trump issued an executive order blocking AVGO from acquiring the chipmaker.
·      Stocks have had a good bout of news for the most part starting with better jobs data Friday, while inflation expectations have eased after moderating wages Friday and the in-line CPI today, ahead of the FOMC meeting next month (though a rate hike is still widely expected) – helping lift markets after the brief 10% February correction for the S&P 500 and Dow Industrials. One more inflation data point tomorrow, with the February PPI expected.

Economic Data
·      Consumer price index (CPI) for February was reported in-line across the board, as the 12-month rate of core CPI flat at 1.8% in February, 12-month gain in CPI inflation rises to 2.2% from 2.1% (but in-line with the 2.2% est.) and Feb core CPI, minus food and energy, increases 0.2%. The headline of a 0.2% rise was in-line and slowed from the 0.5% jump last month. Feb. Real Average Weekly Earnings up 0.6% YoY and avg. weekly earnings rose 0.3% MoM in Feb
·      The index of small-business optimism from the National Federation of Independent Businesses rose 0.7 in February to a reading of 107.6, the second-highest reading in its history and slightly above the 107.1 consensus forecast
·      Oil prices end lower, with WTI crude slipping 65c to settle at $60.71 per barrel (high $61.97 and low $60.27) ahead of weekly inventory data tonight (API) and tomorrow morning (EIA). Oil prices failed to hold earlier gains, falling amid concerns the Iran nuclear deal could be derailed after President Donald Trump’s ouster of Secretary of State Rex Tillerson earlier today. Markets await the EIA data where forecasts are for a rise in U.S. crude supplies for a third week in a row.
·      Gold futures posted their biggest one-day point gain in a week, rising $6.30, or 0.5%, to settle at $1,327.10 an ounce. News of U.S. President Donald Trump’s decision to remove Rex Tillerson as Secretary of State and nominate CIA director Mike contributed to weakness in the U.S. dollar and boosted interest in commodity prices
·      The U.S. dollar ended lower vs. most currencies, declining following the surprise ousting of Secretary of State Rex Tillerson by President Bush, as the revolving door in Washington continues. The dollar index (DXY) dropped back below the 90 level, down over -0.2% as the euro topped the 1.24 level; the dollar pared gains late day vs. the yen, but slumped vs. most other currencies; Bitcoin rebounds back above the $9,000 level after falling yesterday.
Bond Market
·      Treasury markets finished higher, with the yield on the 10-year trading around 2.83% in volatile trading (lows 2.83% and high shy of 2.87%). Early on bonds saw buying, pulling yields lower, as an inflation report matched expectations, easing concerns the Federal Reserve would speed up its pace of rate hikes from a widely expected three to a more aggressive four. The U.S. Treasury auctioned $13B in 30-year notes at a yield of 3.109% (below the 3.114% when issued prior) with a bid to cover at 2.38 vs. 2.26 prior and indirect bidders awarded 57.9% of the auction. As stocks sunk late day to lows, bonds moved to the highs.
Sector News Breakdown
·      Retail; DKS Q4 comp sales missed estimates (-2%) and said it would no longer provide quarterly guidance/said 4Q ecommerce sales growth decelerated to up 9% y/y from 3Q’s y/y growth of 16% (shares of comps/suppliers FINL, NKE, FL, VSTO, FIT, GRMN were active);DSW quarterly earnings and comp. sales beats and liquidation of eBuys; Macy’s (M) helped boost retailers after CEO said at Bank America conference that they have healthy inventory levels, and is on a “clear path” to comparable sales growth in fiscal 2019; TLYSshares declined following quarterly results
·      Autos; CTB downgraded to neutral at Longbow and cut 2018 earnings estimate by 9% saying they observed greater than expected price and volume pressure in the U.S. channel over last month; MTOR defended at both Longbow and Piper as believe that the recent weakness in its shares due to fears from material cost headwinds and the Class 8 market peaking in 2018 are overblown
·      Housing & Building Products; Raymond James Initiated U.S. wallboard manufacturer USG with an Outperform and Market Perform ratings on both EXP and CBPX, saying they favor USG over the others at this point in time due to its “self-help” productivity initiatives; in housing, Morgan Stanley said ZG’s rental business is under-monetized and “could be a new set of legs for the story,” as they raise tgt to $55; homebuilder MDC was upgraded to buy from sell at UBS; AWI 2.35M share Block Trade priced at $60.00
·      Energy shares reversed lower, falling late morning as oil prices failed to hold gains ahead of inventory data tonight and tomorrow; RENQ4 EBITDA beat post the 2/26; in research: KOS was upgraded to buy at Jefferies noting sell-off since downgrade in October; raises PT to $7.00 vs $6.00 citing development concept; NBL was upgraded to buy at Argus noting it has a successful exploration program, particularly in the Eastern Mediterranean, and should benefit from the recent acquisition of Clayton Williams Energy. Utilities PCG, EIX, SRE spiked late session on reports Governor Brown and Legislative Leaders Partner to Bolster Climate Resilience and Improve Disaster Planning, Management and Response
·      Large Cap banks and regional took a breather after logging gains yesterday; the regional bank index (KRE) traded to 52-week highs yesterday before sliding today; in brokers and banks, MC 5M share Spot Secondary priced at $51.00 and HLI 4M share Spot Secondary priced at $47.25
·      Asset managers; IVZ reported preliminary month-end assets under management (AUM) of $945.4B, a decrease of 2.8% MoM, driven by unfavorable market returns, foreign exchange, non-management fee earning AUM outflows, and net long-term outflows; WDRreported preliminary assets under management of $81.4B for the month ended February 28, 2018, compared to $84.3B on January 31, 2018
