Wednesday, March 14, 18
Equity Market Recap
· U.S. stocks end lower, once again failing to hold earlier gains following a combination of factors, with the S&P 500 and Dow Industrials making it a third straight daily decline. The S&P 500 Index (SPX) traded and held (for the most part) its 50 day moving average technical level (2,747), while the Dow Industrials underperformed led by weakness in Boeing (BA), falling over -300 points earlier before paring losses. The Nasdaq Composite fell for a 2nd straight day, falling back below the 7,500 level (low 7,473) before paring losses. Major averages initially opened higher following tamer inflation data (PPI) and as retail sales declined for a 3rd straight month, raising expectations the Fed won’t have to speed up the pace of interest rate hikes (though they are expected to raise rates when they convene next week).
· Stocks recovered mid-afternoon, led by a brief bounce in technology and consumer discretionary, following utilities (which rose a 5th straight day) into positive territory. The move was preceded by reports Larry Kudlow would be named to succeed Gary Cohn failed as the White House Economic Advisor, seen as a pro-market fit. But the move was short lived as stocks reversed.
· Some key elements that markets are “chewing on”: 1) important technical levels as the S&P cash (SPX) tested the 50 day MA support level of 2,747 several times, 2) GDP estimates were trimmed as the Atlanta GDP lowered its estimate to 1.9% from 2.5%, 3) politics in play (see below), 4) and ongoing trade fears with the U.S. and now China, 5) bonds jumped again, with yields falling across the curve (10-year yield 2.81%), 6) last 3 inflation data points (wages, CPI and PPI) all eased, for the time being, rising inflation expectations
· Trade war fears (with China) intensify rhetoric with China amped up after Trump was seeking tariffs of more than $30B on China imports (some reports said $60B), while his executive order blocking Broadcom from acquiring chipmaker Qualcomm, citing the tie-up’s threat to U.S. national security also a factor.
· Politics remain an issue after Trump’s ousting of Tillerson as Secretary of State yesterday while Democrat Lamb leads Republican Saccone by narrow margin in special election in Pennsylvania in seat that has been held by GOP for 14-years. CNBC reported late day that Trump plans to name Larry Kudlow as his next top economic advisor to replace the recently departed Gary Cohn…the White House later confirmed the report (Kudlow seen as a big advocate of free trade)
· Producer Prices (PPI) for February rose 0.2% in February, down from the 0.4% rise last month, but was slightly above the 0.1% economist estimate; the 12-month rate of wholesale inflation edged up to 2.8% (in-line), but it’s still below a recent peak of 3.1%. Core PPI prices MoM rose 0.2%, in-line with estimates – inflation report follows in-line CPI data yesterday
· U.S. retail sales fall for third month in a row, sliding (-0.1%) vs. estimates for a 0.3% rise, though the prior month was upwardly revised to a loss of (-0.1%) from (-0.3%); Sales rose 0.3% last month if autos and gas are stripped out, in-line with estimates; the decline in retail sales last month was largely concentrated in auto dealers, gas stations and traditional department stores
· Business Inventories for January rose 0.6% MoM, in-line with estimates while Business sales fell (-0.2%) in January after rising 0.5% the prior month
· Oil prices end higher as WTI crude rises 25c or 0.4% to settle at $60.96 per barrel as a larger than expected weekly draw in gasoline and distillates trump the bearish bigger build in crude inventories. The EIA reported a larger-than-expected weekly build of 5.0M barrels vs. est. 2.5M build (bearish), though gasoline inventories fell a greater -6.2M barrels vs. est. draw -1.1M (bullish) and distillates bigger draw as well at -4.3M vs. est. -1.7M (bullish); API overnight reported U.S. crude supplies rose nearly 1.2M barrels
· Industrial metal prices advanced, led by gains in copper on stronger industrial production data out of China overnight, rising to its best levels since late February. China’s industrial output +7.2% YoY in Jan-Feb., beating +6.2% projection in Bloomberg survey. The price of US steel surged in the past month as President Trump imposed tariffs of 25% on steel and 10% on aluminum imports. Precious metals slide on the dollar bounce, with gold prices down -$1.50 to $1,325.60 an ounce
· The U.S. dollar was mixed, rebounding modestly after yesterday’s losses despite weaker retail sales data and lowered expectations of an aggressive FOMC. The dollar index (DXY) inched higher (high 89.89 and low 89.56) before paring gains. The euro pared losses late day while the dollar declined against the safe-haven Japanese yen. British pound afternoon highs vs. USD at 1.3976 (off lows 1.3926 around noon). Crypto currencies slide as Bitcoin prices dropped 9% to around $8,200 after Google announced plans to review its advertising policy as it affects certain financial services, including Bitcoin and other cryptocurrencies, from June this year.
