Market Review: March 15, 2018

Scott GreenDaily Market Report

Closing Recap
Thursday, March 15, 18
Equity Market Recap
·      U.S. stocks end mixed with the Dow Industrial Average outperforming, the S&P 500 index holding around its 50-day moving average support level of 2,748 most of the afternoon (a second day holding), while the Nasdaq Composite underperformed, falling on the day. Stocks moved to afternoon lows after the New York Times reported Special counsel Robert Mueller subpoenaed the Trump Organization to turn over documents, including some related to Russia. Energy stocks were among the biggest decliners, specifically the MLP space, amid a tax ruling as Federal Energy Regulatory Commission (FERC) said it will no longer allow master limited partnership natural gas and oil pipelines to recover an income tax allowance in cost-of-service rates (more details below on the ruling and sector implications). Oil prices ended higher, while natural gas prices slid. Markets got another round of stronger than expected economic data, but as has been the case the last three trading sessions, markets failed to hold early gains. This morning, the U.S. announced new sanctions on Russians over election interference, adding to global pressures, with trade war fears between China among the factors driving markets lower this week. It was a quiet day out of Washington, as President Trump confirmed Larry Kudlow as his next economic advisor (replacing Gary Cohn who resigned last week). The Dow snapped its 3-day losing streak, but the S&P 500 made it a 4th straight decline and the NASDAQ dropped for its 3rd straight time.

Economic Data
·      The Philadelphia Fed manufacturing index slipped to a reading of 22.3 in March from 25.8 in February (vs. est. 23.0); the new orders gauge rose to 35.7 from 24.5, shipments gauge also jumped to 32.4 from 15.5; prices paid index fell 2 points to 42.6 but remained near last month’s reading which was the highest since 2011
·      The Empire State Manufacturing Index jumped to a reading of 22.5 in March from 13.1 in February and well above the 15.0 economist estimate; the shipment gauge jumped 14.5 points to 27 while new orders had a smaller 3.3 point gain to 16.8; the prices paid rose again to 50.3 from 45, its highest level in six years
·      Weekly jobless claims dropped 4K to 226K, mostly in-line with the 228K estimate (prior week was revised to 230K from 231K); the four-week moving average slips 750 to 221,500; continuing claims inches higher to 1.879M from 1.875M, but was below the 1.903M estimate
·      Import prices for February rose 0.4% MoM, topping the 0.2% estimate after rising 0.8% in January; Import prices ex-fuels rose 0.5% after rising 0.5% in January; consumer goods prices rose 0.5% after rising 0.1% in January
·      The 30-year fixed mortgage rate for week ended today fell to 4.44% from 4.46%, Freddie Mac said; the 15-year rate avg 3.90%, down from 3.94% a week earlier; the two-basis-point drop from last week in 30-year rate first decline this year
·      The U.S. Home Builders’ Confidence index (NAHB) in March falls to 70 vs 71 last month and was below the estimate of 72; the present single family sales unchanged at 77 vs 77 last month and future single family sales falls to 78 vs 80 last month
·      Oil prices inch higher, as WTI crude rose 23c or 0.4% to settle at $61.19 per barrel, similar to yesterday’s gains while Brent crude climbed 23c as well to $65.12 per barrel. Natural gas prices edge lower after smaller-than-expected weekly inventory draw. In its monthly report, the IEA said global oil demand should grow by 1.5M barrels a day, to average 99.3M barrels a day in 2018. Oil prices active on mixed inventory data yesterday and ahead of tomorrow’s rig report.
·      Gold prices dropped, falling -$7.80, or 0.6% to settle at $1,317.80 an ounce and posting its lowest close in about a week as the dollar moved to new highs late day. The back and forth action in gold (and the dollar) comes after several political headlines in Washington the last few days and ahead of next week’s FOMC interest rate policy meeting (with a rate hike expected). Aluminum had the lowest close in almost three months as analysts warn supply may swell with China’s winter capacity cutbacks coming to an end (fell -0.2% to settle at $2,085/ton)
Currencies & Bonds
·      The U.S. dollar finished higher, with the dollar index (DXY) rising to its best levels late day (highs around 90.15) with the greenback buoyed by better economic data and bullish news of Larry Kudlow as economic advisor to White House (spoke positively on CNBC late yesterday about importance of a strong dollar). The dollar did not gain against the safe-haven Japanese yen. Bitcoin prices inched higher to $8,416 (off overnight lows $7,666), but closed lower on the day. The Canadian dollar slid after existing Canadian home sales had a soft reading for February.