·      Insurance; shares of Private Mortgage Insurers (ESNT, RDN, MTG) declined yesterday following news that Freddie Mac has introduced an alternative for securing mortgage insurance as a pilot program with Arch Capital that has pricing “solidly below” published mortgage insurer lender-paid singles rate cards – several Wall Street analysts defended the private MI’s saying weakness overdone following news
·      Large Cap Pharma; JNJ outperforms in large cap Pharma; PTI said the FDA granted breakthrough therapy designation for PTI-428; MRKsaid the U.S. FDA has accepted a new supplemental Biologics License Application and granted Priority Review for KEYTRUDA as a treatment for patients with advanced cervical cancer with disease progression on or after chemotherapy
·      Biotech movers; BLCM said interim clinical data of BPX-501 in pediatric patients with acute myeloid leukemia and primary immunodeficiencies showed low rates of cancer recurrence; ADXS said the FDA placed a clinical hold on its Phase 1/2 trial of durvalumab with Imfinzi for treatment of patients with HPV-associated cervical cancer after a patient death
·      Healthcare services; SunTrust said after attending CERN’s annual investor meeting, they think once again out year Street estimates may need to come down, while Argus downgraded shares to hold noting although posted record 4Q bookings, margins are falling
·      Medical devices and equipment; MYGN shares fell after disclosing it received a subpoena from the Department of HHS and Office of Inspector General as part of “an investigation into possible false or otherwise improper claims submitted for payment under Medicare and Medicaid”; DVA sinks after saying the U.S. FTC has made a second request for information regarding its unit sale to UnitedHealth’s Optum
Industrials & Materials
·      Industrial & Machinery; GE tgt cut to Street low $11 at JP Morgan saying with a “grind it out” strategy now in play, where proceeds from the $20B in targeted value go to the balance sheet or pension deficit reduction, GE’s “normalized” level of FCF looks to be well below $1, with a plausible case of sustainable FCF in the $0.50 range, just above the standing dividend; CAT said February rolling 3-month retail machine sales rose 33% vs. Jan. 34% rise, and North America machine sales up 30% after rising 23% in January
·      Airlines; UAL raised its Q1 Prasm up 1%-3%, vs prior view of flat to up 2% and now sees 1Q adjusted pre-tax margin flat to up 2%, vs prior flat. (narrows Q1 consolidated capacity of up 3.5%-4%); HA raises Q1 RASM view to 3%-5% from (0.5%)-2.5% and narrows Q1 cost per ASM ex-items view to 4%-6% from 3.5%-6.5%; raises Q1 ASMs view to 4%-5% from 3%-5%; JBLU Feb traffic rose 6.8% YoY on a capacity increase of 6.8% and expects Q1 revenue per available seat mile (RASM) growth to range between 3.5%-5.5 vs. Q1’17; DALnarrows Q1 EPS to 65c-75c from 60c-80c and sees Q1 pre-tax margin 6.5%-7.5% from 6%-8%
·      Metals & Mining; U.S. Steel (X) said it continues to believe Q1 EBITDA will be approximately $250M; said based on the Company’s assessment of potential market conditions resulting from the Section 232 actions, and increased shipments from Granite City Works, the Company currently expects full-year 2018 EBITDA of approximately $1.7B (vs. prior view $1.5B); CENX upgraded at Cowen (2ndanalyst in as many days) primarily due to Trump’s decision on Section 232, allowing the company to restart significant U.S. production capacity; GOLD was upgraded to buy at Canaccord
Technology, Media & Telecom
·      Internet; the group reversed earlier gains, with a broad decline in high-beat tech names, including recent winners such as AMZN, NFLX, SNAP, GOOGLAMZN tgt raised to $1,850  at Jefferies on deep dive in advertising and what can look like for Amazon over time, and expect this segment grows at a 40%+ CAGR to $22B by ’22; Baird’s proprietary tracker of merchandise volume shows EBAY tracking in line with Baird’s 1Q marketplace growth expectation of 150 bps slowdown vs 4Q; SFIX reported rev/EBITDA that were 2%/37% above consensus and provided mixed guidance for Q3 and year
·      Semiconductors; sector surged to fresh record highs, led by another advance in MU shares (up 51% YTD) as analysts remain positive ahead of earnings (tgt raised to $66 at Mizuho today after Nomura boosted to $100 yesterday); the Philly Semi index (SOX) spiked over 1% before reversing lower with the broader tech space (fell more than 30 points off highs); QCOM declined after CEO Steve Mollenkopf said AVGO must permanently abandon its attempt to acquire the company in response to the Presidential order to block the merger issued last night; AMD shares dropped after security vulnerabilities reported by CTS Labs
·      Software movers; COUP reported 4Q upside across revenue, calculated billings, margins and cash flow and better Q1 revenue outlook; in research, KeyBanc downgraded AYX & FIVN to sector weight from OW noting EV/S multiples for the 55 largest publicly traded SaaS stocks have risen to 7.2x, or roughly double the trough of 3.4x and closing in on the five-year peak of 8.8x; MB to acquire Booker Software for $150M in cash and the assumption of unvested options; BL 8M share Spot Secondary priced at $41.50
·      Telecom & Media; ATUS added to Goldman Sachs Conviction List citing solid fundamentals and attractive valuation vs. CHTR and other high FCF/share growth stories, the planned spin-off from Altice NV, and overstated concerns about the impact of rising interest rates;CCI was removed from the conviction buy list at Goldman Sachs; NCMI shares fall after Q4 sales missed and cut its dividend to 17c from 22c

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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