· Treasury rally continues as yields fall following weaker retail sales data and tamer inflation (CPI yesterday and PPI today), raising expectations the Fed may be less aggressive in their outlook of rising rate hikes; the yield on the 10-year slips about 3 bps to around 2.81% (off highs above 2.95% just 2-weeks ago), while the 30-yr yield slips to 3.05%. FOMC meeting next week.
Other Interesting tidbits
· U.K. Prime Minister Theresa May said her country plans to expel 23 Russian diplomats who have been identified as undeclared intelligence officers, according to reports. The moves come after May on Monday said it was highly likely Russia was responsible for poisoning a former spy
Sector News Breakdown
· Retailers; SIG shares fell after earnings and comps decline of (-5.2%) and is starting a three-year improvement plan where it aims to focus on things like ecommerce and its real-estate footprint; in footwear, CAL Q4 sales of $702.5M beat the highest estimate and midpoint of guidance was in-line with estimates;EXPR posted better Q4 results, though wider Q1 EPS loss; VRA similar to EXPR as posts better Q4 results, but guidance mixed; PETQ said it will open 20 veterinary services clinics in Walmart locations; DKS rebound continues after bottoming yesterday post weak results
· Consumer Staples; grocers active after WMT said it will offer home delivery of groceries in 100 cities by the end of the year and launch same-day delivery in New York City (SFM, KR) – said Uber Technologies Inc. will be one of the initial partners, expanding a test started in 2016; IPAR year EPS beat views but sales short of consensus
· Housing & Building Products; RH upgraded to Outperform at Raymond James and setting a $95 target price saying with the company’s business transformation now behind them and RH’s ~12% YTD decline, they believe RH’s valuation now offers a favorable risk/reward scenario; in home furnishing, WSM due to report earnings tonight
· Casino, Lodging & Leisure; CWH shares rallied as it filed its 10-K which won’t include further impact to revenue, adjusted EBITDA or adjusted EPS according to Baird; in lodging, HTHT shares slid after it released 4Q results (rev miss) and closed 47 hotels in the quarter
· Auto’s; Ford (F) upgraded to overweight from underweight at Morgan Stanley saying that negative sentiment on Ford has taken valuation to attractive levels and the F-150 franchise may be worth more than 150% of the company’s enterprise value; TSLA has lost two of its most senior financial executives in short succession within weeks of when the electric-car maker will report production figures for the Model 3 sedan
· Inventory data dominates energy space; Energy futures active after mixed weekly inventory data: the EIA reported a larger-than-expected weekly build of 5.0M barrels vs. est. 2.5M build (bearish), though gasoline inventories fell a greater -6.2M barrels vs. est. draw -1.1M (bullish) and distillates bigger draw as well at -4.3M vs. est. -1.7M (bullish); API overnight reported U.S. crude supplies rose nearly 1.2M barrels; in stock news; OII upgraded to hold at Jefferies as the driver of their negative view—ample downside to medium-term estimates—seems no longer true
· Utilities; Utilities (UTY) rise a 5th straight session, best streak since November on lower bond yields, making dividend paying sectors more appealing; shares ofPCG, EIX, SRE advanced yesterday after the California Governor’s office supported a revamp of rules dealing with natural disasters in the state (analysts see this as a positive step in clearing uncertainty related to California wild fire exposure)
· Refiners; Cowen said China is pressuring refining margins and sector estimates look 30% too high for 1Q, but they remain constructive with VLO, MPC and PSXtop picks; SUN was downgraded to sell at Goldman Sach’s;
· Banks weak, with declines in large cap and regional banks given the pullback in yields and reduced aggressive rate hike expectations from the Fed following softer retail sales and PPI data; regional bank ETF (KRE) falls a second day after rising to 52-week highs Monday; Western banks FHB, HTBK, and TCBK upgraded to outperform at KBW Inc. as they consistently have the highest level of profitability (in terms of ROA) among regions, along with outperforming net interest margins; BWB 6.7M share IPO priced at $11.75
· Insurance; British insurer Prudential PLC (PUK) split its European and international arms into two new companies with entirely different business models; Private mortgage insurers ESNT, RDN, MTG all under pressure again after small rebound yesterday (group pressured of late on news that Freddie Mac has introduced an alternative for securing mortgage insurance as a pilot program with ACGL)