·      Treasuries ended little changed, with the yield on the 10-year note around 2.82%, at yesterday’s closing levels, while the 30-yr unchanged around 3.057% and the shorter term 2-yr yield around 2.28%. With a busy week of economic data and moves out of Washington, bonds have inched higher, but the FOMC policy decision next week (expected rate hike) could be next major catalyst for yields that have pulled back from multi-year highs just 2-weeks ago.
Sector News Breakdown
·      Retailers; JILL shares plunge after results, with Q4 EPS/sales/comps all topping views, but Q1 EPS missed estimates and said its CEO will retire; SMRT shares spiked on earnings and amended its credit agreement with Wells Fargo; SHLD also a mover on earnings, helped by tax benefit; OSTK shares slumped ahead of earnings tonight – shares nearly cut in half since January highs); toy makers HAS and MAT slipped early after Toys R Us confirmed shutting down US business
·      Dollar stores rebound; after a few dismal earnings/guidance results from likes of DLTR and BIGDG shares jump after same-store sales beat, upbeat outlook as it plans to open about 900 new stores this year, and sees earnings well above analysts’ estimates in the current fiscal year (Q4 comps also beat at3.3% vs. est. 2.6%) and raises dividend
·      Consumer Staples; in tobacco, PM, MO, BTI active after Bloomberg reported FDA to explore lowering nicotine standards in cigarettes; ELF was downgraded to underweight at Morgan Stanley saying the market remains far too bullish on a growth recovery following the company’s weaker than expected 2018 guidance; SFS shares declined after issuing 2018 forecast that signals a comp slowdown and constrained margins on increased investments, said Morgan Stanley
·      Restaurants; TACO shares fall after reported lower profits and lower sales than estimated and year EPS guidance fell short of views; NDLS Q4 EPS and sales topped consensus; FRSH posted Q4 results above views and forecast2018 comp sales growth at the midpoint of a flat to low-single digit range; CMG tgt boosted to $355 at Piper after Strategy Officer resigns
·      Housing & Building Products; in home furnishings, WSM Q4 came in above expectations as the company generated its strongest sales growth (+6.2%) since 1Q16
·      MLP stocks plunged, with the Alerian MLP Index (AMZ) falling over 9% to its lowest levels since February 2016 after FERC will no longer allow MLP interstate gas and oil pipelines to recover an income tax allowance in cost of service rates. “The revised policy statement explains that, while all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the application of the United Airlines court case to non-MLP partnerships will be addressed as those issues arise in subsequent proceedings” (shares of SEP, ETP, WPZ, EEP, PAA, TCP all plunged) – some MLPS rebounded off lows, as Wells Fargo noted FERC ruling doesn’t impactKMI, OKE, TRP, ENB – Evercore/ISI said the news impacts TEP, TEGP, WMB, WPZ
·      E&P space; EQT CEO Steven Schlotterbeck has stepped down from the board, and changes are effective immediately and also resigned from his positions at EQM, RMPand EQGPREXX sells some acreage for $17.2M
·      Financials quiet, falling the last few days with broader markets on less aggressive rate hike expectations, but group little bounce today early; ZION upgraded to outperform at Raymond James as came away from our meetings with a better appreciation for its risk-reduction efforts, and commitment to improved profitability; JRVRupgraded at KBW Inc.; Insurance brokers upgraded at Goldman Sachs with AON upgraded to buy and WLTW upgraded to neutral; mortgage insurers (ESNT, RDN, MTG) underperform after ACGL issued a white paper arguing for diversifying mortgage credit risk, and as 4Q U.S. residential property loan originations dropped 19% YoY
·      Credit card monthly data statistics; COF February net charge-offs (NCO’s) 5.16% vs. 5.33% last month and 30-plus day performing delinquencies 3.92% vs. 4.11% last month; SYF February net charge off rate 4.90% vs. 4.98% last month and 30-plus day delinquencies 3.12% vs. 3.11% last month; JPM February net credit losses 2.28% vs. 2.40% last month and 30-plus day delinquencies 1.24% vs. 1.21% last month; ADS Feb net charge offs 6.9% vs. 6.8% last month and delinquency rate 5.6% vs. 5.1% last year; BAC February NCO’s 2.78% vs. 2.58% last month  and delinquency rate 1.72% vs. 1.70% last month; AXP February NCOs 2.2% vs. 1.7% prior month and delinquency 1.4% vs. 1.4% in the prior month; C NCO’s 2.57% vs. 2.17% MoM and delinquency 1.58% vs. 1.6%; DFS February NCO’s 3.6% vs. 3.1% last month and delinquency rate 2.4% vs. 2.4% last month
·      REITs; related REITs (KIM, BRX, SKT, SPG, DDR) active after Toys ‘R’ Us said it will liquidate all 735 of its U.S. stores, including those in Puerto Rico, and pursue a sale process for its international operations (though news of bankruptcy had been floated about the last week);
·      Large Cap Pharma; ALXN shares rise after its experimental drug (ALXN1210) to treat patients with a rare blood disorder was shown to be not inferior to its flagship drug, Soliris (though didn’t achieve superiority for breakthrough hemolysis vs Soliris); LJPC 3.4M share Spot Secondary priced at $29.50; AKCA rises as upgraded at Wells Fargo after IONS licensing worldwide rights to inotersen and Ionis-TTR-L Rx
·      Biotech movers; SLDB shares plunge after the FDA placed its DMD study of lead candidate SGT-001 on clinical hold due to adverse event in first patient; SRPT active after SLDB trial for lead gene therapy candidate in Duchenne muscular dystrophy (DMD) was paused by the FDA due to safety; Citigroup found some AACR abstracts interesting for KURA, SNDX, HALO & PTCT; RCUS 8M share IPO priced at $15.00
·      Healthcare services and facilities; LPNT upgraded to outperform at Raymond James as think shares are undervalued at 6.5x 2018 EBITDA; TDOC downgraded to hold at Deutsche Bank saying product expansion and renewed marketing efforts have excited investors, but cuts on valuation as shares are up 23.2% YTD; MGLN upgraded to outperform from market perform and raise tgt to $120 from $95 at Leerink
Industrials & Materials
·      Industrial & Machinery; UBS said on UTX that they don’t see enough value in a full break-up yet, but still see ~20% upside in the stock; EMR said February trailing 3-month average orders up 10%; AMOT reported its second consecutive sizeable quarterly beat yesterday with virtually every metric ahead of expectations, according to Craig Hallum
·      Chemicals; DWDP CFO said aims to deliver as much in cost savings as possible, but needs to manage expectations as synergy target already raised from $3 billion; MONshares tumbled on midday report of US antitrust hurdles for Bayer deal – The Justice Department’s antitrust division doesn’t think Bayer’s proposal to sell businesses goes far enough, citing the reports
Technology, Media & Telecom
·      Internet; BABA active after WSJ reported company said to explore plan to list shares in China upgraded at KeyBanc (third analyst upgrade of late) as believe cost reductions are likely to lead to upward revisions to consensus margin expectations; In travel, CTRP reported quarterly eps beat, but forecast revenue well below expectations, blaming the shortfall on new rules that constrained its business; Z tgt raised to $65 at KeyBanc as believe multiple expansion can continue as investors better appreciate the new Zillow narrative; EXPE was downgraded to neutral at Macquarie on expected “ugly” Q1 results
·      Semiconductors; AVGO to report earnings after the close; SMTC produced a Q4 beat and raise despite recent investor concerns around optical headwinds and smartphone product transitions; QRVO downgraded to neutral at Bank America as believes Qorvo faces headwinds of a sluggish high-end smartphone market and increasing competitive risks in upcoming versions of the iPhone
·      Software & Software movers; in security, PANW announced it entered into a definitive agreement to acquire for $300M in cash; APPN shares tumbled over 10% midday; in the 3D space, DDD Q4 revenue and gross margins $48.2% vs. 47.9%) topped consensus; CNBC reported that AMZN is cloud is looking at building a corporate training service (shares of CSOD, INST, WDAY were among movers as they involved in learning management software for work)
·      Media movers; VIAB upgraded to buy at Needham and $40 tgt saying forward PE valuation at 8.2-times is 15%-30% below peers mainly due to Paramount’s losses; LBTYAupgraded to outperform at Bernstein saying the project Lightning in the U.K. will lighten up standalone growth prospects and FX tailwinds are being ignored; MTCH was downgraded to neutral on valuation; IAC tgt raised to $200 at UBS as believe that IAC’s SOTP valuation provides one of the most compelling risk/rewards in coverage universe; WOW falls a posts Q4 miss, while EVC shares dropped after comments that Q1 TV and radio revs are pacing down 19% and 9%, respectively

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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