· Consumer finance and Lending; EVRI strong Q4 report and in-line guidance, while accounting shift results in a sharp reduction to both revenue according to one analyst; ARI 13.5M share Spot Secondary priced at $18.00; SQ shares new all-time highs today
· Brokers; online brokers (AMTD, ETFC, SCHW) weak as Morgan Stanley said the SEC may announce a new maker taker pilot which would pose a risk as it may cap the rebate revenue they get for directing retail order flow; ETFC said daily average rev trades (DARTs) for Feb were 330,121, up 51% YoY and added 51,988 gross new brokerage accounts, ending Feb. with about 3.7M brokerage accounts; SCHW said total client assets at a record $3.33T as of Feb. 28, up 15% Y/Y and down 4% M/M
· REITs; BTIG raised tgts on SPG (to $230) but lowered on MAC (to $66); Mizuho maintained Buy rating on HCP, and are upgraded SBRA to Buy from Neutral saying the deeply discounted multiple provides them the necessary comfort to make this call
· Large Cap Pharma; VRX active after filing showed Chairman and CEO Joseph Papa disclosed the purchase of 30,000 common shares of the company at a price of $16.05 per share; EPZM reported Q4 and FY 2017 operational results and provided updates to key tazemetostat programs that were in-line with disclosures at recent investor events; TYME said FDA accepts IND application for SM-88 phase II trial; SNDX shares moved higher ahead of American Association of Cancer Research (AACR) abstracts and titles of late-breaking abstracts to be released tonight at 4:30 PM said Bloomberg
· Medical services, equipment and suppliers; DGX was upgraded at Morgan Stanley noting that the stock’s valuation has drifted back toward that of peer LH;PDCO rose after Credit Suisse said today they view as opportunistic buying opportunities with the recent correction following another disappointing quarterly performance (company also announced $500M share buyback); SIEN reported Q4 results modestly below their pre-release; EVHC shares dropped late morning after Bloomberg reported UNH is no longer interested in a deal for all or part of EVHC, as it had been interested in Envision’s ambulatory services unit, potentially as part of a deal involving private equity firms for the rest of the health-care company https://goo.gl/DGRsDj
Industrials & Materials
· Aerospace & Defense; Dow component BA falls, leading the index sharply lower; SPR declined after its CEO forecast a challenging first quarter due to an increase in Boeing 737 production; in air leasing, Macquarie initiated outperform on AER, AL, AYR given positive view on the current economic backdrop and the expectation for continued strength in global demand for air travel
· Metals & Mining; CMC downgraded to neutral at Bank America as think shares largely reflect the near term boost in steel prices we expect from Section 232 tariffs; CLF downgraded to sell at Vertical Group; CENX received its 3rd upgrade this week, as JP Morgan raised to overweight and $29 tgt to reflect the price impact of a 10% tariff and CENX’s plan to restart all of the idled potlines at its Hawesville smelter (upped @ Cowen and BMO recently)
· Chemicals; RKDA shares jumped after the company announced that it has reached two key milestones in its High Fiber Resistant Starch Wheat program
Technology, Media & Telecom
· Semiconductors; the Philly Semi index (SOX) dipped, well off yesterday intraday highs of 1,464 (record highs) but held up well after yesterday’s sharp decline;AVGO officially drops bid for QCOM after President Trump executive order banning deal (AVGO reports earnings tomorrow night); NVDA tgt was raised to $285 at RBC Capital
· Software & Equipment movers; MDB Q4 results included all key financial metrics coming in ahead of consensus estimates with F4Q18 total revenue of $45M growing a healthy 50.5% Y/Y, said Stifel; ULTI downgraded to neutral at Wedbush saying shares are appropriately benefiting from strong execution in a healthy demand environment; CSOD tgt raised to $55 at Needham following analyst day and details on new strategic plan; RPD 2M share Spot Secondary priced at $26.25; SILC shares extend yesterday losses after major cloud customer is stopping deployment of its technology due to internal problems implementing — losing ~$75M in Revs in CY19
· Media & Telecom; DIS reorganizes business into four segments: a newly-formed Direct-to-Consumer and International; the combined Parks, Experiences and Consumer Products; Media Networks; and Studio Entertainment; the NY Post reports AT&T rejects DOJ’s claim that TWX deal would raise fees